AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 16, 1997
REGISTRATION NO. 333-16509
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SOUTHWEST BANCORPORATION OF TEXAS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 6712
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
76-0519693
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
4400 POST OAK PARKWAY
HOUSTON, TX 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 FRED B. WHITE, III
VINSON & ELKINS L.L.P. SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
1001 FANNIN, SUITE 2300 919 THIRD AVENUE
HOUSTON, TX 77002 NEW YORK, NY 10022
(713) 758-2222 (212) 735-3000
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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 being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, par value $1.00
per share.......................... 1,507,253 shares $17.00 $25,623,301 $7,765
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</TABLE>
(1) Includes 172,500 shares of Common Stock subject to the Underwriters'
over-allotment option.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(a) under the Securities Act of 1933.
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 COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 16, 1997
PROSPECTUS
1,334,753 SHARES
SOUTHWEST BANCORPORATION OF TEXAS, INC.
COMMON STOCK
[LOGO FOR SOUTHWEST BANK OF TEXAS]
Of the 1,334,753 shares of Common Stock, par value $1.00 per share (the
"Common Stock"), offered hereby (the "Offering"), 1,150,000 shares are being
sold by Southwest Bancorporation of Texas, Inc. (the "Company") and 184,753
shares are being sold by certain shareholders of the Company ("Selling
Shareholders"). Prior to this Offering, there has been no established public
trading market for the Common Stock. It is estimated that the initial public
offering price will be in the range of $15.00 to $17.00 per share. See
"Underwriting." The Common Stock has been approved for quotation on The Nasdaq
Stock Market's National Market under the symbol "SWBT."
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT
ACCOUNTS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
BANK INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY.
SEE "RISK FACTORS" ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PROCEEDS PROCEEDS
PRICE TO UNDERWRITING TO TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
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<S> <C> <C> <C> <C>
Per Share.............. $ $ $ $
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Total(3)............... $ $ $ $
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</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting offering expenses payable by the Company, estimated at
$350,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
172,500 additional shares of Common Stock, on the same terms and conditions
as set forth above, solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be approximately $ , $ and
$ , respectively. See "Underwriting."
The shares of Common Stock to be distributed to the public are offered by
the Underwriters, subject to prior sale, when, as and if issued to and accepted
by the Underwriters, subject to approval of certain legal matters by counsel for
the Underwriters and certain other conditions. The Underwriters reserve the
right to withdraw, cancel or modify such offer and to reject orders in whole or
in part.
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KEEFE, BRUYETTE & WOODS, INC. LEGG MASON WOOD WALKER
INCORPORATED
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The date of this Prospectus is , 1997.
<PAGE>
The following charts present selected consolidated financial data of the
Company for the six years in the period ended December 31, 1996. This financial
data should be read in conjunction with the Consolidated Financial Statements of
the Company and the Notes thereto, appearing elsewhere in this Prospectus, the
information contained in "Recent Developments" and the information contained
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
Balance Sheet Data (in Millions)
12/91 12/92 12/93 12/94 12/95 12/96
---- ---- ---- ---- ---- ------
(unaudited)
Loans $145 $210 $286 $358 $438 $ 601
Deposits $214 $304 $418 $490 $673 $ 834
Assets $235 $339 $472 $578 $825 $1,046
[Description of graphic: bar graphs showing loans, deposits and assets as of
December 31, 1991, 1992, 1993, 1994, 1995 and 1996.]
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
Net Income (in Millions)
12/91 12/92 12/93 12/94 12/95 12/96
---- ---- ---- ---- ---- ------
(unaudited)
Net Income $1.9 $2.8 $3.6 $5.8 $7.8 $9.6
[Bar graphs showing net income for the years ended December 31, 1991,
1992, 1993, 1994, 1995 and 1996.]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY DOES NOT PURPORT TO BE COMPLETE, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND FINANCIAL
STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS.
UNLESS OTHERWISE INDICATED, ALL SHARE AND PER SHARE INFORMATION HAS BEEN
ADJUSTED TO GIVE EFFECT TO A 2.5 FOR 1 SPLIT OF THE COMMON STOCK (THE "STOCK
SPLIT") EFFECTED IN THE FORM OF A STOCK DIVIDEND ISSUED TO SHAREHOLDERS OF
RECORD AS OF NOVEMBER 20, 1996. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN
THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT
EXERCISED.
THE COMPANY
Southwest Bancorporation of Texas, Inc. (the "Company") is a bank holding
company headquartered in Houston, Texas. As of December 31, 1996, the Company
had assets of $1.0 billion, net loans of $595.5 million, total deposits of
$833.6 million and total shareholders' equity of $54.6 million. Substantially
all of the Company's revenue and income is derived from the operation of its
bank subsidiary, Southwest Bank of Texas National Association, a national bank
with seven full service banking facilities in the Houston area (the "Bank").
The 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 September 30, 1996, the Company is the largest independent
bank holding company headquartered in the Houston metropolitan area.
Walter E. Johnson joined the 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 $1.0 billion at December 31, 1996,
without acquisitions or mergers.
Management believes that its emphasis on local relationship banking,
together with its conservative approach to lending and resultant strong asset
quality, have assisted the Company toward its goal of becoming the preeminent
middle market lender in the Houston area. High-quality personal service and
responsiveness to customer needs using state-of-the-art technology have
attracted numerous customers from larger regional banks. Through a team of
seasoned managers with significant lending experience, the Company seeks to
develop long-term relationships with middle market companies. These companies
are typically privately-held with annual revenues ranging between $1 million and
$250 million and loan requirements of $150,000 to $10 million. The Company also
offers a full array of consumer lending and deposit products, including private
banking services for high net worth individuals and families.
The Company's business strategy is to (i) target middle market operating
companies and private banking customers in the Houston area for loans, deposits,
treasury management services, investment services 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 Houston metropolitan area offers significant growth opportunities for
the Company. Houston ranked as the fourth largest city in the United States with
an estimated population of approximately 3.8 million people in the Houston
metropolitan area in 1995.
3
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[GRAPHIC OMITTED]
Description of Graphic: Map of Houston metropolitan area showing branch
locations of Southwest Bank of Texas N.A.
THE OFFERING
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<S> <C>
Common Stock offered by the Company..... 1,150,000 shares
Common Stock offered by the Selling
Shareholders.......................... 184,753 shares
Common Stock outstanding after the
Offering.............................. 9,134,961 shares(1)
Use of Proceeds......................... Approximately $7.5 million is expected to be used to
redeem preferred stock issued by the Bank and the
remainder will be used for general corporate purposes.
See "Use of Proceeds."
Risk Factors............................ See "Risk Factors" for a discussion of certain factors
that should be considered by each prospective investor.
The Nasdaq Stock Market's National
Market Symbol......................... SWBT
</TABLE>
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(1) This number includes 250,000 shares to be issued to Walter E. Johnson upon
his exercise of an outstanding stock option immediately prior to the closing
of the Offering, but excludes 910,025 shares of Common Stock reserved for
issuance upon the exercise of the remaining outstanding stock options
granted under the Company's stock option plans. See "Management -- Employee
Stock Option Plans." As of the date of this Prospectus, the Company had
outstanding 7,734,961 shares of Common Stock. See "Capitalization."
4
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data of the Company is derived
from the Selected Consolidated Financial Data appearing elsewhere in this
Prospectus, and should be read in conjunction with the Consolidated Financial
Statements of the Company and the Notes thereto and the information contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income.............. $ 26,288 $ 20,640 $ 28,692 $ 22,844 $ 16,940 $ 11,974 $ 8,148
Provision for loan losses........ 840 685 925 1,145 1,005 767 540
--------- --------- --------- --------- --------- --------- ---------
Net interest income after
provision for loan
losses..................... 25,448 19,955 27,767 21,699 15,935 11,207 7,608
Noninterest income............... 3,487 2,623 3,712 3,063 2,159 1,478 1,196
Noninterest expenses............. 17,043 13,978 19,458 15,782 12,684 9,042 6,860
--------- --------- --------- --------- --------- --------- ---------
Income before taxes.......... 11,892 8,600 12,021 8,980 5,410 3,643 1,944
Preferred stock dividend......... 341 -- 50 -- -- -- --
Net income available to common
shareholders................... 7,388 5,586 7,757 5,839 3,555 2,763 1,944
PER SHARE DATA:
Net income(1).................... $ 0.87 $ 0.67 $ 0.92 $ 0.70 $ 0.43 $ 0.44 $ 0.32
Book value....................... 6.63 5.51 5.81 4.65 3.84 3.38 2.73
Weighted average common shares
outstanding (in thousands)..... 8,515 8,383 8,394 8,302 8,211 6,281 5,984
AVERAGE BALANCE SHEET DATA:
Total assets..................... $ 839,105 $ 640,349 $ 668,996 $ 511,171 $ 393,581 $ 270,326 $ 192,991
Securities....................... 302,707 189,066 206,717 140,478 105,965 65,713 47,373
Loans............................ 467,846 378,206 388,329 317,373 243,805 173,486 121,115
Allowance for loan losses(2)..... 5,280 4,609 4,700 3,679 2,696 2,161 1,745
Total deposits................... 669,223 528,391 551,661 437,828 345,426 244,764 174,530
Total shareholders' equity....... 47,959 39,392 40,397 33,473 27,494 16,905 14,084
PERFORMANCE RATIOS(3):
Return on average assets......... 1.18% 1.17% 1.16% 1.14% 0.90% 1.02% 1.01%
Return on average common
equity......................... 20.58 18.96 19.20 17.44 12.93 16.34 13.80
Net interest margin.............. 4.49 4.62 4.60 4.82 4.65 4.81 4.53
Efficiency ratio(4).............. 56.99 59.72 58.08 60.67 66.41 67.22 73.42
ASSET QUALITY RATIOS(2):
Nonperforming assets to total
loans and other real estate.... 0.47% 0.30% 0.07% 0.19% 0.22% 0.31% 0.09%
Net charge-offs (recoveries) to
average loans(3)............... 0.07 0.02 0.08 0.03 (0.02) 0.24 0.30
Allowance for loan losses to
total loans.................... 1.05 1.21 1.12 1.20 1.14 1.05 1.28
Allowance for loan losses to
nonperforming loans(5)......... 253.95 400.82 1,673.78 1,081.58 1,406.84 1,231.31 10,925.88
CAPITAL RATIOS(2):
Leverage ratio................... 6.52% 5.96% 6.29% 6.33% 6.23% 7.62% 6.47%
Average shareholders' equity to
average total assets........... 5.72 6.15 6.04 6.55 6.99 6.25 7.30
Tier 1 risk-based capital
ratio.......................... 10.68 9.93 10.72 9.59 10.04 12.23 10.40
Total risk-based capital ratio... 11.65 11.08 11.74 10.72 11.15 13.27 11.70
</TABLE>
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(1) Net income per share is based upon the weighted average number of common
shares and common share equivalents outstanding during the period.
(2) At period end, except net charge-offs (recoveries) to average loans and
average shareholders' equity to average total assets.
(3) All interim periods have been annualized.
(4) Calculated by dividing total noninterest expenses, excluding securities
losses, by net interest income plus noninterest income.
(5) Nonperforming loans consist of nonaccrual loans and loans contractually past
due 90 days or more.
5
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY, ITS
BUSINESS AND PROSPECTS BEFORE PURCHASING ANY OF THE SHARES OF COMMON STOCK
OFFERED HEREBY.
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 effects 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 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--Financial Condition--Interest Rate Sensitivity and
Liquidity."
COMPETITION
The banking business is highly competitive, and the profitability of the
Company depends principally upon the Company's 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 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.
6
<PAGE>
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 Board
of Governors of the Federal Reserve System (the "Federal Reserve Board"). The
Bank, as a national banking association, is subject to regulation and
supervision by the Office of the Comptroller of the Currency (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 the 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 the 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."
DIVIDEND HISTORY AND RESTRICTIONS ON ABILITY TO PAY DIVIDENDS
The Company has not previously paid any cash dividends on the Common Stock,
and the Company's Board of Directors does not intend to declare dividends on the
Common Stock for the foreseeable future. It is the policy of the Federal Reserve
Board that bank holding companies should pay cash dividends on common stock only
out of income available over the past year and only if prospective earnings
retention is consistent with the organization's expected future needs and
financial condition. The policy provides that bank holding companies should not
maintain a level of cash dividends that undermines the bank holding company's
ability to serve as a source of strength to its banking subsidiaries.
The Company's principal source of funds to pay dividends on the shares of
Common Stock will be cash dividends from the Bank. The payment of dividends by
the 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 the 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 September 30, 1996, approximately $21.0 million was available for payment of
dividends by the 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 the Bank. Regulatory authorities could
also impose administratively stricter limitations on the ability of the Bank to
pay dividends to the Company if such limits were deemed appropriate to preserve
the Bank's capital. See "Supervision and Regulation," "Dividend Policy" and
"Description of Securities of the Company."
DEPENDENCE ON KEY PERSONNEL
The Company and the Bank are dependent on certain key personnel, including
Walter E. Johnson, Paul B. Murphy, Jr., Yale Smith, Steve D. Stephens, Sharon K.
Sokol and David C. Farries, each of whom has relationships with customers of the
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
7
<PAGE>
growth and profitability. The Company has entered into employment contracts with
these officers, as described under "Management."
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."
NO PRIOR TRADING MARKET
Prior to the Offering, there has been no public market for the Common
Stock. The Common Stock has been approved for quotation on The Nasdaq Stock
Market's National Market under the symbol "SWBT." Keefe, Bruyette & Woods,
Inc. and Legg Mason Wood Walker, Incorporated (the "Representatives") have
advised the Company that they intend to make a market in the Common Stock as
long as the volume of trading activity in the Common Stock and certain other
market making considerations justify doing so. However, there can be no
assurance that an active public market will develop or be sustained after the
Offering or that if such a market develops, investors in the Common Stock will
be able to resell their shares at or above the initial public offering price.
Making a market involves maintaining bid and asked quotations for the Common
Stock and being available as a principal to effect transactions in reasonable
quantities at those quoted prices, subject to various securities laws and other
regulatory requirements. A public trading market having the desired
characteristics of depth, liquidity and orderliness depends upon the presence in
the market place of willing buyers and sellers of the Common Stock at any given
time, which presence is dependent upon the individual decisions of investors
over which neither the Company nor any market maker has any control.
The initial public offering price of the shares of Common Stock will be
determined by negotiations between the Company and the Representatives, and will
not necessarily bear any relationship to the Company's book value, past
operating results, financial condition or other established criteria of value
and may not be indicative of the market price of the Common Stock after the
Offering. See "Underwriting" for information relating to the method of
determining the initial public offering price.
SHARES ELIGIBLE FOR FUTURE SALE
The Company will have 9,134,961 shares of Common Stock outstanding after
the Offering. The Company, its executive officers and directors and certain
shareholders (who collectively will own approximately 18.7% of the outstanding
shares after the Offering) have agreed with the Representatives not to offer,
sell, contract to sell or otherwise dispose of any of their shares of Common
Stock for a period of 180 days after the date of this Prospectus without the
permission of the Representatives. The currently outstanding shares of Common
Stock which are not subject to such agreement with the Representatives are held
by approximately 370 shareholders of record, and all of such shares will be
freely tradable in accordance with Rule 144(k) under the Securities Act of 1933.
In addition, all of the shares of Common Stock sold in the Offering will
generally be freely tradable under the Securities Act of 1933. No prediction can
be made as to the effect, if any, that future sales of Common Stock or the
availability of Common Stock
8
<PAGE>
for future sale will have on the market price of the Common Stock prevailing
from time to time. Sales of a substantial number of such shares of Common Stock
(including shares issued upon exercise of stock options) in the future, or the
perception that such sales could occur, could adversely affect the market price
of the Common Stock. See "Management" and "Principal Shareholders."
REGULATION OF CONTROL
Individuals, alone or acting in concert with others, who acquire 10% or
more of any class of voting securities of the Company are presumed to have
acquired "control" of the Company under the Change in Bank Control Act, which
requires the prior approval of the Federal Reserve Board for any such
acquisition. Entities, alone or acting in concert, seeking to acquire 25% or
more (5% or more in the case of an acquiror that is a bank holding company) of
any class of voting securities of, or otherwise to control, the Company is
required to seek the prior approval of the Federal Reserve Board under the BHCA.
THE COMPANY
GENERAL
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 the Bank. The holding company formation was consummated and
the Company acquired all of the outstanding shares of capital stock of the Bank
as of the close of business on June 30, 1996. Based upon total assets as of
September 30, 1996, 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 will
continue 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
9
<PAGE>
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
no specific discussions with any candidates are currently underway, the Company
believes market and regulatory factors may present opportunities for the Company
to acquire other financial institutions.
THE BANK
The Bank, a national banking association, was chartered in January 1982 and
commenced business operations in October 1982. In July 1989, the 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. Primarily as a result of Mr. Johnson's reputation
and community contacts, the Bank completed two successful capital offerings,
raising $13 million and $8 million of new capital in 1990 and 1992,
respectively. Mr. Johnson also improved the 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. The Bank's 11 senior loan officers average more than 19
years of lending experience in the metropolitan Houston area. As a result of Mr.
Johnson's leadership, the Bank's assets have grown from $43.4 million at June
30, 1989 to $1.0 billion at December 31, 1996.
The 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,
the Company 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 first quarter of 1997, the
Bank intends to introduce a home banking product.
The Bank maintains a staff of professional treasury management marketing
officers who consult with middle market companies to design custom
cost-effective cash management systems. The 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 the Bank's
continued investment in new technology and people, the Bank has been able to
attract some of Houston's largest middle market companies to utilize the Bank's
treasury management products. The Bank has also been able to attract new loan
customers through their use of the 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, the Bank's STAR system provides customers with instant access
to all bank account information with multiple intraday updates. The 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, the Bank can provide the customer with a
paperless funds management system. Positive Pay, a service under which the Bank
only pays checks listed on a legitimate "company issue" file, is another
recent product addition which helps prevent check fraud. The 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.
10
<PAGE>
The 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 the Bank and in developing or modifying products and
services to better meet customer needs.
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 DEPOSITS AT
BRANCH SQ. FT. LOCATION SEPTEMBER 30, 1996
- ---------------------------------------- --------- ----------------------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Galleria/Headquarters................... 83,770 4400 Post Oak Parkway $411,101
Downtown -- 1100 Louisiana.............. 10,000 1100 Louisiana 109,041
Northwest Crossing...................... 8,134 Hwy 290 at Tidwell 95,371
Memorial City........................... 3,554 899 Frostwood 43,986
Greenway Plaza.......................... 2,669 12 Greenway Plaza 40,557
Medical Center.......................... 2,437 6602 Fannin 4,229
Downtown -- Two Houston Center.......... 2,219 909 Fannin --(1)
</TABLE>
- ------------
(1) Opened in January 1997.
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,
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.
See "Risk Factors -- Competition."
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. See "Risk Factors -- Exposure
to Local Economic Conditions."
EMPLOYEES
As of September 30, 1996, the Company had 308 full-time employees, 110 of
whom were officers of the 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 204 of its employees are currently
participating. The Company considers its relations with its employees to be
excellent.
11
<PAGE>
RECENT DEVELOPMENTS
OVERVIEW
Net income available to common shareholders for the three months ended
December 31, 1996 was $2.2 million, or $0.25 per share, compared to $2.2 million
or $0.25 per share for the same period in 1995. Included in the calculation of
net income for the fourth quarter of 1996 were expenses related to a one-time
bonus of $500,000 paid to Mr. Johnson and a significantly higher provision for
loan losses due to the unusually strong loan growth in the quarter. The higher
provision for loan losses was not a result of higher nonperforming assets, which
decreased from September 30, 1996. In addition, there were higher occupancy
expenses because the Company moved into larger facilities in order to support
the Company's growth. Net income available to common shareholders for the year
ended December 31, 1996 (including the above items) was $9.6 million or $1.12
per share compared to $7.8 million or $0.92 per share, an increase of 23.6% and
21.7% in net income and earnings per share, respectively. The growth in net
income was primarily attributable to the growth in the loan portfolio.
The following table presents for the periods indicated certain summary
consolidated financial data reflecting the Company's results of operations and
financial condition.
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER YEARS ENDED
31, DECEMBER 31,
--------------------------- -----------------------
1996 1995 1996 1995
----------- ----------- ----------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net income available to common
shareholders.................... $ 2,200 $ 2,170 $ 9,588 $ 7,757
Net income per share(1)............ $ 0.25 $ 0.25 $ 1.12 $ 0.92
Weighted average common shares
outstanding (in thousands)...... 8,585 8,417 8,535 8,394
</TABLE>
DECEMBER 31,
-------------------------
1996 1995
----------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
BALANCE SHEET DATA(2):
Total assets....................... $ 1,046,015 $825,474
Loans.............................. 601,475 438,259
Total deposits..................... 833,624 672,641
Total shareholders' equity......... 54,556 44,826
Book value per share............... 7.07 5.81
ASSET QUALITY RATIOS(2):
Nonperforming assets to loans and
other real estate.................. 0.21% 0.07%
Allowance for loan losses to
nonperforming loans(3)............. 619.12 1,673.78%
- ------------
(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.
(3) Nonperforming loans consist of nonaccrual loans and loans contractually past
due 90 days or more.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the Offering (based
upon an assumed initial public offering price of $16.00 per share, which is the
midpoint of the estimated offering range), after deducting the underwriting
discount and estimated expenses, are estimated to be approximately $16.8
million, or $19.4 million if the Underwriters' over-allotment option is fully
exercised. The Company intends to use $7.5 million of the proceeds to redeem the
750,000 outstanding shares of Series 1 Adjustable Rate First Preferred Stock of
the Bank (the "Bank Preferred Stock"), and the remaining estimated net
proceeds ($9.3 million) for general corporate purposes. The Company will not
receive any of the proceeds from the sale of the shares of Common Stock being
sold by the Selling Shareholders in the Offering.
Dividends on the Bank Preferred Stock are payable quarterly in arrears and
are calculated on the $10.00 subscription price at a floating rate equal to 1%
above the United States Treasury Bill rate. Dividends are noncumulative, and the
Bank is prohibited from paying any cash dividends on its common stock unless all
dividends on the Bank Preferred Stock have been paid in full for all completed
quarterly periods. Each share of Bank Preferred Stock is entitled to a
liquidation preference of $10.00, and holders of the Bank Preferred Stock have
no voting rights except in certain limited circumstances. The terms of the Bank
Preferred Stock provide that it may be redeemed by the Bank at any time on or
after December 31, 1997, in whole or in part, at $10.10 per share together with
all unpaid dividends per share whether or not declared. The holder of all of the
outstanding shares of the Bank Preferred Stock has consented to the redemption
by the Bank of all shares of Bank Preferred Stock at any time prior to December
31, 1997 for a redemption price of $10.00 per share plus accrued dividends to
the date of redemption.
Pending the application of the net proceeds, the Company intends to invest
such proceeds in short-term, interest-bearing securities, certificates of
deposit or guaranteed obligations of the United States of America.
DIVIDEND POLICY
The Company has not previously paid any cash dividends on the Common Stock
and does not intend to declare dividends on the Common Stock for the foreseeable
future.
In the future, the declaration and payment of dividends on the 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's Board of Directors. 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
the Bank with respect to the Bank's common stock. As of September 30, 1996,
approximately $21.0 million was available for payment of dividends by the Bank
to the Company under applicable restrictions without regulatory approval.
Regulatory authorities could impose administratively stricter limitations on the
ability of the Bank to pay dividends to the Company if such limits were deemed
appropriate to preserve certain capital adequacy requirements. See "Risk
Factors -- Dividend History and Restrictions on Ability to Pay Dividends" and
"Supervision and Regulation."
13
<PAGE>
DILUTION
As of September 30, 1996, the tangible book value of the Common Stock was
$6.63 per share ($6.58 per share including (i) the exercise of an option to
purchase 250,000 shares of Common Stock by Walter E. Johnson immediately prior
to the closing of the Offering; (ii) the issuance by the Company of 3,420 shares
of Common Stock to the Company's 401(k) savings plan and (iii) the cash
settlement of fractional shares as a result of the Company's Stock Split).
"Tangible book value per share" represents the amount of total tangible assets
less total liabilities divided by the number of shares of Common Stock
outstanding. After giving effect to the sale by the Company of 1,150,000 shares
of Common Stock offered hereby (after deducting underwriting discount and other
estimated offering expenses to be paid by the Company), the pro forma tangible
book value of the Company as of September 30, 1996 would have been $7.59 per
share. This represents an immediate increase in tangible book value of $0.96 per
share to current shareholders and an immediate dilution of $8.41 per share to
new investors. The following table illustrates this per share dilution.
Assumed price to public.............. $ 16.00
Tangible book value per share
before Offering................. 6.63
Increase per share attributable
to new investors................ 0.96
---------
Pro forma tangible book value per
share after Offering................. 7.59
---------
Dilution to new investors............ $ 8.41
---------
The following table sets forth, as of September 30, 1996, the number of
shares of Common Stock purchased from the Company, the total consideration paid
therefor and the average price per share paid by existing shareholders and by
new investors:
<TABLE>
<CAPTION>
TOTAL CASH
SHARES PURCHASED CONSIDERATION AVERAGE
--------------------- ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
----------- ------- --------- ------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Existing shareholders................ 7,984,961 87% $ 24,484 59% $ 3.07
New investors........................ 1,150,000 13 16,750 41 14.57
----------- ------- --------- -------
Total........................... 9,134,961 100% $ 41,234 100%
=========== ======= ========= =======
</TABLE>
The foregoing computations do not take into account the possible exercise
of outstanding stock options granted under the Company's stock option plans
(other than the option to be exercised by Mr. Johnson immediately prior to the
closing of the Offering) or the possible issuance of up to an additional 172,500
shares of Common Stock to new investors pursuant to the exercise of an option
granted by the Company to the Underwriters solely to cover over-allotments, if
any, in connection with the Offering. See "Underwriting." Options to purchase
a total of 910,025 shares of Common Stock were outstanding under the Company's
stock option plans at September 30, 1996 (other than the option to be exercised
by Mr. Johnson), of which 331,043 were exercisable at prices ranging from $0.40
to $10.10 per share. See "Management -- Employee Stock Option Plans." If the
shares subject to such outstanding options under the Company's stock option
plans were included in the foregoing calculations, further dilution to the new
shareholders would be incurred.
14
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of September 30, 1996, and as adjusted to give effect to (i) the sale
by the Company of 1,150,000 shares of Common Stock offered hereby, at a per
share price of $16.00 (which is the midpoint of the estimated offering range),
less underwriting discount and other estimated offering expenses; (ii) the
exercise of an option to purchase 250,000 shares of Common Stock for an
aggregate exercise price of $100,000 by Mr. Johnson immediately prior to the
closing of the Offering, and the resultant tax benefit of approximately $1.2
million, representing the amount that is deductible for tax purposes (which
amount does not affect net income and accordingly is added to paid-in capital);
(iii) the issuance by the Company of 3,420 shares of Common Stock to the
Company's 401(k) savings plan; (iv) the cash settlement of fractional shares as
a result of the Company's Stock Split and (v) the redemption of the Bank
Preferred Stock. See "Use of Proceeds."
SEPTEMBER 30, 1996
----------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN THOUSANDS)
Bank preferred stock.................... $ 7,323 $--
------- -----------
Shareholders' equity
Common Stock, $1 par value; 50,000,000
shares authorized, 7,731,595 shares
issued and outstanding; 9,134,961
shares issued and outstanding as
adjusted(1)........................ 7,731 9,135
Additional paid-in capital......... 17,965 34,424
Retained earnings.................. 26,530 26,530
Unrealized depreciation on
securities....................... (974) (974)
------- -----------
Total shareholders' equity.... 51,252 69,115
------- -----------
Total capitalization.......... $58,575 $69,115
======= ===========
- ------------
(1) Does not include approximately 1,160,025 actual (910,025 as adjusted) shares
of Common Stock reserved for issuance upon exercise of options granted under
the Company's stock option plans.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
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 the Prospectus, and the information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The selected historical consolidated financial data as
of the end of and for each of the five years in the period ended December 31,
1995 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 nine months ended September 30,
1996 and September 30, 1995 have not been audited but, in the opinion of
management, contain all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the financial position and 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 nine months ended September 30, 1996,
are not necessarily indicative of the financial position or results of
operations that may be expected at and for the year ended December 31, 1996, or
for any future periods.
<TABLE>
<CAPTION>
AS OF AND FOR THE
NINE MONTHS ENDED AS OF AND FOR THE
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income.................. $ 46,184 $ 36,282 $ 50,582 $ 34,288 $ 24,690 $ 18,605 $ 16,166
Interest expense................. 19,896 15,642 21,890 11,444 7,750 6,631 8,018
--------- --------- --------- --------- --------- --------- ---------
Net interest income.......... 26,288 20,640 28,692 22,844 16,940 11,974 8,148
Provision for loan losses........ 840 685 925 1,145 1,005 767 540
--------- --------- --------- --------- --------- --------- ---------
Net interest income after
provision for loan
losses..................... 25,448 19,955 27,767 21,699 15,935 11,207 7,608
Noninterest income............... 3,487 2,623 3,712 3,063 2,159 1,478 1,196
Noninterest expenses............. 17,043 13,978 19,458 15,782 12,684 9,042 6,860
--------- --------- --------- --------- --------- --------- ---------
Income before taxes.......... 11,892 8,600 12,021 8,980 5,410 3,643 1,944
Provision for income taxes....... 4,163 3,014 4,214 3,141 1,871 1,252 671
Cumulative effect of change in
accounting principle........... -- -- -- -- 16 -- --
--------- --------- --------- --------- --------- --------- ---------
Net income before extraordinary
item........................... 7,729 5,586 7,807 5,839 3,555 2,391 1,273
Extraordinary item............... -- -- -- -- -- 372 671
Preferred stock dividend......... 341 -- 50 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income available to common
shareholders................... $ 7,388 $ 5,586 $ 7,757 $ 5,839 $ 3,555 $ 2,763 $ 1,944
========= ========= ========= ========= ========= ========= =========
PER SHARE DATA:
Net income(1).................... $ 0.87 $ 0.67 $ 0.92 $ 0.70 $ 0.43 $ 0.44 $ 0.32
Book value....................... 6.63 5.51 5.81 4.65 3.84 3.38 2.73
Weighted average common shares
outstanding
(in thousands)................. 8,515 8,383 8,394 8,302 8,211 6,281 5,984
BALANCE SHEET DATA(2):
Total assets..................... $ 912,702 $ 711,349 $ 825,474 $ 578,335 $ 472,314 $ 339,114 $ 234,812
Securities....................... 296,721 237,813 295,183 151,467 136,504 63,581 58,842
Loans............................ 516,459 406,050 438,259 358,304 285,892 210,458 144,561
Allowance for loan losses........ 5,427 4,902 4,921 4,294 3,249 2,204 1,857
Total deposits................... 704,285 600,057 672,641 489,836 417,695 303,762 214,099
Total shareholders' equity....... 51,252 42,502 44,826 35,770 29,443 25,848 15,201
PERFORMANCE RATIOS(3):
Return on average assets......... 1.18% 1.17% 1.16% 1.14% 0.90% 1.02% 1.01%
Return on average common
equity......................... 20.58 18.96 19.20 17.44 12.93 16.34 13.80
Net interest margin.............. 4.49 4.62 4.60 4.82 4.65 4.81 4.53
Efficiency ratio(4).............. 56.99 59.72 58.08 60.67 66.41 67.22 73.42
ASSET QUALITY RATIOS(2):
Nonperforming assets to loans and
other real estate.............. 0.47% 0.30% 0.07% 0.19% 0.22% 0.31% 0.09%
Net charge-offs (recoveries) to
average loans(3)............... 0.07 0.02 0.08 0.03 (0.02) 0.24 0.30
Allowance for loan losses to
total loans.................... 1.05 1.21 1.12 1.20 1.14 1.05 1.28
Allowance for loan losses to
nonperforming loans(5)......... 253.95 400.82 1,673.78 1,081.58 1,406.84 1,231.31 10,925.88
CAPITAL RATIOS(2):
Leverage ratio................... 6.52% 5.96% 6.29% 6.33% 6.23% 7.62% 6.47%
Average shareholders' equity to
average total assets........... 5.72 6.15 6.04 6.55 6.99 6.25 7.30
Tier 1 risk-based capital
ratio.......................... 10.68 9.93 10.72 9.59 10.04 12.23 10.40
Total risk-based capital ratio... 11.65 11.08 11.74 10.72 11.15 13.27 11.70
</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) All interim periods have been annualized.
(4) Calculated by dividing total noninterest expenses, excluding securities
losses, by net interest income plus noninterest income.
(5) Nonperforming loans consist of nonaccrual loans and loans contractually past
due 90 days or more.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations analyzes the major elements of the Company's balance sheets and
statements of income. This section should be read in conjunction with the
Company's financial statements and accompanying notes and other detailed
information appearing elsewhere in this Prospectus.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
OVERVIEW
For the nine months ended September 30, 1996, the Company had net income
available to common shareholders of $7.4 million, an increase of $1.8 million or
32.3% from the same time period in 1995. Net income per share increased to $0.87
for the nine months ended September 30, 1996 from $0.67 for the same time period
in 1995. 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 1.18% and an
annualized return on average common equity of 20.58% for the nine months ended
September 30, 1996 compared to 1.17% and 18.96%, respectively, for the same time
period in 1995.
Total assets increased to $912.7 million from $711.3 million, an increase
of $201.4 million, at September 30, 1996 and 1995, respectively. The increase
was driven primarily by strong loan growth and an increase in the securities
portfolio. Deposits increased to $704.3 million at September 30, 1996 from
$600.1 million at September 30, 1995, an increase of $104.2 million or 17.4%.
Total shareholders' equity was $51.3 million at September 30, 1996, representing
an increase of $8.8 million or 20.7% over total shareholders' equity of $42.5
million at September 30, 1995.
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 for the nine months ended September 30, 1996 was $26.3
million, an increase of $5.7 million or 27.7% from $20.6 million for the nine
months ended September 30, 1995. This resulted in a net interest margin of 4.49%
and 4.62% and a net interest spread of 3.35% and 3.44% for the nine months ended
September 30, 1996 and 1995, respectively. The decrease in the net interest
margin and net interest spread was primarily the result of a lower yield on the
loan portfolio caused by a decrease in the Company's prime lending rate.
The increase in net interest income was driven almost exclusively by
increases in the volume of interest-earning assets. Interest income from loans
increased to $32.2 million from $27.1 million for the nine months ended
September 30, 1996 and 1995, respectively, an increase of $5.1 million or 18.8%.
The driving factor was a substantial increase in the loans which was partially
offset by the yield on the loan portfolio decreasing to 9.18% from 9.57% for the
nine months ended September 30, 1996 and 1995, respectively. Also, interest
income from the securities portfolio increased to $13.6 million for the nine
months ended 1996, from $7.9 million for the nine months ended 1995, a $5.7
million or 72.2% increase. This was due primarily to a 60.1% increase in average
securities held by the Company coupled with a yield that increased to 5.99% from
5.57% for the nine months ended September 30, 1996 and 1995, respectively.
Partially offsetting the interest income growth was higher interest expense
which grew to $19.9 million compared to $15.6 million for the nine months ended
September 30, 1996 and 1995, respectively, driven by
17
<PAGE>
strong growth in average deposits, in particular, money market and savings
deposits and certificates of deposit.
The following table presents for the periods indicated the total dollar
amount of average balances, 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 tables as loans carrying a
zero yield.
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
----------------------------------- -----------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- --------- ------- ----------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans............................... $ 467,846 $32,152 9.18% $ 378,206 $27,071 9.57%
Securities.......................... 302,707 13,584 5.99 189,047 7,877 5.57
Federal funds sold & other.......... 10,744 448 5.57 30,030 1,334 5.94
----------- --------- ------- ----------- --------- -------
Total interest-earning assets... 781,297 46,184 7.90% 597,283 36,282 8.12%
--------- ------- --------- -------
Less allowance for loan losses.......... (5,280) (4,609)
----------- -----------
Total earning assets, net of
allowance............................. 776,017 592,674
Nonearning assets....................... 63,088 47,675
----------- -----------
Total assets.................... $ 839,105 $ 640,349
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits.... $ 35,368 375 1.42% $ 32,470 494 2.03%
Money market and savings deposits... 301,449 9,982 4.42 227,517 7,751 4.55
Certificates of deposit............. 136,700 5,466 5.34 118,001 4,606 5.22
Repurchase agreements and borrowed
funds............................. 110,306 4,073 4.93 69,063 2,791 5.40
----------- --------- ------- ----------- --------- -------
Total interest-bearing
liabilities................... 583,823 19,896 4.55% 447,051 15,642 4.68%
--------- ------- --------- -------
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits.......................... 191,256 145,647
Other liabilities................... 8,744 8,259
----------- -----------
Total liabilities............... 783,823 600,957
Bank preferred stock.................... 7,323 --
Shareholders' equity.................... 47,959 39,392
----------- -----------
Total liabilities and
shareholders' equity.......... $ 839,105 $ 640,349
=========== ===========
Net interest income..................... $26,288 $20,640
========= =========
Net interest spread..................... 3.35% 3.44%
======= =======
Net interest margin..................... 4.49% 4.62%
======= =======
</TABLE>
18
<PAGE>
The following table presents for the periods indicated 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 related to higher outstanding balances and the volatility
of interest rates:
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1996 VS. 1995
------------------------------
INCREASE (DECREASE)
DUE TO
-------------------
VOLUME RATE TOTAL
------- ------- ------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans................................... $ 6,447 ($1,366) $5,081
Securities.............................. 4,888 819 5,707
Federal funds sold and other............ (849) (37) (886)
------- ------- ------
Total increase (decrease) in
interest income.................. 10,486 (584) 9,902
------- ------- ------
INTEREST-BEARING LIABILITIES:
Interest bearing deposits............... 45 (164) (119)
Savings and money market accounts....... 2,529 (298) 2,231
Time deposits........................... 1,075 (215) 860
Repurchase agreements and borrowed
funds................................. 1,671 (389) 1,282
------- ------- ------
Total increase (decrease) in
interest expense................. 5,320 (1,066) 4,254
------- ------- ------
Increase in net interest income......... $ 5,166 $ 482 $5,648
======= ======= ======
PROVISION FOR LOAN LOSSES
The provision for loan losses increased to $840,000 for the nine months
ended September 30, 1996 from $685,000 for the same time period in 1995, an
increase of $155,000 or 22.6%. The increase was driven primarily by strong loan
growth.
NONINTEREST INCOME
Noninterest income for the nine months ended September 30, 1996 was $3.5
million, an increase of $900,000 or 34.6% from $2.6 million in the same period
in 1995.
The following table presents for the periods indicated the major categories
of noninterest income:
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
Service charges on deposit accounts..... $ 2,069 $ 1,663
Retail services income.................. 64 34
Corporate services income............... 17 8
Loan operations......................... 405 321
Investment services..................... 860 506
Other noninterest income................ 72 91
--------- ---------
Total noninterest income........... $ 3,487 $ 2,623
========= =========
Service charges on deposit accounts is the largest component of noninterest
income and a significant source of revenue to the Company. The Company offers a
full product line of cash concentration, disbursement and automated information
reporting services comparable to those offered by major regional banks. For the
period ended September 30, 1996, service charges on deposit accounts were $2.1
million, an increase of $406,000 or 24.4% over the same period in 1995. This
increase is primarily attributable to a significant increase in the number of
deposit accounts from 14,247 at September 30, 1995 to 17,138 at
19
<PAGE>
September 30, 1996 and the addition of new products and services. Another reason
for the increase in noninterest income was the growth of the Company's
investment services department. During the past four years, the Company has
expanded investment sales, established a foreign exchange department and a
custody services department. These areas have been performing well as larger
regional competitors move these services out of state, giving the Company a
distinct competitive advantage. Fee income from investment services increased to
$860,000 for the nine months ended September 30, 1996 from $506,000 for the same
period in 1995, an increase of $354,000 or 70.0%. Investment sales, the largest
component of investment services income, increased to $617,000 from the
comparable period in 1995, an increase of $253,000 or 69.5%. For the nine months
ended September 30, 1996, foreign exchange income was $200,000, an increase of
$69,000 or 52.7% over the same time period in 1995.
NONINTEREST EXPENSES
In the nine month period ended September 30, 1996, noninterest expenses
increased $3.1 million or 22.2% to $17.0 million from the 1995 comparable
period. However, for the same time periods the efficiency ratio, calculated by
dividing total noninterest expenses (excluding securities losses) by net
interest income plus noninterest income, decreased to 56.99% in 1996 from 59.72%
in 1995. This decrease was primarily due to a large increase in earning assets,
a significant decrease in deposit insurance premiums, and the Company's
continued efforts to control overhead expenses.
Salary and benefit expense for the nine months ended September 30, 1996 was
$10.1 million, an increase of $2.3 million or 29.5% from $7.8 million in the
same period of 1995. The increase was due to additional personnel required to
accommodate the Company's growth and included staffing of the new Memorial City
and Medical Center offices. Total full-time equivalent employees at September
30, 1996 increased to 308 from 249 at September 30, 1995.
Occupancy expense increased to $2.6 million for the nine month period ended
September 30, 1996 from $1.8 million for the nine month period ended September
30, 1995, an increase of $745,000 or 41.2%. Major categories included within
occupancy expense are building lease expense, depreciation expense, and
maintenance contract expense. Building lease expense increased $160,000 or 28%
to $731,000 for the first nine months of 1996 from $571,000 for the same period
in 1995. This increase was the result of opening the Memorial City and Medical
Center offices and increasing the rentable number of square feet at the Galleria
location. It is expected that annual building lease expense will increase by
approximately $600,000 in 1997 because of the Company's relocation of its
headquarters in November 1996. Depreciation expense increased to $1.5 million
for the nine month period September 30, 1996, an increase of $469,000 or 46.5%
from $1.0 million for the same period in 1995. This increase was due primarily
to depreciation on equipment provided to new employees and expenses related to
technology upgrades throughout the Company. Maintenance contract expense for the
nine month period ended September 30, 1996 was $279,000, an increase of $103,000
or 58.9% over the same period in 1995. The Company has purchased maintenance
contracts for major operating systems throughout the organization.
On August 8, 1995, the FDIC Board of Directors voted to reduce the deposit
insurance premium paid by most banks. This resulted in a premium reduction from
$0.23 per $100 of deposits to $0.04 per $100 of deposits for the Bank.
Subsequently, the FDIC Board of Directors voted on additional changes which
reduced the rate paid by the Bank to $500 per quarter. As a result of the
changes, deposit insurance premiums were reduced to $1,500 in the first nine
months of 1996 from $486,000 for the same period in 1995. Deposit insurance
premiums for banks were subsequently increased effective as of January 1, 1997
to $0.0129 per $100 of deposits. If this rate had been effective during 1996,
the Company estimates it would have paid approximately $57,000 in deposit
insurance premiums for the first nine months of 1996. See "Supervision and
Regulation."
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
20
<PAGE>
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. In the
first nine months of 1996, income tax expense was $4.2 million, an increase of
$1.2 million or 40% from the $3.0 million of income tax expense for the same
period in 1995. The higher income tax expense in the first nine months of 1996
compared to the first nine months of 1995 is principally due to the increase in
taxable income. The income tax component of the Texas franchise tax was $14,000
for the first nine months in 1996, and $109,000 in the first nine months of
1995.
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.
FINANCIAL CONDITION
LOAN PORTFOLIO
Loans, net of unearned interest, were $516.5 million at September 30, 1996,
an increase of $110.5 million or 27.2% from $406.0 million at September 30,
1995. 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.
The following table summarizes the loan portfolio of the Company by type of
loans as of September 30, 1996 and September 30, 1995:
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
-------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
Commercial and industrial.......... $ 241,397 46.7% $ 177,064 43.6%
Real estate
Construction and land
development................... 58,144 11.3 40,656 10.0
1-4 family residential........ 98,649 19.1 85,568 21.1
Commercial owner occupied..... 34,143 6.6 33,933 8.3
Farmland...................... 9,461 1.8 5,390 1.3
Other......................... 21,080 4.1 22,132 5.5
Consumer........................... 53,585 10.4 41,307 10.2
---------- ------- ---------- -------
Total loans................... $ 516,459 100.0% $ 406,050 100.0%
========== ======= ========== =======
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
21
<PAGE>
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 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 September 30, 1996 are
summarized in the following table:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------------------------
AFTER ONE
ONE YEAR THROUGH AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and industrial............ $ 150,095 $ 82,698 $ 8,604 $ 241,397
Real estate construction............. 30,131 27,320 693 58,144
---------- ---------- ---------- ----------
Total........................... $ 180,226 $ 110,018 $ 9,297 $ 299,541
========== ========== ========== ==========
Loans with a fixed interest rate..... $ 36,710 $ 29,564 $ 2,941 $ 69,215
Loans with a floating interest
rate................................. 143,516 80,454 6,356 230,326
---------- ---------- ---------- ----------
Total........................... $ 180,226 $ 110,018 $ 9,297 $ 299,541
========== ========== ========== ==========
</TABLE>
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
22
<PAGE>
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 following table presents information regarding nonperforming assets at
September 30, 1996 and 1995:
SEPTEMBER 30,
--------------------
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
Nonaccrual loans..................... $ 2,128 $ 1,222
Accruing loans 90 or more days past
due............................. 9 1
Restructured loans................... -- --
Other real estate and foreclosed
property........................ 276 13
--------- ---------
Total nonperforming assets...... $ 2,413 $ 1,236
========= =========
Nonperforming assets to total loans
and other real estate.............. 0.47% 0.30%
Nonperforming assets (nonaccrual loans, restructured loans and real estate
acquired by foreclosure) were $2.4 million and $1.2 million, resulting in a
ratio of nonperforming assets to loans plus other real estate owned of 0.47% and
0.30% at September 30, 1996 and 1995, respectively. The increase was primarily
from one loan which was put on nonaccrual status during 1996.
The Company had $276,000 in real estate acquired by foreclosure at
September 30, 1996, as compared with $13,000 at September 30, 1995. The Company
records real estate acquired by foreclosure at the lesser of the outstanding
loan balance, net of any reduction in basis, or the fair value at the time of
foreclosure, less estimated costs to sell.
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, 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 September 30,
1996 is adequate to cover losses inherent in the portfolio as of such date.
There can be no assurance, however, that the Company will
23
<PAGE>
not sustain losses in future periods, which could be greater than the size of
the allowance at September 30, 1996.
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data:
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
Allowance for loan losses at January
1.................................. $ 4,921 $ 4,294
Provision for loan losses............ 840 685
Charge-offs.......................... (341) (83)
Recoveries........................... 7 6
--------- ---------
Allowance for loan losses at
September 30....................... $ 5,427 $ 4,902
========= =========
Allowance to period-end loans........ 1.05% 1.21%
Net charge-offs to average loans..... 0.07 0.02
Allowance to period-end nonperforming
loans.............................. 253.95 400.82
The following table describes 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>
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
--------------------- ---------------------
PERCENT OF PERCENT OF
LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance of allowance for loan losses
applicable to:
Commercial and industrial....... $ 535 46.7% $ 300 43.6%
Real estate:
Construction and land
development................ -- 11.3 -- 10.0
1-4 family residential..... 105 19.1 10 21.1
Commercial owner
occupied................... -- 6.6 -- 8.3
Farmland................... -- 1.8 -- 1.3
Other...................... -- 4.1 -- 5.5
Consumer........................ 9 10.4 48 10.2
Unallocated..................... 4,778 4,544
------ ------
Total allowance for loan losses...... $5,427 $4,902
====== ======
</TABLE>
SECURITIES
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("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 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
24
<PAGE>
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 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.
All securities held by the Company as of September 30, 1996 are classified
as available for sale. The following table presents the amortized cost of
securities classified as available for sale and their approximate fair values at
September 30, 1996:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government securities........... $ 93,034 $ 68 $ (347) $ 92,755
Mortgage-backed securities........... 160,109 186 (1,407) 158,888
Federal Reserve Bank Stock........... 950 -- -- 950
Federal Home Loan Bank Stock......... 38,810 -- -- 38,810
Other securities..................... 5,316 2 -- 5,318
---------- ---------- ---------- ----------
Total securities................ $ 298,219 $ 256 $ (1,754) $ 296,721
========== ========== ========== ==========
</TABLE>
Mortgage-backed securities are securities which have been developed by
pooling a number of real estate mortgages and are principally issued by federal
agencies such as the Federal National Mortgage Corporation and the Federal Home
Loan Bank. These securities have high credit ratings, and minimum regular
monthly cash flows of principal and interest are guaranteed by the agencies. The
Company has no mortgage-backed securities that have been issued by non-agency
entities.
Included in the Company's mortgage-backed securities at September 30, 1996
were $9.4 million in agency issued collateralized mortgage obligations. At
September 30, 1996, $81.1 million or 50.7% of the mortgage-backed securities
held by the Company had final maturities of more than 10 years; however, $72.8
million of these securities earn interest at floating rates and reprice within
one year, and accordingly are less susceptible to declines in value should
interest rates increase.
25
<PAGE>
The following table summarizes the contractual maturity of investments
(including securities, federal funds sold and interest-bearing deposits) and
their weighted average yields at September 30, 1996:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
YEAR BUT WITHIN YEARS BUT WITHIN
WITHIN
ONE YEAR FIVE YEARS TEN YEARS AFTER TEN YEARS
---------------- ---------------- ---------------- -----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL
------- ----- ------- ----- ------- ----- -------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
U.S. Government securities........... $43,735 5.85 % $49,299 6.07 % $ -- -- % $ -- -- % $ 93,034
Mortgage-backed securities........... -- -- 35,370 6.27 43,592 6.75 81,147 5.93 160,109
Federal Reserve Bank Stock........... -- -- -- -- -- -- 950 6.00 950
Federal Home Loan Bank Stock......... -- -- -- -- -- -- 38,810 5.85 38,810
Other securities..................... 5,166 4.96 -- -- 150 7.88 -- -- 5,316
Federal funds sold................... 1,450 5.89 -- -- -- -- -- -- 1,450
Interest-bearing deposits............ 75 5.05 -- -- -- -- -- -- 75
------- ----- ------- ----- ------- ----- -------- ----- ---------
Total investments................ $50,426 5.76 % $84,669 6.15 % $43,742 6.76 % $120,907 5.90 % $ 299,744
======= ===== ======= ===== ======= ===== ======== ===== =========
</TABLE>
YIELD
-----
U.S. Government securities........... 5.97 %
Mortgage-backed securities........... 6.23
Federal Reserve Bank Stock........... 6.00
Federal Home Loan Bank Stock......... 5.85
Other securities..................... 5.04
Federal funds sold................... 5.89
Interest-bearing deposits............ 5.05
-----
Total investments................ 6.07 %
=====
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 September 30, 1996, the Company has 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 ratios of average demand deposits to average total deposits
at September 30, 1996 and September 30, 1995 were 28.6%, and 27.6%,
respectively. The daily average balances and weighted average rates paid on
deposits for the nine month period ended September 30, 1996 are presented below:
SEPTEMBER 30,
1996
-------------------
AMOUNT RATE
-------- -----
(DOLLARS IN
THOUSANDS)
NOW accounts............................ $ 35,368 1.42%
Regular savings......................... 2,698 2.34
Treasury Plus........................... 168,926 4.85
Money Market............................ 129,825 3.90
CD's less than $100,000................. 42,486 5.20
CD's $100,000 and over.................. 85,823 5.41
IRA's & QRP's........................... 8,391 5.33
-------- -----
Total interest-bearing deposits.... 473,517 4.46%
-------- -----
Noninterest-bearing deposits............ 195,706 --
-------- -----
Total deposits..................... $669,223 3.16%
======== =====
26
<PAGE>
The following table sets forth the maturity of the Company's certificates
of deposit that are $100,000 or greater at September 30, 1996:
SEPTEMBER 30, 1996
----------------------
(DOLLARS IN THOUSANDS)
3 months or less........................ $ 43,666
Between 3 months and 6 months........... 28,409
Between 6 months and 1 year............. 14,791
Over 1 year............................. 6,516
----------------------
Total CD's $100,000 and over....... $ 93,382
======================
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 as of September 30, 1996,
is summarized as follows:
SEPTEMBER 30, 1996
----------------------
(DOLLARS IN THOUSANDS)
Securities sold under repurchase
agreements:
Average......................... $ 96,079
Period end...................... 86,176
Maximum month-end balance during
period............................. 107,320
Interest Rate:
Average......................... 4.87%
Period end...................... 4.76
Other short-term borrowings:
Average......................... $ 14,227
Period end...................... 60,044
Maximum month-end balance during
period............................. 60,044
Interest rate:
Average......................... 5.31%
Period end...................... 5.35
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 the Bank, in
accordance with policies approved by the 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 September 30, 1996, this ratio was a negative 2.09%. The
Company estimates that a 100 basis point change in interest rates would have no
significant
27
<PAGE>
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 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 interest rate
sensitivity 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, the 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 September 30, 1996:
<TABLE>
<CAPTION>
VOLUMES SUBJECT TO REPRICING WITHIN
-------------------------------------------------------
AFTER
0-30 DAYS 31-180 DAYS 181-365 DAYS ONE YEAR TOTAL
------------ ------------ ------------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Money market funds.............. $ 5,166 $ -- $ -- $ -- $ 5,166
Securities...................... 46,542 33,369 93,135 120,007 293,053
Loans........................... 325,804 33,706 36,030 119,692 515,232
Overdrafts...................... 3,102 -- -- -- 3,102
Federal funds sold.............. 1,525 -- -- -- 1,525
------------ ------------ ------------ ---------- ----------
Total interest-earning assets... 382,139 67,075 129,165 239,699 818,078
------------ ------------ ------------ ---------- ----------
Interest-bearing liabilities:
Demand, money market and savings
deposits...................... 325,878 -- -- -- 325,878
Certificates of deposit and
other time deposits........... 23,490 78,704 23,181 19,472 144,847
Short term borrowings........... 146,220 -- -- -- 146,220
------------ ------------ ------------ ---------- ----------
Total interest-bearing
liabilities............. 495,588 78,704 23,181 19,472 616,945
------------ ------------ ------------ ---------- ----------
Period GAP........................... $ (113,449) $ (11,629) $105,984 $ 220,227 $ 201,133
Cumulative GAP....................... $ (113,449) $ (125,078) $(19,094) $ 201,133
Period GAP to total assets........... (12.43)% (1.27)% 11.61% 24.13%
Cumulative GAP to total assets....... (12.43)% (13.70)% (2.09)% (22.04)%
</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. During the nine months ended September 30, 1996,
the Company's liquidity needs have primarily been met by growth in core
deposits, as previously discussed.
28
<PAGE>
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.
Federal Home Loan Bank ("FHLB") advances may be utilized from time to
time as either a short-term funding source or a longer term funding source. FHLB
advances can be particularly attractive as a longer term funding source to
balance interest rate sensitivity and reduce interest rate risk. The Company is
eligible for two borrowing programs through the FHLB. The first, called "Short
Term Fixed" (STF), requires delivery of eligible securities for collateral. At
September 30, 1996, the Company had approximately $14.5 million in securities
safekept at the FHLB which qualify as eligible collateral. Maturities under this
program range from 1-35 days, and the rate paid is approximately 25 basis points
less than the other programs.
The second borrowing program, the "Blanket Borrowing Program" (BBP), is
under an overnight borrowing agreement which does not require the delivery of
specific collateral. Borrowings are limited to a maximum of 65% of the Company's
1-4 family mortgage loans. At September 30, 1996, the Company had approximately
$64.9 million in potential borrowings available under this program. Under this
program, the Company must hold approximately $1 in FHLB stock for each $10 in
borrowings. In addition, under the Blanket Borrowing Program, the Company may
deliver specific collateral which will dramatically increase total potential
borrowings. Upon delivery, the FHLB will review the collateral and assign a
loan-to-value ratio of approximately 90%. In addition to real estate loans, the
FHLB will accept delivery of credit card and installment loans. The advances are
limited to 50% of assets or total eligible collateral, whichever is less. The
advances are subject to the stock purchase requirements as mentioned above. At
September 30, 1996, the Company had a total potential borrowings under the
various programs discussed above of $79.4 million.
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 the 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 the
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, qualifying perpetual preferred stock
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."
29
<PAGE>
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.
The total of shareholders' equity and Bank Preferred Stock increased to
$58.6 million at September 30, 1996, from $52.1 million at December 31, 1995, an
increase of $6.5 million or 12.5%. This increase was primarily attributable to
the retention of $7.4 million in earnings. These amounts were partially offset
by the payment of $341,000 in dividends on the Bank Preferred Stock and an
increase in the unrealized loss on securities of $1.2 million.
The following table provides a comparison of the Company's and the Bank's
leverage and risk-weighted capital ratios as of September 30, 1996 to the
regulatory standards:
WELL-
COMPANY CAPITALIZED
AND BANK MINIMUM MINIMUM
RATIO REQUIRED REQUIRED
-------- ------- -----------
Leverage ratio.......................... 6.52% 3.00%(1) 5.00%
Tier 1 risk-based capital ratio......... 10.68% 4.00% 8.00%
Risk-based capital ratio................ 11.65% 8.00% 10.00%
- ------------
(1) The OCC has the authority to require the Bank to maintain a leverage ratio
of up to 200 basis points above the required minimum.
Pursuant to Federal Deposit Insurance Corporation Improvement Act of 1991
("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, the Bank is
classified "well capitalized" for purposes of prompt corrective action. See
"Supervision and Regulation."
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
OVERVIEW
Total assets at December 31, 1995, 1994 and 1993 were $825.5 million,
$578.3 million and $472.3 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 $438.3 million at December 31, 1995 an
increase of $80.0 million or 22.3% from $358.3 million at the end of 1994. Loans
were $285.9 million at year end 1993. Deposits experienced similar growth,
increasing to $672.6 million at year end 1995 from $489.8 million at year end
1994 and $417.7 million at year end 1993. Shareholders' equity was $44.8
million, $35.8 million and $29.4 million at December 31, 1995, 1994 and 1993,
respectively.
Net income available to common shareholders was $7.8 million, $5.8 million
and $3.6 million and net income per share was $0.92, $0.70 and $0.43 for the
years ended 1995, 1994 and 1993, 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 1.16%, 1.14% and
0.90% and returns on
30
<PAGE>
average common equity of 19.20%, 17.44% and 12.93% for the years ended 1995,
1994 and 1993, respectively.
RESULTS OF OPERATIONS
NET INTEREST INCOME
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 in certificates of deposit and repurchase agreements and
borrowed funds.
1994 VERSUS 1993. Net interest income for 1994 was $22.8 million an
increase of $5.9 million or 34.9% from $16.9 million in 1993. The increase was
driven by an increase in interest income of $9.6 million and was partially
offset by an increase in interest expense of $3.7 million. This resulted in net
interest spreads of 3.89% and 3.87% and net interest margins of 4.82% and 4.65%
for the years ended 1994 and 1993, respectively.
Interest income increased primarily due to growth in interest income from
the loan portfolio. Interest income from the loan portfolio grew to $26.7
million from $18.7 million, an increase of $8.0 million or 42.6%. The growth was
due to an increase in the average loans to $317.4 million at year end 1994 from
$243.8 million at the end of 1993. Also, the yield on loans increased to 8.41%
in 1994 from 7.68% in 1993. Also contributing to the increase in interest income
was the increase in interest income from the securities portfolio which
increased to $6.9 million in 1994, an increase of $1.6 million or 29.4% from
$5.3 million in 1993. The increase in interest expense was driven by growth in
savings and money market accounts and certificates of deposit. Both categories
had increases in average balances and rates paid on deposits.
31
<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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1995 1994 1993
--------------------------------- --------------------------------- -----------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING
BALANCE PAID RATE BALANCE PAID RATE BALANCE
----------- --------- ------- ----------- --------- ------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans................................. $ 388,329 $37,089 9.55% $ 317,373 $26,684 8.41% $ 243,805
Securities............................ 206,717 11,668 5.64 140,478 6,898 4.91 105,965
Federal funds sold and other earning
assets.............................. 29,325 1,825 6.22 15,839 706 4.46 14,720
----------- --------- ------- ----------- --------- ------- -----------
Total interest-earning assets..... 624,371 50,582 8.10% 473,690 34,288 7.24% 364,490
----------- --------- ------- ----------- --------- ------- -----------
Less allowance for loan losses.......... (4,700) (3,679) (2,696)
----------- ----------- -----------
Total earning assets, net of
allowance............................. 619,671 470,011 361,794
Nonearning assets....................... 49,325 41,160 31,787
----------- ----------- -----------
Total assets...................... $ 668,996 $ 511,171 $ 393,581
=========== =========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits...... $ 31,886 626 1.96% $ 34,928 597 1.71% $ 21,607
Savings and money market accounts..... 243,652 11,066 4.54 153,105 4,850 3.17 132,707
Certificates of deposit............... 119,349 6,290 5.27 116,099 4,530 3.90 95,278
Repurchase agreements and borrowed
funds............................... 72,578 3,908 5.38 37,697 1,467 3.89 18,082
----------- --------- ------- ----------- --------- ------- -----------
Total interest-bearing
liabilities..................... 467,465 21,890 4.68% 341,829 11,444 3.35% 267,674
----------- --------- ------- ----------- --------- ------- -----------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits... 151,905 133,696 95,834
Other liabilities..................... 8,425 2,173 2,579
----------- ----------- -----------
Total liabilities................. 627,795 477,698 366,087
----------- ----------- -----------
Bank preferred stock.................... 804 -- --
Shareholders' equity.................... 40,397 33,473 27,494
----------- ----------- -----------
Total liabilities and
shareholders' equity............ $ 668,996 $ 511,171 $ 393,581
=========== =========== ===========
Net interest income..................... $28,692 $22,844
========= =========
Net interest spread..................... 3.42% 3.89%
======= =======
Net interest margin..................... 4.60% 4.82%
======= =======
</TABLE>
INTEREST AVERAGE
EARNED/ YIELD/
PAID RATE
--------- -------
ASSETS
Interest-earning assets:
Loans................................. $18,718 7.68%
Securities............................ 5,332 5.03
Federal funds sold and other earning
assets.............................. 640 4.35
--------- -------
Total interest-earning assets..... 24,690 6.77%
--------- -------
Less allowance for loan losses..........
Total earning assets, net of
allowance.............................
Nonearning assets.......................
Total assets......................
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits...... 484 2.24%
Savings and money market accounts..... 3,494 2.63
Certificates of deposit............... 3,333 3.50
Repurchase agreements and borrowed
funds............................... 439 2.43
--------- -------
Total interest-bearing
liabilities..................... 7,750 2.90%
--------- -------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits...
Other liabilities.....................
Total liabilities.................
Bank preferred stock....................
Shareholders' equity....................
Total liabilities and
shareholders' equity............
Net interest income..................... $16,940
=========
Net interest spread..................... 3.87%
=======
Net interest margin..................... 4.65%
=======
32
<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 can be segregated have been allocated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1995 VS. 1994 1994 VS. 1993
----------------------------- -----------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO DUE TO
------------------ ------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ --------- --------- ------ --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans................................... $5,966 $ 4,439 $ 10,405 $5,648 $ 2,320 $ 7,968
Securities.............................. 3,250 1,579 4,829 1,933 (524) 1,409
Federal funds sold and other earning
assets................................ 571 490 1,061 33 190 223
------ --------- --------- ------ --------- ---------
Total increase in interest income... 9,787 6,508 16,295 7,614 1,986 9,600
------ --------- --------- ------ --------- ---------
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits........ (51 ) 96 45 187 (90) 97
Savings and money market accounts....... 2,877 3,325 6,202 537 834 1,371
Certificates of deposit................. 127 1,632 1,759 728 470 1,198
Repurchase agreements and borrowed
funds................................. 1,358 1,083 2,441 477 551 1,028
------ --------- --------- ------ --------- ---------
Total increase in interest
expense........................... 4,311 6,136 10,447 1,929 1,765 3,694
------ --------- --------- ------ --------- ---------
Increase in net interest income......... $5,476 $ 372 $ 5,848 $5,685 $ 221 $ 5,906
====== ========= ========= ====== ========= =========
</TABLE>
PROVISION FOR LOAN LOSSES
The 1995 provision for loan losses decreased to $925,000 from $1.1 million
in 1994, a decrease of $175,000 or 15.9%. The provision for the year ended 1994
increased by $140,000 or 13.9% from the year ended December 31, 1993. The
reduced provision in 1995 relates to the Company's methodology for determining
the appropriate provision amount which includes an analysis of loan portfolio
and economic trends and other portfolio risks.
NONINTEREST INCOME
Noninterest income for the year ended December 31, 1995 was $3.7 million,
an increase of $649,000 or 21.2% over the same period in 1994. Noninterest
income of $3.1 million earned in the year ended December 31, 1994 represented an
increase of $904,000 or 41.9% over the same period in 1993. The following table
presents for the periods indicated the major changes of noninterest income.
DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Service charges on deposit accounts..... $ 2,386 $ 2,122 $ 1,678
Retail services income.................. 44 37 42
Corporate services income............... 11 35 29
Loan operations......................... 439 354 224
Investment services..................... 695 221 124
Other noninterest income................ 137 294 62
--------- --------- ---------
Total noninterest income...... $ 3,712 $ 3,063 $ 2,159
========= ========= =========
Service charges were $2.4 million for the year ended December 31, 1995,
compared to $2.1 million for the year ended December 31, 1994, an increase of
$264,000 or 12.5%, and increased $444,000 or 26.5% from 1993 to 1994. During
this three year period the Company introduced several new products which
33
<PAGE>
contributed to the increase in service charge income. In addition, the number of
deposit accounts similarly grew from 11,452 at December 31, 1993 to 12,736 at
December 31, 1994 to 14,686 at December 31, 1995.
Other significant increases in noninterest income were recognized in the
categories of loan operations, investment services and all other noninterest
income. The largest single component of loan operations income is fees received
from letters of credit. These fees have increased to $314,000 in 1995 to
$285,000 in 1994 to $159,000 in 1993. This increase was due primarily to the
formal addition of an International Department and marketing a new service,
confirmation of letters of credit. Fee income from investment services has
increased significantly in each of the past three years. For the year ended
1995, investment income grew to $695,000, an increase of $474,000 or 214% over
the 1994 level, and increased to $221,000 for the year ended 1994, an increase
of $97,000 or 78.2% from 1993. 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 year ended 1995, noninterest expenses totaled $19.5 million, an
increase of $3.7 million, or 23.4%, from $15.8 million during 1994, which had
increased from $12.7 million during 1993. Noninterest expenses increased from
$12.7 million during 1993 to $15.8 million during 1994, an increase of 24.4%.
The increase in noninterest expenses during these periods was due primarily to
salaries and employee benefits. For the same time periods the efficiency ratio
was 58.08% in 1995, 60.67% in 1994 and 66.41% in 1993. The percentage decrease
from 1993 to the 1994 and 1995 percentages 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, 1995 was $10.7
million, an increase of $2.0 million or 23.0% from $8.7 million for the year
ended December 31, 1994. Salary and benefit expense for the year ended December
31, 1994 was up $1.5 million or 21.4% from the same period in 1993. This
increase was due primarily to the hiring of additional personnel required to
accommodate the Company's growth. Total full-time equivalent employees for the
years ended 1995, 1994 and 1993 were 256, 205 and 170, respectively.
Occupancy expense rose $515,000 and $674,000 or 25.8% and 51.0% in 1995 and
1994, respectively. Major categories included within occupancy expense are
building lease expense, depreciation expense, and maintenance contract expense.
Building lease expense increased to $779,000 in 1995 from $657,000 in 1994, an
increase of $122,000 or 18.6%, and increased $102,000 or 18.4% for the year
ended 1993. Additionally, the Company increased the rentable number of square
feet of the Galleria location. Depreciation expense increased $510,000 and
$412,000 or 98.5% and 40.1% in 1994 and 1995, respectively. This increase was
due primarily to depreciation on equipment provided to new employees and
expenses related to technology upgrades throughout the Company. Maintenance
contract expense for the year ended December 31, 1995 was $247,000, an increase
of $90,000 or 57.3% compared to $157,000 in 1994 and $90,000 in 1993. 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 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. In 1995 income
tax expense was $4.2 million, an increase of $1.1 million or 35% from the $3.1
million of income tax expense in 1994. In 1994 income tax expense was $3.1
million, an increase of $1.2 million or 63% from the $1.9 million of income tax
expense in 1993. The income tax component of the Texas franchise tax was
$145,000 in 1995, $53,000 in 1994, and zero in 1993.
34
<PAGE>
FINANCIAL CONDITION
LOAN PORTFOLIO
Total loans increased by $80.0 million, or 22.3%, to $438.3 million at
December 31, 1995, from $358.3 million at December 31, 1994. During 1994, total
loans increased by $72.4 million, or 25.3%, from $285.9 million at December 31,
1993.
At December 31, 1995, total loans represented 65.2% of deposits and 53.1%
of total assets. Total loans as a percentage of deposits were 73.1% at December
31, 1994 as compared with 68.4% at December 31, 1993. Total loans as a
percentage of total assets were 62.0% at December 31, 1994, compared with 60.5%
at December 31, 1993.
The following table summarizes the loan portfolio of the Company by major
category as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------------
1995 1994 1993 1992
-------------------- -------------------- -------------------- --------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT
-------- ------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial............... $194,095 44.3% $148,177 41.3% $125,062 43.7% $ 95,339
Real estate
Construction & land development........ 46,926 10.7 43,895 12.3 35,362 12.4 13,977
1-4 family residential................. 88,120 20.1 75,132 21.0 59,371 20.8 51,510
Commercial owner
occupied............................. 36,765 8.4 26,907 7.5 21,167 7.4 17,866
Farmland............................... 5,283 1.2 2,945 0.8 2,998 1.0 2,283
Other.................................. 22,923 5.2 23,766 6.6 13,325 4.7 10,478
Consumer................................ 44,147 10.1 37,483 10.5 28,607 10.0 19,005
-------- ------- -------- ------- -------- ------- --------
Total Loans.......................... $438,259 100.0% $358,305 100.0% $285,892 100.0% $210,458
======== ======= ======== ======= ======== ======= ========
</TABLE>
1991
--------------------
PERCENT AMOUNT PERCENT
------- -------- -------
Commercial and industrial............... 45.3% $ 67,353 46.6%
Real estate
Construction & land development........ 6.6 11,092 7.7
1-4 family residential................. 24.5 31,282 21.6
Commercial owner
occupied............................. 8.5 11,146 7.7
Farmland............................... 1.1 1,000 0.7
Other.................................. 5.0 8,583 5.9
Consumer................................ 9.0 14,104 9.8
------- -------- -------
Total Loans.......................... 100.0% $144,560 100.0%
======= ======== =======
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, 1995
are summarized in the following table:
DECEMBER 31, 1995
--------------------------------------------
AFTER ONE
THROUGH AFTER
ONE YEAR FIVE FIVE
OR LESS YEARS YEARS TOTAL
---------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
Commercial and industrial......... $ 124,322 $ 64,982 $ 4,791 $ 194,095
Real estate construction.......... 29,940 16,236 750 46,926
---------- --------- --------- ----------
Total...................... $ 154,262 $ 81,218 $ 5,541 $ 241,021
========== ========= ========= ==========
Loans with a fixed interest rate.. $ 18,232 $ 24,733 $ 216 $ 43,181
Loans with a floating interest
rate............................ 136,030 56,485 5,325 197,840
---------- --------- --------- ----------
Total...................... $ 154,262 $ 81,218 $ 5,541 $ 241,021
========== ========= ========= ==========
Effective January 1, 1995, the Company adopted SFAS No. 114, "ACCOUNTING
FOR 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 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.
35
<PAGE>
NONPERFORMING ASSETS
The Company's conservative lending approach has resulted in strong asset
quality. Nonperforming assets at December 31, 1995 were $294,000, compared with
$688,000 at December 31, 1994 and $631,000 at December 31, 1993. This resulted
in a ratio of nonperforming assets to loans plus other real estate of 0.07%,
0.19% and 0.22% for the years ended 1995, 1994 and 1993, respectively.
The following table presents information regarding nonperforming assets as
of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans..................... $ 291 $ 397 $ 202 $ 179 $ 5
Accruing loans 90 or more days past
due................................ 3 -- 29 -- 12
Restructured loans................... -- -- -- -- --
Other real estate and foreclosed
property........................... -- 291 400 466 111
--------- --------- --------- --------- ---------
Total nonperforming assets.... $ 294 $ 688 $ 631 $ 645 $ 128
========= ========= ========= ========= =========
Nonperforming assets to total loans
and other real estate.............. 0.07% 0.19% 0.22% 0.31% 0.09%
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at January
1.................................. $ 4,294 $ 3,250 $ 2,204 $ 1,857 $ 1,679
Provision for loan losses............ 925 1,145 1,005 767 540
Charge-offs.......................... (312) (167) (19) (441) (443)
Recoveries........................... 14 66 60 21 81
----------- ----------- ----------- ----------- ------------
Allowance for loan losses at December
31................................. $ 4,921 $ 4,294 $ 3,250 $ 2,204 $ 1,857
=========== =========== =========== =========== ============
Allowance to period-end loans........ 1.12% 1.20% 1.14% 1.05% 1.28%
Net charge-offs (recoveries) to
average loans...................... 0.08 0.03 (0.02) 0.24 0.30
Allowance to period-end nonperforming
loans.............................. 1,673.78 1,081.58 1,406.84 1,231.31 10,925.88
</TABLE>
36
<PAGE>
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 from any segment of loans.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1995 1994
----------------------- -----------------------
PERCENT OF PERCENT OF
LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
--------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance of allowance for loan losses
applicable to:
Commercial and industrial....... $ 103 44.3% $ 88 41.3%
Real estate:
Construction and land
development............. -- 10.7 -- 12.3
1-4 family residential..... -- 20.1 -- 21.0
Commercial owner
occupied................ -- 8.4 -- 7.5
Farmland................... -- 1.2 -- 0.8
Other...................... -- 5.2 -- 6.6
Consumer........................ 25 10.1 51 10.5
Unallocated..................... 4,793 4,155
--------- ---------
Total allowance for loan losses...... $ 4,921 $ 4,294
========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------
1993 1992 1991
----------------------- ----------------------- -----------------------
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....... $ 100 43.7% $ 140 45.3% $ -- 46.6%
Real estate:
Construction and land
development............. -- 12.4 -- 6.6 -- 7.7
1-4 family residential..... -- 20.8 -- 24.5 -- 21.6
Commercial owner
occupied................ -- 7.4 -- 8.5 7.7
Farmland................... -- 1.0 1.1 0.7
Other...................... -- 4.7 -- 5.0 -- 5.9
Consumer........................ 58 10.0 32 9.0 -- 9.8
Unallocated..................... 3,092 2,032 1,857
--------- --------- ---------
Total allowance for loan losses...... $ 3,250 $ 2,204 $ 1,857
========= ========= =========
</TABLE>
37
<PAGE>
SECURITIES
The following table summarizes the amortized cost of securities held by the
Company as of the dates shown:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Government securities.............. $ 97,797 $ 95,336 $ 88,745 $ 38,231 $ 33,823
Mortgage-backed securities.............. 154,083 55,079 45,857 24,003 18,813
Federal Reserve Bank Stock.............. 946 718 716 479 479
Federal Home Loan Bank Stock............ 37,692 1,421 1,037 718 577
Other securities........................ 4,329 150 149 150 5,150
---------- ---------- ---------- --------- ---------
Total securities................... $ 294,847 $ 152,704 $ 136,504 $ 63,581 $ 58,842
========== ========== ========== ========= =========
</TABLE>
The following table summarizes the carrying value and classification of
securities as of the dates shown. See " -- For the Nine Months Ended September
30, 1996 and 1995 -- Financial Condition -- Securities" for a discussion of
SFAS No. 115 and the classification of securities.
DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Available for sale...................... $ 295,183 $ 63,628 $ --
Held to maturity........................ -- 87,839 --
Securities at amortized cost............ -- -- 136,504
---------- ---------- ----------
Total securities................... $ 295,183 $ 151,467 $ 136,504
========== ========== ==========
The following table presents the amortized cost of securities classified as
available for sale and their approximate values at December 31, 1995 and
December 31, 1994:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------------------------------------- -----------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED
COST GAIN LOSS VALUE COST GAIN LOSS
--------- ---------- ---------- -------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Government securities.............. $ 97,797 $491 $ (200) $ 98,088 $47,584 $ 29 $ (810)
Mortgage-backed securities.............. 154,083 451 (416) 154,118 15,142 14 (470)
Federal Reserve Bank Stock.............. 946 -- -- 946 718 -- --
Federal Home Loan Bank Stock............ 37,692 -- -- 37,692 1,421 -- --
Other securities........................ 4,329 10 -- 4,339 -- -- --
--------- ---------- ---------- -------- --------- --- ----------
Total securities.................... $294,847 $952 $ (616) $295,183 $64,865 $ 43 $ (1,280)
========= ========== ========== ======== ========= === ==========
</TABLE>
FAIR
VALUE
-------
U.S. Government securities.............. $46,803
Mortgage-backed securities.............. 14,686
Federal Reserve Bank Stock.............. 718
Federal Home Loan Bank Stock............ 1,421
Other securities........................ --
-------
Total securities.................... $63,628
=======
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 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>
38
<PAGE>
The following table presents the amortized cost of securities and their
approximate fair values at December 31, 1993:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government securities.............. $ 88,745 $ 771 $ (70) $ 89,446
Mortgage-backed securities.............. 45,857 172 (227) 45,802
Other................................... 1,902 -- -- 1,902
--------- ---------- ---------- --------
Total securities................... $ 136,504 $ 943 $ (297) $137,150
========= ========== ========== ========
</TABLE>
At December 31, 1995, securities totaled $295.2 million, an increase of
$143.7 million from $151.5 million at December 31, 1994. The increase occurred
primarily in mortgage-backed securities and FHLB stock. During 1994, securities
increased $15.0 million from $136.5 million at December 31, 1993. The yield on
the securities portfolio for 1995 was 5.64% while the yield was 4.91% in 1994
and 5.03% in 1993.
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, 1995 were $22.9 million in agency issued collateral mortgage
obligations.
At December 31, 1995, 45.1% of the mortgage-backed securities held by the
Company had final maturities of more than 10 years. At December 31, 1995,
approximately $62.0 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, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
YEAR BUT WITHIN YEARS BUT WITHIN
WITHIN
ONE YEAR FIVE YEARS TEN YEARS AFTER TEN YEARS
---------------- ---------------- ---------------- -----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL
------- ----- ------- ----- ------- ----- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
U.S. Government securities.............. $41,533 5.93 % $56,264 5.65 % $ -- -- % $ -- -- % $ 97,797
Mortgage-backed securities.............. -- -- 33,250 6.63 51,351 6.38 69,483 6.56 154,084
Federal Reserve Bank Stock.............. -- -- -- -- -- -- 946 6.00 946
Federal Home Loan Bank Stock............ -- -- -- -- -- -- 37,692 5.95 37,692
Other securities........................ 4,179 5.39 -- -- 150 8.13 -- -- 4,329
Federal funds sold...................... 23,885 5.73 -- -- -- -- -- -- 23,885
Interest-bearing deposits............... 15,010 5.13 -- -- -- -- -- -- 15,010
------- ----- ------- ----- ------- ----- -------- ----- --------
Total investments................... $84,607 5.71 % $89,514 6.02 % $51,501 6.38 % $108,121 6.34 % $333,743
======= ===== ======= ===== ======= ===== ======== ===== ========
</TABLE>
YIELD
-----
U.S. Government securities.............. 5.77 %
Mortgage-backed securities.............. 6.51
Federal Reserve Bank Stock.............. 6.00
Federal Home Loan Bank Stock............ 5.95
Other securities........................ 5.48
Federal funds sold...................... 5.73
Interest-bearing deposits............... 5.13
-----
Total investments................... 6.10 %
=====
DEPOSITS
The Company's ratio of average demand deposits to average total deposits
for years ended December 31, 1995, 1994 and 1993 were 28.4%, 30.4%, and 27.7%,
respectively.
Average total deposits during 1995 increased to $551.7 million from $437.8
million in 1994, an increase of $113.8 million or 25.9%. The development of the
Treasury Plus product, which attracted $91.4 million of average deposits,
contributed to this growth. Treasury Plus is a money market account which pays a
rate in excess of the U.S. Treasury bill rate based upon the size of the
deposit. In addition, average noninterest-bearing deposits increased to $156.8
million in 1995 from $133.7 million in 1994 due to the increase in the number of
deposit accounts. Average deposits in 1994 rose to $437.8 million from $345.4
million in 1993, an increase of $92.4 million or 26.8%.
39
<PAGE>
The daily average balances and weighted average rates paid on deposits for
each of the years ended December 31, 1995, 1994 and 1993 are presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1995 1994 1993
--------------------- --------------------- ---------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
NOW accounts......................... $ 31,886 1.96% $ 34,928 1.69% $ 21,607 1.92%
Regular savings...................... 2,680 2.83 2,126 2.77 1,703 2.47
Treasury Plus........................ 91,396 5.35 -- -- -- --
Money market......................... 149,576 4.08 150,979 3.17 131,004 2.72
CD's less than $100,000.............. 38,306 5.14 40,536 3.99 38,148 3.71
CD's $100,000 and over............... 73,760 5.32 70,190 3.83 52,481 3.33
IRA's & QRP's........................ 7,281 5.46 5,373 4.17 4,649 3.64
---------- --------- ---------- --------- ---------- ---------
Total interest-bearing
deposits........................ 394,885 4.55% 304,132 3.28% 249,592 2.92%
---------- --------- ---------- --------- ---------- ---------
Noninterest-bearing deposits......... 156,776 -- 133,696 -- 95,834 --
---------- --------- ---------- --------- ----------
Total deposits.................. $ 551,661 3.26% $ 437,828 2.28% $ 345,426 2.14%
========== ========= ========== ========= ========== =========
</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:
DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
3 months or less..................... $ 45,166 $ 44,659 $ 25,595
Between 3 months and 6 months........ 15,558 9,405 7,302
Between 6 months and 1 year.......... 13,385 10,640 10,671
Over 1 year.......................... 8,538 5,986 5,639
--------- --------- ---------
Total CD's $100,000 and over.... $ 82,647 $ 70,690 $ 49,207
========= ========= =========
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:
DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Securities sold under repurchase
agreements:
Average......................... $ 65,674 $ 33,817 $ 18,079
Year-end........................ 95,638 42,448 23,140
Maximum month-end balance during
year............................... 95,638 44,630 27,857
Interest Rate:
Average......................... 5.36% 3.80% 2.38%
Year-end........................ 5.41% 5.05% 2.31%
Other short-term borrowings:
Average......................... 6,904 3,880 2,740
Year-end........................ 1,287 8,819 --
Maximum month-end balance during
year................................. 10,000 11,270 --
Interest rate:
Average......................... 5.58% 4.73% 2.92%
Year-end........................ 5.32% 5.22% 0%
40
<PAGE>
INTEREST RATE SENSITIVITY AND LIQUIDITY
The following table sets forth an interest rate sensitivity analysis for
the Company as of December 31, 1995:
<TABLE>
<CAPTION>
VOLUMES SUBJECT TO REPRICING WITHIN
-----------------------------------------------------------------
AFTER
0-30 DAYS 31-180 DAYS 181-360 DAYS ONE YEAR TOTAL
--------- ----------- ------------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Money market funds.............. $ 4,179 $ -- $ -- $ -- $ 4,179
Securities...................... 47,850 51,882 76,934 114,338 291,004
Loans........................... 291,586 19,390 24,266 99,909 435,151
Overdrafts...................... 3,108 -- -- -- 3,108
Federal funds sold.............. 23,885 -- -- -- 23,885
--------- ----------- ------------ ---------- ----------
Total interest-earning assets... 370,608 71,272 101,200 214,247 757,327
--------- ----------- ------------ ---------- ----------
Interest-bearing liabilities
Demand, money market and savings
deposits...................... 344,950 -- -- -- $ 344,950
Certificates of deposit and
other time deposits........... 29,325 56,088 19,070 21,870 126,353
Short term borrowings........... 96,925 -- -- -- 96,925
--------- ----------- ------------ ---------- ----------
Total interest-bearing
liabilities................... 471,200 56,088 19,070 21,870 568,228
--------- ----------- ------------ ---------- ----------
Period GAP........................... $(100,592) $ 15,184 $ 82,130 $ 192,377 $ 189,099
Cumulative GAP....................... $(100,592) $ (85,408) $ (3,278) $ 189,099
Period GAP to total assets........... (12.19)% 1.84% 9.95% 23.31%
Cumulative GAP to total assets....... (12.19)% (10.35)% (0.40)% 22.91%
</TABLE>
CAPITAL RESOURCES
Shareholders' equity increased to $44.8 million at December 31, 1995 from
$35.8 million at December 31, 1994, an increase of $9.0 million, or 25.1%. This
increase was primarily the result of net income of $7.8 million. In addition,
the Bank sold $7.3 million in Bank Preferred Stock. During 1994, shareholders'
equity increased by $6.4 million, or 21.8%, from $29.4 million at December 31,
1993.
The following table provides a comparison of the Company's and the Bank's
leverage and risk-weighted capital ratios as of December 31, 1995 to the minimum
regulatory standards:
COMPANY WELL-CAPITALIZED
AND BANK MINIMUM MINIMUM
RATIO REQUIRED REQUIRED
-------- -------- -----------------
Leverage ratio.................... 6.29% 3.00%(1) 5.00%
Tier 1 risk-based capital ratio... 10.72% 4.00% 8.00%
Risk-based capital ratio.......... 11.74% 8.00% 10.00%
- ------------
(1) The OCC has the authority to require the Bank to maintain a leverage ratio
of up to 200 basis points above the required minimum.
41
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following is a list of the directors and executive officers of the
Company, their respective offices with the Company and the Bank and their ages.
All of the directors of the Company are also directors of the 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.
NAME POSITION AGE
- ---------------------------------------------------------------------- ----
John B. Brock III................ Director 64
Ernest H. Cockrell............... Director 51
John W. Johnson.................. Director and Chairman of the 51
Executive Committee of the Board
Walter E. Johnson................ Chairman of the Board and Chief 60
Executive Officer
Wilhelmina R. Morian............. Director 50
Paul B. Murphy, Jr............... Director and President 37
Andres Palandjoglou.............. Director 49
Michael T. Willis................ Director 52
David C. Farries................. Executive Vice President, Treasurer 50
and Secretary of the Company and
Executive Vice President and Chief
Financial Officer of the Bank
Yale Smith....................... Executive Vice President of the 57
Company and the Bank
Sharon K. Sokol.................. Executive Vice President of the 46
Company and the Bank
Steve D. Stephens................ Executive Vice President of the 37
Company and the Bank
R. John McWhorter................ Vice President and Controller 32
JOHN B. BROCK III. Mr. Brock 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 and a director of
St. Luke's Episcopal Hospital.
ERNEST H. COCKRELL. Mr. Cockrell became a director of the 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.
JOHN W. JOHNSON. Mr. Johnson became a director and Chairman of the Board
of the Bank in 1982 and served in that capacity until 1996, when he was named
Chairman of the 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 the 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
42
<PAGE>
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 currently serves on the Board of Directors of
the Houston Branch of the Dallas Federal Reserve Bank. He also 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 the Bank in 1982.
For more than five years, 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 the 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 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 the
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 the 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.
DAVID C. FARRIES. Mr. Farries joined the 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 Chief Financial Officer of the
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 the 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 the 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 the Board of Directors for the Southwest
Automated Clearing House and also serves on the Board of Directors of the
43
<PAGE>
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 the Bank in February 1990 as an Executive Vice
President and heads the Bank's downtown branch office. Mr. Smith is very active
in the Houston community having served on the Board of the Salvation Army and as
Chairman of the Irvington Corporation Community Center.
STEVE D. STEPHENS. Mr. Stephens has over 15 years of commercial lending
experience, and is currently in charge of the Bank's Northwest Crossing office,
and the Memorial City office. Prior to joining the 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 Fund and active in the Muscular
Dystrophy Association. He graduated from the University of Houston with a B.B.A.
in accounting in 1980.
R. JOHN MCWHORTER. Mr. McWhorter has been Vice President and Controller of
the Bank since 1990, prior to which he had been employed by Coopers & Lybrand
LLP. 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 and Palandjoglou are Class I directors with terms of
office expiring on the date of the Company's annual meeting of shareholders in
1997; 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 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 Board of Directors and holds office until his successor is duly elected
and qualified or until his or her earlier death, resignation or removal.
The Board of Directors has established audit and compensation committees.
The Audit Committee currently consists of John W. Johnson, Andres Palandjoglou
and Wilhelmina R. Morian, none of whom is an employee of the Company. The Audit
Committee will review 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 will meet 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 will administer the Company's stock option plans and will
make recommendations to the Board of Directors as to option grants to Company
employees under such plans. In addition, the Compensation Committee is
responsible for making recommendations to the Board of Directors 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 the Bank's Board
of Directors 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
Bank's Board of Directors 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's Board of Directors 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.
44
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
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>
ANNUAL COMPENSATION
-------------------------------------
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION COMPENSATION(1)
- ---------------------------------------- ---------- ---------- ------------- ---------------
<S> <C> <C> <C> <C>
Walter E. Johnson....................... $ 325,000 $ 662,500 $ 6,006 $ 4,500
Chairman & Chief Executive Officer
Paul B. Murphy, Jr...................... 175,000 87,500 6,660 4,500
President
Sharon K. Sokol......................... 125,000 45,000 2,842 3,750
Executive Vice President
Yale Smith.............................. 125,000 14,000 4,732 3,750
Executive Vice President
Steve D. Stephens....................... 125,000 50,000 3,000 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>
POTENTIAL REALIZABLE
VALUE AT
% OF TOTAL ASSUMED ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES IN EXERCISE TERM(2)
OPTIONS FISCAL YEAR PRICE(1) EXPIRATION ------------------------
NAME GRANTED(#) 1996 ($/SH) DATE 0%($) 5%($)
- ------------------------------------- ----------- ------------ -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Walter E. Johnson.................... 250,900 60.77% $16.00 11/19/06 $ -- $ 2,524,635
Paul B. Murphy, Jr................... 60,425 14.64% 16.00 11/19/06 -- 608,015
Sharon K. Sokol...................... 7,875 1.91% 16.00 11/19/06 -- 79,241
Steve D. Stephens.................... 19,625 4.75% 16.00 11/19/06 -- 197,473
Yale Smith........................... 7,125 1.73% 16.00 11/19/06 -- 71,694
</TABLE>
NAME 10%($)
- ------------------------------------- -----------
Walter E. Johnson.................... $ 6,397,920
Paul B. Murphy, Jr................... 1,540,830
Sharon K. Sokol...................... 200,812
Steve D. Stephens.................... 500,435
Yale Smith........................... 181,687
- ------------
(1) The exercise price of all options shown in the table is equal to the "price
to public" shown on the cover page of this Prospectus, which is deemed to
be the fair market value of the Common Stock on the date of grant. The
number shown in the table ($16.00 per share) is the midpoint of the
estimated offering range.
(2) 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.
45
<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 DECEMBER 31, IN-THE-MONEY OPTIONS AT
1996 DECEMBER 31, 1996(1)
--------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Walter E. Johnson....................... 342,160 288,750 $ 5,178,606 $ 387,125
Paul B. Murphy, Jr...................... 19,400 106,425 279,660 561,720
Sharon K. Sokol......................... 14,076 55,425 219,578 590,272
Yale Smith.............................. 17,300 45,200 269,880 469,970
Steve D. Stephens....................... 17,300 57,700 269,880 469,970
</TABLE>
- ------------
(1) The value is based on $16.00 per share, which is the midpoint of the
estimated offering range.
Walter E. Johnson intends to exercise an option for 250,000 of the 342,160
exercisable shares shown in the above table immediately prior to the closing of
the Offering. Such option was granted to Mr. Johnson in 1989 in connection with
his employment by the Bank at that time and is exercisable at a price of $.40
per share. Following his exercise of such option, Mr. Johnson intends to sell
such 250,000 shares to Mr. Robert C. McNair or to certain of his family members
or business associates.
EMPLOYMENT AGREEMENTS
Walter E. Johnson, Paul B. Murphy, Jr., Sharon K. Sokol, Yale Smith, Steve
D. Stephens and David C. Farries 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.
DIRECTOR COMPENSATION
In an effort to attract and retain qualified directors, the Bank's Board of
Directors 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 a maximum of 44,525 shares of 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 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 19,325 shares will be granted for the 1996 calendar year with an
exercise price equal to the "price to public" shown on the cover page of this
Prospectus.
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 Bank and for serving on
the Bank's Management Committee. Directors of the Bank
46
<PAGE>
receive a fee of $500 for each meeting of the Bank's Board of Directors attended
and $200 for each Board Committee meeting attended. Directors of the Bank who
are also employees of the Bank do not receive fees for attending Board Committee
meetings.
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 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, $187,000 and $259,000
of compensation expense in connection with the Former Option Plans during 1996,
1995, 1994 and 1993, 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
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 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 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 1,523,575 shares granted to 79 employees
and non-employee directors (including options to be granted under the Directors
Plan for the 1996 calendar year) were outstanding, with per share exercise
prices ranging from $.40 to the "price to public" shown on the cover page of
this Prospectus (the "Public Offering Price"). Options for 412,925 shares were
granted in 1996 at exercise prices ranging from $9.00 to the Public Offering
Price, and no options were exercised in 1996. At December 31, 1996, options to
purchase an aggregate of 600,368 shares were exercisable and 271,450 shares were
reserved for future grants.
401(K) PLAN
The 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 the Bank determines, at its discretion, the amount
of matching contributions. Beginning July 1, 1994, the 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, the 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, 1994 and 1993 was approximately $180,000, $136,000, $146,000, and
$120,000, respectively.
During April, 1993, the plan was amended to allow the Bank to contribute
shares of 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 Bank common stock under the 401(k) Plan were
converted into rights to acquire Common Stock. Under the 401(k) plan, 250,000
shares of 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.
47
<PAGE>
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 the Company. During 1996
the Company 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 the Bank to executive officers, directors and principal
shareholders satisfy the foregoing standards. On September 30, 1996, all of such
loans aggregated approximately $11.3 million, which was 19.0% of the Bank's Tier
1 capital at such date. The Bank 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.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 1996, and as
adjusted to reflect the sale of the Common Stock offered hereby and the exercise
of the option by Walter E. Johnson immediately prior to the closing of the
Offering, by (i) each director, (ii) each of the Named Executives, (iii) each
person who is known by the Company to own beneficially 5% or more of the Common
Stock and (iv) 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.
PERCENTAGE
BENEFICIALLY OWNED
---------------------
NUMBER OF BEFORE AFTER
SHARES OFFERING OFFERING
----------- -------- --------
John B. Brock III.................... 77,892(1)(2) 1.0% * %
Ernest H. Cockrell................... 131,762(3) 1.7 1.4
John W. Johnson...................... 249,700(4)(2) 3.2 2.2
Walter E. Johnson.................... 471,500(5) 5.8 2.4
Wilhelmina R. Morian................. 226,360(6) 2.9 2.5
Paul B. Murphy, Jr. ................. 37,882(7) * *
Andres Palandjoglou.................. 236,460(8)(2) 3.0 1.8
Yale Smith........................... 36,805(9) * *
Sharon K. Sokol...................... 21,165(10) * *
Steve D. Stephens.................... 24,330(9) * *
Michael T. Willis.................... 139,820(11) 1.8 1.5
Robert C. McNair..................... 223,302(12) 2.9 5.2
Directors and Executive Officers as a
Group.............................. 1,913,269(13) 23.3 18.9
- ------------
* Does not exceed 1.0%.
(1) Includes 1,625 shares which may be acquired within 60 days pursuant to
outstanding stock options.
(2) See "Selling Shareholders."
(3) Includes 17,500 shares held in trust for the benefit of Ernest H. Cockrell
and 1,400 shares which may be acquired within 60 days pursuant to
outstanding stock options.
(4) Includes 49,281 shares held by John W. Johnson, Trustee for the benefit of
his three children and 38,175 shares which may be acquired within 60 days
pursuant to outstanding stock options.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
48
<PAGE>
(5) Includes 3,750 shares held by Walter E. Johnson's wife and 351,260 shares
which may be acquired by Walter E. Johnson within 60 days pursuant to
outstanding stock options, 250,000 of which Walter E. Johnson expects to
acquire upon exercise thereof immediately prior to the closing of the
Offering and then sell to Robert C. McNair or certain of his family members
or business associates upon closing of the Offering. Such shares are
therefore not reflected in his percentage ownership after the Offering.
(6) Includes 162,635 shares held by Cullen Estate Trust for the benefit of
Wilhelmina R. Morian and 3,525 shares which may be acquired within 60 days
pursuant to outstanding stock options.
(7) Includes 25,900 shares which may be acquired within 60 days pursuant to
outstanding stock options.
(8) Includes 232,335 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 4,125 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 2,300 shares which may be acquired within 60 days pursuant to
outstanding stock options.
(12) In addition to the shares shown in the table before the Offering, it is
anticipated that Mr. McNair or certain of his family members or business
associates will purchase an additional 250,000 shares from Walter E.
Johnson at the time of consummation of the Offering. Such additional
250,000 shares are reflected in Mr. McNair's percentage ownership after the
Offering. Mr. McNair's address is 1600 Smith Street, Suite 5000, Houston,
Texas 77002.
(13) Includes 490,660 shares which may be acquired within 60 days pursuant to
outstanding stock options.
SELLING SHAREHOLDERS
A total of 184,753 shares of Common Stock are being sold in the Offering by
the Selling Shareholders. The Company and each of the Selling Shareholders have
entered into a Purchase Agreement pursuant to which the Selling Shareholders
will bear the underwriting discount applicable to the shares sold by them, and
will indemnify the Underwriters from certain liabilities, including liabilities
under the Securities Act.
The following table sets forth certain information regarding the beneficial
ownership by the Selling Shareholders of the Company's Common Stock as of
September 30, 1996, and as adjusted to reflect the sale of the Common Stock
offered hereby and the exercise of the option by Walter E. Johnson immediately
prior to the closing of the Offering. Except as otherwise noted below and in the
table under "Principal Shareholders," each shareholder has sole voting and
investment power with respect to the shares beneficially owned. Messrs. Brock,
Heaney, Johnson, Mullins and Soriero have each been a director of the Bank for
more than three years. Mr. Palandjoglou has been an advisory director of the
Bank for more than three years. See "Management -- Directors and Executive
Officers of the Company" for information regarding Messrs. Brock, Johnson and
Palandjoglou, who became directors of the Company in 1996.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
-------------------------------------------------------
SHARES OWNED PERCENT
NUMBER ------------------------- OWNED
OF SHARES BEFORE AFTER AFTER
NAME OF BENEFICIAL OWNER OFFERED OFFERING OFFERING OFFERING
- ------------------------------------- --------- -------- ----------- -----------
<S> <C> <C> <C> <C>
John B. Brock III.................... 25,000 77,892(1) 52,892 (*)%
David Heaney......................... 6,250 107,641(2) 101,391 1.1
John W. Johnson...................... 46,523(3) 249,700(1) 203,177 2.2
Don R. Mullins....................... 29,480 88,850(4) 59,370 (*)
Rio Largo de Panama, S.A.(5)......... 70,000 236,460(1) 166,460 1.8
Thomas F. Soriero.................... 7,500 32,145(4) 24,645 (*)
</TABLE>
- ------------
* Less than 1.0%.
(1) See the table under "Principal Shareholders" for information regarding the
form of beneficial ownership.
(2) Includes 31,160 shares owned by Mr. Heaney's wife, 31,844 shares held in
trust for the benefit of his two children and 2,000 shares which may be
acquired within 60 days pursuant to outstanding stock options.
(3) A portion of such shares will be sold by Mr. Johnson as Trustee for his
three children.
(4) Includes 1,350 shares which may be acquired within 60 days pursuant to
outstanding stock options.
(5) A family investment corporation in which Andres Palandjoglou owns a 25%
beneficial interest and shares voting and investment power.
49
<PAGE>
SUPERVISION AND REGULATION
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of the Company and the 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 the Bank, are brief summaries and
are qualified in their entirety by reference to such statutes and regulations.
THE BANK
As a national banking association, the 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. The Bank must also furnish quarterly and annual reports to the OCC,
and the OCC may exercise cease and desist and other enforcement powers over the
Bank if its actions represent unsafe or unsound practices or violations of law.
Since the deposits of the Bank are insured by the Bank Insurance Fund ("BIF")
of the FDIC, the 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 the Bank.
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES AND INSIDERS. The 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 the Bank. Such
transactions with the Company or any of its nonbanking subsidiaries are limited
in amount to ten percent of the 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 the 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
the Bank, including its subsidiaries, and its affiliates must be on terms
substantially the same, or at least as favorable to the 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 the 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. The Bank is also
subject to certain prohibitions against any advertising that indicates the Bank
is responsible for the obligations of its affiliates. The Company does not have
any nonbanking affiliates as of the date of this 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 the Bank are primarily
governed by the National Bank Act which generally defers to the laws of the
state where the 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 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 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
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.
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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. FDICIA authorizes the OCC to
assess the institution for its costs of conducting the examinations.
AUDIT REPORTS. Insured institutions with total assets of $500 million or
more must submit annual audit reports prepared by independent auditors to
federal and state regulators. In some instances, the audit report of the
institution's holding company can be used to satisfy this requirement. Auditors
must receive examination reports, supervisory agreements and reports of
enforcement actions, and must apply procedures agreed to by the FDIC to
determine compliance by the institution or holding company with legal
requirements designated by the FDIC. The annual audit report must include
financial statements prepared in accordance with generally accepted accounting
principles, certifications concerning management's responsibility for the
financial statements, internal controls and compliance with legal requirements
designated by the FDIC, and an attestation by the auditor regarding the
statements of management. For institutions with total assets of more than $3
billion, independent auditors may be required to review quarterly financial
statements. FDICIA requires that independent audit committees be formed,
consisting of outside directors only. The committees of such institutions must
include members with experience in banking or financial management, must have
access to outside counsel, and must not include representatives of large
customers.
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,
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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.
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 September 30, 1996, the 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 the Bank in an amount in any calendar year which exceeds the 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, the
Bank cannot pay a dividend if it will cause the Bank to be "undercapitalized."
See "Risk Factors -- Dividend History and Restrictions on Ability to Pay
Dividends" and "Dividend Policy."
DEPOSIT INSURANCE. The deposits of the 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 twenty seven cents 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 BIF-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 an estimated $0.0129 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 the 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 the Bank was placed into conservatorship or
receivership, because of the cross-guarantee provisions of the Federal Deposit
Insurance Act, as amended, the Delaware Company as the sole shareholder of the
Bank, would likely lose its investment in the 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.
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CONSUMER LAWS AND REGULATIONS. In addition to the laws and regulations
discussed herein, the 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. The Bank must comply with the
applicable provisions of these consumer protection laws and regulations as part
of their ongoing customer relations.
THE COMPANY
The Company and its wholly-owned second tier holding company, Southwest
Bancorporation of Delaware, Inc. (the "Delaware Company"), are bank holding
companies registered under the BHCA, and each 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 the Bank, the claims of depositors and other general or
subordinated creditors of the 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 and the Delaware Company are
each 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.
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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).
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 average 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 and the OCC recently adopted amendments to their
risk-based capital regulations to provide for the consideration of interest rate
risk in the agencies' determination of a banking institution's capital adequacy.
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, the Delaware Company or the 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 " -- The
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
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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 September 30, 1996, however, the Bank satisfied the
requirements of a "well capitalized" institution and, therefore, these
requirements are presently inapplicable to the Company.
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 requires 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 its subsidiaries
cannot be predicted.
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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 Common Stock, $1.00 par value per share, 7,731,595 shares of which are
issued and outstanding as of September 30, 1996; and (ii) 1,000,000 authorized
shares of Preferred Stock, $0.01 par value per share, 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, copies of which have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
COMMON STOCK
The holders of the Common Stock are entitled to one vote for each share of
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, all voting power is in the Common Stock. Holders of
Common Stock may not cumulate their votes for the election of directors. Holders
of 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 Common Stock will be entitled to receive dividends out of funds
legally available therefor, if and when properly declared by the Board of
Directors. However, the Board of Directors may not declare or pay cash dividends
on Common Stock, and no 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 -- Dividend History and Dividend Restrictions" and "Supervision and
Regulation."
On the liquidation of the Company, the holders of 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's Board of Directors, including, without
limitation, making future acquisitions, raising additional equity capital and
financing. Subject to certain limits set by the Company's Articles of
Incorporation, the Preferred Stock may be issued on such terms and conditions,
and at such times and in such situations, as the Board of Directors 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 Articles of Incorporation or
applicable laws, rules or regulations, the Board of Directors has the sole
authority to determine the relative rights and preferences of the Preferred
Stock and any series thereof without shareholder approval. The Company's
Articles of Incorporation 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 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 Board of Directors 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
Texas Business Corporation Act, shareholder approval prior to the issuance of
shares
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of Common Stock or Preferred 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 Board of Directors 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 Common
Stock could include, among other things, (i) reduction of the amount otherwise
available for payments of dividends on Common Stock if dividends are payable on
the series of Preferred Stock; (ii) restrictions on dividends on Common Stock if
dividends on the series of Preferred Stock are in arrears; (iii) dilution of the
voting power of 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 Common Stock
if the series of Preferred Stock is convertible, and is converted, into Common
Stock; and (v) restrictions on the rights of holders of 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's Articles of Incorporation
and the Company's 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's Articles of Incorporation and the Company's Bylaws, copies of which
are filed as exhibits to the Registration Statement of which this Prospectus is
a part.
CLASSIFIED BOARD OF DIRECTORS. Under the Company's Bylaws, the Board of
Directors is classified into three classes, with the directors being elected for
staggered, three-year terms. The classification of the Company's Board of
Directors will have the effect of making it more difficult to change the
composition of the Board of Directors, because at least two annual meetings of
the shareholders would be required to change the control of the Board of
Directors rather than one. In addition, the Bylaws provide that directors may be
removed by the shareholders only for cause and that vacancies on the Board of
Directors may be filled by the remaining directors.
ADVANCE NOTICE OF SHAREHOLDER PROPOSALS AND NOMINATIONS. The Company's
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 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 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 Board of Directors 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
57
<PAGE>
is increased and there is no public announcement naming all of the nominees for
director or specifying the size of the increased 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 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 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 Articles of Incorporation and 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's
Articles of Incorporation provide that, notwithstanding any provision of the
Texas Business Corporation Act 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's Articles of
Incorporation, each of which would otherwise require two-thirds shareholder
approval under Texas law.
NO ACTION BY WRITTEN CONSENT. Under the Texas Business Corporation Act, no
action required or permitted to be taken at an annual or special meeting of
shareholders may be taken by written consent in lieu of a meeting of
shareholders.
AMENDMENT OF BYLAWS. The Company's Articles of Incorporation and Bylaws
provide that the Bylaws may be amended only by the Board of Directors.
Shareholders do not have the power to amend the Company's Bylaws.
58
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Purchase Agreement dated, the
Underwriters named below (the "Underwriters"), through their Representatives,
Keefe, Bruyette & Woods, Inc. and Legg Mason Wood Walker, Incorporated, have
severally agreed to purchase from the Company and the Selling Shareholders the
following respective numbers of shares of Common Stock at the initial public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus.
NUMBER OF
NAME SHARES
- ------------------------------------- ------------
Keefe, Bruyette & Woods, Inc.........
Legg Mason Wood Walker,
Incorporated.......................
Total...........................
============
The Purchase Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all such shares of the Common Stock if any of such shares are
purchased. The Underwriters are obligated to take and pay for all of the shares
of Common Stock offered hereby (other than those covered by the over-allotment
option described below) if any are taken.
The Company has been advised by the Representatives of the Underwriters
that the Underwriters propose to offer such shares of Common Stock to the public
at the public offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may re-allow, a concession
not in excess of $ per share to certain other dealers. After the initial
public offering, the offering price and other selling terms may be changed by
the Representatives of the Underwriters.
Pursuant to the Purchase Agreement, the Company has granted to the
Underwriters an option, exercisable not later than 30 days after the date of
this Prospectus, to purchase up to 172,500 additional shares of Common Stock at
the public offering price, less the underwriting discounts and commissions set
forth on the cover page of this Prospectus, solely to cover over-allotments. To
the extent that the Underwriters exercise such option, each Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional shares as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of shares in
such table, and the Company will be obligated, pursuant to the option, to sell
such shares to the Underwriters.
The Company, each of its directors and executive officers, each of the
Selling Shareholders and certain other shareholders of the Company have agreed
not to sell or otherwise dispose of any shares of Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent of
the Representatives of the Underwriters, except that the Company may issue
shares of Common Stock upon the exercise of currently outstanding options. See
"Risk Factors -- Shares Eligible for Future Sale."
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock has
been determined by negotiations between the Company and the Representatives of
the Underwriters. Among the factors considered in such negotiations were
prevailing market and general economic conditions, the market capitalizations,
trading histories and stages of development of other traded companies that the
Company and the Representatives of the Underwriters believed to be comparable to
the Company, the results of operations of the Company in recent periods, the
current financial position of the Company, estimates of the business potential
of the Company and the present state of the Company's development and the
availability for sale in the market of a significant number of shares of Common
Stock. Additionally, consideration has been given to the general status of the
59
<PAGE>
securities market, the market conditions for new issues of securities and the
demand for securities of comparable companies at the time the Offering was made.
The Common Stock has been approved for quotation on The Nasdaq Stock
Market's National Market.
LEGAL MATTERS
The validity of the shares of Common Stock to be issued by the Company will
be passed upon by Vinson & Elkins L.L.P., Houston, Texas. Vinson & Elkins L.L.P.
owns 112,965 shares of Common Stock. Certain legal matters with respect to the
Common Stock offered hereby have been passed upon for the Underwriters by
Skadden, Arps, Slate, Meagher & Flom LLP.
EXPERTS
The consolidated balance sheet of Southwest Bancorporation of Texas, Inc.
as of December 31, 1995 and 1994 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, 1995, included in this prospectus, have been
included herein in reliance on the report, which includes an explanatory
paragraph for changes in accounting principles, of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company has not previously been subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended. The Company has filed with
the Securities and Exchange Commission (the "Commission") a Registration
Statement on Form S-1 (the "Registration Statement") under the Securities Act,
with respect to the offer and sale of Common Stock pursuant to this Prospectus.
This Prospectus, filed as a part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement or the exhibits
and schedules thereto in accordance with the rules and regulations of the
Commission and reference is hereby made to such omitted information. Statements
made in this Prospectus concerning the contents of any contract, agreement or
other document filed as an exhibit to the Registration Statement are summaries
of the terms of such contracts, agreements or documents and are not necessarily
complete. Reference is made to each such exhibit for a more complete description
of the matters involved and such statements shall be deemed qualified in their
entirety by such reference. The Registration Statement and the exhibits and
schedules thereto filed with the Commission may be inspected, without charge,
and copies may be obtained at prescribed rates, at the public reference facility
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located at
7 World Trade Center, 13th Floor, New York, New York 10048 and CitiCorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60621-2511. For further
information pertaining to the Common Stock offered by this Prospectus and the
Company, reference is made to the Registration Statement. The Registration
Statement and other information filed by the Company with the Commission are
also available at the Commission's World Wide Web site on the Internet at
http://www.sec.gov.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements certified by independent auditors and
quarterly reports containing unaudited financial statements for the first three
quarters of each fiscal year.
60
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
Report of Independent Accountants.... F-2
Consolidated Balance Sheet as of
September 30, 1996 (Unaudited) and
December 31, 1995
and 1994........................... F-3
Consolidated Statement of Income for
the Nine Months Ended September 30,
1996
(Unaudited) and September 30, 1995
(Unaudited) and for the Years Ended
December 31,
1995, 1994 and 1993................ F-4
Consolidated Statement of Changes in
Shareholders' Equity for the Years
Ended December 31, 1995, 1994 and
1993 and the Nine Months Ended
September 30, 1996 (Unaudited)..... F-5
Consolidated Statement of Cash Flows
for the Nine Months Ended September
30, 1996 (Unaudited) and September
30, 1995 (Unaudited) and for the
Years Ended December 31, 1995,
1994, and 1993..................... F-6
Notes to Consolidated Financial
Statements........................... F-7
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, 1995 and 1994, 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, 1995. 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, 1995 and 1994,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1995 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 and changed its accounting
for income taxes as of January 1, 1993.
COOPERS & LYBRAND L.L.P.
Houston, Texas
February 9, 1996, except for the fourth
paragraph of Note 1, as to which the date
is November 18, 1996
F-2
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ----------------------
1996 1995 1994
------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks................. $ 86,930 $ 57,310 $ 42,952
Federal funds sold...................... 1,450 23,885 18,490
------------- ---------- ----------
Total cash and cash equivalents.... 88,380 81,195 61,442
Securities -- available for sale........ 296,721 295,183 63,628
Securities -- held to maturity.......... 87,839
Loans, net.............................. 511,032 433,338 354,010
Premises and equipment, net............. 5,902 5,676 4,599
Accrued interest receivable............. 6,412 5,974 4,119
Prepaid expenses and other.............. 4,255 4,108 2,698
------------- ---------- ----------
Total assets....................... $ 912,702 $ 825,474 $ 578,335
============= ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand -- noninterest-bearing......... $ 233,561 $ 201,338 $ 172,593
Demand -- interest-bearing............ 41,198 33,350 40,697
Money market accounts................. 281,940 308,933 158,619
Savings............................... 2,739 2,667 2,733
Time, $100 and over................... 93,382 79,899 69,539
Other time............................ 51,465 46,454 45,655
------------- ---------- ----------
Total deposits..................... 704,285 672,641 489,836
Securities sold under repurchase
agreements............................ 86,176 95,638 42,448
Other short-term borrowings............. 60,044 1,287 8,819
Accrued interest payable................ 527 598 483
Other liabilities....................... 3,095 3,161 979
------------- ---------- ----------
Total liabilities.................. 854,127 773,325 542,565
------------- ---------- ----------
Commitments and contingencies
Bank preferred stock.................... 7,323 7,323
------------- ---------- ----------
Shareholders' equity:
Common stock -- $1 par value,
50,000,000 shares authorized;
7,731,595, 7,717,580 and 7,696,183
shares issued and outstanding at
September 30, 1996 (unaudited),
December 31, 1995 and 1994,
respectively....................... 7,731 7,717 7,696
Additional paid-in capital............ 17,965 17,745 17,505
Retained earnings..................... 26,530 19,142 11,385
Net unrealized appreciation
(depreciation) on securities
available for sale, net of deferred
taxes of $524, ($115) and $420 at
September 30, 1996 (unaudited),
December 31, 1995 and 1994,
respectively....................... (974) 222 (816)
------------- ---------- ----------
Total shareholders' equity......... 51,252 44,826 35,770
------------- ---------- ----------
Total liabilities and shareholders'
equity........................... $ 912,702 $ 825,474 $ 578,335
============= ========== ==========
</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>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------------- -------------------------------
1996 1995 1995 1994 1993
----------- ----------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans........................... $32,152 $27,071 $ 37,089 $ 26,684 $ 18,718
Securities...................... 13,584 7,877 11,668 6,898 5,332
Federal funds sold and other.... 448 1,334 1,825 706 640
----------- ----------- --------- --------- ---------
Total interest income...... 46,184 36,282 50,582 34,288 24,690
Interest expense on deposits and
other borrowings..................... 19,896 15,642 21,890 11,444 7,750
----------- ----------- --------- --------- ---------
Net interest income........ 26,288 20,640 28,692 22,844 16,940
Provision for loan losses............ 840 685 925 1,145 1,005
----------- ----------- --------- --------- ---------
Net interest income after
provision for loan
losses.................. 25,448 19,955 27,767 21,699 15,935
----------- ----------- --------- --------- ---------
Other income:
Service charges................. 2,069 1,663 2,386 2,122 1,678
Other operating income.......... 1,418 908 1,258 665 479
Gain on sale of other assets.... 52 68 276 2
----------- ----------- --------- --------- ---------
Total other income......... 3,487 2,623 3,712 3,063 2,159
----------- ----------- --------- --------- ---------
Other expense:
Salaries and employee
benefits........................ 10,093 7,821 10,686 8,672 7,145
Occupancy expense............... 2,552 1,807 2,510 1,995 1,321
Loss on sale of securities,
net............................. 71 93 639 63
Other operating expenses........ 4,327 4,257 5,623 5,052 4,218
----------- ----------- --------- --------- ---------
Total other expenses....... 17,043 13,978 19,458 15,782 12,684
----------- ----------- --------- --------- ---------
Income before income
taxes...................... 11,892 8,600 12,021 8,980 5,410
Provision for income taxes........... (4,163) (3,014) (4,214) (3,141) (1,871)
----------- ----------- --------- --------- ---------
Income before accounting
change.................. 7,729 5,586 7,807 5,839 3,539
Cumulative effect to January 1, 1993
of change in accounting
principle.......................... 16
----------- ----------- --------- --------- ---------
Net income before bank
preferred stock
dividend................ 7,729 5,586 7,807 5,839 3,555
----------- ----------- --------- --------- ---------
Bank preferred stock dividend........ 341 50
----------- ----------- --------- --------- ---------
Net income available to
common shareholders..... $ 7,388 $ 5,586 $ 7,757 $ 5,839 $ 3,555
=========== =========== ========= ========= =========
Earnings per common share............ $ 0.87 $ 0.67 $ 0.92 $ 0.70 $ 0.43
=========== =========== ========= ========= =========
</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 PER 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, 1992........... 7,651,760 $7,652 $ 16,205 $ 1,991 $25,848
Issuance of common stock for
cash........................... 8,178 8 32 40
Net income....................... 3,555 3,555
--------- ------- ---------- -------- --------------- -------------
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....................... 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
appreciation on securities
available for sale, net of
deferred taxes of ($535)....... 1,038 1,038
Cash dividends on Bank Preferred
Stock ($.07 per share)......... (50 ) (50)
Net income....................... 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 (unaudited)....... 14,015 14 119 133
Deferred compensation
amortization (unaudited)....... 101 101
Net change in unrealized
depreciation on securities
available for sale, net of
deferred taxes of $644
(unaudited).................... (1,196) (1,196)
Cash dividends on Bank preferred
stock ($.45 per share)
(unaudited).................... (341 ) (341)
Net income (unaudited)........... 7,729 7,729
--------- ------- ---------- -------- --------------- -------------
BALANCE SEPTEMBER 30, 1996
(UNAUDITED)........................ 7,731,595 $7,731 $ 17,965 $26,530 $ (974) $51,252
========= ======= ========== ======== =============== =============
</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>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------------- -------------------------------
1996 1995 1995 1994 1993
----------- ----------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income....................... $ 7,729 $ 5,586 $ 7,807 $ 5,839 $ 3,555
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for loan losses... 840 685 925 1,145 1,005
Depreciation................ 1,478 1,009 1,440 1,028 518
Compensation expense........ 101 98 132 187 259
Deferred tax expense
(benefit)................. 798 (185) (445) (419) (260)
Gain on sale of other
assets.................... (52) (68) (276) (2)
Realized losses on
securities available for
sale...................... 71 93 639 63
Net amortization of premiums
and discounts............. 1,414 (45) 256 314 526
Dividends on Federal Home
Loan Bank stock........... (1,118) (957)
Increase in accrued interest
receivable, prepaid
expenses and other
assets.................... (470) (2,781) (3,646) (1,655) (785)
(Decrease) increase in
accrued interest payable
and other liabilities..... (203) 1,528 2,247 392 46
----------- ----------- --------- --------- ---------
Net cash provided by
operating
activities............ 10,640 5,936 8,330 6,618 4,862
Cash flows from investing activities:
Proceeds from maturity of
securities..................... 10,000
Proceeds from maturity of
securities available for
sale........................... 26,000 50,500 57,000 20,000
Proceeds from maturity of
securities held to maturity.... 5,000 8,000
Principal paydowns of
mortgage-backed securities
available for sale............. 40,364 2,220 6,691 2,091
Principal paydowns of
mortgage-backed securities held
to maturity.................... 4,264 8,208 4,608 17,922
Proceeds from sale of securities
available for sale............. 35,805 11,405 56,152 7,939
Purchase of securities available
for sale....................... (105,907) (124,058) (199,587) (42,208)
Purchase of securities held to
maturity....................... (34,285) (78,546) (9,008) (101,369)
Proceeds from sale of other real
estate and other loan related
assets......................... 10 344 500 750 69
Proceeds from sale of premises
and equipment.................. 27
Net increase in loans
receivable..................... (78,820) (47,837) (80,393) (72,874) (75,394)
Purchase of premises and
equipment...................... (1,703) (1,682) (2,516) (2,607) (1,784)
----------- ----------- --------- --------- ---------
Net cash used in
investing
activities............ (84,251) (134,129) (224,491) (91,309) (150,529)
Cash flows from financing activities:
Net increase (decrease) in
noninterest-bearing deposits... 32,222 (284) 28,745 40,823 45,568
Net increase in time deposits.... 18,494 7,817 11,159 24,012 7,160
Net (decrease) increase in other
interest-bearing deposits...... (19,072) 102,687 142,901 7,306 61,205
Net (decrease) increase in
securities sold under
repurchase agreements.......... (9,462) 14,467 53,190 19,308 15,366
Net increase (decrease) in other
borrowings..................... 58,757 (199) (7,531) 8,819
Net proceeds from issuance of
Bank preferred stock........... 7,323
Proceeds from issuance of common
stock.......................... 133 97 127 147 40
Payment of dividends on Bank
preferred stock................ (276)
----------- ----------- --------- --------- ---------
Net cash provided by
financing
activities............ 80,796 124,585 235,914 100,415 129,339
Net increase (decrease) in cash and
cash equivalents................... 7,185 (3,608) 19,753 15,724 (16,328)
Cash and cash equivalents at
beginning of year.................. 81,195 61,442 61,442 45,718 62,046
----------- ----------- --------- --------- ---------
Cash and cash equivalents at end of
year............................... $ 88,380 $ 57,834 $ 81,195 $ 61,442 $ 45,718
=========== =========== ========= ========= =========
</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
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 IS
UNAUDITED)
(DOLLARS IN THOUSANDS)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements for the nine months ended September
30, 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 financial statements for prior periods include the accounts
of the Bank.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and the prevailing practices within the banking
industry. The financial statements for the nine months ended September 30, 1996
and 1995 are unaudited and, in the opinion of management, include all
adjustments necessary (which consist of only normal recurring adjustments) for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods. The financial information and results of
operations for the nine months ended September 30, 1996 are not necessarily
indicative of the financial position or results of operations that may be
expected at and for the year ended December 31, 1996 or for any future periods.
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.) 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
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 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 revenue 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
$14,503 for the nine months ended September 30, 1996 and $10,922 and $13,501 for
the years ended December 31, 1995 and 1994, respectively.
F-7
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 IS
UNAUDITED)
(DOLLARS IN THOUSANDS)
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 change has been included in the
Statement of Changes in Shareholders' Equity for the year ended December 31,
1994.
Securities in 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.
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 at
September 30, 1996, December 31, 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. During 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 FOR 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
F-8
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 IS
UNAUDITED)
(DOLLARS IN THOUSANDS)
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. 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,
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 any 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, including impaired 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 level yield 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.
EMPLOYEE STOCK OPTIONS
The Company has several stock option plans. (See Note 9.) These plans
reserve shares for the granting of "non-qualified" options to key employees of
the Company to purchase common stock at a price which
F-9
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 IS
UNAUDITED)
(DOLLARS IN THOUSANDS)
may be less than the fair market value on the date of grant. For those options
where the exercise price is less than the market price of the stock at the date
of grant the difference is considered compensation expense and is recognized
ratably over the vesting period.
EARNINGS PER COMMON SHARE
Earnings per common share is calculated by dividing net income by the
weighted average number of common shares and common share equivalents. Stock
options are regarded as common stock equivalents and are therefore considered in
earnings per share calculations if dilutive. Common stock equivalents are
computed using the treasury stock method. All stock options are dilutive and,
accordingly, primary and fully diluted earnings per share are the same.
FEDERAL INCOME TAX
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109 (SFAS 109), ACCOUNTING FOR INCOME
TAXES. SFAS 109 mandates the liability method for computing deferred income
taxes, 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.
The Company has adopted SFAS 109 effective January 1, 1993 on a prospective
basis. The cumulative effect of the change has been included in the 1993
consolidated statement of income. There was no effect on pretax income in 1993
related to the adoption of SFAS 109.
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 October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("SFAS 123"). This statement establishes fair value based
accounting and reporting standards for all transactions in which a company
acquires goods or services by issuing its equity investments, which includes
stock-based compensation plans. Under SFAS 123, compensation cost is measured at
the grant date based on the value of the award and is recognized over the
service period, which is usually the vesting period. Fair value of stock options
is determined using an option-pricing model. This statement encourages companies
to adopt, as prescribed, the fair value based method of accounting to recognize
compensation expense for employee stock compensation plans. However, it does not
require the fair value based method to be adopted but a company must comply with
the disclosure requirements set forth in the statement. The Company expects to
remain with the accounting in Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and, therefore, at December 31, 1996
expects to make pro forma disclosures of net income as if the fair value based
method of accounting defined in SFAS 123 had been applied.
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 a "financial components" approach that focuses on
content and provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. SFAS
125 is effective for transactions occurring after December 31, 1996.
F-10
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 IS
UNAUDITED)
(DOLLARS IN THOUSANDS)
2. SECURITIES:
Securities have been classified in the Company's consolidated balance sheet
according to management's intent. The carrying amount and approximate fair value
of securities were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 (UNAUDITED)
------------------------------------------
GROSS UNREALIZED
AMORTIZED ---------------- FAIR
COST GAINS LOSSES VALUE
--------- ----- ------- ----------
<S> <C> <C> <C> <C>
U.S. Government securities.............. $ 93,034 $ 68 $ (347) $ 92,755
Mortgage-backed securities.............. 160,109 186 (1,407) 158,888
Federal Reserve Bank stock.............. 950 950
Federal Home Loan Bank stock, at cost... 38,810 38,810
Other securities........................ 5,316 2 5,318
--------- ----- ------- ----------
Total securities available for
sale............................. $ 298,219 $ 256 $(1,754) $ 296,721
========= ===== ======= ==========
DECEMBER 31, 1995
------------------------------------------
GROSS UNREALIZED
AMORTIZED ---------------- FAIR
COST GAINS LOSSES VALUE
--------- ----- ------- ----------
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
========= ===== ======= ==========
DECEMBER 31, 1994
-----------------------------------------
GROSS UNREALIZED
AMORTIZED ---------------- FAIR
COST GAINS LOSSES VALUE
--------- ----- ------- ---------
Securities -- available for sale
U.S. Government securities............ $47,584 $ 29 $ (810) $ 46,803
Mortgage-backed securities............ 15,142 14 (470) 14,686
Other securities...................... 2,139 2,139
--------- ----- ------- ---------
Total securities available for
sale............................. $64,865 $ 43 $(1,280) $ 63,628
========= ===== ======= =========
Securities -- held to maturity
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 held to
maturity......................... $87,839 $ $(4,229) $ 83,610
========= ===== ======= =========
</TABLE>
F-11
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 IS
UNAUDITED)
(DOLLARS IN THOUSANDS)
The scheduled maturities of securities available for sale were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
(UNAUDITED) DECEMBER 31, 1995
---------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Due in one year or less.............. $ 43,735 $ 43,721 $ 41,533 $ 41,655
Due from one year to five years...... 49,299 49,034 56,264 56,433
--------- ---------- --------- ----------
93,034 92,755 97,797 98,088
--------- ---------- --------- ----------
Mortgage-backed securities........... 160,109 158,888 154,083 154,118
Federal Reserve Bank stock........... 950 950 946 946
Federal Home Loan Bank stock......... 38,810 38,810 37,692 37,692
Other securities..................... 5,316 5,318 4,329 4,339
--------- ---------- --------- ----------
Total securities available for
sale.......................... $ 298,219 $ 296,721 $ 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.
At September 30, 1996 and December 31, 1995, respectively, securities
amounting to approximately $180,500 and $148,600 with a market value of
approximately $179,000 and $148,500 have been pledged to collateralize
repurchase agreements, public deposits and other items.
3. LOANS:
DECEMBER 31,
SEPTEMBER 30, ----------------------
1996 1995 1994
------------- ---------- ----------
(UNAUDITED)
Commercial........................... $ 241,584 $ 194,304 $ 148,313
Real estate:
Construction.................... 58,484 47,152 44,052
1-4 family residential.......... 98,815 88,297 75,343
Other........................... 64,867 65,156 53,800
Consumer............................. 53,585 44,147 37,482
------------- ---------- ----------
517,335 439,056 358,990
Less:
Unearned fees and discounts..... (876) (797) (686)
Allowance for loan losses....... (5,427) (4,921) (4,294)
------------- ---------- ----------
$ 511,032 $ 433,338 $ 354,010
============= ========== ==========
F-12
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 IS
UNAUDITED)
(DOLLARS IN THOUSANDS)
An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------------- -------------------------------
1996 1995 1995 1994 1993
----------- ----------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period.... $ 4,921 $ 4,294 $ 4,294 $ 3,250 $ 2,204
Provision charged against
operations.................... 840 685 925 1,145 1,005
Charge-offs..................... (341) (83) (312) (167) (19)
Recoveries...................... 7 6 14 66 60
----------- ----------- --------- --------- ---------
Balance, end of period.......... $ 5,427 $ 4,902 $ 4,921 $ 4,294 $ 3,250
=========== =========== ========= ========= =========
</TABLE>
The Company had $2,128, $291 and $397 in nonaccrual and impaired loans at
September 30, 1996, December 31, 1995 and 1994, respectively, and are not
considered material.
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 September 30,
1996, December 31, 1995 and 1994, the aggregate amount of loans and unfunded
lines of credit to all related parties was $11,307, $6,574 and $9,162,
respectively.
Following is an analysis of activity with respect to such amounts:
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
Balance, beginning of period......... $ 6,574 $ 9,162
New loans............................ 5,836 1,177
Repayments........................... (1,103) (3,765)
------------- ------------
Balance, end of period............... $11,307 $ 6,574
============= ============
4. PREMISES AND EQUIPMENT:
Premises and equipment consisted of the following:
DECEMBER 31,
SEPTEMBER 30, --------------------
1996 1995 1994
------------- --------- ---------
(UNAUDITED)
Land................................. $ 955 $ 955 $ 955
Premises and leasehold
improvements......................... 2,265 1,892 1,752
Furniture and equipment.............. 8,846 7,539 5,181
------------- --------- ---------
12,066 10,386 7,888
Less accumulated depreciation and
amortization....................... 6,164 4,710 3,289
------------- --------- ---------
$ 5,902 $ 5,676 $ 4,599
============= ========= =========
F-13
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 IS
UNAUDITED)
(DOLLARS IN THOUSANDS)
5. PREPAID EXPENSES AND OTHER ASSETS:
Prepaid expenses and other assets consisted of the following:
DECEMBER 31,
SEPTEMBER 30, --------------------
1996 1995 1994
------------- --------- ---------
(UNAUDITED)
Prepaid expenses..................... $ 435 $ 459 $ 286
Foreclosed real estate............... 276 291
Deferred taxes....................... 1,856 1,883 1,973
Banker's acceptances................. 116 1,713 44
Other................................ 1,572 53 104
------------- --------- ---------
$ 4,255 $ 4,108 $ 2,698
============= ========= =========
6. DEPOSITS:
Scheduled maturities of time deposits are summarized as follows:
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
MATURITY
Zero to one year..................... $ 128,883 $108,970
One year to two years................ 10,848 9,720
Two years to three years............. 2,473 4,989
Three years to four years............ 1,204 1,108
Four years to five years............. 759 591
Thereafter........................... 680 975
------------- ------------
$ 144,847 $126,353
============= ============
At September 30, 1996, December 31, 1995 and 1994, the aggregate amount of
deposits from all related parties was $38,246, $45,657 and $10,703,
respectively.
F-14
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 IS
UNAUDITED)
(DOLLARS IN THOUSANDS)
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>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Securities sold under repurchase
agreements:
Average......................... $ 96,079 $ 65,674 $ 33,817
Period-end...................... 86,176 95,638 42,448
Maximum month-end balance during
period........................ 107,320 95,638 44,630
Interest rate:
Average......................... 4.87% 5.36% 3.80%
Period-end...................... 4.76% 5.41% 5.05%
Other short-term borrowings:
Average......................... $ 14,227 $ 6,904 $ 3,880
Period-end...................... 60,044 1,287 8,819
Maximum month-end balance during
period........................ 60,044 10,000 11,270
Interest rate:
Average......................... 5.31% 5.58% 4.73%
Period-end...................... 5.35% 5.32% 5.22%
</TABLE>
Securities sold under repurchase agreements are maintained in safekeeping
by correspondent banks.
8. FEDERAL INCOME TAXES:
The income tax (provision)/benefit for the years ended December 31, 1995,
1994 and 1993 was composed of the following:
DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
Current................................. $ (4,659) $ (3,560) $ (2,115)
Deferred................................ 445 419 244
--------- --------- ---------
$ (4,214) $ (3,141) $ (1,871)
========= ========= =========
F-15
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 IS
UNAUDITED)
(DOLLARS IN THOUSANDS)
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, 1995 DECEMBER 31, 1994
-------------------- --------------------
TEMPORARY TAX TEMPORARY TAX
DIFFERENCES EFFECT DIFFERENCES EFFECT
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Premises and equipment.................. $ 274 $ 96 $ 207 $ 70
Allowance for loan losses............... 4,101 1,435 2,885 981
Unearned fees........................... 162 57 510 173
Deferred compensation................... 1,246 436 1,122 381
Accruals................................ 68 24 36 12
Unrealized loss on securities available
for sale.............................. 1,237 420
---------- ------ ---------- ------
Deferred income tax asset.......... $5,851 2,048 $5,997 2,037
========== ==========
------ ------
Unrealized gain on securities available
for sale.............................. $ 336 114
Market discounts on securities.......... 147 51 $ 190 64
---------- ------ ---------- ------
Deferred income tax liability...... $ 483 165 $ 190 64
========== ==========
------ ------
Net deferred income tax asset........... $1,883 $1,973
====== ======
</TABLE>
The reconciliation between the statutory federal income tax rate is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Statutory federal income tax rate....... 35.0% 34.0% 34.0%
Permanent differences................... 0.7 0.9 0.5
Effect of utilization of graduated tax
rates................................. (0.8)
Other................................... 0.2 0.1 0.1
------------ ------------ ------------
Effective income tax rate............... 35.1% 35.0% 34.6%
============ ============ ============
</TABLE>
9. EMPLOYEE BENEFITS:
The Company has two employee stock option plans, which were approved in
1989 and 1993, respectively. The 1989 and 1993 stock option plans (the "Option
Plans") reserve shares for the granting of "nonqualified" options to key
employees and Bank directors of the Company to purchase 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 $101 and
$98 of compensation expense in connection with the Option Plans during the nine
months ended September 30, 1996 and 1995, respectively, and $132, $187 and $259
of compensation expense in connection with the Option Plans during 1995, 1994
and 1993, respectively. Generally, under the Option Plans, options for employees
vest ratably over five to seven years, and must be exercised no later than three
months after the employee's termination with the Company.
Bank 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 a
F-16
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 IS
UNAUDITED)
(DOLLARS IN THOUSANDS)
maximum of 36,875 shares of Common Stock may be granted to Bank directors during
a calendar year with the exercise price approximating the fair market value of
the stock at the date of grant. Such options accumulate throughout the year, are
issued during the following year and are considered fully vested upon issuance.
The Company has reserved 50,000 shares of Common Stock for issuance under
an option which had been granted at a price of $2.80 per share under the
Company's former 1982 Stock Option Plan (the "1982 Plan"). Although that 1982
Plan expired in August 1992, such option does not expire until 1999 and is
currently exercisable. No shares were exercised under the 1982 Plan during the
nine months ended September 30, 1996 or the years ended December 31, 1995, 1994
or 1993.
The following is a summary of changes in total options outstanding, which
include the Option Plans and the 1982 Plan:
Options outstanding at December 31,
1992............................... 583,360 $0.40 to $2.80
Granted......................... 226,790 $0.40 to $4.80
--------------
Options outstanding at December 31,
1993............................... 810,150 $0.40 to $4.80
Granted......................... 164,425 $0.40 to $7.20
Exercised....................... (12,500) $0.40
--------------
Options outstanding at December 31,
1994............................... 962,075 $0.40 to $6.40
Granted......................... 170,550 $0.40 to $8.80
Exercised....................... (3,225) $0.40
--------------
Options outstanding at December 31,
1995............................... 1,129,400 $0.40 to $8.80
Granted (unaudited)............. 34,375 $9.20 to $10.10
Forfeited (unaudited)........... (3,750) $6.40
--------------
Options outstanding at September 30,
1996............................... 1,160,025 $0.40 to $10.10
==============
Options exercisable at September
30, 1996...................... 581,043
==============
Shares available for future
grants........................ 243,317
==============
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 will
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 nine months ended September 30, 1996 and 1995 was $136 and $101,
respectively, and for the years ended December 31, 1995, 1994 and 1993 was $136,
$146 and $120, 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 14,015 and 18,172 shares
at prices ranging from $9.20 to $9.60 and $6.50 to $7.60 were issued to the
401-K Plan during the nine months ended September 30, 1996 and the twelve months
ended December 31, 1995, respectively.
F-17
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 IS
UNAUDITED)
(DOLLARS IN THOUSANDS)
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 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 its 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 of the Bank equal to the quotient of $10 divided by the
book value per common share. No such shares have been redeemed.
11. EARNINGS PER COMMON SHARE:
Earnings per common share were computed as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------------- ----------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income........................... $ 7,729 $ 5,586 $ 7,807 $ 5,839 $ 3,555
Less: Bank Preferred Stock
dividend........................... 341 50
----------- ----------- ------------ ------------ ------------
Net income available to common
shareholders....................... $ 7,388 $ 5,586 $ 7,757 $ 5,839 $ 3,555
----------- ----------- ------------ ------------ ------------
Divided by average common shares and
common share equivalents:
Average common shares........... 7,723,845 7,704,620 7,707,428 7,675,340 7,659,937
Average common share
equivalents................... 791,355 678,633 686,690 626,270 551,545
----------- ----------- ------------ ------------ ------------
Total average common share and common
share equivalents.................. 8,515,200 8,383,253 8,394,118 8,301,610 8,211,483
Earnings per common share............ $ 0.87 $ 0.67 $ 0.92 $ 0.70 $ 0.43
=========== =========== ============ ============ ============
</TABLE>
F-18
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 IS
UNAUDITED)
(DOLLARS IN THOUSANDS)
12. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in various lawsuits which arose in the normal
course of business and 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.
LEASES
At December 31, 1995, the Company had certain noncancelable operating
leases which cover the Company's premises with future minimum annual rental
payments as follows:
1996................................. $ 713
1997................................. 329
1998................................. 251
1999................................. 251
2000 and thereafter.................. 469
Rent expense was $731 and $571 for the nine months ended September 30, 1996
and 1995, respectively, and $779, $657 and $555 for the years ended December 31,
1995, 1994 and 1993, respectively.
On May 1, 1996, the Company entered into a five 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 regulatory risk-based capital
requirements that assign risk factors to all assets, including off-balance sheet
items such as loan commitments and standby letters of credit. Capital is
separated into two categories, Tier 1 and Tier 2, which combine for total
capital. At September 30, 1996 and December 31, 1995, the Company's and Bank's
Tier 1 capital consists of their respective shareholders' equity and Tier 2
consists of the allowance for loans losses subject to certain limitations. The
guidelines require total capital of 8% of risk-weighted assets.
The Company's and Bank's regulatory capital position were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
(UNAUDITED) DECEMBER 31, 1995
------------------------- -------------------------
COMPUTED COMPUTED COMPUTED COMPUTED
CAPITAL PERCENT CAPITAL PERCENT
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total capital........................ $64,921 11.65%(1) $56,848 11.74%(1)
Tier 1 capital....................... 59,494 10.68%(1) 51,927 10.72%(1)
Leverage ratio....................... 6.52% 6.29%
</TABLE>
- ------------
(1) Stated as a percent of risk-weighted assets as defined in OTS capital
regulations.
In conjunction with risk-based capital guidelines, the regulators have
issued capital leverage guidelines. The leverage ratio consists of Tier 1
capital as a percent of total assets. The minimum leverage ratio for all banks
is 3%, with a higher minimum ratio dependent upon the condition of the
individual bank. The
F-19
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 IS
UNAUDITED)
(DOLLARS IN THOUSANDS)
3% minimum was established to make certain that all banks have a minimum capital
level to support their assets, regardless of risk profile.
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 to meet the financing needs of its customers.
These financial instruments include loan commitments and standby letters of
credit. These instruments 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 financial instrument for loan commitments and standby letters
of credit is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
The amounts of financial instruments with off-balance sheet risk are as
follows:
DECEMBER 31, DECEMBER 31,
1995 1994
CONTRACT CONTRACT
AMOUNT AMOUNT
------------- -------------
Financial instruments whole contract
amounts represent credit risk:
Loan commitments including
unfunded lines of credit....... $ 229,865 $ 159,584
Standby letters of credit....... 20,332 17,845
Commercial letters of credit.... 848 1,112
------------- -------------
$ 251,045 $ 178,541
============= =============
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
counter party. 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 the account and periodically assesses the financial condition of
correspondent banks.
F-20
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 IS
UNAUDITED)
(DOLLARS IN THOUSANDS)
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.
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 those
assets' fair values.
SECURITIES: Fair values for 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: 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 calculation that applies interest rates currently being
offered on certificates to a
F-21
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 IS
UNAUDITED)
(DOLLARS IN THOUSANDS)
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, 1995 DECEMBER 31, 1994
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks......... $ 57,310 $ 57,310 $ 42,952 $ 42,952
Fed funds sold.................. 23,885 23,885 18,490 18,490
Securities available for sale... 295,183 295,183 63,628 63,628
Securities held to maturity..... 87,839 83,610
Loans, net of allowance......... 433,338 434,036 354,010 350,400
Accrued interest receivable..... 5,974 5,974 4,119 4,119
LIABILITIES
Deposits........................ 672,640 673,147 489,836 489,408
Securities sold under repurchase
agreements.................... 95,638 95,638 42,448 42,448
Other short-term borrowings..... 1,287 1,287 8,819 8,819
Accrued interest payable........ 598 598 483 483
</TABLE>
The total fair value of the Company's loan commitments and standby letters
of credit was immaterial at December 31, 1995 and 1994.
16. SUPPLEMENTAL CASH FLOW INFORMATION:
The supplemental cash flow information for the years ended December 31,
1995, 1994 and 1993 was as follows:
DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
Cash paid for interest............... $ 21,774 $ 11,356 $ 7,738
Cash paid for federal income tax..... 4,244 3,560 2,115
F-22
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES UNDER ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary ....................................................... 3
Summary Consolidated Financial Data ...................................... 5
Risk Factors ............................................................. 6
The Company .............................................................. 9
Recent Developments ...................................................... 12
Use of Proceeds .......................................................... 13
Dividend Policy .......................................................... 13
Dilution ................................................................. 14
Capitalization ........................................................... 15
Selected Consolidated Financial Data ..................................... 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations ............................................................ 17
Management ............................................................... 42
Principal Shareholders ................................................... 48
Selling Shareholders ..................................................... 49
Supervision and Regulation ............................................... 50
Description of Securities of the Company ................................. 56
Underwriting ............................................................. 59
Legal Matters ............................................................ 60
Experts .................................................................. 60
Available Information .................................................... 60
Index to Financial Statements ............................................ F-1
------------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
================================================================================
================================================================================
1,334,753 SHARES
SOUTHWEST BANCORPORATION
OF TEXAS, INC.
COMMON STOCK
[LOGO FOR SOUTHWEST BANK OF TEXAS]
------------------------------
PROSPECTUS
------------------------------
KEEFE, BRUYETTE & WOODS, INC.
LEGG MASON WOOD WALKER
INCORPORATED
, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses of the offering are estimated to be as follows:
Securities and Exchange Commission
registration fee...................... $ 8,593
NASD filing fee......................... 3,336
NASDAQ listing fee...................... 40,000
Legal fees and expenses................. 100,000
Accounting fees and expenses............ 80,000
Blue Sky fees and expenses (including
legal fees)........................... 10,000
Printing expenses....................... 100,000
Transfer Agent fees..................... 5,000
Miscellaneous........................... 3,071
----------
TOTAL.............................. $ 350,000
==========
ITEM 14. 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 2.02-1 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 office, (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 15. RECENT SALES OF UNREGISTERED SECURITIES
On June 30, 1996, the Company issued 3,088,452 shares of Common Stock to
the former shareholders of Southwest Bank of Texas National Association (the
"Bank") in exchange for all of their shares of common stock of the Bank on a
one-for-one basis, in connection with the Company's organization as a holding
company for the Bank under Section 3(a) of the Bank Holding Company Act of 1956.
This transaction was exempt from registration under the Securities Act of 1933
(the "Act") pursuant to Section 3(a)(12) thereof because the transaction
occurred solely as part of the reorganization in which the shareholders of the
Bank exchanged their shares of Bank common stock for shares of Common Stock of
the
II-1
<PAGE>
Company (which had no significant assets other than securities of the Bank), the
shareholders of the Bank received substantially the same proportional share
interests in the Company as they held in the Bank, the rights and interests of
shareholders of the Company are substantially the same as those in the Bank
other than as may be required by law, and the Company has substantially the same
assets and liabilities on a consolidated basis as the Bank had prior to the
transaction.
For the calendar years 1994, 1995 and 1996, the Company issued 23,745,
18,172 and 17,435 shares, respectively, of Common Stock to the Company's 401(k)
plan as the Company's contribution to such plan for the benefit of its employees
in a transaction not involving a sale of securities and therefore not subject to
the registration requirements under the Act. (The interests of the Company's
employees in such plan are exempt from registration under the Act pursuant to
Section 3(a)(2) of the Act.)
On November 18, 1996, the Company declared a 2.5 for 1 stock split effected
in the form of a 150% stock dividend on all outstanding shares of Common Stock
of the Company, payable on December 31, 1996 to shareholders of record as of
November 20, 1996. A total of 4,640,955 shares were issued in connection with
this stock split, and such transaction was not subject to the registration
requirements of the Act because it did not involve a sale of securities under
the Act.
Immediately prior to the closing of the Offering, Walter E. Johnson intends
to exercise an option to purchase 250,000 shares of Common Stock from the
Company at a purchase price of $.40 per share. Such option was granted to Mr.
Johnson in 1989 under the Company's 1989 Stock Option Plan (the "1989 Plan")
as a condition to his employment by the Company at that time. In addition, on
April 1, 1994 and September 11, 1995, the Company sold to two employees 12,500
shares and 3,225 shares of Common Stock, respectively, at a purchase price of
$.40 per share, pursuant to the exercise by such employees of options granted by
the Company under the 1989 Plan. The sales of such shares by the Company
pursuant to the exercises of all such options were exempt from registration
under the Act pursuant to Section 4(2) thereof as sales not involving any public
offering.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
<S> <C>
*1.1 -- Form of Purchase Agreement
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.
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., David C. Farries, Sharon K. Sokol, Yale Smith and
Steve D. Stephens
11.1 -- Computation of Earnings Per Share
21.1 -- List of subsidiaries of the Company
*23.1 -- Consent of Coopers & Lybrand L.L.P.
*23.2 -- Consent of Vinson & Elkins L.L.P. (contained in Exhibit 5.1 hereto)
24.1 -- Powers of Attorney (included on the signature page to this Registration
Statement)
27.1 -- Financial Data Schedule
</TABLE>
- ------------
* Filed herewith.
(b) Financial Statement Schedules:
1. FINANCIAL STATEMENTS INCLUDED: SEE INDEX TO FINANCIAL STATEMENTS
INCLUDED ON PAGE F-1.
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" in the Consolidated Financial Statements.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under 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 in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or
II-3
<PAGE>
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.
The undersigned Registrant hereby undertakes to provide at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus 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-4
<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 15TH DAY OF JANUARY 1997.
SOUTHWEST BANCORPORATION
OF TEXAS, INC.
By: /s/ WALTER E. JOHNSON
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 BELOW 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 Chief January 15, 1997
WALTER E. JOHNSON Executive Officer (Principal Executive
Officer)
/s/DAVID C. FARRIES Executive Vice President, Treasurer and January 15, 1997
DAVID C. FARRIES Secretary (Principal Financial Officer)
/s/R. JOHN McWHORTER Vice President and Controller January 15, 1997
R. JOHN MCWHORTER (Principal Accounting Officer)
* Director and Chairman of the Executive January 15, 1997
JOHN W. JOHNSON Committee of the Board
* Director and President January 15, 1997
PAUL B. MURPHY, JR.
* Director January 15, 1997
JOHN B. BROCK III
* Director January 15, 1997
ERNEST H. COCKRELL
* Director January 15, 1997
WILHELMINA R. MORIAN
* Director January 15, 1997
ANDRES PALANDJOGLOU
* Director January 15, 1997
MICHAEL T. WILLIS
*By: /s/DAVID C. FARRIES
DAVID C. FARRIES
ATTORNEY-IN-FACT
</TABLE>
II-5
EXHIBIT 1.1
==============================================================================
SOUTHWEST BANCORPORATION OF TEXAS, INC.
(a Texas corporation)
1,334,753 Shares of Common Stock
PURCHASE AGREEMENT
Dated: o, 1997
==============================================================================
<PAGE>
TABLE OF CONTENTS
PAGE
PURCHASE AGREEMENT........................................................... 1
SECTION 1. REPRESENTATIONS AND WARRANTIES................................. 2
(a) REPRESENTATIONS AND WARRANTIES BY THE COMPANY.................. 2
(i) COMPLIANCE WITH REGISTRATION REQUIREMENTS............. 2
(ii) INDEPENDENT ACCOUNTANTS............................... 3
(iii) FINANCIAL STATEMENTS.................................. 3
(iv) NO MATERIAL ADVERSE CHANGE IN BUSINESS................ 4
(v) GOOD STANDING OF THE COMPANY.......................... 4
(vi) GOOD STANDING OF SUBSIDIARIES......................... 4
(vii) CAPITALIZATION........................................ 5
(viii) AUTHORIZATION OF AGREEMENT............................ 5
(ix) AUTHORIZATION AND DESCRIPTION OF SECURITIES........... 5
(x) ABSENCE OF DEFAULTS AND CONFLICTS..................... 5
(xi) ABSENCE OF LABOR DISPUTE.............................. 6
(xii) ABSENCE OF PROCEEDINGS................................ 6
(xiii) ACCURACY OF EXHIBITS.................................. 6
(xiv) POSSESSION OF INTELLECTUAL PROPERTY................... 6
(xv) ABSENCE OF FURTHER REQUIREMENTS....................... 7
(xvi) POSSESSION OF LICENSES AND PERMITS.................... 7
(xvii) COMPLIANCE WITH APPLICABLE LAWS....................... 7
(xviii) TITLE TO PROPERTY..................................... 7
(xix) WARRANTS, OPTIONS AND OTHER RIGHTS.................... 8
(xx) COMPLIANCE WITH CUBA ACT.............................. 8
(xxi) INVESTMENT COMPANY ACT................................ 8
(xxii) ENVIRONMENTAL LAWS.................................... 8
(xxiii) REGISTRATION RIGHTS................................... 9
(xxiv) TAX MATTERS........................................... 9
(xxv) INSURANCE............................................. 9
(xxvi) ACCOUNTING CONTROLS................................... 9
(xxvii) FEES.................................................. 9
(xxviii) LOCK-UP AGREEMENTS.................................... 9
(xxix) USE OF PROSPECTUS..................................... 10
(b) REPRESENTATIONS AND WARRANTIES BY THE SELLING SHAREHOLDERS..... 10
(i) ACCURATE DISCLOSURE................................... 10
(ii) AUTHORIZATION OF AGREEMENTS........................... 10
(iii) GOOD AND VALID TITLE.................................. 11
(iv) DUE EXECUTION OF POWER OF ATTORNEY AND
CUSTODY AGREEMENT..................................... 11
(v) ABSENCE OF MANIPULATION............................... 11
(vi) ABSENCE OF FURTHER REQUIREMENTS....................... 11
(vii) RESTRICTION ON SALE OF SECURITIES..................... 12
(viii) CERTIFICATES SUITABLE FOR TRANSFER.................... 12
i
<PAGE>
PAGE
(ix) NO ASSOCIATION WITH NASD.............................. 12
(c) OFFICER'S CERTIFICATES......................................... 12
SECTION 2. SALE AND DELIVERY TO UNDERWRITERS; CLOSING..................... 13
(a) INITIAL SECURITIES............................................. 13
(b) OPTION SECURITIES.............................................. 13
(c) PAYMENT........................................................ 13
(d) DENOMINATIONS; REGISTRATION.................................... 14
SECTION 3. COVENANTS OF THE COMPANY....................................... 14
(a) COMPLIANCE WITH SECURITIES REGULATIONS AND
COMMISSION REQUESTS............................................ 14
(b) FILING OF AMENDMENTS........................................... 15
(c) DELIVERY OF REGISTRATION STATEMENTS............................ 15
(d) DELIVERY OF PROSPECTUSES....................................... 15
(e) Continued Compliance with Securities Laws...................... 15
(f) BLUE SKY QUALIFICATIONS........................................ 16
(g) RULE 158....................................................... 16
(h) USE OF PROCEEDS................................................ 16
(i) LISTING........................................................ 16
(j) RESTRICTION ON SALE OF SECURITIES.............................. 16
(k) REPORTING REQUIREMENTS......................................... 17
(l) COMPLIANCE WITH RULE 463....................................... 17
(m) COMPLIANCE WITH CUBA ACT....................................... 17
SECTION 4. PAYMENT OF EXPENSES............................................ 17
(a) EXPENSES....................................................... 17
(b) EXPENSES OF CONCURRENT SALE.................................... 18
(c) TERMINATION OF AGREEMENT....................................... 18
(d) ALLOCATION OF EXPENSES......................................... 18
SECTION 5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS........................ 18
(a) EFFECTIVENESS OF REGISTRATION STATEMENT........................ 18
(b) OPINION OF COUNSEL FOR COMPANY................................. 19
(c) OPINION OF COUNSEL FOR THE SELLING SHAREHOLDERS................ 19
(d) OPINION OF COUNSEL FOR UNDERWRITERS............................ 19
(e) OFFICERS' CERTIFICATE.......................................... 19
(f) CERTIFICATE OF SELLING SHAREHOLDERS............................ 19
(g) ACCOUNTANT'S COMFORT LETTER.................................... 20
(h) BRING-DOWN COMFORT LETTER...................................... 20
(i) APPROVAL OF LISTING............................................ 20
(j) NO OBJECTION................................................... 20
(k) LOCK-UP AGREEMENTS............................................. 20
(l) CONDITIONS TO PURCHASE OF OPTION SECURITIES.................... 20
(i) OFFICERS' CERTIFICATE................................. 20
(ii) OPINION OF COUNSEL FOR COMPANY........................ 21
(iii) OPINION OF COUNSEL FOR UNDERWRITERS................... 21
(iv) BRING-DOWN COMFORT LETTER............................. 21
(m) ADDITIONAL DOCUMENTS........................................... 21
ii
<PAGE>
PAGE
(n) TERMINATION OF AGREEMENT....................................... 21
SECTION 6. INDEMNIFICATION................................................ 22
(a) INDEMNIFICATION OF UNDERWRITERS................................ 22
(b) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS
AND SELLING SHAREHOLDERS....................................... 23
(c) ACTIONS AGAINST PARTIES; NOTIFICATION.......................... 23
(d) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE............. 24
(e) OTHER AGREEMENTS WITH RESPECT TO INDEMNIFICATION............... 24
SECTION 7. CONTRIBUTION................................................... 24
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY....................................................... 26
SECTION 9. TERMINATION OF AGREEMENT....................................... 26
(a) TERMINATION; GENERAL........................................... 26
(b) LIABILITIES.................................................... 27
SECTION 10.DEFAULT BY ONE OR MORE OF THE UNDERWRITERS..................... 27
SECTION 11.DEFAULT BY ONE OR MORE OF THE SELLING SHAREHOLDERS
OR THE COMPANY................................................. 28
SECTION 12.NOTICES........................................................ 28
SECTION 13.PARTIES........................................................ 28
SECTION 14.GOVERNING LAW AND TIME......................................... 29
SECTION 15.EFFECT OF HEADINGS............................................. 29
SCHEDULE A............................................................Sch A-1
SCHEDULE B............................................................Sch B-1
SCHEDULE C............................................................Sch C-1
SCHEDULE D............................................................Sch D-1
Exhibit A.................................................................A-1
Exhibit B.................................................................B-1
Exhibit C.................................................................C-1
iii
<PAGE>
Draft of 1/14/97
SOUTHWEST BANCORPORATION OF TEXAS, INC.
(a Texas corporation)
1,334,753 Shares of Common Stock
(Par Value $1.00 Per Share)
PURCHASE AGREEMENT
o, 1997
KEEFE , BRUYETTE & WOODS, INC.
LEGG MASON WOOD WALKER, INCORPORATED
as Representatives of the several Underwriters
c/o Keefe, Bruyette & Woods, Inc.
Two World Trade Center
New York, New York 10048
Ladies and Gentlemen:
Southwest Bancorporation of Texas, Inc., a Texas corporation (the
"Company"), and the persons listed in Schedule B hereto (the "Selling
Shareholders"), confirm their respective agreements with Keefe, Bruyette &
Woods, Inc. ("KBW") and each of the other Underwriters named in Schedule A
hereto (collectively, the "Underwriters", which term shall also include any
underwriter substituted as hereinafter provided in Section 10 hereof), for whom
KBW and Legg Mason Wood Walker, Incorporated are acting as representatives (in
such capacity, the "Representatives"), with respect to (i) the sale by the
Company and the Selling Shareholders, acting severally and not jointly, and the
purchase by the Underwriters, acting severally and not jointly, of the
respective numbers of shares of Common Stock, par value $1.00 per share, of the
Company ("Common Stock") set forth in Schedules A and B hereto and (ii) the
grant by the Company to the Underwriters, acting severally and not jointly, of
the option described in Section 2(b) hereof to purchase all or any part of
172,500 additional shares of Common Stock to cover over-allotments, if any. The
aforesaid 1,334,753 shares of Common Stock (the "Initial Securities") to be
purchased by the Underwriters and all or any part of the 172,500 shares of
Common Stock subject to the option described in Section 2(b) hereof (the "Option
Securities") are hereinafter called, collectively, the "Securities".
The Company and the Selling Shareholders understand that the
Underwriters propose to make a public offering of the Securities as soon as the
Representatives deem advisable after this Agreement has been executed and
delivered.
1
<PAGE>
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-16509) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The
information included in such prospectus or in such Term Sheet, as the case may
be, that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred
to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto and schedules thereto at the time it
became effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement." Any
registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations
is herein referred to as the "Rule 462(b) Registration Statement," and after
such filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The final prospectus in the form first furnished to the
Underwriters for use in connection with the offering of the Securities is herein
called the "Prospectus." If Rule 434 is relied on, the term "Prospectus" shall
refer to the preliminary prospectus dated _____, 199_ together with the Term
Sheet and all references in this Agreement to the date of the Prospectus shall
mean the date of the Term Sheet. For purposes of this Agreement, all references
to the Registration Statement, any preliminary prospectus, the Prospectus or any
Term Sheet or any amendment or supplement to any of the foregoing shall be
deemed to include the copy filed with the Commission pursuant to its Electronic
Data Gathering, Analysis and Retrieval system ("EDGAR").
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company
represents and warrants to each Underwriter as of the date hereof, as of the
Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery
(if any) referred to in Section 2(b) hereof, and agrees with each Underwriter,
as follows:
(i) COMPLIANCE WITH REGISTRATION REQUIREMENTS. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of
2
<PAGE>
the Company, are contemplated by the Commission, and any request on the
part of the Commission for additional information has been complied
with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any Option Securities
are purchased, at the Date of Delivery), the Registration Statement, the
Rule 462(b) Registration Statement and any amendments and supplements
thereto complied and will comply in all material respects with the
requirements of the 1933 Act and the 1933 Act Regulations and did not
and will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading. Neither the Prospectus nor any
amendments or supplements thereto, at the time the Prospectus or any
such amendment or supplement was issued and at the Closing Time (and, if
any Option Securities are purchased, at the Date of Delivery), included
or will include an untrue statement of a material fact or omitted or
will omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading. If Rule 434 is used, the Company will comply
with the requirements of Rule 434 and the Prospectus shall not be
"materially different", as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time it became
effective. The representations and warranties in this subsection shall
not apply to statements in or omissions from the Registration Statement
or Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any Underwriter through KBW
expressly for use in the Registration Statement or Prospectus.
Each preliminary prospectus and the prospectus filed as part of
the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations and each preliminary prospectus and the Prospectus delivered
to the Underwriters for use in connection with this offering was
identical to the electronically transmitted copies thereof filed with
the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(ii) INDEPENDENT ACCOUNTANTS. The accountants who certified the
financial statements and supporting schedules included in the
Registration Statement are independent public accountants as required by
the 1933 Act and the 1933 Act Regula- tions.
(iii) FINANCIAL STATEMENTS. The financial statements included in
the Registration Statement and the Prospectus, together with the related
schedules and notes, present fairly the financial position of the
Company and its consolidated subsidiaries at the dates indicated and the
results of operations, shareholders' equity and cash flows of the
Company and its consolidated subsidiaries for the periods specified;
said financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods involved. The supporting
schedules included in the Registration Statement present fairly in
accordance
3
<PAGE>
with GAAP the information required to be stated therein. The selected
financial data and the summary financial information included in the
Prospectus present fairly the information shown therein and have been
compiled on a basis consistent with that of the audited financial
statements included in the Registration Statement.
(iv) NO MATERIAL ADVERSE CHANGE IN BUSINESS. Since the respective
dates as of which information is given in the Registration Statement and
the Prospectus, except as otherwise stated therein, (A) there has been
no material adverse change in the condition, financial or otherwise, or
in the earnings, business affairs or business prospects of the Company
and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business (a "Material Adverse
Effect"), (B) there have been no transactions entered into by the
Company or any of its subsidiaries, other than those in the ordinary
course of business, which are material with respect to the Company and
its subsidiaries considered as one enterprise, and (C) there has been no
dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(v) GOOD STANDING OF THE COMPANY. The Company has been duly
organized and is validly existing as a corporation in good standing
under the laws of the State of Texas and has the corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and to enter into and perform
its obligations under this Agreement; and the Company is duly qualified
as a foreign corporation to transact business and is in good standing in
each other jurisdiction in which such qualification is required, whether
by reason of the ownership or leasing of property or the conduct of
business, except where the failure or failures so to qualify or to be in
good standing would not, individually or in the aggregate, result in a
Material Adverse Effect; and the Company is duly registered as a bank
holding company under the Bank Holding Company Act of 1956, as amended.
(vi) GOOD STANDING OF SUBSIDIARIES. Each subsidiary of the
Company (each a "Subsidiary" and, collectively, the "Subsidiaries") has
been duly organized and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation, has
corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Prospectus and is duly
qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the conduct
of business, except where the failure or failures so to qualify or to be
in good standing would not, individually or in the aggregate, result in
a Material Adverse Effect; except as otherwise disclosed in the
Registration Statement, all of the issued and outstanding capital stock
of each such Subsidiary has been duly authorized and validly issued, is
fully paid and non-assessable and is owned by the Company, directly or
through subsidiaries, free and clear of any security interest, mortgage,
pledge, lien, encumbrance, claim or equity; none of the outstanding
shares of capital stock of any Subsidiary was issued in violation of the
preemptive or similar rights of any securityholder of such Subsidiary.
The only subsidiaries of the Company are the subsidiaries listed on
Exhibit 21 to the Registration Statement. Except for the shares of
4
<PAGE>
capital stock of the Subsidiaries owned by the Company and such
Subsidiaries, neither the Company nor the Subsidiaries owns any shares
of stock or any other equity securities of any corporation or has any
equity interest in any firm, partnership, association or other entity,
except as described in the Prospectus and except for those interests
which are not required to be described in the Registration Statement.
(vii) CAPITALIZATION. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus in the
column entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectus or pursuant to the exercise of convertible securities or
options referred to in the Prospectus). The shares of issued and
outstanding capital stock, including the Securities to be purchased by
the Underwriters from the Selling Shareholders, have been duly
authorized and validly issued and are fully paid and non-assessable;
none of the outstanding shares of capital stock, including the
Securities to be purchased by the Underwriters from the Selling
Shareholders, was issued in violation of the preemptive or other similar
rights of any securityholder of the Company.
(viii) AUTHORIZATION OF AGREEMENT. This Agreement has been duly
authorized, executed and delivered by the Company.
(ix) AUTHORIZATION AND DESCRIPTION OF SECURITIES. The Securities
to be purchased by the Underwriters from the Company have been duly
authorized for issuance and sale to the Underwriters pursuant to this
Agreement and, when issued and delivered by the Company pursuant to this
Agreement against payment of the consideration set forth herein, will be
validly issued and fully paid and non-assessable; the Common Stock
conforms to all statements relating thereto contained in the Prospectus
and such description conforms to the rights set forth in the instruments
defining the same; no holder of the Securities will be subject to
personal liability by reason of being such a holder; and the issuance of
the Securities is not subject to the preemptive or other similar rights
of any securityholder of the Company.
(x) ABSENCE OF DEFAULTS AND CONFLICTS. Neither the Company nor
any of its Subsidiaries is in violation of its charter or by-laws or in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage,
deed of trust, loan or credit agreement, note, lease or other agreement
or instrument to which the Company or any of its Subsidiaries is a party
or by which it or any of them may be bound, or to which any of the
property or assets of the Company or any Subsidiary is subject
(collectively, the "Agreements and Instruments") except for such
defaults that would not, individually or in the aggregate, result in a
Material Adverse Effect; and the execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated
herein and in the Registration Statement (including the issuance and
sale of the Securities and the use of the proceeds from the sale of the
Securities as described in the Prospectus under the caption "Use of
Proceeds") and compliance by the Company with its obligations hereunder
have been duly authorized by all necessary corporate action and do not
and
5
<PAGE>
will not, whether with or without the giving of notice or passage of
time or both, conflict with or constitute a breach of, or a default or
Repayment Event (as defined below) under, give rise to any right of
termination under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any
Subsidiary pursuant to, any of the Agreements and Instruments (except
for such conflicts, breaches or defaults or liens, charges or
encumbrances that would not, individually or in the aggregate, result in
a Material Adverse Effect), nor will such action result in any violation
of the provisions of the charter or by-laws of the Company or any
Subsidiary or any applicable law, statute, rule, regulation, judgment,
order, writ or decree of any government, government instrumentality or
court, domestic or foreign, having jurisdiction over the Company or any
Subsidiary or any of their assets, properties or operations. As used
herein, a "Repayment Event" means any event or condition which gives the
holder of any note, debenture or other evidence of indebtedness (or any
person acting on such holder's behalf) the right to require the
repurchase, redemption or repayment of all or a portion of such
indebtedness by the Company or any Subsidiary.
(xi) ABSENCE OF LABOR DISPUTE. No labor dispute with the
employees of the Company or any Subsidiary exists or, to the knowledge
of the Company, is imminent.
(xii) ABSENCE OF PROCEEDINGS. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the Company, threatened, against or affecting the
Company or any Subsidiary, which is required to be disclosed in the
Registration Statement (other than as disclosed therein), or which would
reasonably be expected to result in a Material Adverse Effect, or which
would reasonably be expected to materially and adversely affect the
properties or assets thereof or the consummation of the transactions
contemplated in this Agreement or the performance by the Company of its
obligations hereunder; the aggregate of all pending legal or
governmental proceedings to which the Company or any Subsidiary is a
party or of which any of their respective property or assets is the
subject which are not described in the Registration Statement, including
ordinary routine litigation incidental to the business, would not
reasonably be expected to result in a Material Adverse Effect.
(xiii) ACCURACY OF EXHIBITS. There are no contracts or documents
which are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits thereto which have not been so
described or filed as required.
(xiv) POSSESSION OF INTELLECTUAL PROPERTY. The Company and its
Subsidiaries own or possess, or can acquire on reasonable terms,
adequate patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks, trade names or other
intellectual property (collectively, "Intellectual Property") necessary
to carry on the business now operated by them, and neither the Company
nor any of its Subsidiaries has received any notice or is otherwise
aware of any infringement of or conflict with asserted rights of others
with respect to any Intellectual Property or of any facts or
circumstances which would render any Intellectual
6
<PAGE>
Property invalid or inadequate to protect the interest of the Company or
any of its Subsidiaries therein, and which infringement or conflict (if
the subject of any unfavorable decision, ruling or finding) or
invalidity or inadequacy, individually or in the aggregate, would result
in a Material Adverse Effect.
(xv) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Company of
its obligations hereunder, in connection with the offering, issuance or
sale of the Securities hereunder or the consummation of the transactions
contemplated by this Agreement, except such as have been already
obtained or as may be required under the 1933 Act or the 1933 Act
Regulations or state securities laws.
(xvi) POSSESSION OF LICENSES AND PERMITS. The Company and its
Subsidiaries possess such certificates, authorities, permits, licenses,
approvals, consents and other authorizations (collectively,
"Governmental Licenses") issued by the appropriate federal, state, local
or foreign regulatory agencies or bodies necessary to conduct the
business now operated by them; the Company and its Subsidiaries are in
compliance with the terms and conditions of all such Governmental
Licenses, except where the failure so to comply would not, individually
or in the aggregate, have a Material Adverse Effect; all of the
Governmental Licenses are valid and in full force and effect, except
when the invalidity of such Governmental Licenses or the failure of such
Governmental Licenses to be in full force and effect would not have a
Material Adverse Effect; and neither the Company nor any of its
Subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses which,
individually or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would result in a Material Adverse Effect.
(xvii) COMPLIANCE WITH APPLICABLE LAWS. Except as set forth in
the Prospectus, the Company and each of its Subsidiaries is in
compliance in all material respects with all applicable laws, statutes,
ordinances, rules or regulations, the violation of which, individually
or in the aggregate, would be reasonably expected to have a Material
Adverse Effect.
(xviii) TITLE TO PROPERTY. Each of the Company and each of its
Subsidiaries has good and indefeasible title to all properties (real and
personal) owned by the Company or its Subsidiaries, free and clear of
all mortgages, pledges, liens, security interests, claims, restrictions
or encumbrances of any kind except such as (a) are described in the
Prospectus or (b) do not, individually or in the aggregate, materially
affect the value of such property and do not interfere with the use made
and proposed to be made of such property by the Company or any of its
Subsidiaries; and all of the leases and subleases material to the
business of the Company and its Subsidiaries, considered as one
enterprise, and under which the Company or any of its Subsidiaries holds
properties described in the Prospectus, are in full force and effect,
and neither the Company nor any Subsidiary has any notice of any
material claim of any sort that has been asserted by anyone adverse to
the rights of the Company or any Subsidiary under any of the leases
7
<PAGE>
or subleases mentioned above, or affecting or questioning the rights of
the Company or such Subsidiary to the continued possession of the leased
or subleased premises under any such lease or sublease.
(xix) WARRANTS, OPTIONS AND OTHER RIGHTS. Except as disclosed in
the Prospectus, there are no outstanding options, warrants or other
rights calling for the issuance of, and no commitments, plans or
arrangements to issue, any shares of capital stock of the Company or any
of its Subsidiaries or any security convertible into or exchangeable for
capital stock of the Company or any of its Subsidiaries.
(xx) COMPLIANCE WITH CUBA ACT. The Company has complied with, and
is and will be in compliance with, the provisions of that certain
Florida act relating to disclosure of doing business with Cuba, codified
as Section 517.075 of the Florida statutes, and the rules and
regulations thereunder (collectively, the "Cuba Act") or is exempt
therefrom.
(xxi) INVESTMENT COMPANY ACT. The Company is not, and upon the
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Prospectus
will not be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company
Act of 1940, as amended (the "1940 Act").
(xxii) ENVIRONMENTAL LAWS. Except as described in the
Registration Statement and except as would not, individually or in the
aggregate, result in a Material Adverse Effect, (A) neither the Company
nor any of its Subsidiaries is in violation of any federal, state, local
or foreign statute, law, rule, regulation, ordinance, code, policy or
rule of common law or any judicial or administrative interpretation
thereof, including any judicial or administrative order, consent, decree
or judgment, relating to pollution or protection of human health, the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata) or wildlife, including,
without limitation, laws and regulations relating to the release or
threatened release of chemicals, pollutants, contaminants, wastes, toxic
substances, hazardous substances, petroleum or petroleum products
(collectively, "Hazardous Materials") or to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling
of Hazardous Materials (collectively, "Environmental Laws"), (B) the
Company and its Subsidiaries have all permits, authorizations and
approvals required under any applicable Environmental Laws and are each
in compliance with their requirements, (C) there are no pending or, to
the best knowledge of the Company, threatened, administrative,
regulatory or judicial actions, suits, demands, demand letters, claims,
liens, notices of noncompliance or violation, investigation or
proceedings relating to any Environmental Law against the Company or any
of its Subsidiaries and (D) there are no events or circumstances that
might reasonably be expected to form the basis of an order for clean-up
or remediation, or an action, suit or proceeding by any private party or
governmental body or agency, against or affecting the Company or any of
its Subsidiaries relating to Hazardous Materials or any Environmental
Laws.
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(xxiii) REGISTRATION RIGHTS. There are no persons with
registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise
registered by the Company under the 1933 Act.
(xxiv) TAX MATTERS. The Company and its Subsidiaries have timely
filed all federal, state, local and foreign tax returns that are
required to be filed or have duly requested extensions thereof and have
timely paid all taxes required to be paid by any of them and any related
assessments, fines or penalties, except for any such tax, assessment,
fine or penalty that is being contested in good faith and by appropriate
proceedings; and adequate charges, accruals and reserves have been
provided for in the financial statements referred to in Section
1(a)(iii) above in respect of all federal, state, local and foreign
taxes for all periods as to which the tax liability of the Company or
any of its Subsidiaries has not been finally determined or remains open
to examination by applicable taxing authorities.
(xxv) INSURANCE. The Company and its Subsidiaries carry or are
entitled to the benefits of insurance in such amounts and covering such
risks as is generally maintained by companies of established repute
engaged in the same or similar business, and all such insurance is in
full force and effect.
(xxvi) ACCOUNTING CONTROLS. The Company and its Subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance
with management's general and specific authorizations; (ii) transactions
are recorded as necessary to permit the preparation of financial
statements in conformity with GAAP and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorizations; and (iv) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(xxvii) FEES. Other than as contemplated by this Agreement, there
is no broker, finder or other party that is entitled to receive from the
Company or any of its Subsidiaries any brokerage or finder's fee or any
other fee, commission or payment as a result of the transactions
contemplated by this Agreement.
(xxviii) LOCK-UP AGREEMENTS. The Company has obtained and
delivered to the Representatives the agreements of the persons and
entities named in Schedule D hereto to the effect that each such person
and entity will not, for a period of 180 days from the date hereof and
except as otherwise provided therein, without the prior written consent
of KBW directly or indirectly, (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant for the sale of, or
otherwise dispose of or transfer any shares of the Common Stock or any
securities convertible into or exchangeable or exercisable for Common
Stock or file or cause to be filed any registration statement under the
1933 Act with respect to any of the foregoing or (ii) enter into any
swap or any other agreement or any transaction that transfers, in whole
or in part, directly or indirectly, the economic
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consequence of ownership of the Common Stock, whether any such swap or
transaction is to be settled by delivery of Common Stock or other
securities, in cash or otherwise; PROVIDED, HOWEVER, that the agreements
of Messrs. Heaney, Mullins and Soriero allow Permitted Dispositions (as
defined below) of Common Stock without the prior written consent of KBW.
(xxix) USE OF PROSPECTUS. The Company has not distributed and,
prior to the later to occur of (i) the Closing Time and (ii) completion
of the distribution of the Securities, will not distribute any
prospectus (as such term is defined in the 1933 Act and the 1933 Act
Regulations) in connection with the offering and sale of the Securities
other than the Registration Statement, any preliminary prospectus, the
Prospectus or other materials, if any, permitted by the 1933 Act or by
the 1933 Act Regulations and approved by the Representatives.
(b) REPRESENTATIONS AND WARRANTIES BY THE SELLING SHAREHOLDERS. Each
Selling Shareholder severally and not jointly represents and warrants to each
Underwriter as of the date hereof and as of the Closing Time, and agrees with
each Underwriter, as follows:
(i) ACCURATE DISCLOSURE. The Shareholder Information (as defined
in Section 6(a)) furnished by such Selling Shareholder does not contain
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; such Selling
Shareholder is not prompted to sell the Securities to be sold by such
Selling Shareholder hereunder by any information concerning the Company
or any Subsidiary which is not set forth in the Prospectus.
(ii) AUTHORIZATION OF AGREEMENTS. Each Selling Shareholder has
the full right, power and authority to enter into this Agreement and a
Power of Attorney and Custody Agreement (the "Power of Attorney and
Custody Agreement") and to sell, transfer and deliver the Securities to
be sold by such Selling Shareholder hereunder (assuming the
effectiveness of the Registration Statement and such authorizations,
approvals or consents as may be necessary under foreign or state
securities and blue sky laws). The execution and delivery of this
Agreement and the Power of Attorney and Custody Agreement and the sale
and delivery of the Securities to be sold by such Selling Shareholder
and the consummation of the transactions contemplated herein and under
the Power of Attorney and Custody Agreement and compliance by such
Selling Shareholder with its obligations hereunder and under the Power
of Attorney and Custody Agreement have been duly authorized by such
Selling Shareholder and do not and will not, whether with or without the
giving of notice or passage of time or both, conflict with or constitute
a breach of, or default under, or result in the creation or imposition
of any tax, lien, charge or encumbrance upon the Securities to be sold
by such Selling Shareholder or any property or assets of such Selling
Shareholder pursuant to any contract, indenture, mortgage, deed of
trust, loan or credit agreement, note, license, lease or other agreement
or instrument to which such Selling Shareholder is a party or by which
such Selling Shareholder may be bound, or to which any of the property
or assets of such Selling Shareholder is subject, nor will such action
result in any violation of the provisions of
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the charter or by-laws or other organizational instrument of such
Selling Shareholder, if applicable, or any applicable treaty, law,
statute, rule, regulation, judgment, order, writ or decree of any
government, government instrumentality or court, domestic or foreign,
having jurisdiction over such Selling Shareholder or any of its
properties.
(iii) GOOD AND VALID TITLE. Such Selling Shareholder has and will
at the Closing Time have good and valid title to the Securities to be
sold by such Selling Shareholder hereunder, free and clear of any
security interest, mortgage, pledge, lien, charge, claim, equity or
encumbrance of any kind, other than pursuant to this Agreement and the
Power of Attorney and Custody Agreement; and upon delivery of such
Securities and payment of the purchase price therefor as herein
contemplated, assuming each such Underwriter is purchasing the
Securities in good faith and has no notice of any defect in title or any
adverse claim relating to the Securities, each of the Underwriters will
receive good and valid title to the Securities purchased by it from such
Selling Shareholder, free and clear of any security interest, mortgage,
pledge, lien, charge, claim, equity or encumbrance of any kind.
(iv) DUE EXECUTION OF POWER OF ATTORNEY AND CUSTODY AGREEMENT.
Such Selling Shareholder has duly executed and delivered, in the form
heretofore furnished to the Representatives, the Power of Attorney and
Custody Agreement with Walter E. Johnson, Paul B. Murphy, Jr. and David
C. Farries, or any of them, as attorneys-in-fact (the
"Attorneys-in-Fact"), and Southwest Bancorporation of Texas, Inc., as
custodian (the "Custodian"); the Custodian is authorized to deliver the
Securities to be sold by such Selling Shareholder hereunder and to
accept payment therefor; and each Attorney-in-Fact is authorized to
execute and deliver this Agreement and the certificate referred to in
Section 5(f) or that may be required pursuant to Section 5(m) on behalf
of such Selling Shareholder, to sell, assign and transfer to the
Underwriters the Securities to be sold by such Selling Shareholder
hereunder, to determine the purchase price to be paid by the
Underwriters to such Selling Shareholder, as provided in Section 2(a)
hereof, to authorize the delivery of the Securities to be sold by such
Selling Shareholder hereunder, to accept payment therefor, and otherwise
to act on behalf of such Selling Shareholder in connection with this
Agreement.
(v) ABSENCE OF MANIPULATION. Such Selling Shareholder has not
taken, and will not take, directly or indirectly, any action which is
designed to or which has constituted or which might reasonably be
expected to cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of
the Securities.
(vi) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or consent,
approval, authorization, order, registration, qualification or decree
of, any court or governmental authority or agency, domestic or foreign,
is necessary or required for the performance by each Selling Shareholder
of its obligations hereunder or in the Power of Attorney and Custody
Agreement, or in connection with the sale and delivery of the Securities
hereunder or the consummation of the transactions contemplated by this
Agreement,
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except such as may have previously been made or obtained or as may be
required under the 1933 Act or the 1933 Act Regulations or state
securities laws.
(vii) RESTRICTION ON SALE OF SECURITIES. During a period of 180
days from the date of the Prospectus, such Selling Shareholder will not,
without the prior written consent of KBW, (a) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or file or cause to be
filed any registration statement under the 1933 Act with respect to any
of the foregoing or (b) enter into any swap or any other agreement or
any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (a) or (b)
above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise; PROVIDED, HOWEVER, that with respect
to each of Messrs. Heaney, Mullins and Soriero, such restrictions shall
not apply to Permitted Dispositions. The foregoing sentence shall not
apply to the Securities to be sold hereunder. "Permitted Dispositions"
mean (x) a bona fide gift, provided that the donee thereof agrees in
writing with KBW to be bound by the restrictions imposed by this clause
(vii) or (y) a transfer to an affiliate of such Selling Shareholder,
provided that the affiliate agrees in writing with KBW to be bound by
the restrictions imposed by this clause (vii).
(viii) CERTIFICATES SUITABLE FOR TRANSFER. Certificates for all
of the Securities to be sold by such Selling Shareholder pursuant to
this Agreement, in suitable form for transfer by delivery or accompanied
by duly executed instruments of transfer or assignment in blank with
signatures guaranteed, have been placed in custody with the Custodian
with irrevocable conditional instructions to deliver such Securities to
the Underwriters pursuant to this Agreement.
(ix) NO ASSOCIATION WITH NASD. Neither such Selling Shareholder
nor any of such Selling Shareholder's affiliates directly, or indirectly
through one or more intermediaries, controls, or is controlled by, or is
under common control with, or has any other association with (within the
meaning of Article I, Section 1(m) of the By-laws of the National
Association of Securities Dealers, Inc.), any member firm of the
National Association of Securities Dealers, Inc.
(c) OFFICER'S CERTIFICATES. Any certificate signed by any officer of the
Company or any of its Subsidiaries delivered to the Representatives or to
counsel for the Underwriters shall be deemed a representation and warranty by
the Company to each Underwriter as to the matters covered thereby; and any
certificate signed by or on behalf of any Selling Shareholder as such and
delivered to the Representatives or to counsel for the Underwriters pursuant to
the terms of this Agreement shall be deemed a representation and warranty by
such Selling Shareholder to the Underwriters as to the matters covered thereby.
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SECTION 2. SALE AND DELIVERY TO UNDERWRITERS; CLOSING.
(a) INITIAL SECURITIES. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, each of the Company and each Selling Shareholder, severally and not
jointly, agrees to sell to each Underwriter, severally and not jointly, and each
Underwriter, severally and not jointly, agrees to purchase from the Company and
each Selling Shareholder, at the price per share set forth in Schedule C, that
proportion of the number of Initial Securities set forth in Schedule B opposite
the name of the Company or such Selling Shareholder, as the case may be, which
the number of Initial Securities set forth in Schedule A opposite the name of
such Underwriter, plus any additional number of Initial Securities which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof, bears to the total number of Initial Securities, subject, in
each case, to such adjustments among the Underwriters as the Representatives in
their sole discretion shall make to eliminate any sales or purchases of
fractional securities.
(b) OPTION SECURITIES. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants an option to the Underwriters, severally
and not jointly, to purchase up to an additional 172,500 shares of Common Stock,
as set forth in Schedule B, at the price per share set forth in Schedule C, less
an amount per share equal to any dividends or distributions declared by the
Company and payable on the Initial Securities but not payable on the Option
Securities. The option hereby granted will expire 30 days after the date hereof
and may be exercised in whole or in part from time to time only for the purpose
of covering over-allotments which may be made in connection with the offering
and distribution of the Initial Securities upon notice by the Representatives to
the Company setting forth the number of Option Securities as to which the
several Underwriters are then exercising the option and the time and date of
payment and delivery for such Option Securities. Any such time and date of
delivery (a "Date of Delivery") shall be determined by the Representatives, but
shall not be later than seven full business days after the exercise of said
option, nor in any event prior to the Closing Time, as hereinafter defined. If
the option is exercised as to all or any portion of the Option Securities, each
of the Underwriters, acting severally and not jointly, will purchase (a) that
proportion of the total number of Option Securities then being purchased which
the number of Initial Securities set forth in Schedule A opposite the name of
such Underwriter bears to the total number of Initial Securities and (b) any
additional number of Option Securities which such Underwriter may become
obligated to purchase pursuant to the provisions of Section 10 hereof, subject,
in each case, to such adjustments as the Representatives in their sole
discretion shall make to eliminate any sales or purchases of fractional shares.
(c) PAYMENT. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Vinson
& Elkins L.L.P., 1001 Fannin Street, Houston, Texas 77002, or at such other
place as shall be agreed upon by the Representatives and the Company and the
Selling Shareholders, at 9:00 A.M. (Eastern time) on the third (fourth, if the
pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day
after the date hereof (unless postponed in accordance with the provisions of
Section 10), or such other time not later than ten business days after such date
as shall be agreed upon by the Representatives
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and the Company and the Selling Shareholders (such time and date of payment and
delivery being herein called "Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
offices, or at such other place as shall be agreed upon by the Representatives
and the Company, on each Date of Delivery as specified in the notice from the
Representatives to the Company.
Payment shall be made to the Company and the Selling Shareholders by
wire transfer of immediately available funds to bank accounts designated by the
Company and the Custodian pursuant to each Selling Shareholder's Power of
Attorney and Custody Agreement, as the case may be, against delivery to the
Representatives for the respective accounts of the Underwriters of certificates
for the Securities to be purchased by them. It is understood that each
Underwriter has authorized the Representatives, for its account, to accept
delivery of, receipt for, and make payment of the purchase price for, the
Initial Securities and the Option Securities, if any, which it has agreed to
purchase. KBW, individually and not as representative of the Underwriters, may
(but shall not be obligated to) make payment of the purchase price for the
Initial Securities or the Option Securities, if any, to be purchased by any
Underwriter whose funds have not been received by the Closing Time or the
relevant Date of Delivery, as the case may be, but such payment shall not
relieve such Underwriter from its obligations hereunder.
(d) DENOMINATIONS; REGISTRATION. Certificates for the Initial Securities
and the Option Securities, if any, shall be in such denominations and registered
in such names as the Representatives may request in writing at least one full
business day before the Closing Time or the relevant Date of Delivery, as the
case may be. The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Representatives in The City of New York not later than 10:00 A.M. (Eastern time)
on the business day prior to the Closing Time or the relevant Date of Delivery,
as the case may be.
SECTION 3. COVENANTS OF THE COMPANY. The Company covenants with each
Underwriter as follows:
(a) COMPLIANCE WITH SECURITIES REGULATIONS AND COMMISSION
REQUESTS. The Company, subject to Section 3(b), will comply with the
requirements of Rule 430A or Rule 434, as applicable, and will notify
the Representatives immediately, and confirm such notice in writing, (i)
when any post-effective amendment to the Registration Statement shall
become effective, or any supplement to the Prospectus or any amended
Prospectus shall have been filed, (ii) of the receipt of any comments
from the Commission, (iii) of any request by the Commission for any
amendment to the Registration Statement or any amendment or supplement
to the Prospectus or for additional information, and (iv) of the
issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing
or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the Securities for offering or sale
in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes. The Company will promptly
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effect the filings necessary pursuant to Rule 424(b) and will take such
steps as shall be necessary to ascertain promptly whether the form of
prospectus transmitted for filing under Rule 424(b) was received for
filing by the Commission and, in the event that it was not, it will
promptly file such prospectus. The Company will make every reasonable
effort to prevent the issuance of any stop order and, if any stop order
is issued, to obtain the lifting thereof at the earliest possible
moment.
(b) FILING OF AMENDMENTS. The Company will give the
Representatives notice of its intention to file or prepare any amendment
to the Registration Statement (including any filing under Rule 462(b)),
any Term Sheet or any amendment, supplement or revision to either the
prospectus included in the Registration Statement at the time it became
effective or to the Prospectus, will furnish the Representatives with
copies of any such documents a reasonable amount of time prior to such
proposed filing or use, as the case may be, and will not file or use any
such document to which the Representatives or counsel for the
Underwriters shall object.
(c) DELIVERY OF REGISTRATION STATEMENTS. The Company has
furnished or will deliver to the Representatives and counsel for the
Underwriters, without charge, signed copies of the Registration
Statement as originally filed and of each amendment thereto (including
exhibits filed therewith or incorporated by reference therein) and
signed copies of all consents and certificates of experts, and will also
deliver to the Representatives, without charge, a conformed copy of the
Registration Statement as originally filed and of each amendment thereto
(without exhibits) for each of the Underwriters. The copies of the
Registration Statement and each amendment thereto furnished to the
Underwriters will be identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the
extent permitted by Regulation S-T.
(d) DELIVERY OF PROSPECTUSES. The Company has delivered to each
Underwriter, without charge, as many copies of each preliminary
prospectus as such Underwriter reasonably requested, and the Company
hereby consents to the use of such copies for purposes permitted by the
1933 Act. The Company will furnish to each Underwriter, without charge,
during the period when the Prospectus is required to be delivered under
the 1933 Act or the Securities Exchange Act of 1934 (the "1934 Act"),
such number of copies of the Prospectus (as amended or supplemented) as
such Underwriter may reasonably request. The Prospectus and any
amendments or supplements thereto furnished to the Underwriters will be
identical to the electronically transmitted copies thereof filed with
the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(E) CONTINUED COMPLIANCE WITH SECURITIES LAWS. The Company will
comply with the 1933 Act and the 1933 Act Regulations so as to permit
the completion of the distribution of the Securities as contemplated in
this Agreement and in the Prospectus. If at any time when a prospectus
is required by the 1933 Act to be delivered in connection with sales of
the Securities, any event shall occur or condition shall exist as a
result of which it is necessary, in the opinion of counsel for the
Underwriters or for the Company, to amend the Registration Statement or
amend or supplement the
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Prospectus in order that the Prospectus will not include any untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements therein not misleading in the light of
the circumstances existing at the time it is delivered to a purchaser,
or if it shall be necessary, in the opinion of such counsel, at any such
time to amend the Registration Statement or amend or supplement the
Prospectus in order to comply with the requirements of the 1933 Act or
the 1933 Act Regulations, the Company will promptly prepare and file
with the Commission, subject to Section 3(b), such amendment or
supplement as may be necessary to correct such statement or omission or
to make the Registration Statement or the Prospectus comply with such
requirements, and the Company will furnish to the Underwriters such
number of copies of such amendment or supplement as the Underwriters may
reasonably request.
(f) BLUE SKY QUALIFICATIONS. The Company will use its best
efforts, in cooperation with the Underwriters, to qualify the Securities
for offering and sale under the applicable securities laws of such
states and other jurisdictions (domestic or foreign) as the
Representatives may designate and to maintain such qualifications in
effect for a period of not less than one year from the later of the
effective date of the Registration Statement and any Rule 462(b)
Registration Statement; provided, however, that the Company shall not be
obligated to file any general consent to service of process or to
qualify as a foreign corporation or as a dealer in securities in any
jurisdiction in which it is not so qualified or to subject itself to
taxation in respect of doing business in any jurisdiction in which it is
not otherwise so subject. In each jurisdiction in which the Securities
have been so qualified, the Company will file such statements and
reports as may be required by the laws of such jurisdiction to continue
such qualification in effect for a period of not less than one year from
the effective date of the Registration Statement and any Rule 462(b)
Registration Statement.
(g) RULE 158. The Company will timely file such reports pursuant
to the 1934 Act as are necessary in order to make generally available to
its securityholders as soon as practicable an earnings statement for the
purposes of, and to provide the benefits contemplated by, the last
paragraph of Section 11(a) of the 1933 Act.
(h) USE OF PROCEEDS. The Company will use the net proceeds
received by it from the sale of the Securities in the manner specified
in the Prospectus under "Use of Proceeds".
(i) LISTING. The Company will use its best efforts to effect and
maintain the quotation of the Securities on the Nasdaq National Market
and will file with the Nasdaq National Market all documents and notices
required by the Nasdaq National Market of companies that have securities
that are traded in the over-the-counter market and quotations for which
are reported by the Nasdaq National Market.
(j) RESTRICTION ON SALE OF SECURITIES. During a period of 180
days from the date of the Prospectus, the Company will not, without the
prior written consent of KBW, (i) directly or indirectly, offer, pledge,
sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or
warrant
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to purchase or otherwise transfer or dispose of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable
for Common Stock or file or cause to be filed any registration statement
under the 1933 Act with respect to any of the foregoing or (ii) enter
into any swap or any other agreement or any transaction that transfers,
in whole or in part, directly or indirectly, the economic consequence of
ownership of the Common Stock, whether any such swap or transaction
described in clause (i) or (ii) above is to be settled by delivery of
Common Stock or such other securities, in cash or otherwise. The
foregoing sentence shall not apply to (A) the Securities to be sold
hereunder, (B) any shares of Common Stock issued by the Company upon the
exercise of an option or warrant or the conversion of a security
outstanding on the date hereof and referred to in the Prospectus, (C)
any shares of Common Stock issued or options to purchase Common Stock
granted pursuant to existing employee benefit plans of the Company
referred to in the Prospectus, (D) any shares of Common Stock issued
pursuant to any non-employee director stock plan or (E) any shares of
Common Stock issued in connection with the acquisition of a business.
(k) REPORTING REQUIREMENTS. The Company, during the period when
the Prospectus is required to be delivered under the 1933 Act or the
1934 Act, will file all documents required to be filed with the
Commission pursuant to the 1934 Act within the time periods required by
the 1934 Act and the rules and regulations of the Commission thereunder.
(l) COMPLIANCE WITH RULE 463. The Company will file with the
Commission such reports on Form SR as may be required pursuant to Rule
463 of the 1933 Act Regulations.
(m) COMPLIANCE WITH CUBA ACT. In accordance with the Cuba Act and
without limitation to the provisions of Sections 6 and 7 hereof, the
Company agrees to indemnify and hold harmless each Underwriter from and
against any and all loss, liability, claim, damage and expense
whatsoever (including fees and disbursements of counsel), as incurred,
arising out of any violation by the Company of the Cuba Act.
SECTION 4. PAYMENT OF EXPENSES. (a) EXPENSES. The Company will pay or
cause to be paid all expenses incident to the performance of the obligations of
the Company and the Selling Shareholders under this Agreement, including (i) the
preparation, printing and filing of the Registration Statement (including
financial statements and exhibits) as originally filed and of each amendment
thereto, (ii) the preparation, printing and delivery to the Underwriters of this
Agreement, any Agreement among Underwriters and such other documents as may be
required in connection with the offering, purchase, sale, issuance or delivery
of the Securities, (iii) the preparation, issuance and delivery of the
certificates for the Securities to the Underwriters, including any stock or
other transfer taxes and any stamp, capital or other duties payable upon the
sale, issuance or delivery of the Securities to the Underwriters whether by the
Company or the Selling Shareholders or otherwise, (iv) the fees and
disbursements of the Company's counsel, accountants and other advisors and the
fees and disbursements of counsel, accountants and other advisors for the
Selling Shareholders, (v) the qualification of the Securities under securities
laws in accordance with the provisions of Section 3(f) hereof, including filing
fees and the fees and
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disbursements of counsel for the Underwriters in connection therewith and in
connection with the preparation of the Blue Sky Survey and any supplement
thereto, (vi) the printing and delivery to the Underwriters of copies of each
preliminary prospectus, any Term Sheets and of the Prospectus and any amendments
or supplements thereto, (vii) the preparation, printing and delivery to the
Underwriters of copies of the Blue Sky Survey and any supplement thereto, (viii)
the fees and expenses of any transfer agent or registrar for the Securities,
(ix) the filing fees incident to, and the fees and disbursements of counsel to
the Underwriters in connection with, the review by the National Association of
Securities Dealers, Inc. (the "NASD") of the terms of the sale of the Securities
and (x) the fees and expenses incurred in connection with the inclusion of the
Securities in the Nasdaq National Market.
(b) EXPENSES OF CONCURRENT SALE. Concurrent with the offering and sale
of the Securities, Mr. Walter E. Johnson, Chairman and Chief Executive Officer
of the Company, is selling 250,000 shares of Common Stock to another shareholder
of the Company (the "Johnson Shares"). The Company agrees to indemnify and hold
harmless each Underwriter from and against any and all loss, liability, claim,
damage and expense whatsoever (including fees and disbursements of counsel),
including, without limitation, any costs or expenses of the type referred to in
other provisions of this Section 4, as incurred, arising out of or related to
the offering and sale of the Johnson Shares.
(c) TERMINATION OF AGREEMENT. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5, Section 9(a)(i)
or Section 11 hereof, the Company shall reimburse the Underwriters for all of
their out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Underwriters.
(d) ALLOCATION OF EXPENSES. The provisions of this Section shall not
affect and, as between the Underwriters, on the one hand, and the Company, Mr.
Johnson and/or the Selling Shareholders, on the other hand, shall not be
affected by, any agreement that the Company, Mr. Johnson and/or the Selling
Shareholders may make for the sharing of such costs and expenses.
SECTION 5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of
the several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company and the Selling Shareholders
contained in Section 1 hereof or in certificates of any officer of the Company
or any Subsidiary of the Company or on behalf of any Selling Shareholder
delivered pursuant to the provisions hereof, to the performance by the Company
and the Selling Shareholders of their respective covenants and other obligations
hereunder, and to the following further conditions:
(a) EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration
Statement, including any Rule 462(b) Registration Statement, shall have
become effective and at Closing Time no stop order suspending the
effectiveness of the Registration Statement shall have been issued under
the 1933 Act or proceedings therefor initiated or threatened by the
Commission, and any request on the part of the Commission for additional
information shall have been complied with to the reasonable satisfaction
of counsel to the Underwriters. A prospectus containing the Rule 430A
Information shall have been filed with the Commission in accordance with
Rule 424(b) (or a post-effective amendment
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providing such information shall have been filed and declared effective
in accordance with the requirements of Rule 430A) or, if the Company has
elected to rely upon Rule 434, a Term Sheet shall have been filed with
the Commission in accordance with Rule 424(b).
(b) OPINION OF COUNSEL FOR COMPANY. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of
Closing Time, of Vinson & Elkins L.L.P., counsel for the Company, in
form and substance satisfactory to counsel for the Underwriters,
together with signed or reproduced copies of such letter for each of the
other Underwriters to the effect set forth in Exhibit A hereto.
(c) OPINION OF COUNSEL FOR THE SELLING SHAREHOLDERS. At Closing
Time, the Representatives shall have received the favorable opinion,
dated as of Closing Time, of Vinson & Elkins L.L.P., counsel for the
Selling Shareholders, in form and substance satisfactory to counsel for
the Underwriters, together with signed or reproduced copies of such
letter for each of the other Underwriters to the effect set forth in
Exhibit B hereto.
(d) OPINION OF COUNSEL FOR UNDERWRITERS. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of
Closing Time, of Skadden, Arps, Slate, Meagher & Flom LLP, counsel for
the Underwriters, together with signed or reproduced copies of such
letter for each of the other Underwriters in form and substance
satisfactory to the Underwriters.
(e) OFFICERS' CERTIFICATE. At Closing Time, there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Prospectus, any material adverse change in
the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company and its Subsidiaries
considered as one enterprise, whether or not arising in the ordinary
course of business, and the Representatives shall have received a
certificate of the Chairman of the Board, the President or a Vice
President of the Company and of the chief financial or chief accounting
officer of the Company, dated as of Closing Time, to the effect that (i)
there has been no such material adverse change, (ii) the representations
and warranties in Section 1(a) hereof are true and correct with the same
force and effect as though expressly made at and as of Closing Time,
(iii) the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to
Closing Time, and (iv) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or are contemplated by the
Commission.
(f) CERTIFICATE OF SELLING SHAREHOLDERS. At Closing Time, the
Representatives shall have received a certificate of an Attorney-in-Fact
on behalf of each Selling Shareholder, dated as of Closing Time, to the
effect that (i) the representations and warranties of each Selling
Shareholder contained in Section 1(b) hereof are true and correct in all
respects with the same force and effect as though expressly made at and
as of Closing Time and (ii) each Selling Shareholder has complied with
all agreements and
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satisfied all conditions on its part to be performed or satisfied under
this Agreement at or prior to Closing Time.
(g) ACCOUNTANT'S COMFORT LETTER. At the time of the execution of
this Agreement, the Representatives shall have received from Coopers &
Lybrand L.L.P. a letter dated such date, in form and substance
satisfactory to the Representatives, together with signed or reproduced
copies of such letter for each of the other Underwriters containing
statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectus.
(h) BRING-DOWN COMFORT LETTER. At Closing Time, the
Representatives shall have received from Coopers & Lybrand L.L.P. a
letter, dated as of Closing Time, in form and substance satisfactory to
the Representatives, to the effect that they reaffirm the statements
made in the letter furnished pursuant to subsection (g) of this Section,
except that the specified date referred to shall be a date not more than
three business days prior to Closing Time.
(i) APPROVAL OF LISTING. At Closing Time, the Securities shall
have been approved for inclusion in the Nasdaq National Market, subject
only to official notice of issuance.
(j) NO OBJECTION. The NASD shall have confirmed that it has not
raised any objection with respect to the fairness and reasonableness of
the underwriting terms and arrangements.
(k) LOCK-UP AGREEMENTS. At the date of this Agreement, the
Representatives shall have received an agreement substantially in the
form of Exhibit C hereto signed by the persons listed on Schedule D
hereto.
(l) CONDITIONS TO PURCHASE OF OPTION SECURITIES. In the event
that the Underwriters exercise their option provided in Section 2(b)
hereof to purchase all or any portion of the Option Securities, the
representations and warranties of the Company contained herein and the
statements in any certificates furnished by the Company and any
Subsidiary of the Company shall be true and correct as of each Date of
Delivery and, at the relevant Date of Delivery, and the Representatives
shall have received:
(i) OFFICERS' CERTIFICATE. A certificate, dated such Date of
Delivery, of the Chairman of the Board, the President or a Vice
President of the Company and of the chief financial or chief
accounting officer of the Company confirming that the certificate
delivered at the Closing Time pursuant to Section 5(e) hereof
remains true and correct as of such Date of Delivery.
(ii) OPINION OF COUNSEL FOR COMPANY. The favorable opinion of
Vinson & Elkins L.L.P., counsel for the Company, in form and
substance satisfactory to counsel for the Underwriters, dated
such Date of Delivery, relating to the Option
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Securities to be purchased on such Date of Delivery and otherwise
to the same effect as the opinion required by Section 5(b)
hereof.
(iii) OPINION OF COUNSEL FOR UNDERWRITERS. The favorable opinion
of Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the
Underwriters, dated such Date of Delivery, relating to the Option
Securities to be purchased on such Date of Delivery and otherwise
to the same effect as the opinion required by Section 5(d)
hereof.
(iv) BRING-DOWN COMFORT LETTER. A letter from Coopers & Lybrand
L.L.P., in form and substance satisfactory to the Representatives
and dated such Date of Delivery, substantially in the same form
and substance as the letter furnished to the Representatives
pursuant to Section 5(g) hereof, except that the "specified date"
in the letter furnished pursuant to this paragraph shall be a
date not more than five days prior to such Date of Delivery.
(m) ADDITIONAL DOCUMENTS. At Closing Time and at each Date of
Delivery counsel for the Underwriters shall have been furnished with
such documents and opinions as they may reasonably require for the
purpose of enabling them to pass upon the issuance and sale of the
Securities as herein contemplated, or in order to evidence the accuracy
of any of the representations or warranties, or the fulfillment of any
of the conditions, herein contained; and all proceedings taken by the
Company and the Selling Shareholders in connection with the issuance and
sale of the Securities as herein contemplated shall be reasonably
satisfactory in form and substance to the Representatives and counsel
for the Underwriters.
(n) TERMINATION OF AGREEMENT. If any condition specified in this
Section shall not have been fulfilled when and as required to be
fulfilled, this Agreement, or, in the case of any condition to the
purchase of Option Securities on a Date of Delivery which is after the
Closing Time, the obligations of the several Underwriters to purchase
the relevant Option Securities, may be terminated by the Representatives
by notice to the Company at any time at or prior to the Closing Time or
such Date of Delivery, as the case may be, and such termination shall be
without liability of any party to any other party except as provided in
Section 4 and except that (i) in the case of a termination of this
Agreement, Sections 1(a)(viii), 1(a)(x), 1(a)(xv), 1(b)(ii), 1(b)(iv),
1(b)(vi), 3(m), 6 and 7 shall survive such termination and remain in
full force and effect and (ii) in the case of a termination of the
obligations of the several Underwriters to purchase Option Securities on
a Date of Delivery, Sections 1, 3(m), 6, 7 and 8 shall survive such
termination and remain in full force and effect.
SECTION 6. INDEMNIFICATION.
(a) INDEMNIFICATION OF UNDERWRITERS. The Company agrees to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act to the extent and in the manner set forth in clauses (i), (ii) and
(iii) below. In addition, each Selling Shareholder,
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severally and not jointly, agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or the
omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact included in any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto), or the omission
or alleged omission therefrom of a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or proceeding
by any governmental agency or body, commenced or threatened, or of any
claim whatsoever based upon any such untrue statement or omission, or
any such alleged untrue statement or omission; provided that (subject to
Section 6(d) below) any such settlement is effected with the written
consent of the Company and the Selling Shareholders; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by KBW),
reasonably incurred in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental
agency or body, commenced or threatened, or any claim whatsoever based
upon any such untrue statement or omission, or any such alleged untrue
statement or omission, to the extent that any such expense is not paid
under (i) or (ii) above;
PROVIDED, HOWEVER, that each Selling Shareholder shall be obligated to indemnify
and hold harmless each Underwriter, and each person who controls any Underwriter
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act,
only to the extent such loss, liability, claim, damage or expense arises out of
an untrue statement or omission or alleged untrue statement or omission of a
material fact made in reliance upon and in conformity with written information
furnished to the Company or the Underwriters by or on behalf of such Selling
Shareholder ("Shareholder Information") expressly for use in the Registration
Statement (or any amendment thereto) or the preparation thereof, including the
Rule 430A Information and the Rule 434 Information, if applicable, or any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) or the preparation thereof; and, PROVIDED FURTHER, that this indemnity
agreement shall not apply to any loss, liability, claim, damage or expense to
the extent arising out of any untrue statement or omission or alleged untrue
statement or omission made in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through KBW expressly
for use in the Registration Statement (or any amendment thereto), including the
Rule 430A Information and the Rule 434 Information, if applicable, or
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<PAGE>
any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto). The foregoing indemnity with respect to any untrue statement contained
in or omission from a preliminary prospectus shall not inure to the benefit of
any Underwriter (or any person controlling such Underwriter) from whom the
person asserting any such loss, liability, claim, damage or expense purchased
any of the Securities which are the subject thereof if (x) prior to the Closing
Time, the Company provides to the Underwriters written notice of such untrue
statement or omission, which written notice shall specifically delineate such
untrue statement or omission and shall provide all information necessary to
correct such untrue statement or omission and (y) the Company or the Selling
Shareholders shall sustain the burden of proving that (i) any such loss,
liability, claim, damage or expense resulted from the fact that such person was
not sent or given a copy of the Prospectus at or prior to the written
confirmation of the sale of such Securities to such person, (ii) the Company has
previously furnished copies thereof to such Underwriter sufficiently in advance
of the Closing Time to allow for distribution to the purchasers of the
Securities, and (iii) the loss, liability, claim, damage or expense resulted
from an untrue statement contained in or omission from such preliminary
prospectus which was corrected in the Prospectus. Each Selling Shareholder's
aggregate liability under this Section 6 shall be limited to an amount equal to
the net proceeds (before deducting expenses) received by such Selling
Shareholder from the sale of Securities pursuant to this Agreement.
(b) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS AND SELLING
SHAREHOLDERS. Each Underwriter severally agrees to indemnify and hold harmless
the Company, its directors, each of its officers who signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of Section 15 of the 1933 Act or Section 20 of the 1934 Act, and each Selling
Shareholder and each person, if any, who controls any Selling Shareholder within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against
any and all loss, liability, claim, damage and expense described in the
indemnity contained in subsection (a) of this Section, as incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the Registration Statement (or any amendment thereto),
including the Rule 430A Information and the Rule 434 Information, if applicable,
or any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) in reliance upon and in conformity with written information furnished
to the Company by such Underwriter through KBW expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or such preliminary
prospectus or the Prospectus (or any amendment or supplement thereto).
(c) ACTIONS AGAINST PARTIES; NOTIFICATION. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by KBW, and, in the case of
parties indemnified pursuant to Section 6(b) above, counsel to the indemnified
parties shall be selected by the Company. An indemnifying party may participate
at its own expense in the defense of any such action; provided, however,
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that counsel to the indemnifying party shall not (except with the consent of the
indemnified party) also be counsel to the indemnified party. In no event shall
the indemnifying parties be liable for fees and expenses of more than one
counsel (in addition to any local counsel) separate from their own counsel for
all indemnified parties in connection with any one action or separate but
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances. No indemnifying party shall, without the
prior written consent of the indemnified parties, settle or compromise or
consent to the entry of any judgment with respect to any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever in respect of which indemnification or
contribution could be sought under this Section 6 or Section 7 hereof (whether
or not the indemnified parties are actual or potential parties thereto), unless
such settlement, compromise or consent (i) includes an unconditional release of
each indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(ii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
(e) OTHER AGREEMENTS WITH RESPECT TO INDEMNIFICATION. The provisions of
this Section shall not affect any agreement among the Company and the Selling
Shareholders with respect to indemnification.
SECTION 7. CONTRIBUTION. If the indemnification provided for in Section
6 hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company or the
Selling Shareholder, as the case may be, on the one hand and the Underwriters on
the other hand from the offering of the Securities pursuant to this Agreement or
(ii) if the allocation provided by clause (i) is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
Company or such Selling Shareholder, as the case may be, on the one hand and of
the Underwriters on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriters on the other hand in connection with the offering of the Securities
pursuant to this Agreement shall
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be deemed to be in the same respective proportions as the total net proceeds
from the offering of the Securities pursuant to this Agreement (before deducting
expenses) received by the Company and the total underwriting discount received
by the Underwriters with respect to the Securities offered by the Company, in
each case as set forth on the cover of the Prospectus, or, if Rule 434 is used,
the corresponding location on the Term Sheet bear to the aggregate initial
public offering price of the Securities offered by the Company as set forth on
such cover. The relative benefits received by a Selling Shareholder on the one
hand and the Underwriters on the other hand in connection with the offering of
the Securities pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the
Securities pursuant to this Agreement (before deducting expenses) received by
such Selling Shareholder and the total underwriting discount received by the
Underwriters with respect to the Securities offered by such Selling Shareholder,
in each case as set forth on the cover of the Prospectus, or, if Rule 434 is
used, the corresponding location on the Term Sheet bear to the aggregate initial
public offering price of the Securities offered by such Selling Shareholder as
set forth on such cover.
The relative fault of the Company or such Selling Shareholder, as the
case may be, on the one hand and the Underwriters on the other hand shall be
determined by reference to, among other things, whether any such untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact relates to information supplied by the Company or such
Selling Shareholder, as the case may be, or by the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Company, the Selling Shareholders and the Underwriters agree that it
would not be just and equitable if contribution pursuant to this Section 7 were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
7. The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 7 shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, (i) no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Securities underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission and (ii) no Selling
Shareholder shall be required to contribute an amount in excess of the net
proceeds (before deducting expenses) received by such Selling Shareholder from
the sale of Securities pursuant to this Agreement. The Selling Shareholders'
respective obligations to contribute pursuant to this Section 7 are several and
not joint.
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No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company or any
Selling Shareholder within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act shall have the same rights to contribution as the Company or
such Selling Shareholder, as the case may be. The Underwriters' respective
obligations to contribute pursuant to this Section 7 are several in proportion
to the number of Initial Securities set forth opposite their respective names in
Schedule A hereto and not joint.
The provisions of this Section shall not affect any agreement among the
Company and the Selling Shareholders with respect to contribution.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
Subsidiaries or the Selling Shareholders submitted pursuant hereto, shall remain
operative and in full force and effect, regardless of any investigation made by
or on behalf of any Underwriter or controlling person, or by or on behalf of the
Company or the Selling Shareholders, and shall survive delivery of the
Securities to the Underwriters.
SECTION 9. TERMINATION OF AGREEMENT.
(a) TERMINATION; GENERAL. The Representatives may terminate this
Agreement, by notice to the Company and the Selling Shareholders, at any time at
or prior to Closing Time (i) if there has been, since the time of execution of
this Agreement or since the respective dates as of which information is given in
the Prospectus, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its Subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, or (ii) if there has occurred any
material adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the Representatives, impracticable to market the Securities or to
enforce contracts for the sale of the Securities, or (iii) if trading in any
securities of the Company has been suspended or limited by the Commission or the
Nasdaq National Market, or if trading generally on the American Stock Exchange
or the New York Stock Exchange or in the Nasdaq National Market has been
suspended or limited, or minimum or maximum prices for trading have been fixed,
or maximum ranges for prices have been required, by any of said exchanges or by
such system or by order of the Commission, the NASD or any other governmental
authority, or (iv) if a banking moratorium has been declared by either Federal,
New York or Texas authorities.
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(b) LIABILITIES. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1(a)(viii), 1(a)(x), 1(a)(xv), 1(b)(ii), 1(b)(iv), 1(b)(vi), 3(m), 6 and 7 shall
survive such termination and remain in full force and effect.
SECTION 10. DEFAULT BY ONE OR MORE OF THE UNDERWRITERS. If one or more
of the Underwriters shall fail at Closing Time or a Date of Delivery to purchase
the Securities which it or they are obligated to purchase under this Agreement
(the "Defaulted Securities"), the Representatives shall have the right, within
24 hours thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Defaulted Securities in such amounts as may be agreed upon and upon the
terms herein set forth; if, however, the Representatives shall not have
completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of
the number of Securities to be purchased on such date, each of the
non-defaulting Underwriters shall be obligated, severally and not
jointly, to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the
number of Securities to be purchased on such date, this Agreement or,
with respect to any Date of Delivery which occurs after the Closing
Time, the obligation of the Underwriters to purchase and of the Company
to sell the Option Securities to be purchased and sold on such Date of
Delivery shall terminate without liability on the part of any
non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination
of this Agreement or, in the case of a Date of Delivery which is after the
Closing Time, which does not result in a termination of the obligation of the
Underwriters to purchase and the Company to sell the relevant Option Securities,
as the case may be, either the (i) Representatives or (ii) the Company and any
Selling Shareholder shall have the right to postpone the Closing Time or the
relevant Date of Delivery, as the case may be, for a period not exceeding seven
days in order to effect any required changes in the Registration Statement or
Prospectus or in any other documents or arrangements. As used herein, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 10.
SECTION 11. DEFAULT BY ONE OR MORE OF THE SELLING SHAREHOLDERS OR THE
COMPANY. (a) If a Selling Shareholder shall fail at Closing Time to sell and
deliver the number of Securities which such Selling Shareholder or Selling
Shareholders are obligated to sell hereunder, then the Underwriters may, at
option of the Representatives, by notice from the Representatives to the Company
and the non-defaulting Selling Shareholders, either (a) terminate
27
<PAGE>
this Agreement without any liability on the fault of any non-defaulting party
except that the provisions of Sections 1(a)(viii), 1(a)(x), 1(a)(xv), 1(b)(ii),
1(b)(iv), 1(b)(vi), 3(m), 4, 6 and 7 shall remain in full force and effect or
(b) elect to purchase the Securities which the non-defaulting Selling
Shareholders and the Company have agreed to sell hereunder. No action taken
pursuant to this Section 11 shall relieve any Selling Shareholder so defaulting
from liability, if any, in respect of such default.
In the event of a default by any Selling Shareholder as referred to in
this Section 11, each of the Representatives, the Company and the non-defaulting
Selling Shareholders shall have the right to postpone the Closing Time for a
period not exceeding seven days in order to effect any required change in the
Registration Statement or Prospectus or in any other documents or arrangements.
(b) If the Company shall fail at Closing Time to sell the number of
Securities that it is obligated to sell hereunder, then this Agreement shall
terminate without any liability on the part of any non-defaulting party;
provided, however, that the provisions of Sections 1(a)(viii), 1(a)(x),
1(a)(xv), 1(b)(ii), 1(b)(iv), 1(b)(vi), 3(m), 4, 6 and 7 shall remain in full
force and effect. If the Company shall fail at a Date of Delivery to sell the
number of Securities that it is obligated to sell hereunder, then the
obligations of the several Underwriters to purchase any Securities on such date
(whether from the Company or any Selling Shareholder), may be terminated by the
Representatives by notice to the Company without any liability on the part of
any non-defaulting party, and Sections 1, 3(m), 4, 6, 7 and 8 shall survive such
termination and remain in full force and effect. No action taken pursuant to
this Section shall relieve the Company from liability, if any, in respect of
such default.
SECTION 12. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representatives at c/o Keefe, Bruyette &
Woods, Inc., Two World Trade Center, New York, New York 10048, attention of
Craig R. McMahen; notices to the Company shall be directed to it at Southwest
Bancorporation of Texas, Inc., 4400 Post Oak Parkway, Houston, Texas 77027,
attention of David C. Farries; and notices to the Selling Shareholders shall be
directed to Southwest Bancorporation of Texas, Inc., 4400 Post Oak Parkway,
Houston, Texas 77027, attention of David C. Farries.
SECTION 13. PARTIES. This Agreement shall each inure to the benefit of
and be binding upon the Underwriters, the Company and the Selling Shareholders
and their respective successors. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person, firm or
corporation, other than the Underwriters, the Company and the Selling
Shareholders and their respective successors and the controlling persons and
officers and directors referred to in Sections 6 and 7 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein contained. This Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the Underwriters, the Company and the Selling Shareholders
and their respective successors, and said controlling persons and officers and
directors and their heirs and legal representatives, and for the benefit of no
other person, firm or corporation. No
28
<PAGE>
purchaser of Securities from any Underwriter shall be deemed to be a successor
by reason merely of such purchase.
SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS
OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 15. EFFECT OF HEADINGS. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
29
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company and the Attorney-in-Fact for
the Selling Shareholders a counterpart hereof, whereupon this instrument, along
with all counterparts, will become a binding agreement among the Underwriters,
the Company and the Selling Shareholders in accordance with its terms.
Very truly yours,
SOUTHWEST BANCORPORATION OF TEXAS, INC.
By
Name:
Title:
ATTORNEY-IN-FACT, on behalf of the
Selling Shareholders named in Schedule B
hereto
By
Name:
As Attorney-in-Fact acting on behalf of
the Selling Shareholders named in Schedule B
hereto
CONFIRMED AND ACCEPTED,
as of the date first above written:
KEEFE, BRUYETTE & WOODS, INC.
LEGG MASON WOOD WALKER, INCORPORATED
By: KEEFE, BRUYETTE & WOODS, INC.
By ______________________________________________
Authorized Signatory
For themselves and as Representatives of the other Underwriters named in
Schedule A hereto.
30
<PAGE>
SCHEDULE A
Name of Underwriter Number of
------------------- Initial
Securities
----------
Keefe, Bruyette & Woods, Inc.........................
Legg Mason Wood Walker, Incorporated..................
---------
Total................................................. 1,334,753
=========
Sch A-1
<PAGE>
SCHEDULE B
Number of Initial Maximum Number of Option
Securities to be Sold Securities to be Sold
--------------------- ---------------------
Southwest Bancorporation
of Texas, Inc. 1,150,000 172,500
John B. Brock III 25,000
David Heaney 6,250
John W. Johnson 46,523
Don R. Mullins 29,480
Rio Largo de Panama S.A. 70,000
Thomas F. Soriero 7,500
--------- -------
Total.................... 1,334,753 172,500
========= =======
Sch B-1
<PAGE>
SCHEDULE C
SOUTHWEST BANCORPORATION OF TEXAS, INC.
1,334,753 Shares of Common Stock
(Par Value $1.00 Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $o.
2. The purchase price per share for the Securities to be paid by the
several Underwriters shall be $o, being an amount equal to the initial public
offering price set forth above less $o per share; provided that the purchase
price per share for any Option Securities purchased upon the exercise of the
over-allotment option described in Section 2(b) shall be reduced by an amount
per share equal to any dividends or distributions declared by the Company and
payable on the Initial Securities but not payable on the Option Securities.
Sch C-1
<PAGE>
SCHEDULE D
LIST OF PERSONS AND ENTITIES
SUBJECT TO LOCK-UP
John B. Brock III
Ernest H. Cockrell
David C. Farries
David Heaney
John W. Johnson
Walter E. Johnson
Robert C. McNair
R. John McWhorter
Wilhelmina R. Morian
Don R. Mullins
Paul B. Murphy, Jr.
Andres Palandjoglou
Yale Smith
Sharon K. Sokol
Thomas F. Soriero
Steve D. Stephens
Michael T. Willis
Sch D-1
<PAGE>
Exhibit A
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Texas.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Purchase
Agreement.
(iii) The Company is duly registered as a bank holding company under the
Bank Holding Company Act of 1956, as amended. The activities of each of the
Subsidiaries are permitted to subsidiaries of a bank holding company.
(iv) The Company is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure or failures so to
qualify or to be in good standing would not, individually or in the aggregate,
result in a Material Adverse Effect.
(v) The authorized, issued and outstanding capital stock of the Company
is as set forth in the Prospectus in the column entitled "Actual" under the
caption "Capitalization" (except for subsequent issuances, if any, pursuant to
the Purchase Agreement or pursuant to reservations, agreements or employee
benefit plans referred to in the Prospectus or pursuant to the exercise of
convertible securities or options referred to in the Prospectus); the shares of
issued and outstanding capital stock of the Company, including the Securities to
be purchased by the Underwriters from the Selling Shareholders, have been duly
authorized and validly issued and are fully paid and non-assessable; and none of
the outstanding shares of capital stock of the Company, including the Securities
to be purchased by the Underwriters from the Selling Shareholders, was issued in
violation of the preemptive or other similar rights of any securityholder of the
Company.
(vi) The Securities to be purchased by the Underwriters from the Company
have been duly authorized for issuance and sale to the Underwriters pursuant to
the Purchase Agreement and, when issued and delivered by the Company pursuant to
the Purchase Agreement against payment of the consideration set forth in the
Purchase Agreement, will be validly issued and fully paid and non-assessable and
no holder of the Securities is or will be subject to personal liability by
reason of being such a holder. The Common Stock conforms to all statements
relating thereto contained in the Prospectus and such description conforms to
the rights set forth in the instruments defining the same.
A-1
<PAGE>
(vii) The issuance and sale of the Securities by the Company and the
sale of the Securities by the Selling Shareholders is not subject to the
preemptive or other similar rights arising by operation of law or, to our
knowledge, otherwise of any securityholder of the Company.
(viii) Southwest Bank of Texas National Association ("SBTNA") has been
duly organized and is validly existing and in good standing under the laws of
the United States of America, has full authority to conduct operations as a
national bank, has corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus and is
duly qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required, whether
by reason of the ownership or leasing of property or the conduct of business,
except where the failure or failures so to qualify or to be in good standing
would not, individually or in the aggregate, result in a Material Adverse
Effect; Southwest Bancorporation of Delaware, Inc. ("SBD") has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the State of Delaware, has corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Prospectus, is duly qualified as a foreign corporation to transact business and
is in good standing in each jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure or failures so to qualify or to be
in good standing would not, individually or in the aggregate, result in a
Material Adverse Effect and is duly registered as a bank holding company under
the Bank Holding Company Act of 1956, as amended; except as otherwise disclosed
in the Prospectus, all of the issued and outstanding capital stock of each
Subsidiary has been duly authorized and validly issued, is fully paid and
non-assessable and, to our knowledge, is owned by the Company, directly or
through subsidiaries, free and clear of any security interest, mortgage, pledge,
lien, encumbrance, claim or equity; none of the outstanding shares of capital
stock of any Subsidiary was issued in violation of the preemptive or similar
rights of any securityholder of such Subsidiary. To our knowledge, the Company
does not have any subsidiaries other than SBTNA and SBD. To our knowledge,
except for the shares of capital stock of the Subsidiaries owned by the Company
and such Subsidiaries, neither the Company nor the Subsidiaries owns any shares
of stock or any other equity securities of any corporation or has any equity
interest in any firm, partnership, association or other entity, except as
described in the Prospectus and except for those interests which are not
required to be described in the Prospectus.
(ix) Except as disclosed in or specifically contemplated by the
Prospectus, to our knowledge, there are no outstanding options, warrants or
other rights calling for the issuance of, and no commitments, obligations, plans
or arrangements to issue, any shares of capital stock of the Company or any of
its Subsidiaries or any security convertible into or exchangeable for capital
stock of the Company or any of its Subsidiaries.
(x) The Purchase Agreement has been duly authorized, executed and
delivered by the Company.
(xi) The Registration Statement, including any Rule 462(b) Registration
Statement, has been declared effective under the 1933 Act; any required filing
of the Prospectus pursuant
A-2
<PAGE>
to Rule 424(b) has been made in the manner and within the time period required
by Rule 424(b); and, to our knowledge, no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been issued under the 1933 Act and no proceedings for that purpose
have been instituted or are pending or threatened by the Commission.
(xii) The Registration Statement, including any Rule 462(b) Registration
Statement, the Rule 430A Information and the Rule 434 Information, as
applicable, the Prospectus, and each amendment or supplement to the Registration
Statement and Prospectus, as of their respective effective or issue dates (other
than the financial statements and supporting schedules included therein or
omitted therefrom, as to which we need express no opinion) complied as to form
in all material respects with the requirements of the 1933 Act and the 1933 Act
Regulations.
(xiii) The form of certificate used to evidence the Common Stock
complies in all material respects with all applicable statutory requirements,
with any applicable requirements of the charter and by-laws of the Company and
the requirements of the Nasdaq National Market.
(xiv) To our knowledge, there is not pending or threatened any action,
suit, proceeding, inquiry or investigation, to which the Company or any
Subsidiary is a party, or to which the property or assets of the Company or any
Subsidiary is subject, before or brought by any court or governmental agency or
body, domestic or foreign, which would reasonably be expected to result in a
Material Adverse Effect, or which would reasonably be expected to materially and
adversely affect the properties or assets thereof or the consummation of the
transactions contemplated in the Purchase Agreement or the performance by the
Company of its obligations thereunder or that is required to be described in the
Prospectus that is not described as required; and to our knowledge, all pending
legal or governmental proceedings to which the Company or any of its
Subsidiaries is a party or that affect any of their respective properties or
assets that are not described in the Prospectus, including ordinary routine
litigation incidental to the business, would not reasonably be expected to
result in a Material Adverse Effect.
(xv) The information in the Prospectus under "Risk Factors - Supervision
and Regulation," "Risk Factors - Dividend History and Restrictions on Ability to
Pay Dividends," "Risk Factors - Certain Charter and Bylaw Provisions," "Risk
Factors - Regulation of Control," "Management - Employment Agreements,"
"Management - Director Compensation," "Management - Employee Stock Option
Plans," "Management - 401(k) Plan," "Supervision and Regulation" and
"Description of Securities of the Company" and in the Registration Statement
under Items 14 and 15, to the extent that it constitutes matters of law,
summaries of legal matters, the Company's charter and bylaws, documents or legal
proceedings, or legal conclusions, has been reviewed by us and is correct in all
material respects.
(xvi) To our knowledge, there are no statutes or regulations that are
required to be described in the Prospectus that are not described as required.
A-3
<PAGE>
(xvii) All descriptions in the Registration Statement of contracts and
other documents to which the Company or its Subsidiaries are a party are
accurate in all material respects; to our knowledge, there are no franchises,
contracts, indentures, mortgages, loan agreements, notes, leases or other
instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed or incorporated by reference as exhibits thereto,
and the descriptions thereof or references thereto are correct in all material
respects.
(xviii) To our knowledge, neither the Company nor any Subsidiary is in
violation of its charter or by-laws and no default by the Company or any
Subsidiary exists in the due performance or observance of any material
obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, loan agreement, note, lease or other agreement or
instrument that is described or referred to in the Registration Statement or the
Prospectus or filed or incorporated by reference as an exhibit to the
Registration Statement except for such defaults that would not, individually or
in the aggregate, result in a Material Adverse Effect.
(xix) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the 1933 Act and the
1933 Act Regulations, which have been obtained, or as may be required under the
securities or blue sky laws of the various states, as to which we need express
no opinion) is necessary or required in connection with the due authorization,
execution and delivery of the Purchase Agreement or for the offering, issuance,
sale or delivery of the Securities.
(xx) The execution, delivery and performance of the Purchase Agreement
and the consummation of the transactions contemplated in the Purchase Agreement
and in the Registration Statement (including the issuance and sale of the
Securities and the use of the proceeds from the sale of the Securities as
described in the Prospectus under the caption "Use Of Proceeds") and compliance
by the Company with its obligations under the Purchase Agreement do not and will
not, whether with or without the giving of notice or lapse of time or both,
conflict with or constitute a breach of, or a default or Repayment Event (as
defined in Section 1(a)(x) of the Purchase Agreement) under, give rise to any
right of termination under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any
Subsidiary pursuant to any contract, indenture, mortgage, deed of trust, loan or
credit agreement, note, lease or any other agreement or instrument known to us
to which the Company or any Subsidiary is a party or by which it or any of them
may be bound, or to which any of the property or assets of the Company or any
Subsidiary is subject (except for such conflicts, breaches or defaults or liens,
charges or encumbrances that would not, individually or in the aggregate, have a
Material Adverse Effect), nor will such action result in any violation of the
provisions of the charter or by-laws of the Company or any Subsidiary, or any
applicable law, statute, rule or regulation (excluding the securities or blue
sky laws of the various states, as to which we express no opinion), or, to our
knowledge, any judgment, order, writ or decree of any government, governmental
instrumentality or court, domestic or foreign, having jurisdiction over the
Company or any Subsidiary or any of their respective properties, assets or
operations.
A-4
<PAGE>
(xxi) To our knowledge, there are no persons with registration rights or
other similar rights to have any securities registered pursuant to the
Registration Statement or otherwise registered by the Company under the 1933
Act.
(xxii) The Company is not, and upon the issuance and sale of the
Securities as contemplated in the Purchase Agreement and the application of the
net proceeds therefrom as described in the Prospectus will not be, an
"investment company" or an entity "controlled" by an "investment company," as
such terms are defined in the 1940 Act.
We inform you that we have participated in conferences with officers and
other representatives of the Company and representatives of the independent
public accountants for the Company and the Underwriters and representatives of
legal counsel for the Underwriters, at which conferences the contents of the
Registration Statement and the Prospectus were discussed and, although we are
not passing upon and do not assume any responsibility for and shall not be
deemed to have independently verified the accuracy, completeness or fairness of
the statements contained in the Registration Statement and the Prospectus
(except to the extent set forth in subparagraphs (v) and (xv) above), on the
basis of the foregoing (relying as to materiality to a large extent upon the
opinions of officers and other representatives of the Company), nothing has come
to our attention that would lead us to believe that the Registration Statement
or any amendment thereto, including the Rule 430A Information and Rule 434
Information (if applicable), (except for financial statements and schedules and
other financial data included therein or omitted therefrom, as to which we need
make no statement), at the time such Registration Statement or any such
amendment became effective, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus or any
amendment or supplement thereto (except for financial statements and schedules
and other financial data included therein or omitted therefrom, as to which we
need make no statement), at the time the Prospectus was issued, at the time any
such amended or supplemented prospectus was issued or at the Closing Time,
included or includes an untrue statement of a material fact or omitted or omits
to state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
In rendering such opinion, such counsel may rely as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and public officials. Such
opinion shall not state that it is to be governed or qualified by, or that it is
otherwise subject to, any treatise, written policy or other document relating to
legal opinions, including, without limitation, the Legal Opinion Accord of the
ABA Section of Business Law (1991).
A-5
<PAGE>
Exhibit B
FORM OF OPINION OF COUNSEL FOR THE SELLING SHAREHOLDERS
TO BE DELIVERED PURSUANT TO SECTION 5(c)
(i) No filing with, or consent, approval, authorization, license, order,
registration, qualification or decree of, any court or governmental authority or
agency, domestic or foreign, (other than the issuance of the order of the
Commission declaring the Registration Statement effective and such
authorizations, approvals or consents as may be necessary under state securities
laws, as to which we need express no opinion) is necessary or required to be
obtained by the Selling Shareholders for the performance by each Selling
Shareholder of its obligations under the Purchase Agreement or in the Power of
Attorney and Custody Agreement, or in connection with the offer, sale or
delivery of the Securities.
(ii) Each Power of Attorney and Custody Agreement has been duly executed
and delivered by the respective Selling Shareholders named therein and
constitutes the legal, valid and binding agreement of such Selling Shareholder,
subject to bankruptcy, insolvency, reorganization, fraudulent conveyance or
transfer, moratorium or other similar laws affecting creditors' rights generally
and general principles of equity (whether considered in a proceeding at law or
in equity). No opinion is expressed with respect to the enforceability of any
indemnification or contribution provision contained in the Power of Attorney and
Custody Agreement.
(iii) The Purchase Agreement has been duly authorized, executed and
delivered by or on behalf of each Selling Shareholder.
(iv) Each Attorney-in-Fact has been duly authorized by the Selling
Shareholders to deliver the Securities on behalf of the Selling Shareholders in
accordance with the terms of the Purchase Agreement.
(v) The execution, delivery and performance of the Purchase Agreement
and the Power of Attorney and Custody Agreement and the sale and delivery of the
Securities and the consummation of the transactions contemplated in the Purchase
Agreement and in the Registration Statement and compliance by each Selling
Shareholder with its obligations under the Purchase Agreement do not and will
not result in any violation of the provisions of the charter or by-laws or other
constituent documents of any Selling Shareholder, if applicable.
(vi) To our knowledge, each Selling Shareholder has good and valid title
to the Securities to be sold by such Selling Shareholder pursuant to the
Purchase Agreement, free and clear of any pledge, lien, security interest,
charge, claim, equity or encumbrance of any kind other than created pursuant to
the Purchase Agreement and the Power of Attorney and Custody Agreement, and has
full right, power and authority to sell, transfer and deliver such Securities
pursuant to the Purchase Agreement. Assuming that the Underwriters purchase the
Securities to be delivered by the Selling Shareholders at the Closing Time in
good faith and without notice
B-1
<PAGE>
of any adverse claims (as such term is used in Section 8-302 of the Uniform
Commercial Code as in effect in the State of New York), upon delivery to the
Underwriters of certificates representing such Securities, duly endorsed to the
Underwriters or in blank, the Underwriters will own such Securities free and
clear of any pledge, lien, security interest, charge, equity, encumbrance or
adverse claim of any kind.
In rendering such opinion, such counsel may rely as to matters of
fact (but not as to legal conclusions) to the extent they deem proper on
certificates of the Selling Shareholders and public officials. With respect to
Rio Largo de Panama, S.A., such counsel may rely as to matters of Panamanian law
upon the opinion of Icaza, Gonzalez-Ruiz & Aleman, addressed to and delivered to
the Underwriters at the Closing Time.
B-2
<PAGE>
FORM OF LOCK-UP FROM DIRECTORS, OFFICERS OR OTHER SHAREHOLDERS
PURSUANT TO SECTION 5(k)
Exhibit C
o, 1997
KEEFE , BRUYETTE & WOODS, INC.
LEGG MASON WOOD WALKER, INCORPORATED
as Representatives of the several
Underwriters to be named in the
within-mentioned Purchase Agreement
c/o Keefe, Bruyette & Woods, Inc.
Two World Trade Center
New York, New York 10048
Re: PROPOSED PUBLIC OFFERING BY SOUTHWEST BANCORPORATION OF TEXAS, INC.
Dear Sirs:
The undersigned, a shareholder [and an officer and/or director] of
Southwest Bancorporation of Texas, Inc., a Texas corporation (the "Company"),
understands that Keefe, Bruyette & Woods, Inc. ("KBW") and Legg Mason Wood
Walker, Incorporated propose to enter into a Purchase Agreement (the "Purchase
Agreement") with the Company and the Selling Shareholders providing for the
public offering of shares (the "Securities") of the Company's common stock, par
value $1.00 per share (the "Common Stock"). In recognition of the benefit that
such an offering will confer upon the undersigned as a shareholder [and an
officer and/or director] of the Company, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
undersigned agrees with each underwriter to be named in the Purchase Agreement
that, during a period of 180 days from the date of the Purchase Agreement, the
undersigned will not, without the prior written consent of KBW, directly or
indirectly, [except for a Permitted Disposition (as defined in Section 1(b)(vii)
of the Purchase Agreement)]* (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant for the sale of, or otherwise dispose of or
transfer any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for Common Stock, whether now owned or hereafter
acquired by the undersigned or with respect to which the undersigned has or
hereafter acquires the power of disposition, or file or cause to be filed any
registration statement under the Securities Act of 1933, as amended, with
respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock, whether
any such swap or transaction is to be settled by delivery of Common Stock or
other securities, in cash or otherwise.
Very truly yours,
Signature: ________________________
Print Name: _______________________
- --------
* This language is only to be inserted in the lock-ups for Messrs. Heaney,
Mullins and Soriero.
C-1
EXHIBIT 4.1
NUMBER SHARES
- ------ ------
SOUTHWEST BANCORPORATION OF TEXAS, INC.
Incorporated Under the Laws of the State of Texas
CUSIP 84476R 10 9
-----------------
See Reverse for
Certain Definitions
and Legends
THIS CERTIFIES THAT
Is The Owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF $1.00 PAR VALUE COMMON STOCK OF
SOUTHWEST BANCORPORATION OF TEXAS, INC.
transferable only on the books of the Corporation in person or by duly
authorized attorney upon surrender of this Certificate properly endorsed. This
Certificate is not valid unless countersigned by the Transfer Agent and
registered by the Registrar.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to
be executed by the facsimile signatures of its duly authorized officers and to
be sealed with the facsimile seal of the Corporation.
Dated:
SOUTHWEST BANCORPORATION OF TEXAS, INC.
CORPORATE
SEAL
/s/ DAVID C. FARRIES TEXAS /s/ WALTER E. JOHNSON
Secretary Chairman and Chief
Executive Officer
COUNTERSIGNED:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
P.O. Box 1596
Denver, Colorado 80201
By _____________________________________________
Transfer Agent & Registrar Authorized Signature
<PAGE>
SOUTHWEST BANCORPORATION OF TEXAS, INC.
THE CORPORATION IS AUTHORIZED TO ISSUE SHARES OF BOTH COMMON AND
PREFERRED STOCK. A FULL STATEMENT OF ALL OF THE DESIGNATIONS, PREFERENCES,
LIMITATIONS, AND RELATIVE RIGHTS OF THE SHARES OF BOTH CLASSES AND ANY SERIES
THEREOF TO THE EXTENT THAT THEY HAVE BEEN FIXED AND DETERMINED AND THE AUTHORITY
OF THE BOARD OF DIRECTORS OF THE CORPORATION TO FIX AND DETERMINE THE RELATIVE
RIGHTS AND PREFERENCES OF SUBSEQUENT SERIES IS SET FORTH IN THE ARTICLES OF
INCORPORATION ON FILE IN THE OFFICE OF THE SECRETARY OF THE STATE OF TEXAS. THE
CORPORATION WILL FURNISH A COPY OF SUCH STATEMENT TO THE RECORD HOLDER OF THIS
CERTIFICATE WITHOUT CHARGE ON WRITTEN REQUEST TO THE CORPORATION AT ITS
PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE.
THE HOLDER OF THIS CERTIFICATE REPRESENTING SHARES OF COMMON STOCK SHALL
HAVE NO PREEMPTIVE RIGHT WHATSOEVER TO ACQUIRE ANY SHARES OR SECURITIES OF ANY
CLASS, WHETHER NOW OR HEREAFTER AUTHORIZED, WHICH MAY BE AT ANY TIME ISSUED,
SOLD OR OFFERED FOR SALE BY THE CORPORATION, OR WHICH MAY BE HELD IN THE
TREASURY OF THE CORPORATION.
The following abbreviations when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM --as tenants in common UNIF GIFT MIN ACT-- Custodian
TEN ENT --as tenants by the entireties -------------------
JT TEN --as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants
in common under Uniform Gifts to Minors
Act__________________________
(State)
Additional abbreviations may also be used though not in the above list.
- --------------------------------------------------------------------------------
For Value Received, ______________________ hereby sell, assign and transfer unto
Please Insert Social Security
or Other Identifying Number
of Assignee
- ------------------------------
| |
- ------------------------------
________________________________________________________________________________
(Please Print or Typewrite Name and Address, Including Zip Code, of Assignee)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________ Shares of the Common Stock represented
by the within Certificate, and do hereby irrevocably constitute and appoint
_______________________________________________________________ attorney-in-fact
to transfer the said stock on the books of the within-named Corporation, with
full power of substitution in the premises.
Dated ___________________________
______________________________________________________
______________________________________________________
NOTICE: THE SIGNATURES(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE
OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed:
____________________________________________________
The signature(s) should be guaranteed by an eligible guarantor institution
(Banks, Stockbrokers, Savings and Loan Associations and Credit Unions with
membership in an approved signature guarantee Medallion Program), pursuant to
S.E.C. Rule 17Ad-15.
EXHIBIT 5.1
[VINSON & ELKINS Letterhead]
January 9, 1997
Southwest Bancorporation of Texas, Inc.
4400 Post Oak Parkway
Houston, Texas 77027
Ladies and Gentlemen:
We have acted as counsel to Southwest Bancorporation of Texas, Inc., a
Texas corporation (the "Company"), in connection with the preparation of the
Company's Registration Statement on Form S-1 (File No. 333-16509) as filed by
the Company with the Securities and Exchange Commission pursuant to the
Securities Act of 1933, as amended (the "Registration Statement"), which
Registration Statement relates to the proposed offer and sale by the Company and
certain shareholders of an aggregate of up to 1,507,253 shares of the Company's
common stock, $1.00 par value (including the underwriters' over-allotment
option) (the "Shares"). In such connection, we are passing on certain legal
matters in connection with the sale of the Shares. At your request, this opinion
is being furnished to you for filing as an exhibit to the Registration
Statement.
In connection with rendering this opinion, we have examined such
certificates, instruments and documents and reviewed such questions of law as we
have considered necessary or appropriate for the purposes of this opinion. In
addition, we have relied as to factual matters on certificates of certain public
officials and officers of the Company.
Based upon the foregoing examination and review, we are of the opinion
that (i) with respect to the Shares that are currently issued and outstanding,
such Shares have been validly issued and are fully paid and non-assessable, and
(ii) with respect to all other Shares, such Shares have been duly authorized for
issuance and, when the Registration Statement has been declared effective and
the Shares are issued in accordance with the provisions of the Purchase
Agreement (as defined in the Registration Statement), such Shares will be
validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to us under the caption "Legal
Matters" in the Prospectus forming a part of the Registration Statement. In
giving this consent, however, we do not hereby 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 Securities and Exchange
Commission thereunder.
Very truly yours,
VINSON & ELKINS L.L.P.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1
(File No. 333-16509) of our report, which includes an explanatory paragraph for
changes in accounting principles, dated February 9, 1996, except for the fourth
paragraph of Note 1, as to which the date is November 18, 1996, on our audits of
the consolidated financial statements of Southwest Bancorporation of Texas, Inc.
(formerly Southwest Bancorporation, Inc.). We also consent to the reference to
our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Houston, Texas
January 15, 1997
