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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 23, 1997
REGISTRATION NO. 333-33001
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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
---------------------
PRIME BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
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<C> <C> <C>
TEXAS 6711 76-0088973
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
12200 NORTHWEST FREEWAY STUART D. SAUNDERS, ESQ.
HOUSTON, TEXAS 77092 GENERAL COUNSEL
(713) 209-6000 12200 NORTHWEST FREEWAY
(Address, including zip code, and telephone number, HOUSTON, TEXAS 77092
including (713) 209-6000
area code, of registrant's principal executive (Name, address, including zip code, and telephone
offices) number, including area code, of agent for service)
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Copies to:
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JOHN R. BRANTLEY, ESQ.
WILLIAM T. LUEDKE IV, ESQ. WILLIAM S. RUBENSTEIN, ESQ.
BRACEWELL & PATTERSON, L.L.P. SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
2900 SOUTH TOWER PENNZOIL PLACE 919 THIRD AVENUE
HOUSTON, TEXAS 77002-2781 NEW YORK, NEW YORK 10022
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES 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(e)
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
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============================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.25 par value................ 2,494,707 $18.00 $44,904,726 $13,608
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(1) Includes 325,397 shares of Common Stock subject to the Underwriters'
over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee.
---------------------
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 THIS 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> 2
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 SEPTEMBER 23, 1997
PROSPECTUS
2,169,310 SHARES
LOGO
PRIME BANCSHARES, INC.
COMMON STOCK
Of the 2,169,310 shares of Common Stock (the "Common Stock") offered hereby
(the "Offering"), 400,000 shares are being sold by Prime Bancshares, Inc. (the
"Company") and 1,769,310 shares are being sold by certain shareholders of the
Company (the "Selling Shareholders"). The Company will not receive any proceeds
from the sale of shares by the Selling Shareholders. Prior to the Offering,
there has been no established public market for the Common Stock. The initial
public offering price will be determined by negotiations between the Company and
the representatives of the Underwriters (the "Representatives"). It is estimated
that the initial public offering price will be in the range of $15.00 to $18.00
per share. See "Underwriting." Application has been made to have the shares of
Common Stock approved for quotation on The Nasdaq Stock Market's National Market
("Nasdaq/National Market") under the symbol "PBTX."
The Company intends to use the proceeds of the Offering to redeem shares of
its issued and outstanding Series A Preferred Stock. See "Use of Proceeds."
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, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER
GOVERNMENTAL AGENCY.
SEE "RISK FACTORS" ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
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 TO
PRICE TO UNDERWRITING PROCEEDS 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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(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
$250,000.
(3) The Company and certain of the Selling Shareholders have granted the
Underwriters a 30-day option to purchase up to 325,397 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, Proceeds to Company and
Proceeds to Selling Shareholders 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 received 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. It is expected that delivery of the certificates for the shares of
Common Stock will be made against payment therefor in Houston, Texas on or about
, 1997.
KEEFE, BRUYETTE & WOODS, INC. LEGG MASON WOOD WALKER
INCORPORATED
The date of this Prospectus is , 1997.
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[MAP OF TEXAS LOCATIONS]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR AFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE AFFECTED ON THE NASDAQ/NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OFFERED
HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING THE MARKET PRICE OF THE COMMON
STOCK, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
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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 30 for 1 common stock split effected in the form of
a stock dividend issued to shareholders of record as of July 17, 1997. Unless
otherwise indicated, all information in this Prospectus assumes that the
Underwriters' over-allotment option is not exercised.
THE COMPANY
Prime Bancshares, Inc. (the "Company") is a bank holding company
headquartered in Houston, Texas. The Company derives substantially all of its
revenue and income from the operation of its wholly-owned bank subsidiary, Prime
Bank (the "Bank"), a Texas state bank with 19 full-service banking locations, 11
of which are located in the greater Houston metropolitan area. The Bank also has
six offices located in southeast Texas, one office (and two loan production
offices) located in San Antonio and one office located in Brenham. The Bank was
chartered in 1958. The Company was formed as a holding company for the Bank in
1984. The Company has made a profit in each year of its existence, and the
Company has had six consecutive years of increased net earnings. As of June 30,
1997, the Company had assets of $948.0 million, gross loans of $383.7 million,
total deposits of $878.7 million and total shareholders' equity of $65.3
million. Based on total assets as of June 30, 1997, the Company is the second
largest independent bank holding company headquartered in the Houston
metropolitan area.
In 1988, the Company began to expand beyond its Channelview, Texas origins
and diversify its market area. A severe downturn in the Texas economy in the mid
to late 1980s caused a record number of bank and savings and loan failures,
which made deposits available for assumption through competitive bid processes.
The Company's strong capital base and historical profitability enabled it to
successfully bid for and acquire the deposits and certain assets of seven failed
financial institutions from 1988 to 1991. In 1994, the Company acquired nine new
locations (five of which were subsequently sold) through the acquisition of
deposits and certain assets related to branches of a large federal savings bank.
In 1997, the Company acquired deposits and certain assets related to three
commercial bank branches and acquired by merger Houston-based First Northwestern
Bank, N.A. In addition to adding market diversity, these acquisitions allowed
the Company to enhance its core deposit base and increase its total assets from
$81.2 million at December 31, 1987 to $948.0 million at June 30, 1997.
The Company's business continues to reflect the Company's successful
community banking origins by providing a broad line of financial products and
services to small and medium-sized businesses and consumers. The Company
believes that its "super community" brand of banking, which allows for flexible,
responsive decision making at each branch in its network and focuses on
long-standing relationships with its customers and personalized service, is an
important factor in the success and growth of the Company.
While the Company will continue to seek opportunities to expand its deposit
franchise, its strategic focus has shifted toward increasing its loan to deposit
ratio and further enhancing its profitability. The Company has expanded its
lending activities to include products which provide growth and profitability
such as (i) mortgage loans and indirect loans and (ii) increased commercial
loans. Each of the following lines of business was started several years ago and
has developed into a fast growing and profitable component of the Company's
operations:
- Mortgage Banking. The Company uses its existing branch network to offer a
complete line of single family residential mortgage products. The Company
generally retains mortgage loans with shorter terms or variable rates and
sells into the secondary market longer term fixed rate loans. During the
six months ended June 30, 1997, the Company originated $20.0 million of
mortgage loans.
- Indirect Lending. In 1993, the Company initiated a program of purchasing
indirect loans, which are installment loans primarily originated by
automobile dealers for the purpose of financing consumer purchases. The
Company purchases almost exclusively "A"-rated loans from a select list
of local auto dealers and others after performing its own analysis of the
loan package. The Company's total amount
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of indirect loans at June 30, 1997 was $96.8 million. The Company's
delinquency ratio with respect to indirect loans for the six months ended
June 30, 1997 was .69%.
- Commercial Banking. In 1993, the Company established a separate
commercial lending unit as an outgrowth of the Company's historical
practice of making loans to small and medium-sized businesses from its
various locations. The unit is staffed with experienced commercial
lenders who generate commercial loans primarily in the greater Houston
and San Antonio markets. The commercial loan customers generally have
between $5.0 and $50.0 million in annual sales and the average loan is
approximately $300,000.
The Company's overall business strategy is to (i) continue to service its
small to medium-sized owner-operated businesses and consumer customers by
providing individualized, responsive, quality service through its supercommunity
banking network, (ii) continue to increase its loan to deposit ratio and thereby
enrich its earning asset mix, and (iii) augment its existing market share by
looking for additional expansion opportunities in growth areas, particularly in
the Houston and San Antonio markets.
THE OFFERING
Common Stock offered by the
Company.................. 400,000 shares
Common Stock offered by the
Selling Shareholders..... 1,769,310 shares
Common Stock to be
outstanding after the
Offering................. 9,239,020 shares(1)
Use of Proceeds............ The estimated net proceeds of the Offering
(approximately $5.9 million) will be used to redeem
shares of the Company's Series A Preferred Stock.
Risk Factors............... See "Risk Factors" and "Dilution" for a discussion
of certain factors that should be considered by
each prospective investor.
Nasdaq/National Market
Symbol................... "PBTX"
- ---------------
(1) Excludes 600,000 shares of Common Stock reserved for issuance upon the
exercise of options heretofore granted under the Company's stock option
plans. See "Management -- Stock Option Plans." As of the date of this
Prospectus, the Company had outstanding 8,839,020 shares of Common Stock.
See "Capitalization."
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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."
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AS OF AND FOR THE
SIX MONTHS ENDED AS OF AND FOR THE
JUNE 30, YEARS ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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INCOME STATEMENT DATA:
Net interest income............... $ 17,317 $ 14,632 $ 30,074 $ 28,169 $ 23,612 $ 19,343 $ 17,782
Provision for loan losses......... 525 596 1,246 1,510 580 (200) 1,411
-------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses..... 16,792 14,036 28,828 26,659 23,032 19,543 16,371
Noninterest income................ 4,286 4,102 8,292 10,338 7,208 7,055 9,030
Noninterest expenses.............. 12,691 10,233 23,056 23,110 18,344 17,006 15,646
-------- -------- -------- -------- -------- -------- --------
Earnings before taxes........... 8,387 7,905 14,064 13,887 11,896 9,592 9,755
Preferred stock dividend.......... 350 350 700 681 258 320 320
Net earnings available to common
shareholders.................... 5,143 4,860 8,522 8,371 7,590 6,310 5,691
PER SHARE DATA(1):
Net earnings(2)................... $ 0.56 $ 0.53 $ 0.92 $ 0.89 $ 0.79 $ 0.68 $ 0.60
Book value........................ 6.60 5.83 6.23 5.81 4.46 3.61 3.01
Tangible book value............... 6.01 5.83 6.23 5.81 4.41 3.61 3.01
Cash dividends.................... 0.07 0.07 0.13 0.13 0.03 0.03 0.03
Dividend payout ratio............. 11.79% 12.43% 14.15% 14.69% 4.14% 4.80% 5.41%
Weighted average common and common
equivalent shares outstanding
(in thousands).................. 9,247 9,251 9,225 9,403 9,605 9,329 9,418
BALANCE SHEET DATA:
Total assets...................... $947,989 $765,388 $801,455 $758,337 $863,461 $498,002 $476,788
Securities........................ 465,821 449,918 440,625 473,911 605,079 350,131 336,044
Loans............................. 383,739 266,951 311,293 230,172 197,863 105,649 88,035
Allowance for loan losses......... 5,111 4,073 4,436 3,660 2,641 1,788 1,640
Total deposits.................... 878,740 700,384 695,170 694,165 813,818 461,093 444,938
Total shareholders' equity........ 65,334 58,418 61,969 58,330 46,839 34,891 29,475
AVERAGE BALANCE SHEET DATA:
Total assets...................... $908,237 $764,235 $762,455 $829,105 $595,829 $478,484 $470,289
Securities........................ 473,447 463,812 440,167 541,182 401,872 342,457 333,931
Loans............................. 354,668 246,368 267,644 213,454 142,041 93,263 93,774
Allowance for loan losses......... 4,960 3,592 3,765 2,855 1,889 2,026 1,457
Total deposits.................... 838,259 697,719 695,653 772,752 550,568 443,045 440,877
Total shareholders' equity........ 63,253 59,255 59,823 51,106 40,942 31,884 26,465
PERFORMANCE RATIOS(3):
Return on average assets.......... 1.22% 1.37% 1.21% 1.09% 1.32% 1.39% 1.28%
Return on average common equity... 18.44 18.70 16.13 18.98 19.49 21.28 23.91
Net interest margin............... 4.12 4.11 4.20 3.62 4.25 4.36 4.05
Efficiency ratio(4)............... 58.75 54.61 60.09 59.99 59.07 64.37 64.27
</TABLE>
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AS OF AND FOR THE
SIX MONTHS ENDED AS OF AND FOR THE
JUNE 30, YEARS ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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ASSET QUALITY RATIOS(5):
Nonperforming assets to total
loans and other real estate..... 0.33% 0.17% 0.09% 0.71% 0.73% 1.06% 2.95%
Net loan charge-offs (recoveries)
to average loans(3)............. 0.19 0.15 0.18 0.23 0.14 (0.37) 1.09
Allowance for loan losses to total
loans........................... 1.33 1.53 1.43 1.59 1.33 1.69 1.86
Allowance for loan losses to
nonperforming loans(6).......... 858.99 1,036.39 1,540.28 459.22 184.56 350.59 156.19
CAPITAL RATIOS(5):
Leverage ratio.................... 6.31% 7.46% 7.96% 6.99% 5.39% 6.98% 6.29%
Average shareholders' equity to
average total assets............ 6.96 7.75 7.85 6.16 6.87 6.66 5.63
Tier 1 risk-based capital ratio... 13.74 19.28 17.37 20.41 20.15 26.21 24.95
Total risk-based capital ratio.... 14.92 20.66 18.62 21.66 21.30 27.46 26.34
</TABLE>
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(1) Adjusted for a 30 for one stock split.
(2) Net earnings per share is based upon the weighted average number of common
and common equivalent shares outstanding during the period.
(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) At period end, except net loan charge-offs (recoveries) to average loans and
average shareholders' equity to average total assets.
(6) Nonperforming loans consist of nonaccrual loans and restructured loans.
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RISK FACTORS
An investment in the Common Stock offered hereby involves certain risks. In
addition to the other information contained or incorporated by reference herein,
the following factors should be considered carefully in evaluating the Company
before purchasing the Common Stock offered hereby. Information contained in this
Prospectus contains "forward-looking statements" which can be identified by the
use of forward-looking terminology such as "believes," "expects," "will,"
"should," "projected," "contemplated" or "anticipates" or the negative thereof
or other variations thereon or comparable terminology. No assurance can be given
that the future results covered by the forward-looking statements will be
achieved. The following factors could cause actual experience to vary materially
from the future results covered in such forward-looking statements. Other
factors, such as the general state of the economy, could also cause actual
experience to vary materially from the matters covered in such forward-looking
statements.
EXPOSURE TO LOCAL ECONOMIC CONDITIONS
The Company's success is dependent to a significant extent upon general
economic conditions in Texas and the metropolitan Houston 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 and real estate
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 Texas economy has improved in part due to its expansion into
non-energy related industries. As the Texas and Houston economies have
diversified away from the energy industry, however, they have become more
susceptible to adverse effects resulting from recession in the national economy.
Economic recession over a prolonged period or other economic dislocation in
Texas and the Houston area could cause increases in nonperforming assets,
thereby causing operating losses, impairing liquidity and eroding capital. There
can be no assurance that future adverse changes in the Texas or Houston
economies 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 great extent on "rate differentials,"
which are the differences between interest income that the Company earns on
loans and investments and the interest expense paid on deposits and other
borrowings. These rates are highly sensitive to many factors which are beyond
the Company's control, including general economic conditions and the policies of
various government and regulatory authorities. Increases in the discount rate by
the Board of Governors of the Federal Reserve System ("Federal Reserve Board")
usually lead to rising interest rates, which affect the Company's interest
income, interest expense and investment portfolio. Also, governmental policies
such as the creation of a tax deduction for individual retirement accounts can
increase savings and affect the 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 -- 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 market
areas in which its banking operations are located. The Company competes with
other commercial banks, 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 entities, including retail stores which may maintain their own
credit programs and certain governmental organizations which may offer more
favorable financing than the Company. Many of such competitors may have greater
financial and other resources than the Company. The Company has been able to
compete effectively with other financial institutions by emphasizing customer
service, technology and local office decision-making; by establishing long-term
customer relationships and
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building customer loyalty; and by providing products and services designed to
address the specific needs of its customers. Although the Company has been able
to compete effectively in the past, no assurances may 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 or the Texas legislature will not enact legislation that may further
increase competitive pressures on the Company. Competition from both financial
and nonfinancial institutions is expected to continue. See "The
Company -- Competition."
REGULATION AND SUPERVISION
Bank holding companies and banks operate in a highly regulated environment
and are subject to extensive supervision and examination by several federal and
state regulatory agencies. The Company is subject to the Bank Holding Company
Act of 1956, as amended (the "BHCA"), and to regulation and supervision by the
Federal Reserve Board. The Bank, as a Texas state banking association, is
subject to regulation and supervision by the Texas Banking Department and, as a
result of the insurance of its deposits, by the Federal Deposit Insurance
Corporation ("FDIC"). These regulations are intended primarily for the
protection of depositors and customers, rather than for the benefit of
investors. The Company and the Bank are subject to changes in federal and state
laws, as well as changes in regulations 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. See "Supervision and Regulation."
The Federal Reserve Board has adopted a policy that requires a bank holding
company such as the Company to serve as a source of financial strength to its
banking subsidiaries. The Federal Reserve Board has required bank holding
companies to contribute cash to their troubled bank subsidiaries based upon this
"source of strength" policy, which could have the effect of decreasing funds
available for distributions to shareholders. In addition, a bank holding company
in certain circumstances could be required to guarantee the capital plan of an
undercapitalized banking subsidiary. See "Supervision and Regulation."
RESTRICTIONS ON ABILITY TO PAY DIVIDENDS
While the Company has paid cash dividends on the Common Stock since 1990,
there is no assurance that the Company will pay dividends on the Common Stock 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. 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 that the Company receives from the Bank. The
payment of dividends by the Bank to the Company is subject to certain
restrictions imposed by federal and state banking laws, regulations and
authorities. As of June 30, 1997, an aggregate of approximately $21.3 million
was available for payment of dividends by the Bank to the Company under
applicable restrictions, without regulatory approval. See "Supervision and
Regulation -- The Bank."
The federal banking statutes prohibit federally insured banks from making
any capital distributions (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 an insured bank from engaging in an unsafe or unsound practice, as
determined by the agency, in conducting an activity. The payment of dividends
could be deemed to constitute such an unsafe or unsound practice, depending on
the financial condition of the Bank. 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
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to preserve certain capital adequacy requirements. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Capital
Resources" and "Supervision and Regulation."
DEPENDENCE ON KEY PERSONNEL
The Company and the Bank are dependent on certain key personnel including
Fredric M. Saunders and E. J. Guzzo, each of whom is considered to be important
to the success of the Company. The unexpected loss of such personnel or other
members of senior management could have an adverse effect on the Company and the
Bank. The Company has not, however, entered into employment agreements with or
obtained any "key man" insurance for any of the personnel discussed above.
POSSIBLE ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation and Bylaws contain certain
provisions which may 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 of directors with the directors of each
class having staggered, three-year terms, (ii) a provision that any special
meeting of shareholders of the Company may be called only by a majority of the
Board of Directors, the Chairman of the Board, the President, or the holders of
at least 50% of the shares entitled to vote on the matter and that any action
required or permitted to be taken by the Company's shareholders may not be
effected by consent in writing, (iii) 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 or special meeting of
shareholders and (iv) a provision that denies shareholders the right to amend
the Bylaws of the Company. The Company's Articles of Incorporation provide for
noncumulative voting for directors and authorize the Board of Directors of the
Company to issue shares of preferred stock of the Company, $1.00 par value per
share, 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 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. In addition, certain provisions of Texas
law, including a recently enacted provision which restricts certain business
combinations between a Texas corporation and certain affiliated shareholders,
may delay, discourage or prevent an attempted acquisition or change in control
of the Company. See "Supervision and Regulation," "Description of Securities of
the Company -- Preferred Stock," and "Texas Law and Certain Provisions of the
Articles of Incorporation and Bylaws."
CONCENTRATION OF OWNERSHIP
After the consummation of the Offering, the executive officers and
directors of the Company will beneficially own 51.76% of the outstanding shares
of Common Stock, and approximately 48.72% of such shares of Common Stock if the
Underwriters' over-allotment option is fully exercised. Accordingly, these
executive officers and directors will be able to influence, to a significant
extent, the outcome of all matters required to be submitted to the Company's
shareholders for approval, including decisions relating to the election of
directors of the Company, the determination of day-to-day corporate and
management policies of the Company and other significant corporate transactions.
See "Management," "Principal Shareholders" and "Description of Securities of the
Company."
DILUTION OF COMMON STOCK
Investors purchasing shares of Common Stock in the Offering will incur
immediate dilution of approximately 61.27% in their investment, in that the
tangible book value of the Company after the Offering will be approximately
$6.39 compared with an assumed initial public offering price of $16.50 per
share. Options to purchase a total of 600,000 shares of Common Stock were
outstanding under the Company's stock option plans at June 30, 1997, of which
174,000 were exercisable at prices ranging from $0.83 to $2.67 per share. If the
shares subject to such options under the Company's stock option plans were
included in the foregoing calculations, further dilution to new shareholders
would be incurred. See "Dilution."
NO PRIOR TRADING MARKET
Prior to the Offering, there has been no public market for the shares of
Common Stock. An application has been filed to have the Common Stock approved
for quotation on the Nasdaq/National Market under the
9
<PAGE> 11
symbol "PBTX." 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 conditions justify doing so.
Nonetheless, 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 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 marketplace 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.
DETERMINATION OF MARKET PRICE AND POSSIBLE VOLATILITY OF STOCK PRICE
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. Among the factors considered in such negotiations are 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 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
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.
See "Underwriting" for information relating to the method of determining the
initial public offering price. The stock market has from time to time
experienced price and volume volatility. These market fluctuations may be
unrelated to the operating performance of particular companies whose shares are
traded and may adversely affect the market price of the Common Stock. There can
be no assurance that the market price of the Common Stock will not decline below
the initial public offering price.
RESTRICTIONS ON FUTURE SALE OF SHARES
The Company will have 9,239,020 shares of Common Stock outstanding after
the Offering. The Company, its executive officers and directors and certain
shareholders (who collectively will own 51.76% of the outstanding shares of
Common Stock after the consummation of 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 are
held by approximately 170 shareholders of record, and all of such shares will be
freely tradable in accordance with Rule 144(k) under the Securities Act. In
addition, all of the shares of Common Stock sold in the Offering will generally
be freely tradable under the Securities Act. No prediction can be made as to the
effect, if any, that future sales of Common Stock or the availability of Common
Stock 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 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, seeking to acquire 10%
or more of any class of voting securities of the Company must comply with the
Change in Bank Control Act, which requires the prior approval of the Federal
Reserve Board for any such acquisition. Entities seeking to acquire 5% or more
of any class of voting securities of, or otherwise to control, the Company must
obtain the prior approval of the Federal Reserve Board under the BHCA.
Accordingly, prospective investors need to be aware of and to comply with these
requirements, if applicable, in connection with any purchase of shares of the
Common Stock offered hereby.
10
<PAGE> 12
THE COMPANY
GENERAL
The Company was incorporated as a business corporation under the laws of
the State of Texas in 1984 to serve as a holding company for the Bank, which was
chartered in 1958. Fredric M. Saunders, the Company's Chairman of the Board,
joined the Bank in 1962 as President. Based on total assets at June 30, 1997,
the Company ranks as the second largest independent bank holding company
headquartered in the Houston metropolitan area. The Company's headquarters are
located at 12200 Northwest Freeway, Houston, Texas 77092, and its telephone
number is (713) 209-6000.
From its inception until 1988, the Bank primarily served individuals and
small businesses in and around its original principal location in the town of
Channelview, located in the northeastern part of the Houston metropolitan area.
In the mid to late 1980s, the record number of bank and savings and loan
failures caused by a severe downturn in the Texas economy presented the Company
with an opportunity to expand its branch network in the greater Houston area and
expand geographically to other parts of the state, as well as enhance its core
deposit base. From 1988 to 1991, the Company acquired the deposits and certain
assets of seven failed financial institutions, five of which were located in the
Houston area, with the others located in Brenham and San Antonio. In 1994, the
Company acquired the deposits and certain assets of nine branch locations from
First Heights Bank fsb, five of which were subsequently sold, with the Company
retaining branches in Orange, Beaumont, Nederland and Houston. In early 1997,
the Company purchased from a commercial bank the deposits and certain assets
related to three additional branches in Beaumont, Port Arthur and Port Neches,
and acquired by merger First Northwestern Bank, N.A. in Houston. Since the
beginning of 1996, the Company has also established a new full-service branch in
the Houston Galleria area and two loan production offices in San Antonio. As a
result of this expansion activity, the Company has grown from an organization
with two banking locations and assets of $81.2 million at December 31, 1987 to
its current 19 full-service bank locations and assets of $948.0 million at June
30, 1997.
The Company has developed a super community banking network, with most of
its offices located either in separate communities or portions of urban areas
that function as distinct communities. Lending and investment activities are
funded from a strong core deposit base consisting of approximately 98,000
deposit accounts from approximately 55,000 households. Each of the Company's
offices has a manager with the authority and flexibility to make pricing
decisions within overall ranges developed by the Company as a form of quality
control. The Company believes that its responsiveness to local customers and
ability to adjust deposit rates and price loans at each location gives it a
distinct competitive advantage. Adequate staffing is provided at each location
to ensure that customers needs are well addressed, and employees are committed
to quality service and developing long-term customer relationships. The Company
provides economic incentives to its officers to develop additional business for
the Company and to cross sell additional products and services to existing
customers.
The Company continues to look for additional expansion opportunities,
either through acquisitions of existing financial institutions or by
establishing de novo branches or loan production offices. The Company intends to
consider various strategic acquisitions of banks, banking assets or financial
service entities related to banking in those areas that management believes
would complement and help grow the Company's existing business. The Company is
particularly optimistic about the growth potential in the Houston and San
Antonio market areas and in 1997 acquired First Northwestern Bank, N.A. in
Houston and opened two loan production offices in San Antonio.
BUSINESS
In connection with the geographic expansion, market diversification and
deposit acquisitions discussed above, over the past several years the Company
began to seek new lines of business to diversify its asset mix and further
enhance its profitability. While each new line of business reflects the
Company's efforts to enrich its asset mix, each of these lines of business is an
outgrowth of the community banking and small to medium-sized business lending
that the Company has performed so profitably over the years. Reflective of the
11
<PAGE> 13
Company's conservative philosophy, each of these businesses has been developed
deliberately by the Company and is subject to various quality controls. The
Company's principal lines of business are the following:
Community Banking. The Company has historically extended credit
through its branch network to owner-operated small to medium-sized
businesses and to consumers. The Company offers businesses a wide variety
of lending products including term loans, lines of credit and fixed asset
loans, including real estate and equipment financing. These loans, most of
which are collateralized, 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. As a general practice, the Company takes as
collateral a lien on any available real estate, equipment or other assets
and obtains the personal guaranty of the owner or owners of the business.
Consumer loans made by the Company include automobile loans, recreational
vehicle loans, boat loans, home improvement loans and personal loans (both
collateralized and uncollateralized).
Mortgage Banking. The Company uses its existing branch network to
offer a complete line of single family residential mortgage products. The
Company generally retains mortgage loans with shorter terms or variable
rates and sells into the secondary market longer term fixed rate loans. As
a result, the Company retains approximately half of the mortgage loans that
it originates. The Company originates mortgage loans only in its market
areas and services only the loans that it retains. The Company does not buy
mortgage loans from other sources. The volume of mortgage loans originated
by the Company has increased from $11.9 million in 1994 to a volume of
$20.0 million in the first half of 1997.
Indirect Lending. In 1993, the Company initiated a program of
purchasing indirect loans, which are installment loans with typical
maturities of three to five years originated primarily by automobile
dealers for the purpose of financing consumer purchases and sold by the
dealers to commercial banks and other sources of financing. The Company
purchases almost exclusively "A"-rated loans primarily from a select list
of local auto dealers and others after performing its own analysis of the
loan package. The indirect loan program is staffed by 12 people and managed
by an officer with over 20 years of experience in this area and a thorough
knowledge of the reliability of various dealers. The Company also purchases
some indirect boat and recreational vehicle loans. The program's
delinquency ratios of 0.69% for the six months ended June 30, 1997 and .95%
for the year ended December 31, 1996 compare favorably to the industry
average. Similarly, the Company's net loan charge-off ratio of 0.30% at
June 30, 1997 is well below the industry average for this type of lending.
The Company's total amount of indirect loans at June 30, 1997 was $96.8
million. The Company plans to maintain its current quality controls and
grow the indirect loan program at a controlled pace. As a matter of
operating philosophy, the Company is willing to forego the potentially
higher yield represented by lower grade loans in exchange for the better
credit quality of the "A"-rated loans.
Commercial Banking. In 1994, the Company established a separate
commercial lending unit as an outgrowth of the Company's historical
business of making loans to small and medium-sized businesses from its
various locations. The commercial lending unit is staffed with experienced
commercial lenders who generate commercial loans through solicitations of
potential customers primarily in the greater Houston and San Antonio
markets. The commercial loan customers generally have between $5.0 million
and $50.0 million in annual sales, and the average commercial loan is
approximately $300,000. Most of these loans are secured by real estate and
are backed by the personal guaranty of the owners of the business. The
Company makes commercial loans to a wide variety of industries. The Company
intends to expand this business by adding additional experienced commercial
lenders, preferably bankers with an existing commercial loan portfolio.
12
<PAGE> 14
FACILITIES
The Company conducts business at 19 full service banking locations and two
loan production offices. The following table sets forth specific information on
each such location. The Company's headquarters are located at 12200 Northwest
Freeway in Houston in a six story office building owned by the Bank.
<TABLE>
<CAPTION>
DEPOSITS
LOCATION AT JUNE 30, 1997
-------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Houston Area:
Channelview............................................... $ 92,929
Houston Atrium 10(1)...................................... 5,611
Houston Commercial........................................ 46,102
Houston Cypresswood....................................... 11,515
Houston Galleria Area(2).................................. 6,707
Houston I-10 East......................................... 40,222
Houston Northshore........................................ 24,058
Houston Northwest......................................... 49,361
Houston Port City......................................... 61,642
Huffman................................................... 25,250
New Caney Community....................................... 58,326
Southeast Texas:
Beaumont West............................................. 21,109
I-10 Beaumont............................................. 51,395
Nederland................................................. 43,127
Orange.................................................... 143,388
Port Arthur............................................... 25,116
Port Neches............................................... 16,292
San Antonio:
Union..................................................... 80,174
Citadel Plaza(3).......................................... N/A
Loop 410(3)............................................... N/A
Brenham:
Washington County......................................... 76,416
</TABLE>
- ---------------
(1) No lobby services.
(2) Opened for business in July of 1996.
(3) Indicates loan production office.
COMPETITION
The banking business is highly competitive, and the profitability of the
Company depends principally on the Company's ability to compete in the market
areas in which its banking operations are located. The Company competes with
other commercial banks, 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 entities, including retail stores which may maintain their own
credit programs and certain governmental organizations which may offer more
favorable financing than the Company. The Company has been able to compete
effectively with other financial institutions by emphasizing customer service,
technology and local office decision-making; by 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."
13
<PAGE> 15
EMPLOYEES
As of June 30, 1997, the Company had 406 full-time employees, 82 of whom
were officers of the Bank. The Company provides medical and hospitalization
insurance to its full-time employees. The Company considers its relations with
employees to be excellent.
USE OF PROCEEDS
The net proceeds to be received by the Company from the Offering (based
upon an assumed initial public offering price of $16.50 per share), after
deducting the underwriting discount and estimated expenses, are estimated to be
approximately $5.9 million, or $7.1 million if the Underwriters' over-allotment
option is fully exercised. The Company intends to use all of such proceeds to
redeem all 6,000,000 shares of its Series A 10% Non-Cumulative Preferred Stock
("Series A Preferred Stock") immediately after completion of the Offering.
Pursuant to its terms, the Series A Preferred Stock will be redeemed for its
$6.0 million liquidation value on or before December 1, 1997. If such net
proceeds are not sufficient to redeem all of the outstanding shares of Series A
Preferred Stock, the Company will use internal funds to redeem the remainder of
such shares. 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.
The Series A Preferred Stock was issued in 1994 to provide additional
capital to support the growth resulting from the Company's acquisition of nine
branch locations owned by a large federal savings bank. The Company currently
has adequate capital and desires to eliminate the $600,000 annual dividend on
the Series A Preferred Stock. Officers and directors of the Company and their
affiliated interests own an aggregate of 1,729,000 shares of Series A Preferred
Stock and will receive $1,729,000 in connection with the redemption.
Dividends on the shares of Series A Preferred Stock are payable quarterly
and are calculated based on the $1.00 per share par value of such shares.
Dividends on Series A Preferred Stock are not cumulative, and the Company is
prohibited from paying any cash dividends on its Common Stock unless the Company
also declares and pays a dividend with respect to the Series A Preferred Stock
for the quarter during which such dividend is to be declared and paid with
respect to the Common Stock. Each share of Series A Preferred Stock is entitled
to a liquidation preference of $1.00. The holders of Series A Preferred Stock
have no voting rights. The Series A Preferred Stock may be redeemed, in whole or
in part, at $1.00 per share together with all declared and unpaid dividends per
share.
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
Holders of Common Stock are entitled to receive dividends when, as and if
declared by the Company's Board of Directors out of funds legally available
therefor. While the Company has declared dividends on its Common Stock since
1990 and currently pays quarterly dividends aggregating $0.13 per share per
annum, there is no assurance that the Company will continue to pay dividends in
the future. The Company plans to pay a dividend on or about October 1, 1997 to
the holders of record of Common Stock as of September 15, 1997.
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
capital stock. There are certain restrictions on the payment of such dividends
imposed by federal and state banking laws, regulations and authorities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources" and "Supervision and Regulation -- The Bank."
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
"Supervision and
14
<PAGE> 16
Regulation" and "Description of Securities of the Company." As of June 30, 1997,
an aggregate of approximately $21.3 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 "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Capital Resources" and "Supervision and
Regulation."
DILUTION
As of June 30, 1997, the tangible book value of the Common Stock was $6.01
per share. "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 400,000
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 June 30, 1997 would have been $6.39 per
share. This represents an immediate increase in net tangible book value of $0.38
per share to current shareholders and an immediate dilution of $10.11 per share
to new investors. The following table illustrates this per share dilution.
<TABLE>
<S> <C>
Assumed price to public..................................... $ 16.50
Tangible book value per share before Offering............. 6.01
Increase per share attributable to new investors.......... 0.38
--------
Pro forma tangible book value per share after Offering...... 6.39
--------
Dilution to new investors................................... $ 10.11
========
</TABLE>
The following table sets forth, as of June 30, 1997, 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.................. 8,839,020 96% $2,652 31% $ 0.30
New investors.......................... 400,000 4 5,888 69 14.72
--------- --- ------ ---
Total........................ 9,239,020 100% $8,540 100%
========= === ====== ===
</TABLE>
The foregoing computations do not take into account the possible exercise
of outstanding stock options granted under the Company's stock option plans or
the possible issuance of up to an additional 325,397 shares of Common Stock to
new investors pursuant to the exercise of an option granted by the Company to
the Representatives solely to cover over-allotments, if any, in connection with
the Offering. See "Underwriting." Options to purchase a total of 600,000 shares
of Common Stock were outstanding under the Company's stock option plans at June
30, 1997, of which 174,000 were exercisable at prices ranging from $0.83 to
$2.67 per share. If the shares subject to such outstanding options under the
Company's stock option plans were included in the foregoing calculations,
further dilution to new shareholders would be incurred.
15
<PAGE> 17
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of June 30, 1997, and as adjusted to give effect to (i) the sale by
the Company of 400,000 shares of Common Stock offered hereby, at a per share
price of $16.50 (which is the mid-point of the estimated offering range), less
underwriting discounts and other estimated offering expenses and (ii) the
redemption of the Series A Preferred Stock by the Company. See "Use of
Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Shareholders' Equity:
Preferred Stock, $1 par value; 15,000,000 shares
authorized;
6,000,000 shares designated Series A 10% Non-Cumulative
Preferred Stock, all of which are issued and
outstanding............................................ $ 6,000 $ 0
1,250,000 shares designated Series B 10% Non-Cumulative
Preferred Stock, 1,000,000 of which are issued and
outstanding.......................................... 1,000 1,000
------- --------
Common Stock, $.25 par value; 50,000,000 shares
authorized; 12,010,980 shares issued and 8,839,020
shares outstanding, 12,010,980 shares issued and
9,239,020 shares outstanding as adjusted(1)............ 3,003 3,003
Additional capital........................................ 3,955 8,133
Retained earnings......................................... 54,665 54,665
Net unrealized appreciation of available-for-sale
securities............................................. 1,001 1,001
------- --------
62,624 66,802
Less common stock held in treasury-at cost................ 4,290 2,580
------- --------
Total common shareholders' equity................. $58,334 $ 64,222
------- --------
Total shareholders' equity........................ $65,334 $ 65,222
======= ========
</TABLE>
- ---------------
(1) Does not include 600,000 shares of Common Stock reserved for issuance upon
exercise of options granted under the Company's stock option plans.
16
<PAGE> 18
NATURE OF THE TRADING MARKET AND MARKET PRICES
Prior to the Offering, there has been no public market for the shares of
Common Stock and 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. 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 conditions
justify doing so. Nonetheless, 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 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 marketplace 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. See "Risk Factors -- No Prior Trading Market."
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. Among the factors considered in such negotiations are 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
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.
See "Underwriting" for information relating to the method of determining the
initial public offering price. Application has been made for quotation of the
shares of Common Stock on the Nasdaq/National Market under the symbol "PBTX."
17
<PAGE> 19
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 this 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 and for the five years ended December 31, 1996 are derived from the Company's
Consolidated Financial Statements which have been audited by independent public
accountants. The selected historical consolidated financial data as of and for
the six months ended June 30, 1997 and June 30, 1996 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
results of operations for the six months ended June 30, 1997, are not
necessarily indicative of the results of operations that may be expected for the
year ended December 31, 1997, or for any future periods.
<TABLE>
<CAPTION>
AS OF AND FOR THE
SIX MONTHS ENDED AS OF AND FOR THE
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- ------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- --------- --------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income......................... $ 31,858 $ 26,563 $ 53,815 $ 55,310 $ 38,154 $ 30,227 $ 32,219
Interest expense........................ 14,541 11,931 23,741 27,141 14,542 10,884 14,437
-------- --------- --------- --------- -------- -------- --------
Net interest income................... 17,317 14,632 30,074 28,169 23,612 19,343 17,782
Provision for loan losses............... 525 596 1,246 1,510 580 (200) 1,411
-------- --------- --------- --------- -------- -------- --------
Net interest income after provision
for loan losses..................... 16,792 14,036 28,828 26,659 23,032 19,543 16,371
Noninterest income...................... 4,286 4,102 8,292 10,338 7,208 7,055 9,030
Noninterest expenses.................... 12,691 10,233 23,056 23,110 18,344 17,006 15,646
-------- --------- --------- --------- -------- -------- --------
Earnings before taxes................. 8,387 7,905 14,064 13,887 11,896 9,592 9,755
Provision for income tax expense........ 2,894 2,695 4,842 4,835 4,048 3,251 3,744
Cumulative effect of change in
accounting principle.................. -- -- -- -- -- 289 --
-------- --------- --------- --------- -------- -------- --------
Net earnings............................ 5,493 5,210 9,222 9,052 7,848 6,630 6,011
Preferred stock dividend................ 350 350 700 681 258 320 320
-------- --------- --------- --------- -------- -------- --------
Net earnings available to common
shareholders.......................... $ 5,143 $ 4,860 $ 8,522 $ 8,371 $ 7,590 $ 6,310 $ 5,691
======== ========= ========= ========= ======== ======== ========
PER SHARE DATA(1):
Net earnings(2)......................... $ 0.56 $ 0.53 $ 0.92 $ 0.89 $ 0.79 $ 0.68 $ 0.60
Book value.............................. 6.60 5.83 6.23 5.81 4.46 3.61 3.01
Tangible book value..................... 6.01 5.83 6.23 5.81 4.41 3.61 3.01
Cash dividends.......................... 0.07 0.07 0.13 0.13 0.03 0.03 0.03
Dividend payout ratio................... 11.79% 12.43% 14.15% 14.69% 4.14% 4.80% 5.41%
Weighted average common and common
equivalent shares outstanding
(in thousands)........................ 9,247 9,251 9,225 9,403 9,605 9,329 9,418
BALANCE SHEET DATA:
Total assets............................ $947,989 $ 765,388 $ 801,455 $ 758,337 $863,461 $498,002 $476,788
Securities.............................. 465,821 449,918 440,625 473,911 605,079 350,131 336,044
Loans................................... 383,739 266,951 311,293 230,172 197,863 105,649 88,035
Allowance for loan losses............... 5,111 4,073 4,436 3,660 2,641 1,788 1,640
Total deposits.......................... 878,740 700,384 695,170 694,165 813,818 461,093 444,938
Total shareholders' equity.............. 65,334 58,418 61,969 58,330 46,839 34,891 29,475
AVERAGE BALANCE SHEET DATA:
Total assets............................ $908,237 $ 764,235 $ 762,455 $ 829,105 $595,829 $478,484 $470,289
Securities.............................. 473,447 463,812 440,167 541,182 401,872 342,457 333,931
Loans................................... 354,668 246,368 267,644 213,454 142,041 93,263 93,774
Allowance for loan losses............... 4,960 3,592 3,765 2,855 1,889 2,026 1,457
Total deposits.......................... 838,259 697,719 695,653 772,752 550,568 443,045 440,877
Total shareholders' equity.............. 63,253 59,255 59,823 51,106 40,942 31,884 26,465
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
AS OF AND FOR THE
SIX MONTHS ENDED AS OF AND FOR THE
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- ------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- --------- --------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS(3):
Return on average assets................ 1.22% 1.37% 1.21% 1.09% 1.32% 1.39% 1.28%
Return on average common equity......... 18.44 18.70 16.13 18.98 19.49 21.28 23.91
Net interest margin..................... 4.12 4.11 4.20 3.62 4.25 4.36 4.05
Efficiency ratio(4)..................... 58.75 54.61 60.09 59.99 59.07 64.37 64.27
ASSET QUALITY RATIOS(5):
Nonperforming assets to total loans and
other real estate..................... 0.33% 0.17% 0.09% 0.71% 0.73% 1.06% 2.95%
Net loan charge-offs (recoveries) to
average loans(3)...................... 0.19 0.15 0.18 0.23 0.14 (0.37) 1.09
Allowance for loan losses to total
loans................................. 1.33 1.53 1.43 1.59 1.33 1.69 1.86
Allowance for loan losses to
nonperforming loans(6)................ 858.99 1,036.39 1,540.28 459.22 184.56 350.59 156.19
CAPITAL RATIOS(6):
Leverage ratio.......................... 6.31% 7.46% 7.96% 6.99% 5.39% 6.98% 6.29%
Average shareholders' equity to average
total assets.......................... 6.96 7.75 7.85 6.16 6.87 6.66 5.63
Tier 1 risk-based capital ratio......... 13.74 19.28 17.37 20.41 20.15 26.21 24.95
Total risk-based capital ratio.......... 14.92 20.66 18.62 21.66 21.30 27.46 26.34
</TABLE>
- ---------------
(1) Adjusted for a 30 for one stock split.
(2) Net earnings per share is based upon the weighted average number of common
and common equivalent shares outstanding during the period.
(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) At period end, except net loan charge-offs (recoveries) to average loans and
average shareholders' equity to average total assets.
(6) Nonperforming loans consist of nonaccrual loans and restructured loans.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company analyzes the major elements of the Company's balance
sheets and statements of earnings. 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 SIX MONTHS ENDED JUNE 30, 1997 AND 1996
OVERVIEW
The six month period ended June 30, 1997 was marked by strong balance sheet
growth due to the Company's acquisition of approximately $99.2 million in
deposits related to three branch locations acquired from a commercial bank and
the acquisition of First Northwestern Bank, N.A. with approximately $60.5
million in deposits. The Company's earnings growth, however, was affected by the
non-recurring expenses (data processing conversion, severance benefits and other
items) related to those transactions.
Net earnings available to common shareholders for the six months ended June
30, 1997 were $5.1 million, $283,000 or 5.8% more than net earnings for the six
months ended June 30, 1996. Net earnings per common share were $0.56 for the six
months ended June 30, 1997 and $0.53 for the six months ended June 30, 1996. The
increase in net earnings reflected higher net interest income, which was driven
by growth in interest-earning assets, including strong internal loan growth.
Earnings growth was reduced by higher operating expenses, which included
non-recurring expenses of $416,000 related to the acquisitions. Return on
average assets and return on average common equity were 1.22% and 18.44%,
respectively, for the six months ended June 30, 1997 compared to 1.37% and
18.70%, respectively, for the same time period in 1996. Excluding non-recurring
acquisition expenses, net earnings available to common shareholders would have
been $5.4 million for the six months ended June 30, 1997, resulting in an
adjusted return on average assets and return on average common equity of 1.28%
and 19.42%, respectively.
Total assets at June 30, 1997 increased to $948.0 million from $765.4
million at June 30, 1996, an increase of $182.6 million or 23.9%. Deposits rose
to $878.7 million at June 30, 1997 from $700.4 million at June 30, 1996, an
increase of $178.4 million or 25.5%. Acquisitions accounted for approximately
$153.7 million of the growth in deposits and internal growth accounted for $24.7
million of such growth. Total shareholders' equity was $65.3 million at June 30,
1997, representing an increase of $6.9 million or 11.8% over total shareholders'
equity of $58.4 million at June 30, 1996.
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 six months ended June 30, 1997 was $17.3
million compared to $14.6 million for the six months ended June 30, 1996, an
increase of $2.7 million or 18.4%. Net interest income increased as a result of
higher interest-earning assets derived primarily from the acquisitions in the
first quarter of 1997 and loan growth. Average interest-earning assets increased
to $848.5 million for the six months ended June 30, 1997 from $716.7 million for
the six months ended June 30, 1996, an increase of $131.8 million or 18.4%.
Average loans increased to $354.7 million for the six months ended June 30, 1997
from $246.4 million for the six months ended June 30, 1996, an increase of
$108.3 million or 44.0%. Internal loan growth accounted for $77.4 million of
this increase, and acquisitions accounted for the remaining $30.9 million of the
increase. The increase in interest income was partially offset by higher expense
on interest-bearing deposits. Average
20
<PAGE> 22
interest-bearing deposits increased to $701.4 million for the six months ended
June 30, 1997 from $584.2 million for the six months ended June 30, 1996, an
increase of $117.2 million or 20.1%. This growth was primarily attributable to
the first quarter 1997 acquisitions.
The Company posted net interest margins of 4.12% and 4.11% and net interest
spreads of 3.39% and 3.35% for the periods ended June 30, 1997 and June 30,
1996, respectively. The slight increase in the net interest margin from the
first half of 1996 to the first half of 1997 reflects a 12 basis point increase
in the yield on average interest-earning assets and an 8 basis point increase in
the cost of interest-bearing liabilities. The yield on average interest-earning
assets increased to 7.57% for the six months ended June 30, 1997 from 7.45% for
the six months ended June 30, 1996. The increase in yield on average
interest-earning assets was due primarily to loan growth, but it was reduced by
the investment of a large portion of the acquired funds into lower-yielding
securities. The cost of interest-bearing liabilities increased to 4.18% for the
six months ended June 30, 1997 from 4.10% for the six months ended June 30,
1996. This increase was due mainly to the higher cost of the acquired funds.
21
<PAGE> 23
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>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------
1997 1996
-------------------------------- --------------------------------
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............................... $354,668 $16,002 9.10% $246,368 $ 11,325 9.24%
Securities.......................... 473,447 15,311 6.52 463,812 15,065 6.53
Federal funds sold and other
temporary investments............ 20,337 545 5.40 6,477 173 5.37
-------- ------- ----- -------- -------- ------
Total interest-earning
assets.................... 848,452 31,858 7.57% 716,657 26,563 7.45%
-------- ------- ----- -------- -------- ------
Less allowance for loan losses........ (4,960) (3,592)
-------- --------
Total interest-earning assets, net of
allowance........................... 843,492 713,065
Nonearning assets..................... 64,745 51,170
-------- --------
Total assets................ $908,237 $764,235
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits.... $127,928 1,327 2.09% $111,655 1,243 2.24%
Savings and money market accounts... 156,501 2,233 2.88 130,012 1,725 2.67
Certificates of deposit............. 417,002 10,956 5.30 342,577 8,938 5.25
Federal funds purchased and
securities sold under repurchase
agreements....................... 883 25 5.71 887 25 5.67
-------- ------- ----- -------- -------- ------
Total interest-bearing
liabilities............... 702,314 14,541 4.18% 585,131 11,931 4.10%
-------- ------- ----- -------- -------- ------
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits......................... 136,828 113,475
Other liabilities................... 5,842 6,374
-------- --------
Total liabilities........... 844,984 704,980
-------- --------
Shareholders' equity.................. 63,253 59,255
-------- --------
Total liabilities and
shareholders' equity...... $908,237 $764,235
======== ========
Net interest income................. $17,317 $ 14,632
======= ========
Net interest spread................. 3.39% 3.35%
===== ======
Net interest margin................. 4.12% 4.11%
===== ======
</TABLE>
22
<PAGE> 24
The following schedule 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 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>
SIX MONTHS ENDED JUNE 30,
------------------------------
1997 VS. 1996
------------------------------
INCREASE (DECREASE)
DUE TO
--------------------
VOLUME RATE TOTAL
-------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans..................................................... $4,963 $ (286) $4,677
Securities................................................ 312 (66) 246
Federal funds sold and other temporary investments........ 369 3 372
------ ------ ------
Total increase (decrease) in interest income...... 5,644 (349) 5,295
------ ------ ------
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits.......................... 181 (97) 84
Savings and money market accounts......................... 351 157 508
Certificates of deposit................................... 1,935 83 2,018
------ ------ ------
Total increase (decrease) in interest expense..... 2,467 143 2,610
------ ------ ------
Increase (decrease) in net interest income................ $3,177 $ (492) $2,685
====== ====== ======
</TABLE>
Provision for Loan Losses
The provision for loan losses decreased slightly to $525,000 for the six
months ended June 30, 1997 from $596,000 for the same time period in 1996, a
decrease of $71,000 or 11.9%.
Noninterest Income
Noninterest income is an important source of revenue for financial
institutions in a deregulated environment. The Company's primary source of
noninterest income is service charges on deposit accounts and other banking
service related fees.
Noninterest income for the six months ended June 30, 1997 was $4.3 million,
an increase of $184,000 or 4.5% from $4.1 million for the same period in 1996.
The following table presents for the periods indicated the major categories
of noninterest income:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Service charges on deposit accounts......................... $3,378 $3,084
Retail services income...................................... 598 597
Mortgage banking............................................ 81 85
Investment services......................................... 95 83
Securities lending.......................................... 43 56
Other noninterest income.................................... 91 197
------ ------
Total noninterest income.......................... $4,286 $4,102
====== ======
</TABLE>
Service charges on deposit accounts is the largest component of noninterest
income and a significant source of revenue to the Company. The increase in
service charges on deposit accounts and total noninterest income for the first
six months of 1997 as compared to the first six months of 1996 resulted mainly
from the acquisitions which occurred in the first quarter of 1997.
23
<PAGE> 25
Noninterest Expense
In the six month period ended June 30, 1997, noninterest expenses increased
$2.5 million or 24.0% to $12.7 million from $10.2 million for the period ended
June 30, 1996. The increase reflected the additional expenses resulting from
acquisitions consummated in the first quarter of 1997. The Company anticipates
that cost savings from the consolidation of back office operations of the bank
acquired during the first quarter of 1997 will be fully realized in the third
quarter of 1997. The efficiency ratio, calculated by dividing total noninterest
expenses (excluding securities losses) by net interest income plus noninterest
income was 58.8% for the six months ended June 30, 1997 and 54.6% for the six
months ended June 30, 1996. The increase in the efficiency ratio was partially
due to non-recurring acquisition expenses of $416,000. Excluding the non-
recurring expenses, the Company's efficiency ratio in 1997 would have been
56.8%.
The following table presents for the periods indicated the major categories
of noninterest expense:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Employee compensation and benefits.......................... $ 7,984 $ 6,412
Non-staff expenses:
Net bank premises expense................................. 618 584
Equipment rentals, depreciation and maintenance........... 616 394
Data processing........................................... 1,015 686
Professional fees......................................... 390 338
Regulatory assessments.................................... (34) 334
Ad valorem and franchise taxes............................ 207 210
Other..................................................... 1,895 1,275
------- -------
Total non-staff expenses.......................... 4,707 3,821
------- -------
Total noninterest expense......................... $12,691 $10,233
======= =======
</TABLE>
Employee compensation and benefit expense for the six months ended June 30,
1997 was $8.0 million, an increase of $1.6 million or 24.5% from $6.4 million in
the same period of 1996. The increase was principally due to additional staff
associated with the acquisitions closed in the first quarter, the new Galleria
branch which was opened in the last half of 1996, and additional loan staff
hired. Total full-time equivalent employees at June 30, 1997 increased to 434
from 376 at June 30, 1996.
Non-staff expenses, including non-recurring acquisition expenses of
$375,000, increased to $4.7 million for the six month period ended June 30, 1997
from $3.8 million for the same period in 1996, an increase of $886,000 or 23.2%.
Excluding the non-recurring acquisition expenses, the increase was $511,000 or
13.4%. This increase was largely due to additional expenses associated with the
newly acquired locations. Included in regulatory assessments for the six months
ended June 30, 1997 is a refund of FDIC insurance premiums in the amount of
$169,000 resulting from insured deposit rate adjustments.
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 non-deductible interest expense and
the amount of other non-deductible expense. 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 on federal securities. The income tax
component of the Texas franchise tax was zero in the first six months of 1997
and 1996. During the six months ended June 30, 1997, income tax expense was $2.9
million compared to $2.7 million for the six months ended June 30, 1996.
24
<PAGE> 26
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 "-- Interest
Rate Sensitivity and Liquidity" below.
FINANCIAL CONDITION
Loan Portfolio
Loans, net of unearned interest, were $383.7 million at June 30, 1997, an
increase of $116.8 million or 43.7% from $267.0 million at June 30, 1996.
Acquisitions accounted for $40.2 million of this growth, while internally
generated loans accounted for $76.6 million of the increase.
The following table summarizes as of the dates indicated the loan portfolio
of the Company by type of loan:
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996
------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and industrial................... $ 40,671 10.60% $ 23,080 8.65%
Real estate:
Construction and land development......... 24,788 6.46 13,164 4.93
1-4 family residential.................... 67,443 17.58 42,928 16.08
Commercial mortgages...................... 94,797 24.70 65,560 24.56
Farmland.................................. 702 0.18 1,388 0.52
Multi-family residential.................. 4,546 1.18 2,497 0.93
Consumer:
Indirect.................................. 96,772 25.22 73,952 27.70
Direct.................................... 54,020 14.08 44,382 16.63
-------- ------ -------- ------
Total loans............................ $383,739 100.00% $266,951 100.00%
======== ====== ======== ======
</TABLE>
The primary lending focus of the Company is on small and medium-sized
business and consumer loans. The Company offers a variety of commercial lending
products including term loans, lines of credit and fixed asset loans, including
real estate and equipment financing. A broad range of short to medium-term
commercial loans, primarily collateralized, 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.
Although its legal lending limit is substantially higher, the Company
generally does not make loans larger than $3.0 million. Loans up to $400,000 are
evaluated and acted upon by an officers' loan committee, which meets twice per
week. Loans above that amount must be approved by the Executive Loan Committee,
which meets weekly.
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 and obtains a personal
guaranty. Working capital loans are primarily collateralized by short-term
assets whereas term loans are primarily collateralized by long-term assets.
In addition to commercial loans secured by real estate, the Company makes
commercial mortgage loans to finance the purchase of real property which
generally consists of real estate on which structures have already been
completed. Additionally, a portion of the Company's lending activity has
consisted of the origination of
25
<PAGE> 27
single-family residential mortgage loans collateralized by owner-occupied
properties located in the Company's market areas. 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 or have
mortgage insurance. The Company requires mortgage title insurance and hazard
insurance in the amount of the loan. Of the mortgages originated, the Company
generally retains mortgage loans with short terms or variable rates and sells
longer term fixed-rate loans and loans that do not meet the Company's credit
underwriting standards. As a result, the Company retains approximately half of
the mortgage loans that it originates.
The Company's commercial mortgage loans are secured by first liens on real
estate, typically have fixed interest rates and amortize over a 10 to 15 year
period with balloon payments due at the end of three to five years. In
underwriting commercial mortgage loans, consideration is given to the property's
operating history, future operating projections, current and projected
occupancy, location and physical condition. The underwriting analysis also
includes credit checks, appraisals and a review of the financial condition of
the borrower.
The Company makes loans to finance the construction of residential and, to
a limited extent, nonresidential properties. Construction loans generally are
secured by first liens on real estate. The Company conducts periodic
inspections, either directly or through an agent, prior to approval of periodic
draws on these loans. Underwriting guidelines similar to those described above
are also used in the Company's construction lending activities. In keeping with
the community-oriented nature of its customer base, the Company provides
construction and permanent financing for churches located within its market
area.
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.
Approximately 64.2% of the Company's consumer loan portfolio as of June 30,
1997, was comprised of indirect loans (representing 25.2% of the Company's total
loan portfolio). These are installment loans, with typical maturities of three
to five years, which are originated mostly by automobile dealers for the purpose
of financing consumer automobile purchases and sold by automobile dealers to
commercial banks and other sources of financing. The Company also purchases some
indirect boat and recreational vehicle loans. The average yield on the Company's
indirect loan portfolio was 8.51% for the first six months of 1997.
The Company's indirect loan programs are administered by a staff specially
trained in evaluating and servicing this particular type of loan. The Company
competes for these loans with a number of other financial and non-financial
institutions, including the captive financial services subsidiaries of
automobile manufacturers, on the basis of interest rate and quality of service.
The Company generally receives credit applications on a daily basis from
one or more of the automobile dealerships and others from which it actively
purchases indirect loans. Upon receipt of a credit application, the Company
undertakes a credit analysis of the prospective purchaser, ordering credit
reports on the borrower which are analyzed by one of the officers specializing
in buying indirect loans. In making credit decisions, such officers evaluate,
among other things, the general credit quality of the applicant, the proposed
income to debt ratio, and residential and employment stability.
The collection of overdue indirect loans is administered by a staff
specially trained for such purpose. Holders of loans that are 10 days past due
generally receive written notice of such delinquency. When any loan becomes 15
days past due, the collectors establish telephone contact with the borrower. If
the loan remains past due for 30 days, the Company generally sends a demand
letter requiring payment within 10 days before asserting its legal rights. The
Company's collection staff makes all reasonable efforts to work out credit
problems before the accounts are turned over to independent repossession agents.
Repossessed automobiles are sold as soon as possible through a number of means
in order to minimize any potential losses. The Company's ongoing experience with
indirect loan underwriting and collections has contributed to a relatively low
delinquency rate of 0.69% as of June 30, 1997.
26
<PAGE> 28
The following table summarizes with respect to the Company's indirect loans
information regarding the amounts of loans originated and outstanding, the
amounts of loans charged off and the delinquency ratios for the periods
indicated:
<TABLE>
<CAPTION>
AS OF AND
FOR THE AS OF AND FOR THE
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
ENDED --------------------------------
JUNE 30, 1997 1996 1995 1994
------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans originated during period........... $34,001 $56,416 $36,042 $43,941
Loans outstanding at end of period....... 96,772 82,814 65,311 56,643
Net loan charge-offs for the period...... (131) (150) (103) (20)
Net loan charge-off ratio................ 0.30% 0.21% 0.17% 0.06%
Delinquency ratio at end of period....... 0.69% 0.95% 0.98% 1.26%
</TABLE>
The contractual maturity ranges of the commercial and industrial and real
estate construction portfolio and the amount of such loans with predetermined
interest rates and floating rates in each maturity range as of June 30, 1997 are
summarized in the following table:
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------------------------------
AFTER ONE
ONE YEAR THROUGH AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and industrial................. $18,570 $21,551 $ 550 $40,671
Real estate construction.................. 13,944 5,186 5,658 24,788
------- ------- ------ -------
Total........................... $32,514 $26,737 $6,208 $65,459
======= ======= ====== =======
Loans with a predetermined interest
rate.................................... $16,045 $22,256 $4,752 $43,053
Loans with a floating interest rate....... 16,469 4,481 1,456 22,406
------- ------- ------ -------
Total........................... $32,514 $26,737 $6,208 $65,459
======= ======= ====== =======
</TABLE>
Nonperforming Assets
The Company has several procedures in place to assist it in maintaining the
overall quality of its loan portfolio. 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 has historically had strong asset quality. Although
nonperforming assets (nonaccrual loans, restructured loans and other real
estate) at June 30, 1997 increased to $1.3 million from $460,000 at June 30,
1996, this increase was primarily attributable to credits and other real estate
acquired in recent acquisitions. However, the Company's ratio of nonperforming
assets to loans and other real estate remained low at 0.33% at June 30, 1997
compared to 0.17% at June 30, 1996.
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-secured and in the process of collection. Cash payments
received while a loan is classified as nonaccrual are recorded as a reduction of
principal as long as doubt exists as to collection. The Company is sometimes
required to revise a loan's interest rate or repayment terms in a troubled debt
restructuring. The Company had no restructured loans at either June 30, 1997 or
June 30, 1996. The Company's internal loan review department evaluates
additional loans which are potential problem loans as to risk exposure in
determining the adequacy of the allowance for loan losses.
The Company maintains on an ongoing basis updated appraisals on loans
secured by real estate, particularly those categorized as nonperforming loans
and potential problem loans. In instances where updated
27
<PAGE> 29
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. The
Company records other real estate at fair value at the time of acquisition, less
estimated costs to sell.
The following table presents information regarding nonperforming assets at
June 30, 1997 and June 30, 1996:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1997 1996
--------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonaccrual loans............................................ $ 595 $ 393
Restructured loans.......................................... -- --
Other real estate........................................... 668 67
------ -----
Total nonperforming assets........................ $1,263 $ 460
====== =====
Nonperforming assets to total loans and other real estate... 0.33% 0.17%
</TABLE>
The Company would have recorded additional interest income of approximately
$16,000 in the first six months of 1997 on nonperforming loans if the loans had
been current in accordance with original terms. Interest income recorded on
nonperforming loans for the first six months of 1997 was approximately $13,000.
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. Management has established
an allowance for loan losses which it believes is adequate for estimated losses
in the Company's loan portfolio. Based on an evaluation of the loan portfolio,
management presents a quarterly review of the allowance for loan losses to the
Bank's Board of Directors, indicating any change 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.
The Company follows a loan review program to evaluate the credit risk in
the loan portfolio. Through the loan review process, the Company maintains an
internally classified loan list which, along with the delinquency list of loans,
helps management assess the overall quality of the loan portfolio and the
adequacy of the allowance for loan losses. Loans classified as "substandard" are
those loans with clear and defined weaknesses such as a highly-leveraged
position, unfavorable financial ratios, uncertain repayment sources or poor
financial condition, which may jeopardize recoverability of the debt. At June
30, 1997, the Company had $841,000 of such loans, excluding loans on nonaccrual,
which were primarily residential and commercial real estate loans.
Loans classified as "doubtful" are those loans which have characteristics
similar to substandard accounts but with an increased risk that a loss may
occur, or at least a portion of the loan may require a charge-off if liquidated
at present. Although loans classified as substandard do not duplicate loans
classified as doubtful, both substandard and doubtful loans include some loans
that are delinquent at least 30 days or on nonaccrual status. Loans classified
as "loss" are those loans which are in the process of being charged off.
In addition to the internally classified loan list and delinquency list of
loans, the Company maintains a separate "watch list" which further aids the
Company in monitoring loan portfolios. Watch list loans show warning elements
where the present status portrays one or more deficiencies that require
attention in the short term or where pertinent ratios of the loan account have
weakened to a point where more frequent monitoring is warranted. These loans do
not have all of the characteristics of a classified loan (substandard or
doubtful) but do show weakened elements as compared with those of a satisfactory
credit. The Company reviews these loans
28
<PAGE> 30
to assist in assessing the adequacy of the allowance for loan losses. At June
30, 1997, the Company had $640,000 of such loans, which were primarily secured
by residential and commercial real estate.
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 to maintain the allowance for loan losses
at an adequate level determined by the foregoing methodology.
For the six months ended June 30, 1997, net loan charge-offs totaled
$338,000 or 0.19% of average loans outstanding for the period, compared to
$183,000 in net loan charge-offs or 0.15% of average loans for the six months
ended June 30, 1996. During the six months ended June 30, 1997, the Company
recorded a provision for loan losses of $525,000 compared to $596,000 for the
six months ended June 30, 1996. At June 30, 1997, the allowance totaled $5.1
million, or 1.33% of total loans resulting in an allowance to nonperforming
loans of 858.99%.
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1997 1996
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Average loans outstanding................................... $354,668 $246,368
-------- --------
Gross loans outstanding at end of period.................... 383,739 266,951
-------- --------
Allowance for loan losses at beginning of period............ $ 4,436 $ 3,660
Provision for loan losses................................... 525 596
Adjustment due to bank acquisitions......................... 488 --
Charge-offs:
Commercial and industrial................................. (116) (26)
Real estate............................................... (72) (14)
Consumer.................................................. (310) (297)
Recoveries:
Commercial and industrial................................. 13 21
Real estate............................................... 17 8
Consumer.................................................. 130 125
-------- --------
Net loan (charge-offs) recoveries........................... (338) (183)
-------- --------
Allowance for loan losses at end of period.................. $ 5,111 $ 4,073
======== ========
Ratio of allowance to end of period loans................... 1.33% 1.53%
Ratio of net loan charge-offs to average loans.............. 0.19 0.15
Ratio of allowance to end of period nonperforming loans..... 858.99 1,036.39
</TABLE>
29
<PAGE> 31
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 losses may occur. The
total allowance is available to absorb losses from any segment of loans.
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996
-------------------- --------------------
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.................... $ 35 10.60% $ 25 8.65%
Real estate:
Construction and land development.......... -- 6.46 -- 4.93
1- 4 family residential.................... 60 17.58 75 16.08
Commercial mortgage........................ -- 24.70 63 24.56
Farmland................................... -- 0.18 -- 0.52
Multi-family............................... -- 1.18 -- 0.93
Consumer..................................... 58 39.30 67 44.33
Unallocated.................................. 4,958 3,843
------ ------ ------ ------
Total allowance for loan losses.... $5,111 100.00% $4,073 100.00%
====== ====== ====== ======
</TABLE>
The Company believes that the allowance for loan losses at June 30, 1997 is
adequate to cover losses inherent in the portfolio as of such date. There can be
no assurance, however, that the Company will not sustain losses in future
periods, which could be substantial in relation to the size of the allowance at
June 30, 1997.
Securities
The Company uses its securities portfolio primarily as a source of income
and secondarily as a source of liquidity. At June 30, 1997, investment
securities totaled $465.8 million, an increase of $15.9 million from $449.9
million at June 30, 1996. The increase was primarily attributable to the
investment of funds acquired in acquisitions. At June 30, 1997, investment
securities represented 49.1% of total assets compared to 58.8% of total assets
at June 30, 1996. The yield on the investment portfolio for the six months ended
June 30, 1997 was 6.52% compared to a yield of 6.53% for the six months ended
June 30, 1996.
The following table presents the amortized cost of securities classified as
available-for-sale and their approximate fair values at June 30, 1997:
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government securities................. $208,364 $2,167 $ 29 $210,502
Mortgage-backed securities................. 42,316 18 399 41,935
Other securities........................... 37 -- -- 37
-------- ------ ---- --------
Total.................................... $250,717 $2,185 $428 $252,474
======== ====== ==== ========
</TABLE>
30
<PAGE> 32
The following table presents the amortized cost of securities classified as
held-to-maturity and their approximate fair values at June 30, 1997:
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government securities................. $ 66,471 $334 $ -- $ 66,805
Mortgage-backed securities................. 146,876 84 2,074 144,886
-------- ---- ------ --------
Total.................................... $213,347 $418 $2,074 $211,691
======== ==== ====== ========
</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 Association and the Federal Home
Loan Mortgage Corporation. These securities are deemed to have high credit
ratings, and minimum regular monthly cash flows of principal and interest are
guaranteed by the issuing agencies. Included in the Company's mortgage-backed
securities at June 30, 1997 were $27.6 million in agency-issued collateral
mortgage obligations and $581,500 in privately-issued collateral mortgage
obligations.
At June 30, 1997, 18.8% of the mortgage-backed securities held by the
Company had final maturities of more than 10 years. However, unlike U.S.
Treasury and U.S. government agency securities, which have a lump sum payment at
maturity, mortgage-backed securities provide cash flows from regular principal
and interest payments and principal prepayments throughout the lives of the
securities. Mortgage-backed securities which are purchased at a premium will
generally suffer decreasing net yields as interest rates drop because home
owners tend to refinance their mortgages. Thus, the premium paid must be
amortized over a shorter period. Therefore, securities purchased at a discount
will obtain higher net yields in a decreasing interest rate environment. As
interest rates rise, the opposite will generally be true. During a period of
increasing interest rates, fixed rate mortgage-backed securities do not tend to
experience heavy prepayments of principal and consequently, the average life of
this security will not be unduly shortened. If interest rates begin to fall,
prepayments will increase. Approximately $41.6 million of the Company's
mortgage-backed securities earn interest at floating rates and reprice within
one year, and accordingly are less susceptible to declines in value should
interest rates increase.
In December of 1996, the Company purchased $30.4 million of mortgage-backed
securities classified as held-to-maturity. This transaction, which settled in
January of 1997, was the principal cause of the $30.6 million decline in other
liabilities from December 31, 1996 to June 30, 1997. See "Note M -- Supplemental
Statement of Cash Flow Information" to the Financial Statements.
The following table summarizes the contractual maturity of investment
securities (including federal funds sold) and their weighted average yields:
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
YEAR BUT YEARS BUT
WITHIN WITHIN WITHIN AFTER TEN
ONE YEAR FIVE YEARS TEN YEARS YEARS TOTAL
---------------- ---------------- --------------- --------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL YIELD
-------- ----- -------- ----- ------- ----- ------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
securities................ $115,189 6.70% $159,646 6.71% $ -- --% $ -- --% $274,835 6.71%
Mortgage-backed and other
securities................ 1,208 5.95 97,667 6.05 54,764 6.79 35,590 6.16 189,229 6.28
Federal funds sold and other
temporary investments..... 31,245 6.25 -- -- -- -- -- -- 31,245 6.25
-------- ---- -------- ---- ------- ---- ------- ---- -------- ----
Total................... $147,642 6.60% $257,313 6.47% $54,764 6.79% $35,590 6.16% $495,309 6.52%
======== ==== ======== ==== ======= ==== ======= ==== ======== ====
</TABLE>
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities (Statement 115). At the date of purchase,
31
<PAGE> 33
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. Investments not classified as
either held to maturity or trading are classified as available-for-sale and
measured at fair value in the financial statements with unrealized gains and
losses reported, net of tax, in a separate component of shareholders' equity
until realized.
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,
money market and time accounts. The Company relies primarily on competitive
pricing policies and customer service to attract and retain these deposits. The
Company does not have any brokered deposits.
The Company's average total deposits for the six months ended June 30, 1997
were $838.3 million or 20.1% over average total deposits during the same period
in 1996. The Company's total deposits at June 30, 1997, were $878.7 million, up
$178.4 million or 25.5% over total deposits at June 30, 1996.
The Company's lending and investing activities are funded principally by
deposits, approximately 50.3% of which are demand and savings deposits. Average
noninterest-bearing deposits at June 30, 1997 were $136.8 million as compared to
$113.5 million for the first six months of 1996, an increase of $23.4 million or
20.6%. Approximately 16.3% of average deposits for the six months ended June 30,
1997 were noninterest-bearing. The amount of deposits grew due to a combination
of new location acquisitions and the opening of a new branch in the Galleria
area of Houston.
The daily average balances and weighted average rates paid on
interest-bearing deposits for the period ended June 30, 1997 are presented
below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1997
----------------------
AMOUNT RATE
---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Money market checking....................................... $127,928 2.09%
Regular savings............................................. 91,245 2.38
Money market savings........................................ 65,256 3.57
Time deposits less than $100,000............................ 310,390 5.24
Time deposits $100,000 and over............................. 106,612 5.48
-------- ----
Total interest-bearing deposits........................ 701,431 4.17
Noninterest-bearing deposits................................ 136,828 --
-------- ----
Total deposits.................................... $838,259 3.50%
======== ====
</TABLE>
The following table sets forth the amount of the Company's certificates of
deposit that are $100,000 or greater by time remaining until maturity:
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
3 months or less............................................ $ 41,034
Between 3 months and 6 months............................... 22,646
Between 6 months and 1 year................................. 35,777
Over 1 year................................................. 21,729
--------
Total............................................. $121,186
========
</TABLE>
32
<PAGE> 34
Interest Rate Sensitivity and Liquidity
The Company's Funds Management Policy provides management with the
necessary guidelines for effective funds management, and the Company has
established a measurement system for monitoring its net interest rate
sensitivity position. The Company manages its sensitivity position within
established guidelines.
An interest rate sensitive asset or liability is one that, within a defined
time period, either matures or experiences an interest rate change in line with
general market interest rates. The management of interest rate risk is performed
by analyzing the maturity and repricing relationships between interest-earning
assets and interest-bearing liabilities at specific points in time ("GAP") and
by analyzing the effects of interest rate changes on net interest income over
specific periods of time by projecting the performance of the mix of assets and
liabilities in varied interest rate environments. Interest rate sensitivity
reflects the potential effect on net interest income of a movement in interest
rates. A company is considered to be asset sensitive, or having a positive GAP,
when the amount of its interest-earning assets maturing or repricing within a
given period exceeds the amount of its interest-bearing liabilities also
maturing or repricing within that time period. Conversely, a company is
considered to be liability sensitive, or having a negative GAP, when the amount
of its interest-bearing liabilities maturing or repricing within a given period
exceeds the amount of its interest-earning assets also maturing or repricing
within that time period. During a period of rising interest rates, a negative
GAP would tend to affect adversely 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.
The following table sets forth an interest rate sensitivity analysis for
the Company at June 30, 1997:
<TABLE>
<CAPTION>
VOLUMES SUBJECT TO REPRICING WITHIN
----------------------------------------------------------------------------------------
GREATER
0-30 31-180 181-365 1-3 3-5 5-10 THAN
DAYS DAYS DAYS YEARS YEARS YEARS 10 YEARS TOTAL
--------- --------- --------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities............... $ 40,827 $ 73,380 $ 64,786 $206,830 $ 50,443 $ 27,067 $ 731 $464,064
Loans.................... 51,254 40,747 46,145 121,560 78,642 36,106 9,285 383,739
Federal funds sold and
other temporary
investments............ 31,245 -- -- -- -- -- -- 31,245
--------- --------- --------- -------- -------- -------- -------- --------
Total
interest-earning
assets........... 123,326 114,127 110,931 328,390 129,085 63,173 10,016 879,048
--------- --------- --------- -------- -------- -------- -------- --------
Interest-bearing
liabilities:
Demand, money market and
savings deposits....... 298,228 -- -- -- -- -- -- 298,228
Certificates of deposit
and other time
deposits............... 58,793 148,883 103,649 83,746 32,822 1,555 15 429,463
Federal funds purchased
and securities sold
under repurchase
agreements............. 100 -- -- -- -- -- -- 100
--------- --------- --------- -------- -------- -------- -------- --------
Total
interest-bearing
liabilities...... 357,121 148,883 103,649 83,746 32,822 1,555 15 727,791
--------- --------- --------- -------- -------- -------- -------- --------
Period GAP................. $(233,795) $ (34,756) $ 7,282 $244,644 $ 96,263 $ 61,618 $ 10,001 $151,257
Cumulative GAP............. $(233,795) $(268,551) $(261,269) $(16,625) $ 79,638 $141,256 $151,257
Period GAP to total
assets................... (24.66)% (3.67)% 0.77% 25.81% 10.15% 6.50% 1.05%
Cumulative GAP to total
assets................... (24.66)% (28.33)% (27.56)% (1.75)% 8.40% 14.90% 15.96%
Cumulative interest-earning
assets to cumulative
interest-bearing
liabilities 34.53% 46.93% 57.14% 97.60% 110.97% 119.41% 120.78%
</TABLE>
Shortcomings are inherent in GAP analysis since certain assets and
liabilities may not move proportionally as interest rates change. Consequently,
in addition to GAP analysis the Company uses a simulation model
33
<PAGE> 35
and shock analysis to test the interest rate sensitivity of net interest income
and the balance sheet, respectively. Based on the Company's June 30, 1997
simulation analysis, the Company estimates that a 200 basis point rise or
decline in rates over the next twelve month period would have an impact of less
than 3.0% on its net interest income for the same period. The change is
relatively small, despite the Company's liability sensitive GAP position. This
results primarily from the behavior of demand, money market and savings
deposits. The Company has found that historically interest rates on these
deposits change more slowly in a rising rate environment than in a declining
rate environment. The Company maintains an Investment Committee that reviews the
Company's interest rate risk position, generally on a monthly basis.
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 past three years, the Company's
liquidity needs have been met primarily by financing activities, which consisted
mainly of growth in core deposits, supplemented by earnings through operating
activities. In the Company's investing activities, highly liquid securities have
provided much flexibility as demonstrated in meeting the cash demands of the
branch sale in 1995. 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.
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 FDIC and the Texas Banking Department. Both the
Federal Reserve Board and the FDIC 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. These guidelines relate a financial
institution's capital to the risk profile of its assets. The risk-based capital
standards require all financial institutions to have "Tier 1 capital" of at
least 4.0% and "total risk-based" capital (Tier 1 and Tier 2) of at least 8.0%
of total risk-adjusted assets. "Tier 1 capital" generally includes common
shareholders' equity and qualifying perpetual preferred stock together with
related surpluses and retained earnings, less deductions for goodwill and
various other intangibles. "Tier 2 capital" may consist of a limited amount of
intermediate-term preferred stock, a limited amount of term subordinated debt,
certain hybrid capital instruments and other debt securities, perpetual
preferred stock not qualifying as Tier 1 capital, and a limited amount of the
general valuation allowance for loan losses. The sum of Tier 1 capital and Tier
2 capital is "total risk-based capital."
The Federal Reserve Board has also adopted guidelines which supplement the
risk-based capital guidelines with a minimum 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.
34
<PAGE> 36
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. The Bank is subject to capital adequacy guidelines of the FDIC that
are substantially similar to the Federal Reserve Board's guidelines. Also
pursuant to FDICIA, the FDIC has promulgated regulations setting the levels at
which an insured institution such as the Bank would be considered "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." The Bank is classified
"well capitalized" for purposes of the FDIC's prompt corrective action
regulations. See "Supervision and Regulation -- The Company" and "-- The Bank."
Shareholders' equity increased from $58.4 million at June 30, 1996 to $65.3
million at June 30, 1997, an increase of $6.9 million or 11.8%. This increase
was primarily the result of net income of $9.5 million, less the payment of
common stock and preferred stock dividends of $1.2 million and $700,000,
respectively, and a decrease in net unrealized gains on available for sale
securities net of taxes of $456,000. The Company had outstanding at June 30,
1997 $6.0 million in liquidation value of Series A Preferred Stock and $1.0
million in liquidation value of Series B Preferred Stock, both of which qualify
as Tier 1 capital.
The following table provides a comparison of the Company's and the Bank's
leverage and risk-weighted capital ratios as of June 30, 1997 to the minimum and
well-capitalized regulatory standards:
<TABLE>
<CAPTION>
ACTUAL RATIO
MINIMUM REQUIRED WELL-CAPITALIZED AT JUNE 30, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
THE COMPANY
Leverage ratio......................... 3.00%(1) N/A 6.31%
Tier 1 risk-based capital ratio........ 4.00% N/A 13.74%
Risk-based capital ratio............... 8.00% N/A 14.92%
THE BANK
Leverage ratio......................... 3.00%(2) 5.00% 6.27%
Tier 1 risk-based capital ratio........ 4.00% 8.00% 13.66%
Risk-based capital ratio............... 8.00% 10.00% 14.85%
</TABLE>
- ---------------
(1) The Federal Reserve Board may require the Company to maintain a leverage
ratio of up to 200 basis points above the required minimum.
(2) The FDIC may require the Bank to maintain a leverage ratio of up to 200
basis points above the required minimum.
35
<PAGE> 37
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
OVERVIEW
The Company engaged in several transactions in 1994, 1995 and 1996 which
had a significant impact on the Company's performance in each of those years. In
October 1994, the Company acquired $338.9 million in deposits in connection with
its acquisition of nine branch locations owned by a large federal savings bank.
In the last half of 1995, the Company sold five of those branches (including
$77.4 million in deposits) and recorded a $2.4 million gain on the branch sales.
In 1996, the Company paid a one-time FDIC assessment of $1.8 million with
respect to the Company's deposits insured by the Savings Association Insurance
Fund ("SAIF") of the FDIC.
Net earnings available to common shareholders were $8.5 million, $8.4
million and $7.6 million for the years ended December 31, 1996, 1995 and 1994,
respectively, and net earnings per common share were $0.92, $0.89 and $0.79 for
these same periods. Earnings growth from 1995 to 1996 resulted principally from
strong internal loan growth and a higher net interest margin. The increase in
earnings from 1994 to 1995 was due primarily to higher interest-earning assets,
resulting mainly from the 1994 branch acquisitions, and the gain on the sale of
the branches. The Company posted returns on average assets of 1.21%, 1.09% and
1.32% and returns on average common equity of 16.13%, 18.98% and 19.49% for the
years ended 1996, 1995 and 1994, respectively. Without the one-time FDIC
assessment in 1996, the Company's return on average assets and return on average
common equity, respectively, would have been 1.36% and 18.36%.
Total assets at December 31, 1996, 1995 and 1994 were $801.5 million,
$758.3 million and $863.5 million, respectively. Total deposits at December 31,
1996, 1995 and 1994 were $695.2 million, $694.2 million and $813.8 million,
respectively. The Company retained a major portion of the deposits acquired
during 1994 while repricing maturing deposits into a lower rate structure. The
result was an improved net interest margin and steady deposit levels from 1995
to 1996. Loans were $311.3 million at December 31, 1996, an increase of $81.1
million or 35.2% from $230.2 million at the end of 1995. Loans were $197.9
million at year end 1994. Common shareholders' equity was $55.0 million, $51.3
million and $40.8 million at December 31, 1996, 1995 and 1994, respectively.
Changes in common shareholders' equity reflect fluctuations in the net
unrealized appreciation on available-for-sale securities, net of tax in the
amounts of a $3.2 million decrease in 1996 and a $4.7 million increase in 1995.
RESULTS OF OPERATIONS
Net Interest Income
1996 versus 1995. Net interest income totaled $30.1 million in 1996
compared to $28.2 million in 1995, an increase of $1.9 million or 6.8%. The
increase resulted mainly from lower interest expense on deposits and higher
interest income on loans. Interest expense decreased $3.4 million and was only
partially offset by a decline of $1.5 million in total interest income. This
resulted in net interest margins of 4.20% and 3.62% and net interest spreads of
3.44% and 2.98% for 1996 and 1995, respectively.
The decline in interest expense from 1995 to 1996 was due primarily to
lower average interest-bearing deposits of $580.8 million in 1996 versus $659.0
million in 1995. The decline in average interest-bearing deposits, which
included the sale of branches in the last half of 1995, was comprised of $61.2
million or 78.3% in certificates of deposit, and the remainder was primarily in
savings accounts. Accordingly, the cost of average interest-bearing deposits
declined to 4.08% in 1996 from 4.12% in 1995. Interest income on loans increased
to $24.7 million in 1996 from $19.4 million in 1995. The increase was driven by
growth in the average loan portfolio of $54.2 million or 25.4% and an increase
in the yield on average loans to 9.22% in 1996 from 9.07% in 1995. Meanwhile,
the average securities portfolio declined $101.0 million, and its yield rose 15
basis points.
1995 versus 1994. Net interest income increased $4.6 million in 1995 from
$23.6 million in 1994, primarily due to growth in interest income of $17.2
million. This increase was partially offset by an increase in interest expense
of $12.6 million. This resulted in net interest margins of 3.62% and 4.25% and
net interest spreads of 2.98% and 3.65% for 1995 and 1994, respectively.
36
<PAGE> 38
The increase in interest income was driven by growth in average
interest-earning assets of $223.1 million or 40.1% due mostly to the branch
acquisitions which occurred in late 1994. Growth in interest-earning assets
included average loan growth of $71.4 million or 50.3% and growth in average
securities of $139.3 million or 34.7%. Also, the yield on average
interest-earning assets increased 24 basis points from 1994 to 1995. The yield
on average loans declined to 9.07% in 1995 from 9.73% in 1994, but the yield on
average securities increased to 6.38% in 1995 from 5.92% in 1994. The decline in
the loan yield was due primarily to higher amortization in 1994 of the purchase
discount associated with loans purchased in a previous acquisition. The increase
in the securities yield resulted mainly from higher-yielding U.S. Treasury
securities. The increase in interest expense was due both to an increase in
average interest-bearing deposits of $205.9 million and to an increase in their
cost of 91 basis points. Both occurrences resulted primarily from the branch
acquisitions.
37
<PAGE> 39
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 yearly average balances. Nonaccruing loans have been
included in the tables as loans carrying a zero yield.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------- -------------------------------- --------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
----------- -------- ------- ----------- -------- ------- ----------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans.................... $267,644 $24,673 9.22% $213,454 $19,357 9.07% $142,041 $13,826 9.73%
Securities............... 440,167 28,722 6.53 541,182 34,514 6.38 401,872 23,809 5.92
Federal funds sold and
other temporary
investments............ 7,901 420 5.32 24,311 1,439 5.92 11,926 519 4.35
-------- ------- ---- -------- ------- ----- -------- ------- ----
Total
interest-earning
assets.......... 715,712 53,815 7.52% 778,947 55,310 7.10% 555,839 38,154 6.86%
-------- ------- ---- -------- ------- ----- -------- ------- ----
Less allowance for loan
losses................... (3,765) (2,855) (1,889)
-------- -------- --------
Total interest-earning
assets, net of
allowance................ 711,947 776,092 553,950
Nonearning assets.......... 50,508 53,013 41,879
-------- -------- --------
Total assets...... $762,455 $829,105 $595,829
======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
Interest-bearing demand
deposits............... $110,992 2,509 2.26% $112,902 2,599 2.30% $ 92,490 2,134 2.31%
Savings and money market
accounts............... 130,599 3,500 2.68 145,782 4,019 2.76 122,383 3,195 2.61
Certificates of
deposit................ 339,209 17,670 5.21 400,361 20,523 5.13 238,303 9,198 3.86
Federal funds purchased
and securities sold
under repurchase
agreements............. 1,099 62 5.64 5 -- 6.08 304 15 4.93
-------- ------- ---- -------- ------- ----- -------- ------- ----
Total
interest-bearing
liabilities..... 581,899 23,741 4.08% 659,050 27,141 4.12% 453,480 14,542 3.21%
-------- ------- ---- -------- ------- ----- -------- ------- ----
Noninterest-bearing
liabilities:
Noninterest-bearing
demand deposits........ 114,853 113,707 97,392
Other liabilities........ 5,880 5,242 4,015
-------- -------- --------
Total
liabilities..... 702,632 777,999 554,887
-------- -------- --------
Shareholders' equity....... 59,823 51,106 40,942
-------- -------- --------
Total liabilities
and
shareholders'
equity.......... $762,455 $829,105 $595,829
======== ======== ========
Net interest income...... $30,074 $28,169 $23,612
======= ======= =======
Net interest spread...... 3.44% 2.98% 3.65%
==== ===== ====
Net interest margin...... 4.20% 3.62% 4.25%
==== ===== ====
</TABLE>
38
<PAGE> 40
The following schedule 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 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>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1996 VS 1995 1995 VS. 1994
------------------------------ -----------------------------
INCREASE (DECREASE) INCREASE (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.................................... $ 4,915 $ 401 $ 5,316 $6,948 $(1,417) $5,531
Securities............................... (6,445) 653 (5,792) 8,247 2,458 10,705
Federal funds sold and other temporary
investments........................... (971) (48) (1,019) 539 381 920
------- ------ ------- ------ ------- ------
Total increase (decrease) in
interest income................ (2,501) 1,006 (1,495) 15,734 1,422 17,156
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits......... (44) (46) (90) 472 (7) 465
Savings and money market accounts........ (419) (100) (519) 610 214 824
Certificates of deposit.................. (3,134) 281 (2,853) 6,248 5,077 11,325
Federal funds purchased and securities
sold under repurchase agreements...... 67 (5) 62 (15) -- (15)
------- ------ ------- ------ ------- ------
Total increase (decrease) in
interest expense............... (3,530) 130 (3,400) 7,315 5,284 12,599
------- ------ ------- ------ ------- ------
Increase (decrease) in net interest
income................................ $ 1,029 $ 876 $ 1,905 $8,419 $(3,862) $4,557
======= ====== ======= ====== ======= ======
</TABLE>
Provision for Loan Losses
The 1996 provision for loan losses declined slightly to $1.2 million from
$1.5 million in 1995, a decrease of $264,000 or 17.5%. The reduced provision in
1996 reflected improved asset quality as net charge-offs of loans continued at
relatively low levels totaling $470,000 or 0.18% of average loans, compared to
$491,000 or 0.23% of average loans in 1995. The provision for the year 1995
increased by $930,000 or 160.3% from the year ended 1994 due to loan growth and
a higher amount of charged-off loans in 1995 compared to 1994.
Noninterest Income
Noninterest income for the year ended December 31, 1996 was $8.3 million,
down from $10.3 million in 1995, and noninterest income in 1994 was $7.2
million. The year ended December 31, 1995 included a gain of $2.4 million on the
sale of five branches. Excluding this gain, noninterest income was $399,000
greater in 1996 than in 1995 and $685,000 greater in 1995 than in 1994. This
results in annual percentage increases of 5.1% and 9.5% for 1996 and 1995,
respectively. The following table presents for the periods indicated the major
categories of noninterest income:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------ ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service charges on deposit accounts..................... $6,319 $ 6,106 $5,870
Retail services income.................................. 1,200 1,074 792
Mortgage banking........................................ 174 140 135
Investment services..................................... 165 143 64
Securities lending...................................... 118 82 --
Branch sale premiums.................................... -- 2,445 --
Other noninterest income................................ 316 348 347
------ ------- ------
Total noninterest income...................... $8,292 $10,338 $7,208
====== ======= ======
</TABLE>
39
<PAGE> 41
After excluding the gain from the sale of branches in 1995, the increase in
noninterest income from 1995 to 1996 resulted mainly from service charges on
deposit accounts. Service charges on deposit accounts increased $213,000 from
1995 to 1996 in conjunction with new product pricing which was implemented in
the first quarter of 1996. Additionally, the Company's increased emphasis on fee
based services resulted in greater income from retail services, mortgage
banking, and investment services. The increase from 1994 to 1995 was due mainly
to deposit growth from the 1994 branch acquisition, increased investment
services income and implementation of a securities lending program.
Noninterest Expense
For the years ended 1996, 1995 and 1994, noninterest expenses totaled $23.1
million, $23.1 million and $18.3 million, respectively. The slight decline in
1996 reflects several major offsetting factors: a $1.8 million FDIC assessment
on SAIF deposits which was offset by lower overall fees on FDIC insured deposits
and the effect of the sale of five branches in the last half of 1995. The
increase in 1995 of $4.8 million or 26.0% was primarily due to higher employee
compensation and benefits, reflecting the additional staff acquired in the late
1994 branch acquisition. The Company's efficiency ratios were 60.09% in 1996,
59.99% in 1995 and 59.07% in 1994. The efficiency ratio was constant over this
period, reflecting the Company's continued efforts to control operating
expenses. The following table presents for the periods indicated the major
categories of noninterest expense:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Employee compensation and benefits.................... $13,070 $12,887 $ 9,820
Non-staff expenses:
Net bank premises expense........................... 1,246 1,262 1,032
Equipment rentals, depreciation and maintenance..... 975 1,000 899
Data processing..................................... 1,438 1,401 1,429
Professional fees................................... 695 875 871
Special FDIC assessment............................. 1,782 -- --
Regulatory assessments.............................. 522 1,345 1,227
Ad valorem and franchise taxes...................... 420 453 256
Net realized losses on available-for-sale
securities....................................... -- 9 139
Other............................................... 2,908 3,878 2,671
------- ------- -------
Total non-staff expenses.................... 9,986 10,223 8,524
------- ------- -------
Total noninterest expense................... $23,056 $23,110 $18,344
======= ======= =======
</TABLE>
Employee compensation and benefit expense for the year ended December 31,
1996 was $13.1 million, an increase of $183,000 or 1.4% from $12.9 million for
1995. Employee compensation and benefit expense for the year 1995 was up $3.1
million or 31.2% from 1994. The increase in 1995 was primarily due to increased
staff acquired in the branch acquisitions during late 1994. The increase in 1996
resulted mainly from additions to the loan staff but was mitigated by the branch
sales which occurred in the last half of 1995. Total full-time equivalent
employees at December 31, 1996, 1995 and 1994 were 386, 372 and 385,
respectively.
Non-staff expenses were $10.0 million in 1996, a decline of $237,000 from
$10.2 million in 1995. The decline in 1996 occurred in spite of the $1.8 million
special assessment from the FDIC on SAIF deposits and was due to reduced expense
levels resulting from the branch sales, which occurred in the last half of 1995,
as well as lower FDIC fees on all deposits. The 1995 level increased $1.7
million or 19.9% from 1994 non-staff expenses of $8.5 million. The increase in
1995 reflected the effect of the branch acquisitions in late 1994.
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
40
<PAGE> 42
of taxable income, the amount of tax-exempt income, the amount of non-deductible
interest expense and the amount of other non-deductible 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. The income tax component of the Texas franchise tax was zero in
1996, 1995 and 1994. In 1996, income tax expense was $4.8 million, approximately
the same as 1995. The 1995 amount was $787,000 higher than the 1994 amount of
$4.0 million, or 19.4%. The effective tax rates in 1996, 1995 and 1994,
respectively, were 34.03%, 34.41% and 34.03%.
FINANCIAL CONDITION
Loan Portfolio
Total loans increased by $81.1 million or 35.2% to $311.3 million at
December 31, 1996, from $230.2 million at December 31, 1995. During 1995, total
loans increased by $32.3 million or 16.3% from $197.9 million at December 31,
1994. The growth in loans reflected the improving local economy and the
Company's investment in loan production capacity.
At December 31, 1996, total loans represented 44.8% of deposits and 38.8%
of total assets. Total loans as a percentage of deposits were 33.2% at December
31, 1995, compared to 24.3% at December 31, 1994.
The following table summarizes the loan portfolio of the Company by type of
loan as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ------------------ ------------------ ------------------ -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- ------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
industrial............. $ 27,611 8.87% $ 21,017 9.13% $ 16,696 8.44% $ 11,999 11.36% $12,162 13.81%
Real estate:
Construction and land
development.......... 17,470 5.61 10,423 4.53 8,776 4.44 2,954 2.80 1,408 1.60
1-4 family
residential.......... 51,544 16.56 37,494 16.29 30,014 15.17 23,211 21.97 22,652 25.73
Commercial mortgages... 77,220 24.81 50,450 21.92 46,228 23.36 33,448 31.66 32,524 36.95
Farmland............... 1,032 0.33 1,683 0.73 2,623 1.33 2,931 2.77 3,844 4.37
Multi-family
residential.......... 4,056 1.30 2,682 1.17 2,962 1.50 1,783 1.69 1,479 1.68
Consumer:
Indirect............... 82,814 26.60 65,311 28.37 56,643 28.62 12,914 12.22 -- --
Direct................. 49,546 15.92 41,112 17.86 33,921 17.14 16,409 15.53 13,966 15.86
-------- ------ -------- ------ -------- ------ -------- ------ ------- ------
Total loans.......... $311,293 100.00% $230,172 100.00% $197,863 100.0% $105,649 100.00% $88,035 100.0%
======== ====== ======== ====== ======== ====== ======== ====== ======= ======
</TABLE>
The contractual maturity ranges of the commercial and industrial and real
estate construction loan portfolio and the amount of such loans with
predetermined interest rates and floating rates in each maturity range as of
December 31, 1996 are summarized in the following table:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------
AFTER ONE
ONE YEAR THROUGH AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and industrial................. $11,128 $16,042 $ 441 $27,611
Real estate construction.................. 10,007 2,863 4,600 17,470
------- ------- ------ -------
Total........................... $21,135 $18,905 $5,041 $45,081
======= ======= ====== =======
Loans with a predetermined interest
rate.................................... $ 8,952 $16,346 $4,437 $29,735
Loans with a floating interest rate....... 12,183 2,559 604 15,346
------- ------- ------ -------
Total........................... $21,135 $18,905 $5,041 $45,081
======= ======= ====== =======
</TABLE>
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-
41
<PAGE> 43
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 implementation of SFAS No. 114 did not have a
material adverse affect on the Company's financial statements.
Nonperforming Assets
The Company's conservative lending approach, as well as a healthy local
economy, have resulted in strong asset quality. Nonperforming assets at December
31, 1996 were $288,000 compared to $1.6 million at December 31, 1995 and $1.5
million at December 31, 1994. This resulted in ratios of nonperforming assets to
total loans plus other real estate of 0.09%, 0.71% and 0.73% for the years ended
1996, 1995 and 1994, respectively.
The following table presents information regarding nonperforming assets at
the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1996 1995 1994 1993 1992
---- ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans............................ $288 $ 797 $1,431 $ 204 $1,050
Restructured loans.......................... -- -- -- 306 --
Other real estate........................... -- 848 20 619 1,595
---- ------ ------ ------ ------
Total nonperforming assets........ $288 $1,645 $1,451 $1,129 $2,645
==== ====== ====== ====== ======
Nonperforming assets to total loans and
other
real estate............................... 0.09% 0.71% 0.73% 1.06% 2.95%
</TABLE>
Allowance for Loan Losses
For the year ended 1996, net loan charge-offs totaled $470,000 or 0.18% of
average loans outstanding for the period, compared to $491,000 or 0.23% in net
loan charge-offs during 1995. During 1996, the Company recorded a provision for
loan losses of $1.2 million compared with $1.5 million for 1995. At December 31,
1996, the allowance totaled $4.4 million, or 1.43% of total loans. The Company
made a provision for loan losses of $1.5 million during 1995 as compared to a
provision of $580,000 for 1994. At December 31, 1995, the allowance aggregated
$3.7 million or 1.59% of total loans.
42
<PAGE> 44
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,
---------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average loans outstanding........ $267,644 $213,454 $142,041 $ 93,263 $93,774
-------- -------- -------- -------- -------
Gross loans outstanding at end of
period......................... 311,293 230,172 197,863 105,649 88,035
-------- -------- -------- -------- -------
Allowance for loan losses at
beginning of period............ $ 3,660 $ 2,641 $ 1,788 $ 1,640 $ 1,251
Provision for loan losses........ 1,246 1,510 580 (200) 1,411
Adjustments due to
acquisitions................... -- -- 467 -- --
Charge-offs:
Commercial and industrial...... (59) (97) (44) (39) (594)
Real estate.................... (70) (59) (24) (667) (531)
Consumer....................... (656) (675) (314) (84) (37)
Recoveries:
Commercial and industrial...... 27 47 26 501 108
Real estate.................... 19 32 58 629 18
Consumer....................... 269 261 104 8 14
-------- -------- -------- -------- -------
Net loan (charge-offs)
recoveries..................... (470) (491) (194) 348 (1,022)
Allowance for loan losses at end
of period...................... $ 4,436 $ 3,660 $ 2,641 $ 1,788 $ 1,640
======== ======== ======== ======== =======
Ratio of allowance to end of
period loans................... 1.43% 1.59% 1.33% 1.69% 1.86%
Ratio of net loan charge-offs to
average loans.................. 0.18 0.23 0.14 (0.37) 1.09
Ratio of allowance to end of
period nonperforming loans..... 1,540.28 459.22 184.56 350.59 156.19
</TABLE>
The following tables describe the allocation of the allowance for loan
losses among various categories of loans and certain other information for the
dates indicated. The allocation is made for analytical purposes and is not
necessarily indicative of the categories in which future losses may occur. The
total allowance is available to absorb losses from any segment of loans.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1996 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.......................... $ 21 8.87% $ 305 9.13%
Real estate:
Construction and land development............... -- 5.61 -- 4.53
1-4 family residential.......................... 62 16.56 94 16.29
Commercial mortgage............................. 50 24.81 209 21.92
Farmland........................................ -- 0.33 -- 0.73
Multi-family.................................... -- 1.30 -- 1.17
Consumer........................................... 49 42.52 75 46.23
Unallocated........................................ 4,254 2,977
------ ------ ------ ------
Total allowance for loan losses............ $4,436 100.00% $3,660 100.00%
====== ====== ====== ======
</TABLE>
43
<PAGE> 45
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
1994 1993 1992
-------------------- -------------------- --------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance of allowance for loan losses
applicable to:
Commercial and industrial............. $ 49 8.44% $ 26 11.36% $ 37 13.81%
Real estate:
Construction and land development... -- 4.44 -- 2.80 -- 1.60
1-4 family residential.............. 45 15.17 50 21.97 28 25.73
Commercial mortgage................. 10 23.36 3 31.66 5 36.95
Farmland............................ -- 1.33 -- 2.77 -- 4.37
Multi-family........................ -- 1.50 -- 1.69 -- 1.68
Consumer.............................. 77 45.76 103 27.75 48 15.86
Unallocated........................... 2,460 1,606 1,522
------ ------ ------ ------ ------ ------
Total allowance for loan
losses.................... $2,641 100.00% $1,788 100.00% $1,640 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
Securities
The following table summarizes the amortized cost of investment securities
held by the Company as of the dates shown:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Government securities................................. $275,781 $369,747 $501,476
Mortgage-backed securities................................. 161,630 96,074 104,069
Other securities........................................... 37 37 37
-------- -------- --------
Total securities................................. $437,448 $465,858 $605,582
======== ======== ========
</TABLE>
The following table summarizes the contractual maturity of investment
securities and their weighted average yields:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------------------------------------------------
AFTER FIVE
AFTER ONE YEARS BUT
WITHIN YEAR BUT WITHIN WITHIN
ONE YEAR FIVE YEARS TEN YEARS AFTER TEN YEARS
---------------- ---------------- --------------- ---------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL YIELD
-------- ----- -------- ----- ------- ----- ------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
securities......... $127,870 6.61% $147,911 7.00% $ -- --% $ -- --% $275,781 6.82%
Mortgage-backed and
other securities... --...... -- 90,748 5.94 34,026 6.81 36,893 6.22 161,667 6.19
-------- ----- -------- ----- ------- ----- ------- ----- -------- -----
Totals....... $127,870 6.61% $238,659 6.60% $34,026 6.81% $36,893 6.22% $437,448 6.59%
======== ===== ======== ===== ======= ===== ======= ===== ======== =====
</TABLE>
The following table summarizes the carrying value and classification of
securities as of the dates shown:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Available-for-sale......................................... $324,723 $377,837 $ 97,131
Held-to-maturity........................................... 115,902 96,074 507,948
-------- -------- --------
Total securities................................. $440,625 $473,911 $605,079
======== ======== ========
</TABLE>
44
<PAGE> 46
At December 31, 1996, securities totaled $440.6 million, a decrease of
$33.3 million from $473.9 million at December 31, 1995. The decrease occurred
primarily in U.S. Government securities and reflected the Company's use of funds
from maturities to fund loans. During 1995, securities decreased $131.2 million
from $605.1 million at December 31, 1994, reflecting the decline in deposits
which resulted from the branch sales during 1995 and the repricing of deposits
acquired in 1994 into a lower rate structure. During 1995, the Company
transferred from held-to-maturity to available-for-sale accounts securities with
an amortized cost of $339.8 million and net unrealized gains of $6.2 million at
the date of transfer. The transfer was made in light of pending branch sales in
order to maintain the Company's interest rate risk position.
The following table presents the amortized cost of securities classified as
available-for-sale and their approximate fair values as of the dates shown:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------------------------- ----------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE COST GAIN LOSS VALUE
--------- ---------- ---------- -------- --------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government securities... $275,781 $3,432 $ 77 $279,136 $369,747 $8,161 $108 $377,800
Mortgage-backed securities... 45,728 40 218 45,550 -- -- -- --
Other securities............. 37 -- -- 37 37 -- -- 37
-------- ------ ---- -------- -------- ------ ---- --------
Total................ $321,546 $3,472 $295 $324,723 $369,784 $8,161 $108 $377,837
======== ====== ==== ======== ======== ====== ==== ========
</TABLE>
<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....................... $97,597 $2 $505 $97,094
Other securities................................. 37 -- -- 37
------- -- ---- -------
Total.................................. $97,634 $2 $505 $97,131
======= == ==== =======
</TABLE>
The following table presents the amortized cost of securities classified as
held-to-maturity and their approximate fair values as of the dates shown:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------------------------- ---------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE COST GAIN LOSS VALUE
--------- ---------- ---------- -------- --------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities.... $115,902 $68 $1,661 $114,309 $96,074 $103 $941 $95,236
======== === ====== ======== ======= ==== ==== =======
</TABLE>
<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...................... $403,879 $-- $ 8,256 $395,623
Mortgage-backed securities...................... 104,069 -- 7,379 96,690
-------- --- ------- --------
Total................................. $507,948 $-- $15,635 $492,313
======== === ======= ========
</TABLE>
Deposits
Average total deposits during 1996 decreased to $695.7 million from $772.8
million in 1995, a decrease of $77.1 million or 10.0%. The decrease resulted
primarily from the sales of five branch locations with approximately $77.4
million in deposits and the continued repricing of maturing deposits acquired in
the branch acquisitions of 1994 into a lower rate structure. Approximately 79.3%
of the decline occurred in certificates of deposit which lowered the cost of
deposits to 3.40% in 1996 from 3.51% in 1995 and increased
45
<PAGE> 47
the ratio of average demand deposits to average total deposits to 32.5% in 1996
from 29.3% in 1995. Average deposits in 1995 rose to $772.8 million from $550.6
million in 1994, an increase of $222.2 million or 40.4%. The increase resulted
primarily from the branch acquisitions which occurred in late 1994. The
Company's ratios of average noninterest-bearing demand deposits to average total
deposits for years ended December 31, 1996, 1995 and 1994 were 16.5%, 14.7% and
17.7%, respectively.
The daily average balances and weighted average rates paid on deposits for
each of the years ended December 31, 1996, 1995 and 1994 are presented below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ---- -------- ---- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Money market checking................ $110,992 2.26% $112,902 2.30% $ 92,490 2.31%
Regular savings...................... 91,630 2.44 109,552 2.63 87,520 2.63
Money market savings................. 38,969 3.24 36,230 3.16 34,863 2.55
Time deposits less than $100,000..... 257,958 5.16 307,352 5.00 189,718 3.76
Time deposits $100,000 and over...... 81,251 5.37 93,009 5.54 48,585 4.23
-------- ---- -------- ---- -------- ----
Total interest-bearing
deposits............................. 580,800 4.08 659,045 4.12 453,176 3.21
Noninterest-bearing deposits......... 114,853 -- 113,707 -- 97,392 --
-------- ---- -------- ---- -------- ----
Total deposits............. $695,653 3.40% $772,752 3.51% $550,568 2.64%
======== ==== ======== ==== ======== ====
</TABLE>
The following table sets forth the amount of the Company's certificates of
deposit that are $100,000 or greater by time remaining until maturity:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
3 months or less.......................................... $45,009
Between 3 months and 6 months............................. 16,020
Between 6 months and 1 year............................... 14,229
Over 1 year............................................... 10,774
-------
Total........................................... $86,032
=======
</TABLE>
46
<PAGE> 48
Interest Rate Sensitivity and Liquidity
The following table sets forth an interest rate sensitivity analysis for
the Company at December 31, 1996:
<TABLE>
<CAPTION>
VOLUMES SUBJECT TO REPRICING WITHIN
--------------------------------------------------------------------------------------------
0-30 31-180 181-365 1-3 3-5 5-10 GREATER THAN
DAYS DAYS DAYS YEARS YEARS YEARS 10 YEARS TOTAL
--------- --------- --------- -------- -------- -------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities............... $ 48,590 $ 69,389 $ 67,024 $175,384 $ 59,699 $ 16,641 $ 721 $437,448
Loans.................... 45,846 35,550 30,884 95,707 68,533 27,871 6,902 311,293
--------- --------- --------- -------- -------- -------- -------- --------
Total
interest-earning
assets........... 94,436 104,939 97,908 271,091 128,232 44,512 7,623 748,741
--------- --------- --------- -------- -------- -------- -------- --------
Interest-bearing
liabilities:
Demand, money market and
savings deposits....... 241,775 -- -- -- -- -- -- 241,775
Certificates of deposit
and other time
deposits............... 54,496 138,079 63,931 56,760 22,484 189 15 335,954
Federal funds purchased
and securities sold
under repurchase
agreements............. 9,700 -- -- -- -- -- -- 9,700
--------- --------- --------- -------- -------- -------- -------- --------
Total
interest-bearing
liabilities...... 305,971 138,079 63,931 56,760 22,484 189 15 587,429
--------- --------- --------- -------- -------- -------- -------- --------
Period GAP................. $(211,535) $ (33,140) $ 33,977 $214,331 $105,748 $ 44,323 $ 7,608 $161,312
Cumulative GAP............. $(211,535) $(244,675) $(210,698) $ 3,633 $109,381 $153,704 $161,312
Period GAP to total
assets................... (26.39)% (4.14)% 4.24% 26.74% 13.20% 5.53% 0.95%
Cumulative GAP to total
assets................... (26.39)% (30.53)% (26.29)% 0.45% 13.65% 19.18% 20.13%
Cumulative interest-earning
assets to cumulative
interest-bearing
liabilities.............. 30.86% 44.90% 58.52% 100.64% 118.63% 126.17% 127.46%
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Interest Rate Sensitivity and Liquidity" for the six months ended
June 30, 1997 and June 30, 1996 for a discussion of the Company's policies
regarding asset and liability risk management.
Capital Resources
Shareholders' equity increased to $62.0 million at December 31, 1996 from
$58.3 million at December 31, 1995, an increase of $3.6 million or 6.2%. This
increase was primarily the result of net income of $9.2 million offset by a
decline in the net unrealized appreciation on available-for-sale securities of
$3.2 million and dividends paid of $1.9 million. During 1995, shareholders'
equity increased by $11.5 million or 24.5%, from $46.8 million at December 31,
1994. In addition to net income, the increase reflected a change of $4.7 million
in unrealized appreciation on available-for-sale securities.
The following table provides a comparison of the Company's and the Bank's
leverage and risk-weighted capital ratios as of December 31, 1996 to the minimum
and well-capitalized regulatory standards:
<TABLE>
<CAPTION>
ACTUAL RATIO AT
MINIMUM REQUIRED WELL-CAPITALIZED DECEMBER 31, 1996
---------------- ---------------- -----------------
<S> <C> <C> <C>
THE COMPANY
Leverage ratio........................... 3.00%(1) N/A 7.96%
Tier 1 risk-based capital ratio.......... 4.00% N/A 17.37%
Risk-based capital ratio................. 8.00% N/A 18.62%
THE BANK
Leverage ratio........................... 3.00%(2) 5.00% 7.91%
Tier 1 risk-based capital ratio.......... 4.00% 6.00% 17.26%
Risk-based capital ratio................. 8.00% 10.00% 18.51%
</TABLE>
- ---------------
(1) The Federal Reserve Board may require the Company to maintain a leverage
ratio of up to 200 basis points above the required minimum.
(2) The FDIC may require the Bank to maintain a leverage ratio of up to 200
basis points above the required minimum.
47
<PAGE> 49
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following is a list of all of the directors and executive officers of
the Company, their respective positions with the Company and the Bank and their
ages:
<TABLE>
<CAPTION>
NAME POSITION AGE
---- -------- ---
<S> <C> <C>
L. Anderson Creel.................... Secretary and Treasurer of the Company and
Senior Vice President and Chief Financial
Officer of the Company and the Bank 49
James G. Dickson, Jr................. Senior Vice President of the Company and the
Bank 53
Jerry S. Dominy...................... Director of the Company and the Bank 62
E. J. Guzzo.......................... Director and President of the Company and the
Bank 53
Steven H. Jackson.................... Senior Vice President of the Company and the
Bank and Chief Credit Officer of the Bank 37
Walter L. Kopycinski................. Senior Vice President of the Company and the
Bank and Operations Division Manager of the
Bank 60
David Pasternak...................... Director of the Company and the Bank 74
Fredric M. Saunders.................. Chairman of the Board and Chief Executive
Officer of the Company and the Bank 65
Stuart D. Saunders................... Director, Senior Vice President and General
Counsel of the Company and the Bank 33
C. C. Smitherman..................... Director of the Company and the Bank 63
James B. Wesley...................... Director of the Company and the Bank 56
</TABLE>
L. Anderson Creel. Mr. Creel joined the Bank in 1992 as Senior Vice
President and Chief Financial Officer with 19 years of banking experience,
including serving as Senior Vice President and Controller of First City National
Bank of Houston and Founders Bank in Oklahoma City. He assumed the additional
responsibilities of Secretary and Treasurer of the Company in 1996. Mr. Creel
was elected Senior Vice President of the Company in 1997. In addition, Mr. Creel
serves as an Advisory Director for the Bank. Mr. Creel received a BS in
Accounting from Louisiana Tech University and is a certified public accountant.
James G. Dickson, Jr. Mr. Dickson joined the Bank in 1990 as Senior Vice
President and a branch manager. In 1992, he was promoted to Senior Vice
President in charge of branch administration. Mr. Dickson also serves as an
Advisory Director of the Bank. Mr. Dickson was elected a Senior Vice President
of the Company in 1997. Mr. Dickson came to the Bank with 12 years of prior
banking experience, including serving as President and Director of First
Freeport National Bank and Senior Vice President of First City Bank -- Humble.
Mr. Dickson was an officer in the United States Army and served in Vietnam. He
received his BBA from the University of Texas at Austin and his MBA from Texas
Christian University.
Jerry S. Dominy. Mr. Dominy became a director of the Bank in 1970. He has
served as a director of the Company since it was founded in 1984. Prior to Mr.
Dominy's affiliation with the Company and the Bank, he served as an Advisory
Director for North Side Bank from 1961 to 1964 and as a director of Northshore
Bank from 1964 to 1970. Mr. Dominy was a principal owner and Chief Executive
Officer of Dominy, Ford & McPherson, Inc., a Houston based appraisal firm, from
1962 to 1996. He is currently semi-retired from the appraisal business. Mr.
Dominy received his BBA from the University of Houston.
E. J. Guzzo. Mr. Guzzo joined the Bank as Executive Vice President and
director in 1983 and became President of the Bank in 1984. He was elected as a
director of the Company in 1985 and became President of the Company in 1996. Mr.
Guzzo began his banking career in 1973 with Guaranty Bank & Trust in Alexandria,
Louisiana. He also served as Executive Vice President for Community Bank of
LaFourche,
48
<PAGE> 50
Louisiana from 1977 to 1979, and as Vice President and Manager for the Bank of
New Orleans from 1979 to 1983. Mr. Guzzo was an officer in the United States
Army and served in Vietnam. He received his BBA from Northwestern State
University in Louisiana. Mr. Guzzo is a past Chairman of the North Channel Area
Chamber of Commerce.
Steven H. Jackson. Mr. Jackson joined the Bank in 1989 as Senior Vice
President. He has since been promoted to Chief Credit Officer. In addition, Mr.
Jackson serves as an Advisory Director of the Bank. Mr. Jackson was elected a
Senior Vice President of the Company in 1997. Mr. Jackson began his banking
career with First City National Bank of Houston from 1981 to 1984 and then
served as Vice President and Unit Manager for Bank One from 1984 to 1989. He
received his BBA from the University of Texas at Austin and is involved in
numerous civic and community activities including the Rotary Club of Houston and
St. Martin's Episcopal Church.
Walter L. Kopycinski. Mr. Kopycinski joined the Bank in 1991 as Operations
Division Manager. He has since been promoted to Senior Vice President and
Operations Division Manager. He also serves as an Advisory Director of the Bank.
Mr. Kopycinski was elected a Senior Vice President of the Company in 1997. Mr.
Kopycinski has 39 years experience in bank operations. Prior to joining the
Bank, he was employed by First City Bank-Texas in both Houston and Dallas, where
he held various departmental manager positions, including Operations Division
Manager with First City in Dallas. Mr. Kopycinski attended the University of
Houston and is also a graduate of the Southwestern Graduate School of Banking at
Southern Methodist University. Mr. Kopycinski is on the board of directors for
the Clearing House of the Southwest, a non-profit organization which performs
check clearing and other services for Texas banks.
David Pasternak. Mr. Pasternak has been a director of the Bank since the
Bank was chartered in 1958. Mr. Pasternak became a director of the Company when
it was formed in 1984. In 1989, Mr. Pasternak began serving as Chairman of the
Bank's Investment Committee. Mr. Pasternak's principal occupation is investing
in real estate and securities.
Fredric M. Saunders. Mr. Saunders joined the Bank in 1962 as President and
director. In 1969, Mr. Saunders began serving as Chairman of the Bank. The
Company was founded in 1984, and Mr. Saunders served as Chairman and President
from its inception until 1996, when Mr. Guzzo began serving as President of the
Company and Mr. Saunders retained the position of Chairman of the Company. Mr.
Saunders began his banking career in 1957 with MacGregor Park National Bank as
an Assistant Vice President. Next, Mr. Saunders served as Cashier of Bellfort
State Bank in 1959 through 1960, and as Cashier for Fairbanks State Bank in
1961. He also served as an Executive Vice President at Heights Savings and Loan
Association from 1969 through 1970. Mr. Saunders received his BBA from the
University of Texas at Austin and is involved in the Rotary Club of Northshore,
the North Channel Area Chamber of Commerce and the YMCA.
Stuart D. Saunders. Mr. Saunders began serving the Bank as an Advisory
Director in 1991. In 1994, he joined the Bank as Senior Vice President and
General Counsel and became Senior Vice President and General Counsel of the
Company in 1997. Mr. Saunders became a director of the Company and the Bank in
1997. Prior to joining the Bank, Mr. Saunders practiced law from 1990 to 1994 as
an associate in the financial services section of Bracewell & Patterson, L.L.P.
He obtained his BBA from the University of Texas at Austin and his JD from
Baylor University School of Law. Mr. Saunders is a member of the Advisory
Committee for the Institution of Shipboard Education's Semester at Sea program
and is involved in various other civic and community activities. Mr. Saunders is
the son of Fredric M. Saunders.
C. C. Smitherman. Mr. Smitherman became a director of the Bank in 1975. He
became a director of the Company when it was formed in 1984. Mr. Smitherman's
principal occupation is real estate brokerage and appraisal, and he is the owner
of Smitherman Real Estate Company. Mr. Smitherman has a long history of civic
involvement with organizations such as the Rotary Club of Northshore, the
Houston Port Authority, the Board of Directors for the Houston Livestock Show &
Rodeo, the Harris County Health Facility, the Texas Turnpike Authority, and the
North Channel Area Chamber of Commerce. Mr. Smitherman is a graduate of Texas
A&M University.
49
<PAGE> 51
James B. Wesley. Mr. Wesley became a director of the Bank in 1985. He has
served as Chairman of the Bank's Audit Committee since 1989 and was elected as a
director of the Company in 1996. Mr. Wesley is a shareholder in the law firm of
Wesley & Herzog, P.C. He is board certified in Estate Planning and Probate Law,
Commercial Real Estate Law, and Farm & Ranch Real Estate Law by the Texas State
Board of Legal Specialization. Mr. Wesley is also a certified public accountant.
He worked as a division manager of trust operations at Texas Commerce Bank from
1966 to 1969. Mr. Wesley obtained his BBA from the University of Texas at Austin
and his JD from the University of Houston.
Directors are elected for three year terms, classified into Classes I, II
and III. Messrs. Fredric M. Saunders and Smitherman are Class I directors with
terms of office expiring on the date of the Company's annual meeting of
shareholders in 1998; Messrs. Guzzo, Dominy and Pasternak are Class II directors
with terms of office expiring on the date of the Company's annual meeting in
1999; and Messrs. Stuart D. Saunders and Wesley are Class III directors with
terms of office expiring on the date of the Company's annual meeting of
shareholders in 2000. Each officer of the Company is elected by the Board of
Directors of the Company 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 reviews the general scope of the audit conducted by the
Company's independent auditors and matters relating to the Company's internal
control systems. In performing its function, the Audit Committee meets
separately with representatives of the Company's independent auditors and with
representatives of senior management. The Audit Committee is composed of Messrs.
Wesley (Chairman), Pasternak and Dominy, each of whom is an outside director.
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. The Compensation Committee
also administers the Company's stock option plans and makes recommendations to
the Board of Directors as to option grants to Company employees under such
plans. The Compensation Committee is comprised of Messrs. Pasternak (Chairman),
Dominy and Wesley, each of whom is an outside director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the formation of the Compensation Committee in 1997, matters
related to compensation, employee benefit matters and stock options were
considered by the Human Resources Committee of the Bank, which included E.J.
Guzzo, L. Anderson Creel, Stuart D. Saunders and Fredric M. Saunders. As members
of this committee, Messrs. Guzzo, Creel, Stuart D. Saunders and Fredric M.
Saunders participated in determinations as to compensation and grants of stock
options to executive officers, including themselves. Final determination
regarding compensation and stock options was made by the Board of Directors of
the Bank.
DIRECTOR COMPENSATION
Directors of the Company do not receive any fees for attending Company
Board meetings. Directors of the Bank receive a fee of $250 for each meeting of
the Bank's Board of Directors attended and outside directors receive a $300 fee
for each Board Committee meeting attended. Mr. Wesley receives a fee of $10,000
per quarter for serving as Chairman of the Audit Committee. The Bank has
historically paid outside Bank directors an annual bonus based on the Bank's
performance in lieu of a retainer. In 1996, the Bank paid each of Messrs.
Dominy, Pasternak, Smitherman and Wesley, who are also directors of the Company,
a bonus of $5,000.
50
<PAGE> 52
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 each of the other five most highly compensated
executive officers of the Company (determined as of the end of the last fiscal
year) for the fiscal year ended December 31, 1996:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION COMPENSATION(1)
------------------ -------- -------- ------------ ---------------
<S> <C> <C> <C> <C>
Fredric M. Saunders.................... $220,000 $121,000 $ 0 $2,250
Chairman of the Board
E. J. Guzzo............................ 200,000 110,000 3,000 2,250
President
L. Anderson Creel...................... 100,000 27,500 9,000 1,538
Chief Financial Officer
James G. Dickson, Jr................... 110,000 28,250 12,550 1,793
Senior Vice President
Steven H. Jackson...................... 110,000 30,250 10,800 1,767
Senior Vice President
Walter L. Kopycinski................... 100,000 27,500 9,000 1,574
Senior Vice President
</TABLE>
- ---------------
(1) Consists of contributions by the Company to the 401(k) Plan.
STOCK OPTION PLANS
The Company has outstanding options to purchase 600,000 shares of Common
Stock issued pursuant to incentive stock option plans approved by shareholders
in 1984 (the "1984 Plan") and 1993 (the "1993 Plan.") Under the 1984 Plan, 10%
of the options granted vest immediately following the date of grant and an
additional 10% each year thereafter. Options granted under the 1984 Plan
generally must be exercised within 10 years following the date of grant or no
later than three months after termination of the optionee's employment, if
earlier. Under the 1993 Plan, 20% of the options granted vest at the end of the
first year following the date of grant and an additional 20% each year
thereafter. Options granted under the 1993 Plan generally must be exercised
within 10 years following the date of grant or no later than three months after
termination of the optionee's employment, if earlier.
The Company's Board of Directors and shareholders approved a new stock
option plan in 1997 (the "1997 Plan") which authorizes the issuance of up to
1,000,000 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. Generally, under the 1997 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 1997 Plan generally must be exercised within 10 years following the date of
grant or no later than three months after optionee's termination with the
Company, if earlier. No options have been granted under the 1997 Plan.
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 established 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-
51
<PAGE> 53
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 has continued to apply
accounting in Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, ("APB 25") and related Interpretations, and, accordingly,
will provide the pro forma disclosures of net income and earnings per share.
OPTION GRANTS DURING 1996
The Company did not grant any options during 1996.
STOCK OPTION EXERCISES AND FISCAL YEAR END VALUES
The following table sets forth certain information concerning stock options
exercised during fiscal 1996 and the number and value of unexercised options
held by each of the named executives at December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS IN-THE-MONEY OPTIONS AT
SHARES DOLLAR AT DECEMBER 31, 1996(2) DECEMBER 31, 1996(3)
ACQUIRED UPON VALUE --------------------------- ---------------------------
NAME OPTION EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
E. J. Guzzo................ 120,000 $400,000 72,000 48,000 $168,000 $142,000
L. Anderson Creel.......... -0- -0- 36,000 24,000 62,000 38,000
James G. Dickson, Jr....... 12,000 22,000 24,000 24,000 40,000 38,000
Steven H. Jackson.......... -0- -0- 36,000 24,000 62,000 38,000
Walter L. Kopycinski....... -0- -0- 36,000 24,000 62,000 38,000
</TABLE>
- ---------------
(1) Market value of the underlying securities at exercise date, minus the
exercise price.
(2) On January 15, 1997, the Company granted the following options to purchase
240,000 shares at market value (which was $4.17 per share at that time) to
the following officers: E. J. Guzzo (120,000), L. Anderson Creel (30,000),
James G. Dickson, Jr. (30,000), Steven H. Jackson (30,000) and Walter L.
Kopycinski (30,000). These options vest 20% per year over the next five
years.
(3) Market value of the underlying securities at December 31, 1996, minus the
exercise price.
BENEFIT PLAN
The Company has established a contributory profit sharing plan pursuant to
Internal Revenue Code Section 401(k) covering substantially all employees (the
"Plan"). The Bank is the Plan administrator and has hired Smith Barney, Inc. to
serve as the trustee and investment advisor. Each year the Company determines,
in its discretion, the amount of matching contributions. The Company has elected
to match 25% of employee contributions not to exceed 6% of the employee's annual
compensation. As an additional incentive to employees, the Plan does not have a
vesting schedule, and thus all employees are 100% vested from the moment of
contribution. Total Plan expenses charged to the Company's operations for 1996,
1995 and 1994 were approximately $97,000, $96,000 and $68,000 respectively. The
Company has budgeted $108,000 for 1997 contributions.
INTERESTS OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
Many of the directors, executive officers and principal shareholders of the
Company (i.e., those who own 10% or more of the Common Stock) 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 many of the
directors, executive officers and principal shareholders of the Company and
their associates, all of which 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,
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<PAGE> 54
executive officers and principal shareholders of the Company are subject to
limitations contained in the Federal Reserve Act, the principal effect of which
is to require that extensions of credit by the Company to executive officers,
directors and principal shareholders satisfy the foregoing standards. On June
30, 1997, all of such loans aggregated $2.6 million, which was approximately
4.3% of the Company's Tier 1 capital at such date. The Company expects to have
such transactions or transactions on a similar basis with its directors,
executive officers and principal shareholders and their associates in the
future.
The Company leases space for its Houston Atrium 10 branch pursuant to a
lease agreement with Atrium 10 Tower, L.P., in which Stuart D. Saunders is an
11.5% limited partner and Meredith Saunders Mason, the daughter of Fredric M.
Saunders, is also an 11.5% limited partner. The lease agreement was entered into
on an arm's length basis on substantially the same terms as those prevailing at
the time for comparable transactions with unrelated persons.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of August 31, 1997, and as adjusted
to reflect the sale of the Common Stock offered hereby by (i) each director and
executive officer of the Company, (ii) each person who is known by the Company
to own beneficially 5% or more of the Common Stock and (iii) all directors and
executive officers as a group. Unless otherwise indicated, each person has sole
voting and dispositive power over the shares indicated as owned by such person
and the address of each shareholder is the same as the address of the Company.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY OWNED
NUMBER OF -----------------------------------
NAME SHARES BEFORE OFFERING AFTER OFFERING(1)
---- --------- --------------- -----------------
<S> <C> <C> <C>
L. Anderson Creel................................... 68,970(2) * % * %
James G. Dickson, Jr................................ 58,470(3) * *
Jerry S. Dominy..................................... 672,360(4) 7.61 3.85
E. J. Guzzo......................................... 522,390(5) 5.91 5.24
Steven H. Jackson................................... 69,390(6) * *
Walter L. Kopycinski................................ 49,170(7) * *
David Pasternak..................................... 555,000(8) 6.28 4.17
Fredric M. Saunders................................. 4,474,470(9) 50.62 36.19
Stuart D. Saunders.................................. 10,260(10) * *
C. C. Smitherman.................................... 120,000 1.36 *
James B. Wesley..................................... 30,000 * *
Directors and Executive Officers as a Group......... 6,630,480 73.74 51.76
</TABLE>
- ---------------
* Indicates ownership which does not exceed 1.0%
(1) Assumes (i) the issuance of 400,000 shares in the Offering and (ii) the
sale of shares by the Selling Shareholders. See table under "Selling
Shareholders" for the number of shares to be sold by each Selling
Shareholder.
(2) Includes 42,000 shares which may be acquired within 60 days pursuant to
outstanding stock options.
(3) Includes 27,000 shares which may be acquired within 60 days pursuant to
outstanding stock options.
(4) Includes 94,560 shares owned of record by the Dominy, Ford & Associates
Profit Sharing Plan, over which Mr. Dominy has sole voting and investment
power.
(5) Includes 273,000 shares owned of record by Guzzo Partners, Ltd., 870 shares
held by Prime Bank as custodian for Mr. Guzzo's individual retirement
account and 1,740 shares owned of record by Mr. Guzzo's two minor children.
Mr. Guzzo has sole voting and investment power over all of such shares.
(6) Includes 42,000 shares which may be acquired within 60 days pursuant to
outstanding stock options.
(7) Includes 42,000 shares which may be acquired within 60 days pursuant to
outstanding stock options.
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<PAGE> 55
(8) Consists of 195,360 shares owned of record by the David and Lillian
Pasternak Family Investment Partnership, Ltd., 115,800 shares owned by the
David Pasternak Grantor Retained Annuity Trust, and 243,840 shares owned by
the Lillian Pasternak Grantor Retained Annuity Trust. Mr. Pasternak has
shared voting and investment power over all of such shares.
(9) Consists of 3,150 shares held of record by the Stuart D. Saunders Trust #1
of which Gayle Saunders, the wife of Fredric M. Saunders, is the trustee,
3,150 shares held of record by the Meredith A. Saunders Mason Trust #1 of
which Gayle Saunders, the wife of Fredric M. Saunders, is the trustee and
4,468,170 shares held of record by Mission-Heights Management Company,
Ltd., a Texas limited partnership ("Mission-Heights"). Fredric M. Saunders
is the managing general partner of Mission-Heights and has sole voting and
investment power over the shares held by Mission-Heights.
(10) Consists of 3,900 shares held by the Stuart D. Saunders Trust #2 of which
Stuart D. Saunders is the trustee, 4,080 shares held of record by the
Chandler Elizabeth Mason 1992 Trust of which Stuart D. Saunders is the
trustee and 2,280 shares held of record by the Trevor James Mason 1994
Trust of which Stuart D. Saunders is the trustee.
SELLING SHAREHOLDERS
A total of 1,769,310 shares of Common Stock are being sold in the Offering
by Selling Shareholders. The Company and each of the Selling Shareholders have
entered into a Registration Agreement pursuant to which the Selling Shareholders
will bear the underwriting discount applicable to the shares sold by them, and
the Company and the Selling Shareholders 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 August
31, 1997, and as adjusted to reflect the sale of the Common Stock offered
hereby. 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. Dominy, Smitherman and
Pasternak have each been a director of the Company for more than three years.
Mr. Guzzo has been a director of the Company for more than three years and
became President of the Company in 1996. Mission-Heights Management Company,
Ltd. is a Texas limited partnership controlled by Mr. Fredric M. Saunders, who
has been a director of the Company for more than three years and has served as
Chairman of the Board since 1996, prior to which he held the title of President.
See "Management -- Directors and Executive Officers of the Company."
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
------------------------------------------------------------------
SHARES OWNED
-------------------------
NUMBER OF SHARES BEFORE AFTER PERCENT OWNED
NAME OF BENEFICIAL OWNERS(1) OFFERED(2) OFFERING OFFERING AFTER OFFERING(3)
---------------------------- ---------------- --------- ----------- -----------------
<S> <C> <C> <C> <C>
Mission-Heights Management Company,
Ltd............................... 1,125,000 4,468,170 3,343,170 36.19%
Jerry S. Dominy..................... 316,500 672,360 355,860 3.85
C. C. Smitherman.................... 120,000 120,000 -- --
E. J. Guzzo......................... 38,250 522,390 484,140 5.24
David Pasternak..................... 169,560 555,000 385,440 4.17
</TABLE>
- ---------------
(1) See the table under "Principal Shareholders" for information regarding the
form of beneficial ownership.
(2) If the over-allotment option is exercised, the number of shares offered will
be 1,293,750 by Mission-Heights Management Company, Ltd., 363,975 by Mr.
Dominy, 120,000 by Mr. Smitherman, 43,988 by Mr. Guzzo and 194,994 by Mr.
Pasternak.
(3) Assumes the issuance of 400,000 shares in the Offering by the Company.
54
<PAGE> 56
SUPERVISION AND REGULATION
The supervision and regulation of bank holding companies and their
subsidiaries is intended primarily for the protection of depositors, the deposit
insurance funds of the FDIC and the banking system as a whole, and not for the
protection of the bank holding company shareholders or creditors. The banking
agencies have broad enforcement power over bank holding companies and banks
including the power to impose substantial fines and other penalties for
violations of laws and regulations.
The following description summarizes some of the laws to which the Company
and the Bank are subject. References herein to applicable statutes and
regulations are brief summaries thereof, do not purport to be complete, and are
qualified in their entirety by reference to such statutes and regulations.
THE COMPANY
The Company is a bank holding company registered under the BHCA, and it is
subject to supervision, regulation and examination 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.
Regulatory Restrictions on Dividends; Source of Strength. 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.
Under Federal Reserve Board policy, a bank holding company is expected to
act as a source of financial strength to each of its banking subsidiaries and
commit resources to their support. Such support may be required at times when,
absent this Federal Reserve Board policy, a holding company may not be inclined
to provide it. As discussed below, a bank holding company in certain
circumstances could be required to guarantee the capital plan of an
undercapitalized banking subsidiary.
In the event of a bank holding company's bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is required
to cure immediately any deficit under any commitment by the debtor holding
company to any of the federal banking agencies to maintain the capital of an
insured depository institution, and any claim for breach of such obligation will
generally have priority over most other unsecured claims.
Activities "Closely Related" to Banking. The BHCA prohibits a bank holding
company, with certain limited exceptions, from acquiring direct or indirect
ownership or control of any voting shares of any company which is not a bank or
from engaging in any activities other than those of banking, managing or
controlling banks and certain other subsidiaries, or furnishing services to or
performing services for its subsidiaries. One principal exception to these
prohibitions allows the acquisition of interests in companies whose activities
are found by the Federal Reserve Board, by order or regulation, to be so closely
related to banking or managing or controlling banks, as to be a proper incident
thereto. Some of the activities that have been determined by regulation to be
closely related to banking are making or servicing loans, performing certain
data processing services, acting as an investment or financial advisor to
certain investment trusts and investment companies, and providing securities
brokerage services. Other activities approved by the Federal Reserve Board
include consumer financial counseling, tax planning and tax preparation, futures
and options advisory services, check guaranty services, collection agency and
credit bureau services, and personal property appraisals. In approving
acquisitions by bank holding companies of companies engaged in banking-related
activities, the Federal Reserve Board considers a number of factors, and weighs
the expected benefits to the public (such as greater convenience and increased
competition or gains in efficiency) against the risks of possible adverse
effects (such as undue concentration of resources, decreased or unfair
competition, conflicts of interest, or unsound
55
<PAGE> 57
banking practices). The Federal Reserve Board is also empowered to differentiate
between activities commenced de novo and activities commenced through
acquisition of a going concern.
Securities Activities. The Federal Reserve Board has approved applications
by bank holding companies to engage, through nonbank subsidiaries, in certain
securities-related activities (underwriting of municipal revenue bonds,
commercial paper, consumer receivable-related securities and one-to-four family
mortgage-backed securities), provided that the affiliates would not be
"principally engaged" in such activities for purposes of Section 20 of the
Glass-Steagall Act. In limited situations, holding companies may be able to use
such subsidiaries to underwrite and deal in corporate debt and equity
securities.
Safe and Sound Banking Practices. Bank holding companies are not permitted
to engage in unsafe and unsound banking practices. The Federal Reserve Board's
Regulation Y, for example, generally 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. Depending upon the circumstances, the Federal Reserve Board could
take the position that paying a dividend would constitute an unsafe or unsound
banking practice.
The Federal Reserve Board has broad 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, and can assess civil money penalties 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.
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.
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 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). Total capital is the sum of Tier 1 and Tier 2
capital. As of June 30, 1997, the Company's ratio of Tier 1 capital to total
risk-weighted assets was 13.74% and its ratio of total capital to total
risk-weighted assets was 14.92%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Capital Resources."
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. Certain highly-rated bank holding
companies may maintain a minimum leverage ratio of 3.0%, but other bank holding
companies may be required to maintain a leverage ratio of up to 200 basis points
above the regulatory minimum. As of June 30, 1997, the Company's leverage ratio
was 6.31%.
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.
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<PAGE> 58
Imposition of Liability for Undercapitalized Subsidiaries. Bank regulators
are required 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 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.
The aggregate liability of the holding company of 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 bank regulators have greater power in situations
where an institution becomes "significantly" or "critically" undercapitalized or
fails to submit a capital restoration plan. For example, a bank holding company
controlling such an institution can be required to obtain prior Federal Reserve
Board approval of proposed dividends, or might be required to consent to a
consolidation or to divest the troubled institution or other affiliates.
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 ownership
or control of any voting shares of any bank, if after such acquisition it would
own or control, directly or indirectly, more than 5% of the voting shares of
such bank. In approving bank acquisitions by bank holding companies, the Federal
Reserve Board is required to consider the financial and managerial resources and
future prospects of the bank holding company and the banks concerned, the
convenience and needs of the communities to be served, and various competitive
factors.
Control Acquisitions. The Change in Bank Control Act prohibits a person or
group of persons from acquiring "control" of a bank holding company unless the
Federal Reserve Board has been notified and has not objected to the transaction.
Under a rebuttable presumption established by the Federal Reserve Board, the
acquisition of 10% of more of a class of voting stock of a bank holding company
with a class of securities registered under Section 12 of the Exchange Act, such
as the Company, would, under the circumstances set forth in the presumption,
constitute acquisition of control of the Company.
In addition, any company is required to obtain the approval of the Federal
Reserve Board under the BHCA before acquiring 25% (5% in the case of an acquiror
that is a bank holding company) or more of the outstanding Common Stock of the
Company, or otherwise obtaining control or a "controlling influence" over the
Company.
THE BANK
The Bank is a Texas-chartered banking association, the deposits of which
are insured by the Bank Insurance Fund ("BIF") and the SAIF of the FDIC. The
Bank is not a member of the Federal Reserve System; therefore, the Bank is
subject to supervision and regulation by the FDIC and the Texas Banking
Department. Such supervision and regulation subjects the Bank to special
restrictions, requirements, potential enforcement actions and periodic
examination by the FDIC and the Texas Banking Department. Because the Federal
Reserve Board regulates the bank holding company parent of the Bank, the Federal
Reserve Board also has supervisory authority which directly affects the Bank.
Equivalence to National Bank Powers. The Texas Constitution, as amended in
1986, provides that a Texas-chartered bank has the same rights and privileges
that are or may be granted to national banks domiciled in Texas. To the extent
that the Texas laws and regulations may have allowed state-chartered banks to
engage in a broader range of activities than national banks, FDICIA has operated
to limit this authority. FDICIA provides that no state bank or subsidiary
thereof may engage as principal in any activity not permitted for national
banks, unless the institution complies with applicable capital requirements and
the FDIC determines that the activity poses no significant risk to the insurance
fund. In general, statutory restrictions on the activities of banks are aimed at
protecting the safety and soundness of depository institutions.
57
<PAGE> 59
Branching. Texas law provides that a Texas-chartered bank can establish a
branch anywhere in Texas provided that the branch is approved in advance by the
Texas Banking Department. The branch must also be approved by the FDIC, which
considers a number of factors, including financial history, capital adequacy,
earnings prospects, character of management, needs of the community and
consistency with corporate powers.
Restrictions on Transactions With Affiliates and Insiders. Transactions
between the Bank and its nonbanking subsidiaries, including the Company, are
subject to Section 23A of the Federal Reserve Act. In general, Section 23A
imposes limits on the amount of such transactions, and also requires certain
levels of collateral for loans to affiliated parties. It also limits the amount
of advances to third parties which are collateralized by the securities or
obligations of the Company or its subsidiaries.
Affiliate transactions are also subject to Section 23B of the Federal
Reserve Act which generally requires that certain transactions between the Bank
and its affiliates be on terms substantially the same, or at least as favorable
to the Bank, as those prevailing at the time for comparable transactions with or
involving other nonaffiliated persons.
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 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 a loan 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 FDIC may determine
that a lesser amount is appropriate. Insiders are subject to enforcement actions
for knowingly accepting loans in violation of applicable restrictions.
Restrictions on Distribution of Subsidiary Bank Dividends and Assets.
Dividends paid by the Bank have provided a substantial part of the Company's
operating funds and for the foreseeable future it is anticipated that dividends
paid by the Bank to the Company will continue to be the Company's principal
source of operating funds. Capital adequacy requirements serve to limit the
amount of dividends that may be paid by the Bank. Under federal law, the Bank
cannot pay a dividend if, after paying the dividend, the Bank will be
"undercapitalized." The FDIC may declare a dividend payment to be unsafe and
unsound even though the Bank would continue to meet its capital requirements
after the dividend.
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 an insured depository institution, the claims of
depositors and other general or subordinated creditors 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.
Examinations. The FDIC periodically examines and evaluates insured banks.
Based upon such an evaluation, the FDIC may revalue the assets of the
institution and require that it establish specific reserves to compensate for
the difference between the FDIC-determined value and the book value of such
assets. The Texas Banking Department also conducts examinations of state banks
but may accept the results of a federal examination in lieu of conducting an
independent examination.
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. In addition, financial statements prepared in accordance
with generally accepted accounting principles, management's certifications
concerning 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 relating to the internal
controls must be submitted. 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
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<PAGE> 60
with experience in banking or financial management, must have access to outside
counsel, and must not include representatives of large customers.
Capital Adequacy Requirements. The FDIC has adopted regulations
establishing minimum requirements for the capital adequacy of insured
institutions. The FDIC may establish higher minimum requirements if, for
example, a bank has previously received special attention or has a high
susceptibility to interest rate risk.
The FDIC's risk-based capital guidelines generally require state banks to
have a minimum ratio of Tier 1 capital to total risk-weighted assets of 4% and a
ratio of total capital to total risk-weighted assets of 8%. The capital
categories have the same definitions for the Bank as for the Company. As of June
30, 1997, the Bank's ratio of Tier 1 capital to total risk-weighted assets was
13.66% and its ratio of total capital to total risk-weighted assets was 14.85%.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operation of the Company -- Capital Resources."
The FDIC's leverage guidelines require state banks to maintain Tier 1
capital of no less than 5% of average total assets, except in the case of
certain highly rated banks for which the requirement is 3% of average total
assets. The Texas Banking Department has issued a policy which generally
requires state chartered banks to maintain a leverage ratio (defined in
accordance with federal capital guidelines) of 6%. As of June 30, 1997, the
Bank's ratio of Tier 1 capital to average total assets (leverage ratio) was
6.27%. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation of the Company -- Capital Resources."
Corrective Measures for Capital Deficiencies. The federal banking
regulators are required to take "prompt corrective action" with respect to
capital-deficient institutions. Agency regulations define, for each capital
category, the levels at which institutions are "well capitalized," "adequately
capitalized," "under capitalized," "significantly under capitalized" and
"critically under capitalized." A "well capitalized" bank has a total risk based
capital ratio of 10% or higher; a Tier 1 risk based capital ratio of 6% or
higher; a leverage ratio of 5% or higher; and is not subject to any written
agreement, order or directive requiring it to maintain a specific capital level
for any capital measure. An "adequately capitalized" bank has a total risk based
capital ratio of 8% or higher; a Tier 1 risk based capital ratio of 4% or
higher; a leverage ratio of 4% or higher (3% or higher if the bank was rated a
CAMEL 1 in its most recent examination report and is not experiencing
significant growth); and does not meet the criteria for a well capitalized bank.
A bank is "under capitalized" if it fails to meet any one of the ratios required
to be adequately capitalized.
In addition to requiring undercapitalized institutions to submit a capital
restoration plan, agency regulations contain broad restrictions on certain
activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment, and expansion into new lines of business.
With certain exceptions, an insured depository institution is prohibited from
making capital distributions, including dividends, and is prohibited from paying
management fees to control persons if the institution would be undercapitalized
after any such distribution or payment.
As an institution's capital decreases, the FDIC's enforcement powers become
more severe. A significantly undercapitalized institution is subject to mandated
capital raising activities, restrictions on interest rates paid and transactions
with affiliates, removal of management, and other restrictions. The FDIC has
only very limited discretion in dealing with a critically undercapitalized
institution and is virtually required to appoint a receiver or conservator.
Banks with risk-based capital and leverage ratios below the required
minimums may also be subject to certain administrative actions, including the
termination of deposit insurance upon notice and hearing, or a temporary
suspension of insurance without a hearing in the event the institution has no
tangible capital.
Deposit Insurance Assessments. The Bank must pay assessments to the FDIC
for federal deposit insurance protection. The FDIC has adopted a risk based
assessment system as required by FDICIA. Under this system, FDIC-insured
depository institutions pay insurance premiums at rates based on their risk
classification. Institutions assigned to higher-risk classifications (that is,
institutions that pose a greater risk of loss to their respective deposit
insurance funds) pay assessments at higher rates than institutions that pose a
lower risk. An institution's risk classification is assigned based on its
capital levels and the level of supervisory
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<PAGE> 61
concern the institution poses to the regulators. In addition, the FDIC can
impose special assessments in certain instances.
After the one-time SAIF assessment in 1996, the assessment rate disparity
between BIF and SAIF members was eliminated. The current range of BIF and SAIF
assessments is between 0% and .27% of deposits. Institutions which qualify for
the 0% assessment category such as the Bank do, however, still have to pay the
$1,000 minimum semi-annual assessment required by federal statute.
The FDIC established a process for raising or lowering all rates for
insured institutions semi-annually if conditions warrant a change. Under this
new system, the FDIC has the flexibility to adjust the assessment rate schedule
twice a year without seeking prior public comment, but only within a range of
five cents per $100 above or below the premium schedule adopted. Changes in the
rate schedule outside the five cent range above or below the current schedule
can be made by the FDIC only after a full rulemaking with opportunity for public
comment.
On September 30, 1996, President Clinton signed into law an act that
contained a comprehensive approach to recapitalizing the SAIF and to assure the
payment of the Financing Corporation's ("FICO") bond obligations. Under this new
act, banks insured under the BIF are required to pay a portion of the interest
due on bonds that were issued by FICO to help shore up the ailing Federal
Savings and Loan Insurance Corporation in 1987. The BIF rate must equal
one-fifth of the SAIF rate through year-end 1999, or until the insurance funds
are merged, whichever occurs first. Thereafter BIF and SAIF payers will be
assessed pro rata for the FICO bond obligations. With regard to the assessment
for the FICO obligation, the current BIF rate is .0126% of deposits and the SAIF
rate is .0630% of deposits.
Enforcement Powers. The FDIC and the other federal banking agencies have
broad enforcement powers, including the power to terminate deposit insurance,
impose substantial fines and other civil and criminal penalties and appoint a
conservator or receiver. Failure to comply with applicable laws, regulations and
supervisory agreements could subject the Company or its banking subsidiaries, as
well as officers, directors and other institution-affiliated parties of these
organizations, to administrative sanctions and potentially substantial civil
money penalties. 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. The Texas
Banking Department also has broad enforcement powers over the Bank, including
the power to impose orders, remove officers and directors, impose fines and
appoint supervisors and conservators.
Brokered Deposit Restrictions. Adequately capitalized institutions cannot
accept, renew or roll over brokered deposits except with a waiver from the FDIC,
and are subject to restrictions on the interest rates that can be paid on such
deposits. Undercapitalized institutions may not accept, renew, or roll over
brokered deposits.
Cross-Guarantee Provisions. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee" provision which
generally makes commonly controlled insured depository institutions liable to
the FDIC for any losses incurred in connection with the failure of a commonly
controlled depository institution.
Community Reinvestment Act. The Community Reinvestment Act of 1977 ("CRA")
and the regulations issued thereunder are intended to encourage banks to help
meet the credit needs of their service area, including low and moderate income
neighborhoods, consistent with the safe and sound operations of the banks. These
regulations also provide for regulatory assessment of a bank's record in meeting
the needs of its service area when considering applications to establish
branches, merger applications and applications to acquire the assets and assume
the liabilities of another bank. FIRREA requires federal banking agencies to
make public a rating of a bank's performance under the CRA. In the case of a
bank holding company, the CRA performance record of the banks involved in the
transaction are reviewed in connection with the filing of
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an application to acquire ownership or control of shares or assets of a bank or
to merge with any other bank holding company. An unsatisfactory record can
substantially delay or block the transaction.
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 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.
INSTABILITY OF REGULATORY STRUCTURE
Various legislation, including proposals to overhaul the bank regulatory
system, expand the powers of banking institutions and bank holding companies and
limit the investments that a depository institution may make with insured funds,
is from time to time introduced in Congress. Such legislation may change banking
statutes and the operating environment of the Company and its banking
subsidiaries in substantial and unpredictable ways. The Company cannot determine
the ultimate effect that potential legislation, if enacted, or implementing
regulations with respect thereto, would have upon the financial condition or
results of operations of the Company or its subsidiaries.
EXPANDING ENFORCEMENT AUTHORITY
One of the major additional burdens imposed on the banking industry by
FDICIA is the increased ability of banking regulators to monitor the activities
of banks and their holding companies. In addition, the Federal Reserve Board and
FDIC are possessed of 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. FDICIA, FIRREA and other laws have expanded the agencies' authority in
recent years, and the agencies have not yet fully tested the limits of their
powers.
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
AUTHORIZED CAPITAL STOCK
The authorized capital stock of the Company consists of (i) 15,000,000
shares of preferred stock, $1.00 per share par value ("Preferred Stock"),
issuable in series, 6,000,000 shares of which are designated Series A Preferred
Stock, all of which are issued and outstanding and 1,250,000 shares of which are
designated Series B 10% Non-Cumulative Preferred Stock ("Series B Preferred
Stock"), 1,000,000 of which shares are outstanding and (ii) 50,000,000 shares of
Common Stock, $.25 per share par value, of which 12,010,980 shares were issued
and 8,839,020 shares were outstanding as of June 30, 1997. The terms of any new
series of preferred stock may be fixed by the Board of Directors of the Company
within certain limits set by the Company's Articles of Incorporation. As of June
30, 1997, an additional 600,000 shares of Common Stock were issuable upon
exercise of the Company's outstanding employee and director incentive stock
options.
The following discussion of the terms and provisions of the Company's
capital stock is qualified in its entirety by reference to the Company's
Articles of Incorporation and Bylaws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part.
PREFERRED STOCK
The Company is authorized to issue 15,000,000 shares of Preferred Stock.
The Preferred Stock (or other securities convertible in whole or in part into
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 (or such convertible securities) 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 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;
(vi) voting rights; and
(vii) such other powers, preferences and rights as the Board of
Directors shall determine.
The Company has issued and outstanding 6,000,000 shares of Series A
Preferred Stock and 1,000,000 shares of Series B Preferred Stock (the Series A
Preferred Stock and Series B Preferred Stock being sometimes collectively
referred to as the "Outstanding Preferred Stock"). Dividends on both Series A
and B Preferred Stock aggregate 10% of par value per annum, payable quarterly.
Dividends with respect to the Outstanding Preferred Stock are not cumulative.
Accordingly, the Board of Directors of the Company has no
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obligation to declare and pay dividends with respect to the Outstanding
Preferred Stock except as expressly provided in the Articles of Incorporation or
as provided by law. Pursuant to the terms of each of the Series A Preferred
Stock and the Series B Preferred Stock, however, the Company may not declare or
pay a dividend with respect to the Common Stock unless the Company also declares
and pays a dividend with respect to the Series A and B Preferred Stock for the
quarter during which such dividend is to be declared or paid with respect to the
Common Stock. The Outstanding Preferred Stock has no voting rights. The Series A
Preferred Stock is redeemable at any time at the option of the Company at the
$1.00 liquidation value of the shares plus all declared but unpaid dividends
thereon to the date fixed for redemption. The Series B Preferred Stock is
redeemable at any time after January 1, 1998 at the option of the Company at the
$1.00 liquidation value of the shares plus all declared but unpaid dividends
thereon, except that the per share redemption price (exclusive of declared and
unpaid dividends) for shares redeemed after January 1, 1998 but on or before
January 1, 1999 is $1.02, and the per share redemption price for shares redeemed
after January 1, 1999 but on or before January 1, 2000 is $1.01. In the event of
the liquidation, dissolution or winding up of the affairs of the Company, prior
to any distribution or payment to the holders of Common Stock or any other class
of stock of the Company ranking junior to the Outstanding Preferred Stock,
holders of the Outstanding Preferred Stock shall be entitled to be paid in full
the $1.00 liquidation value of the shares plus all declared but unpaid dividends
thereon to the date of payment. The Company plans to redeem the Series A
Preferred Stock after the closing of the Offering.
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. Under the Texas Business Corporation Act ("TBCA"), shareholder
approval prior to the issuance of shares 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
Board of Directors does not intend to issue any shares of Common Stock or
Preferred Stock except on terms which the Board of Directors deems to be in the
best interests of the Company and its then existing shareholders.
Although the Preferred Stock could be deemed to have an anti-takeover
effect, the Board of Directors is not aware of any takeover efforts. 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. Holders of
Common Stock have no preemptive rights to purchase or otherwise acquire any
Preferred Stock that may be issued.
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 by the Board of Directors on any shares of
Preferred Stock issued, 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 for or acquire shares of the
Company.
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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 have been declared and paid on outstanding Preferred Stock for
the current dividend period and, with respect to any outstanding cumulative
preferred stock, all past dividend periods. See "Risk Factors -- Restrictions on
Ability to Pay Dividends" 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.
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 Company is subject to the provisions of the Texas Business Combination
Law (Articles 13.01 through 13.08 of the TBCA), which provides that a Texas
corporation such as the Company may not engage in certain business combinations,
including mergers, consolidations and asset sales, with a person, or an
affiliate or associate of such person, who is an "Affiliated Shareholder"
(generally defined as the holder of 20% or more of the corporation's voting
shares) for a period of three years from the date such person became an
Affiliated Shareholder unless: (i) the business combination or purchase or
acquisition of shares made by the Affiliated Shareholder was approved by the
board of directors of the corporation before the Affiliated Shareholder became
an Affiliated Shareholder or (ii) the business combination was approved by the
affirmative vote of the holders of at least two-thirds of the outstanding voting
shares of the corporation not beneficially owned by the Affiliated Shareholder,
at a meeting of shareholders called for that purpose (and not by written
consent), not less than six months after the Affiliated Shareholder became an
Affiliated Shareholder. The Texas Business Combination Law is not applicable to:
(i) the business combination of a corporation: (a) where the corporation's
original charter or bylaws contain a provision expressly electing not to be
governed by the Texas Business Combination Law, (b) that adopts an amendment to
its charter or bylaws before December 31, 1997, expressly electing not to be
governed by the Texas Business Combination Law, or (c) that adopts an amendment
to its charter or bylaws after December 31, 1997, by the affirmative vote of the
holders, other than Affiliated Shareholders, of at least two-thirds of the
outstanding voting shares of the corporation, expressly electing not to be
governed by the Texas Business Combination Law; (ii) a business combination of a
corporation with an Affiliated Shareholder that became an Affiliated Shareholder
inadvertently, if the Affiliated Shareholder: (a) as soon as practicable divests
itself of enough shares to no longer be an Affiliated Shareholder and (b) would
not at any time within the three year period preceding the announcement of the
business combination have been an Affiliated Shareholder but for the inadvertent
acquisition; (iii) a business combination with an Affiliated Shareholder that
was the beneficial owner of 20% or more of the outstanding voting shares of the
corporation on December 31, 1996, and continuously until the announcement date
of the business combination; (iv) a business combination with an Affiliated
Shareholder who became an Affiliated Shareholder through a transfer of shares of
the corporation by will or intestate succession and continuously was such an
Affiliated Shareholder until the announcement date of the business combination;
and (v) a business combination of a corporation with a wholly owned subsidiary
if the subsidiary is not an affiliate or associate of the Affiliated Shareholder
other than by reason of the Affiliated Shareholder's beneficial ownership of the
voting shares of the corporation. Neither the Articles of Incorporation nor the
Bylaws of the Company contain any provision expressly providing that the Company
will not be subject to the Texas Business Combination Law. The Texas Business
Combination Law may have the effect of inhibiting a non-negotiated merger or
other business combination involving the Company, even if such event would be
beneficial to the Company's shareholders.
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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 tenth day after
public announcement of the date of such meeting is first made). Notwithstanding
the foregoing, in the event that the number of directors to be elected is
increased and there is no public announcement naming all of the nominees for
director or specifying the size of the increased 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 tenth 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 provide
that special meetings of shareholders can be called by shareholders only at the
request of the holders of not less than one-half of the outstanding shares of
stock entitled to vote at the meeting.
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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 and present or
represented by proxy at the meeting, 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 TBCA, 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 Bylaws.
UNDERWRITING
Subject to the terms and conditions of the Purchase Agreement among the
Company, the Selling Shareholders and the Representatives, on behalf of the
Underwriters, the Underwriters named below 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.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---- ----------------
<S> <C>
Keefe, Bruyette & Woods, Inc................................
Legg Mason Wood Walker, Incorporated........................
---------
2,169,310
=========
</TABLE>
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 and certain of the Selling
Shareholders have granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 325,397
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 and
each such Selling Shareholder granting such option 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
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Representatives of the Underwriters, except that the Company may issue shares of
Common Stock upon the exercise of currently outstanding options. See "Risk
Factors -- Restrictions on Future Sale of Shares."
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.
Until the distribution of the Common Stock is completed, rules of the
Commission (as defined herein) may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., if they sell a greater aggregate number of
shares of Common Stock than is set forth on the cover page of this Prospectus,
the Underwriters may reduce the short position by purchasing shares of Common
Stock in the open market. The Underwriters may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
The Underwriters may also impose a penalty bid on certain selling group
members. This means that if the Underwriters purchase Common Stock in the open
market to reduce the selling group members' short position or to stabilize the
price of the Common Stock, they may reclaim the amount of the selling concession
from the selling group members who sold those shares of Common Stock as part of
the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor the Representatives make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor the Representatives make any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Underwriters and dealers may engage in passive market making
transactions in the shares of Common Stock in accordance with Rule 103 of
Regulation M promulgated by the Commission. In general, a passive market maker
may not bid for, or purchase, shares of Common Stock at a price that exceeds the
highest independent bid. In addition, the net daily purchases made by any
passive market maker generally may not exceed 30% of its average daily trading
volume in the Common Stock during a specified two month prior period, or 200
shares, whichever is greater. A passive market maker must identify passive
market making bids as such on the Nasdaq electronic inter-dealer reporting
system. Passive market making may stabilize or maintain the market price of the
Common Stock above independent market levels. Underwriters and dealers are not
required to engage in passive market making and may end passive market making
activities at any time.
Prior to the 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
securities market, the
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market conditions for new issues of securities and the demand for securities of
comparable companies at the time the Offering was made.
Application has been made for quotation of the Common Stock on the
Nasdaq/National Market.
LEGAL MATTERS
The validity of the shares of Common Stock to be issued by the Company will
be passed upon by Bracewell & Patterson, L.L.P., Houston, Texas. 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 sheets of the Company as of December 31, 1996 and
1995 and the related consolidated Statements of Earnings, Shareholders' Equity,
and Cash Flows for each of the three years in the period ended December 31,
1996, have been included in this Prospectus in reliance upon the reports of
Grant Thornton LLP, independent certified public accountants, given on the
authority of said 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.
68
<PAGE> 70
TABLE OF CONTENTS TO FINANCIAL STATEMENTS
PRIME BANCSHARES, INC.
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Consolidated Balance Sheet as of June 30, 1997 (Unaudited)
and December 31, 1996 and 1995............................ F-3
Consolidated Statement of Earnings for the Six Months Ended
June 30, 1997 (Unaudited) and June 30, 1996 (Unaudited)
and for the Years Ended December 31, 1996, 1995 and
1994...................................................... F-4
Consolidated Statement of Changes in Shareholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994 and
for the Six Months Ended June 30, 1997 (Unaudited)........ F-5
Consolidated Statement of Cash Flows for the Six Months
Ended June 30, 1997 (Unaudited) and June 30, 1996
(Unaudited) and for the Years Ended December 31, 1996,
1995 and 1994............................................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 71
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Prime Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of Prime
Bancshares, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of earnings, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the 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 financial position of Prime Bancshares, Inc. and
Subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Effective January 1, 1994, Prime Bancshares, Inc. and Subsidiaries adopted
Statement of Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities.
GRANT THORNTON LLP
Houston, Texas
January 24, 1997 (except for the
first paragraph of Note H,
as to which the date is
August 4, 1997)
F-2
<PAGE> 72
PRIME BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------
1997 1996 1995
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents
Cash and due from banks................................. $ 40,696 $ 34,006 $ 32,854
Federal funds sold and other temporary investments...... 31,245 -- 2,050
-------- -------- --------
Total cash and cash equivalents................. 71,941 34,006 34,904
Securities
Available-for-sale...................................... 252,474 324,723 377,837
Held-to-maturity........................................ 213,347 115,902 96,074
-------- -------- --------
Total securities................................ 465,821 440,625 473,911
Loans, net................................................ 378,628 306,857 226,512
Premises and equipment, net............................... 14,776 9,761 9,580
Accrued interest receivable............................... 7,061 6,453 8,922
Other assets.............................................. 9,762 3,753 4,508
-------- -------- --------
$947,989 $801,455 $758,337
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing.................................. $151,049 $117,441 $109,797
Interest-bearing deposits............................ 727,691 577,729 584,368
-------- -------- --------
Total deposits.................................. 878,740 695,170 694,165
Federal funds purchased and securities sold under
repurchase agreements................................ 100 9,700 --
Other liabilities....................................... 3,815 34,616 5,842
-------- -------- --------
Total liabilities............................... 882,655 739,486 700,007
Commitments and contingencies............................. -- -- --
Shareholders' equity
Preferred stock......................................... 7,000 7,000 7,000
Common stock............................................ 3,003 2,980 2,943
Additional capital...................................... 3,955 3,824 3,721
Retained earnings....................................... 54,665 50,113 42,768
Net unrealized appreciation of available-for-sale
securities, net of tax of $516, $997 and $2,656...... 1,001 1,934 5,154
-------- -------- --------
69,624 65,851 61,586
Less common stock held in treasury -- at cost........... 4,290 3,882 3,256
-------- -------- --------
65,334 61,969 58,330
-------- -------- --------
$947,989 $801,455 $758,337
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 73
PRIME BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------- YEAR ENDED DECEMBER 31,
JUNE 30, JUNE 30, ---------------------------
1997 1996 1996 1995 1994
-------- -------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income
Loans........................................ $16,002 $11,325 $24,673 $19,357 $13,826
Securities................................... 15,311 15,065 28,722 34,514 23,809
Federal funds sold and other temporary
investments............................... 545 173 420 1,439 519
------- ------- ------- ------- -------
Total interest income................ 31,858 26,563 53,815 55,310 38,154
Interest expense............................... 14,541 11,931 23,741 27,141 14,542
------- ------- ------- ------- -------
Net interest income.................. 17,317 14,632 30,074 28,169 23,612
Provision for loan losses...................... 525 596 1,246 1,510 580
------- ------- ------- ------- -------
Net interest income after provision
for loan losses.................... 16,792 14,036 28,828 26,659 23,032
Noninterest income
Service charges.............................. 3,378 3,084 6,319 6,106 5,870
Gain on sale of branches..................... -- -- -- 2,445 --
Other operating income....................... 908 1,018 1,973 1,787 1,338
------- ------- ------- ------- -------
Total noninterest income............. 4,286 4,102 8,292 10,338 7,208
Noninterest expense
Employee compensation and benefits........... 7,984 6,412 13,070 12,887 9,820
Net bank premises expense.................... 618 584 1,246 1,262 1,032
Equipment rentals, depreciation and
maintenance............................... 616 394 975 1,000 899
Net realized losses on available-for-sale
securities................................ -- -- -- 9 139
Other operating expenses..................... 3,473 2,843 7,765 7,952 6,454
------- ------- ------- ------- -------
Total noninterest expenses........... 12,691 10,233 23,056 23,110 18,344
------- ------- ------- ------- -------
Earnings before income taxes......... 8,387 7,905 14,064 13,887 11,896
Provision for income taxes
Current...................................... 3,106 2,880 5,174 5,360 4,180
Deferred benefit............................. (212) (185) (332) (525) (132)
------- ------- ------- ------- -------
2,894 2,695 4,842 4,835 4,048
------- ------- ------- ------- -------
NET EARNINGS......................... $ 5,493 $ 5,210 $ 9,222 $ 9,052 $ 7,848
======= ======= ======= ======= =======
Earnings per common and common equivalent
share........................................ $ .56 $ .53 $ .92 $ .89 $ .79
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 74
PRIME BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE SIX MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS)
ON SECURITIES COMMON TOTAL
PREFERRED COMMON ADDITIONAL RETAINED AVAILABLE- STOCK IN SHAREHOLDERS'
STOCK STOCK CAPITAL EARNINGS FOR-SALE TREASURY EQUITY
--------- ------ ---------- -------- -------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994..... $ 1,803 $2,943 $3,748 $28,303 $ -- $(1,906) $34,891
Unrealized gain from initial
adoption of Statement 115
effective January 1, 1994,
net of tax of $1,340......... -- -- -- -- 2,600 -- 2,600
Redemption of preferred
stock........................ (1,803) -- -- -- -- -- (1,803)
Sale of preferred stock........ 6,000 -- -- -- -- -- 6,000
Stock issuance costs........... -- -- (27) -- -- -- (27)
Dividends...................... -- -- -- (564) -- -- (564)
Net change in unrealized gain
(loss) on securities
available-for-sale, net of
tax of $1,085................ -- -- -- -- (2,106) -- (2,106)
Net earnings for the year...... -- -- -- 7,848 -- -- 7,848
------- ------ ------ ------- ------- ------- -------
Balance at December 31, 1994... 6,000 2,943 3,721 35,587 494 (1,906) 46,839
Purchase of treasury stock..... -- -- -- -- -- (100) (100)
Exchange common stock for
series B preferred stock..... 1,250 -- -- -- -- (1,250) --
Redemption of preferred
stock........................ (250) -- -- -- -- -- (250)
Dividends...................... -- -- -- (1,871) -- -- (1,871)
Net change in unrealized gain
(loss) on available-for-sale
securities, net of tax of
$2,401....................... -- -- -- -- 4,660 -- 4,660
Net earnings for the year...... -- -- -- 9,052 -- -- 9,052
------- ------ ------ ------- ------- ------- -------
Balance at December 31, 1995... 7,000 2,943 3,721 42,768 5,154 (3,256) 58,330
Purchase of treasury stock..... -- -- -- -- -- (626) (626)
Sale of common stock........... -- 37 103 -- -- -- 140
Dividends...................... -- -- -- (1,877) -- -- (1,877)
Net change in unrealized gain
(loss) on available-for-sale
securities, net of tax of
$1,659....................... -- -- -- -- (3,220) -- (3,220)
Net earnings for the year...... -- -- -- 9,222 -- -- 9,222
------- ------ ------ ------- ------- ------- -------
Balance at December 31, 1996... 7,000 2,980 3,824 50,113 1,934 (3,882) 61,969
Purchase of treasury stock
(unaudited).................. -- -- -- -- -- (408) (408)
Sale of common stock
(unaudited).................. -- 23 131 -- -- -- 154
Dividends (unaudited).......... -- -- -- (941) -- -- (941)
Net change in unrealized gain
(loss) on securities
available-for-sale, net of
tax of $481 (unaudited)...... -- -- -- -- (933) -- (933)
Net earnings (unaudited)....... -- -- -- 5,493 -- -- 5,493
------- ------ ------ ------- ------- ------- -------
Balance at June 30, 1997
(unaudited).................. $ 7,000 $3,003 $3,955 $54,665 $ 1,001 $(4,290) $65,334
======= ====== ====== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE> 75
PRIME BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------- YEAR ENDED DECEMBER 31,
JUNE 30, JUNE 30, -------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net earnings.............................................. $ 5,493 $ 5,210 $ 9,222 $ 9,052 $ 7,848
Adjustments to reconcile net earnings to net cash provided
(used) by operating activities
Depreciation............................................ 844 495 1,218 1,380 1,087
Amortization of premiums, net of (accretion) of
discounts on securities............................... (340) (372) (780) (81) 2,280
Net realized loss on available-for-sale securities...... -- -- -- 9 139
Provision for loan losses............................... 525 596 1,246 1,510 580
Write-down of other assets.............................. -- -- 50 155 110
(Gain) loss on sale of premises, equipment and other
real estate........................................... -- 14 (210) 8 (252)
Gain on sale of certain branch assets and liabilities... -- -- -- (2,445) --
Change in assets and liabilities, net of effects
resulting from the acquisition of a bank, and the
purchase and sale of certain branch assets and
liabilities
(Increase) decrease in accrued interest receivable.... (289) 291 2,469 1,572 (4,496)
Decrease (increase) in prepaid and other assets....... 1,161 726 23 (1,106) (676)
(Decrease) increase in other liabilities.............. (30,628) 2,649 (68) 1,198 240
-------- -------- -------- -------- ---------
Net cash (used) provided by operating activities.... (23,234) 9,609 13,170 11,252 6,860
Cash flows from investing activities
Purchases of held-to-maturity securities.................. (93,268) -- -- (18,589) (243,782)
Proceeds from sales and maturities of available-for-sale
securities.............................................. 84,263 64,089 122,607 97,387 4,858
Purchases of available-for-sale securities................ -- (45,326) (73,224) (20,226) (87,235)
Proceeds from maturities of held-to-maturity securities... -- -- 10,176 80,017 79,174
Increase in loans, net of the effects resulting from the
acquisition of a bank, and the purchase and sale of
certain branch assets
and liabilities......................................... (32,831) (36,962) (81,591) (36,257) (44,226)
Purchases of premises and equipment....................... (733) (432) (1,449) (1,703) (1,349)
Proceeds from sale of premises, equipment and other real
estate.................................................. 4 -- 1,071 43 796
Net decrease in cash resulting from the acquisition of a
bank.................................................... (5,805) -- -- -- --
Net increase in cash resulting from acquisition of certain
branch assets and the assumption of certain
liabilities............................................. 96,502 -- -- -- 278,979
Net decrease in cash resulting from the sale of certain
branch assets and liabilities........................... -- -- -- (72,759) --
-------- -------- -------- -------- ---------
Net cash provided (used) by investing activities.... 48,132 (18,631) (22,410) 27,913 (12,785)
Cash flows from financing activities
Change in deposits, net of the effects resulting from the
acquisition of a bank, and the purchase and sale of
certain branch assets and liabilities................... 23,832 6,219 1,005 (42,208) 13,821
Change in federal funds purchased and securities sold
under repurchase agreements............................. (9,600) -- 9,700 -- --
Purchase of treasury stock................................ (408) (613) (613) (100) --
Redemption of preferred stock............................. -- -- -- (250) (1,803)
Sale of preferred stock................................... -- -- -- -- 6,000
Stock issuance cost....................................... -- -- -- -- (27)
Sale of common stock...................................... 154 128 127 -- --
Dividends paid............................................ (941) (940) (1,877) (1,871) (564)
-------- -------- -------- -------- ---------
Net cash provided (used) by financing activities.... 13,037 4,794 8,342 (44,429) 17,427
-------- -------- -------- -------- ---------
Net increase (decrease) in cash and cash
equivalents....................................... 37,935 (4,228) (898) (5,264) 11,502
Cash and cash equivalents at beginning of period............ 34,006 34,904 34,904 40,168 28,666
-------- -------- -------- -------- ---------
Cash and cash equivalents at end of period.................. $ 71,941 $ 30,676 $ 34,006 $ 34,904 $ 40,168
======== ======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 76
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
IS UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements follow.
1. GENERAL
The Bank operates nineteen branches in Southeast and Central Texas. The
Bank's primary sources of revenue are derived from investing in various United
States Treasury and Agency securities and granting loans primarily to customers
in Southeast and Central Texas. Although the Bank has a diversified loan
portfolio, a substantial portion of its debtors' ability to honor their
contracts is dependent on the economies in those areas.
2. PRINCIPLES OF CONSOLIDATION AND INVESTMENT IN SUBSIDIARIES
The consolidated financial statements include the accounts of the Parent
and its wholly-owned subsidiaries, IBID, Inc. (IBID) and Prime Bank (the Bank)
(collectively referred to as the Company). All significant intercompany
transactions and balances have been eliminated in the consolidated report of the
Company.
3. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
4. SECURITIES
Effective January 1, 1994, the Bank adopted Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt
and Equity Securities (Statement 115). At the date of purchase, the Bank 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. Investments not classified as either
held-to-maturity or trading are classified as available-for-sale and measured at
fair value in the financial statements with unrealized gains and losses
reported, net of tax, in a separate component of shareholders' equity until
realized.
Gains and losses on the sale of securities are determined using the
specific-identification method.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their carrying value that are other than
temporary result in write-downs of the individual securities to their fair
value. The related write-downs are included in earnings as realized losses.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
Government notes and mortgage-backed securities for which the Bank has the
positive intent and ability to hold to maturity are reported at cost, adjusted
for premiums and discounts that are recognized in interest income using the
interest method over the period to maturity.
F-7
<PAGE> 77
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
IS UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
5. LOANS
Loans are reported at the principal amount outstanding, net of charge-offs,
unearned discounts, purchase discounts and an allowance for loan losses.
Unearned discounts on installment loans are recognized using a method which
approximates a level yield over the term of the loans. Interest on other loans
is calculated using the simple interest method on the daily balance of the
principal amount outstanding.
Effective January 1, 1995, the Company has adopted 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 identified as impaired when it is probable that
interest and principal will not be collected according to the contractual terms
of the loan agreement. The accrual of interest on impaired loans is discontinued
when, in management's opinion, the borrower may be unable to meet payments as
they become due. All loans past due 90 days are placed on nonaccrual status
unless the loan is both well-secured and in the process of collection. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received. Loans are not again placed on accrual status until payments are
brought current and, in management's judgment, the loan will continue to pay as
agreed.
6. ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for credit
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that collectibility of the principal is
unlikely.
The allowance is an amount that management believes will be adequate to
absorb losses inherent in existing loans and commitments to extend credit, based
on evaluations of the collectibility and prior loss experience of loans and
commitments to extend credit. The evaluations take into consideration such
factors as changes in the nature and volume of the portfolio, overall portfolio
quality, loan concentrations, specific problem loans and current and anticipated
economic conditions that may affect the borrower's ability to pay.
7. BANK PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided on the straight-line basis over the estimated useful
life of each type of asset.
8. OTHER REAL ESTATE
Real estate acquired is recorded at fair value at the date of foreclosure
or acquisition, establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the lower
of carrying amount or fair value less cost to sell. Operating expenses of such
properties, net of related income, and gains and losses on their disposition are
included in other expenses.
9. INCOME TAXES
The Company files a consolidated Federal income tax return. By agreement
with the Parent, the Bank records a provision or benefit for Federal income
taxes on the same basis as if it filed a separate Federal income tax return. The
asset and liability method of accounting is used for income taxes where deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. When management
determines that it is more likely than not that a deferred tax asset will not be
realized, a valuation
F-8
<PAGE> 78
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
IS UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
allowance must be established. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
10. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Earnings per common and common equivalent share is calculated by dividing
net income available for common shareholders by the weighted average number of
common shares and common share equivalents. Stock options are regarded as common
share equivalents and are therefore considered in earnings per share
calculations, if dilutive. Options granted within one year of the initial public
offering (IPO) have been treated as outstanding for all periods as a component
of weighted average common share equivalents. The number of common share
equivalents is determined using the treasury stock method.
11. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, the Bank enters into off-balance-sheet
financial instruments consisting of commitments to extend credit, commercial
letters of credit and standby letters of credit. Such financial instruments are
recorded in the financial statements when they are funded or related fees are
incurred or received.
12. USE OF ESTIMATES
In preparing the financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
13. RECLASSIFICATIONS
Certain reclassifications have been made to conform to the 1996
presentation.
14. INTERIM FINANCIAL INFORMATION
Financial information as of June 30, 1997 and for the six months ended June
30, 1997 and June 30, 1996, included herein, is unaudited. Such information
includes all adjustments (consisting only of normal recurring adjustments),
which are, in the opinion of management, necessary for a fair statement of the
financial information in the interim periods. The results of operations for the
six months ended June 30, 1997 and June 30, 1996 are not necessarily indicative
of the results for the full fiscal year.
F-9
<PAGE> 79
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
IS UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE B -- SECURITIES
The securities have been classified in the consolidated balance sheets
according to management's intent. The carrying amount of securities and their
approximate fair values are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
June 30, 1997 (unaudited):
U. S. Treasury securities........... $208,364 $2,167 $ 29 $210,502
Mortgage-backed securities.......... 42,316 18 399 41,935
Other............................... 37 -- -- 37
-------- ------ ------ --------
$250,717 $2,185 $ 428 $252,474
======== ====== ====== ========
December 31, 1996:
U. S. Treasury securities........... $275,781 $3,432 $ 77 $279,136
Mortgage-backed securities.......... 45,728 40 218 45,550
Other............................... 37 -- -- 37
-------- ------ ------ --------
$321,546 $3,472 $ 295 $324,723
======== ====== ====== ========
December 31, 1995:
U. S. Treasury securities........... $369,747 $8,161 $ 108 $377,800
Other............................... 37 -- -- 37
-------- ------ ------ --------
$369,784 $8,161 $ 108 $377,837
======== ====== ====== ========
HELD-TO-MATURITY SECURITIES:
June 30, 1997 (unaudited):
U.S. Treasury securities............ $ 66,471 $ 334 $ -- $ 66,805
Mortgage-backed securities.......... 146,876 84 2,074 144,886
-------- ------ ------ --------
$213,347 $ 418 $2,074 $211,691
======== ====== ====== ========
December 31, 1996:
Mortgage-backed securities.......... $115,902 $ 68 $1,661 $114,309
======== ====== ====== ========
December 31, 1995:
Mortgage-backed securities.......... $ 96,074 $ 103 $ 941 $ 95,236
======== ====== ====== ========
</TABLE>
There were no gross realized gains on sales of available-for-sale
securities for the period ended June 30, 1997, June 30, 1996, December 31, 1996,
December 31, 1995, and December 31, 1994. Gross realized losses on sales of
available-for-sale securities were $0, $0, $0, $9, and $139 for the period ended
June 30, 1997, June 30, 1996, December 31, 1996, December 31, 1995, and December
31, 1994.
The following table shows the maturity distribution of the investment
portfolio at December 31, 1996:
<TABLE>
<CAPTION>
HELD-TO-MATURITY SECURITIES AVAILABLE-FOR-SALE SECURITIES
---------------------------- ------------------------------
AMORTIZED COST FAIR VALUE AMORTIZED COST FAIR VALUE
-------------- ---------- --------------- -----------
<S> <C> <C> <C> <C>
Due in one year or less........... $ -- $ -- $127,870 $128,477
Due from one year to five years... -- -- 147,911 150,659
Mortgage-backed securities........ 115,902 114,309 45,765 45,587
-------- -------- -------- --------
$115,902 $114,309 $321,546 $324,723
======== ======== ======== ========
</TABLE>
F-10
<PAGE> 80
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
IS UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE B -- SECURITIES -- (CONTINUED)
Securities with an aggregate book value of approximately $165,542, $145,811
and $143,189 at June 30, 1997, December 31, 1996 and December 31, 1995,
respectively, were pledged as collateral to secure public deposits.
During 1995, the Bank transferred from held-to-maturity to
available-for-sale, securities with an amortized cost of $339,753 and net
unrealized gains of $6,166 at the date of transfer. The transfer was made in
light of pending branch sales to maintain the Bank's interest risk rate
position.
The Bank entered into a securities lending agreement whereby certain
securities owned by the Bank are exchanged for a few days for substantially
identical securities. The Bank had exchanged securities with market values
totaling $112,329, $97,978 and $98,013 at June 30, 1997, December 31, 1996 and
December 31, 1995, respectively.
NOTE C -- LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1996 1995
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Commercial.................................... $ 40,671 $ 27,611 $ 21,017
Real estate
Construction................................ 24,788 17,470 10,423
1-4 family residential...................... 67,443 51,544 37,494
Commercial mortgage......................... 94,797 77,220 50,450
Other....................................... 5,248 5,088 4,365
Consumer...................................... 154,304 135,979 111,070
Overdrafts.................................... 167 125 120
-------- -------- --------
387,418 315,037 234,939
Less:
Unearned discounts.......................... 3,156 3,221 3,726
Allowance for loan losses................... 5,111 4,436 3,660
Purchase discounts.......................... 523 523 1,041
-------- -------- --------
$378,628 $306,857 $226,512
======== ======== ========
</TABLE>
Impaired loans were $595, $288 and $797 at June 30, 1997, December 31, 1996
and December 31, 1995. The reduction in interest income associated with these
impaired loans was insignificant and no valuation allowance for loan losses
related to impaired loans has been established. At June 30, 1997, December 31,
1996 and December 31, 1995, there were no commitments to lend additional funds
to borrowers whose loans were classified as impaired.
Outstanding loans to directors and executive officers of the Bank and to
their related business interests aggregated $2,556, $2,230 and $1,851 at June
30, 1997, December 31, 1996 and December 31, 1995.
F-11
<PAGE> 81
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
IS UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE D -- ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
---------------- --------------------------
1997 1996 1996 1995 1994
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance at January 1.................. $4,436 $3,660 $3,660 $2,641 $1,788
Provision............................. 525 596 1,246 1,510 580
Charge-offs........................... (498) (337) (785) (831) (382)
Recoveries............................ 160 154 315 340 188
Increase resulting from bank
acquisition......................... 488 -- -- -- 467
------ ------ ------ ------ ------
Balance at end of period.............. $5,111 $4,073 $4,436 $3,660 $2,641
====== ====== ====== ====== ======
</TABLE>
NOTE E -- PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1996 1995
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Land.......................................... $ 2,659 $ 2,483 $ 2,498
Building and improvements..................... 11,458 6,954 6,705
Furniture, fixtures and equipment............. 9,286 8,216 7,076
Automobiles................................... 68 68 55
------- ------- -------
23,471 17,721 16,334
Less accumulated depreciation................. 8,695 7,960 6,754
------- ------- -------
$14,776 $ 9,761 $ 9,580
======= ======= =======
</TABLE>
Included in other assets are other real estate and repossessed assets of
$936, $197 and $1,000 at June 30, 1997, December 31, 1996 and December 31, 1995.
NOTE F -- INTEREST-BEARING DEPOSITS
The types of accounts and their respective balances included in
interest-bearing deposits are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1996 1995
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
NOW accounts and interest-bearing checking
accounts.................................... $133,600 $114,552 $112,099
Savings and money market accounts............. 164,628 127,223 129,067
Certificates of deposit....................... 429,463 335,954 343,202
-------- -------- --------
$727,691 $577,729 $584,368
======== ======== ========
</TABLE>
F-12
<PAGE> 82
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE F -- INTEREST-BEARING DEPOSITS -- (CONTINUED)
The aggregate amount of certificates of deposit, each with a minimum
denomination of $100, was approximately $121,186, $86,032 and $79,948 at June
30, 1997, December 31, 1996 and December 31, 1995. At December 31, 1996, the
scheduled maturities of certificates of deposit are as follows:
<TABLE>
<S> <C>
1997...................................................... $253,299
1998...................................................... 46,208
1999...................................................... 13,934
2000...................................................... 16,567
2001...................................................... 5,946
--------
$335,954
========
</TABLE>
Deposits of executive officers and directors were $1,794, $2,041 and $1,831
(including time deposits of $1,104, $1,114 and $1,103) at June 30, 1997,
December 31, 1996 and December 31, 1995.
NOTE G -- SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
At December 31, 1996, the Bank entered into the sale of a $9,000 government
note under an agreement to repurchase substantially the identical security on
January 2, 1997. The interest rate was 7%.
NOTE H -- PREFERRED AND COMMON STOCK
The following summary of issued and outstanding shares of stock shows the
effects of a thirty for one common shares stock split, effective August 4, 1997.
<TABLE>
<CAPTION>
ISSUED AND OUTSTANDING
PREFERRED STOCK COMMON COMMON
----------------------- STOCK STOCK TREASURY
SERIES 1 SERIES A SERIES B ISSUED OUTSTANDING STOCK
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994..... 1,802,708 -- -- 11,770,980 9,160,770 (2,610,210)
Redemption of preferred
stock...................... (1,802,708) -- -- -- -- --
Sale of preferred stock...... -- 6,000,000 -- -- -- --
---------- --------- --------- ---------- --------- ----------
Balance at December 31, 1994... -- 6,000,000 -- 11,770,980 9,160,770 (2,610,210)
Exchange of common stock for
preferred stock, net of
redemptions................ -- -- 1,000,000 -- (300,000) (300,000)
Purchase of treasury stock... -- -- -- -- (30,000) (30,000)
---------- --------- --------- ---------- --------- ----------
Balance at December 31, 1995... -- 6,000,000 1,000,000 11,770,980 8,830,770 (2,940,210)
Purchase of treasury stock... -- -- -- -- (150,150) (150,150)
Sale of common stock......... -- -- -- 147,000 147,000 --
---------- --------- --------- ---------- --------- ----------
Balance at December 31, 1996... -- 6,000,000 1,000,000 11,917,980 8,827,620 (3,090,360)
Purchase of treasury stock
(unaudited)................ -- -- -- -- (81,600) (81,600)
Sale of common stock
(unaudited)................ -- -- -- 93,000 93,000 --
---------- --------- --------- ---------- --------- ----------
Balance at June 30, 1997
(unaudited).................. -- 6,000,000 1,000,000 12,010,980 8,839,020 (3,171,960)
========== ========= ========= ========== ========= ==========
</TABLE>
At June 30, 1997, December 31, 1996, December 31, 1995 and December 31,
1994, the Company had 6,000,000 authorized shares of Series A-10% preferred
stock of $1 par value, 1,250,000 authorized shares of
F-13
<PAGE> 83
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE H -- PREFERRED AND COMMON STOCK -- (CONTINUED)
Series B-10% preferred stock of $1 par value, and 50,000,000 authorized shares
of common stock of $.25 par value ($10 par value before the split).
The Series A and B preferred stock pays dividends quarterly. The preferred
stock is not cumulative or participating, has no voting rights and is not
convertible. Preferred stock has liquidation preferences over common stock of
the Company. Dividends on common stock of the Company may not be declared or
paid unless dividends for the same period on preferred stock have been paid or
declared.
NOTE I -- INCOME TAXES
Federal income tax currently receivable, deferred tax asset and deferred
tax liability, included in other assets and other liabilities, respectively, are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------- -----
<S> <C> <C> <C>
Current................................................ $ (22) $ 318 $ 148
Deferred tax asset..................................... 1,340 1,008 483
Deferred tax liability................................. (996) (2,657) (256)
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------- -----
<S> <C> <C> <C>
Deferred tax assets:
Allowance for loan losses............................ $1,077 $ 810 $ 395
Depreciation and amortization differences............ 172 92 32
Difference in basis of other real estate............. 17 132 41
Other................................................ 74 (26) 15
------ ------- -----
$1,340 $ 1,008 $ 483
====== ======= =====
Deferred tax liabilities:
Unrealized gain on available-for-sale securities..... $ (996) $(2,655) $(255)
Other................................................ -- (2) (1)
------ ------- -----
$ (996) $(2,657) $(256)
====== ======= =====
</TABLE>
The reconciliation between the Company's effective income tax rate and the
statutory federal income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Statutory federal income tax rate..................... 35.00% 35.00% 35.00%
Effect of utilization of graduated tax rates.......... (0.69) (0.60) (0.84)
Other................................................. (0.28) 0.01 (0.13)
------- ------- -------
Effective income tax rate............................. 34.03% 34.41% 34.03%
======= ======= =======
</TABLE>
F-14
<PAGE> 84
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
IS UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE J -- COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank is party to financial
instruments with off-balance sheet risk to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. Commitments under outstanding standby letters of credit
totaled $1,111, $735 and $344 at June 30, 1997, December 31, 1996 and December
31, 1995. Commitments to extend credit totaled $41,584, $36,159 and $13,973 at
June 30, 1997, December 31, 1996 and December 31, 1995. The Bank does not
anticipate any material losses as a result of these commitments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation to any condition established in the contract and have
fixed expiration dates or other termination clauses. Some of the commitments are
expected to expire without being drawn upon, so that the total commitment
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's credit worthiness on a case-by-case basis. The
extension of credit, is based on management's credit evaluation of the
counter-party. Collateral held varies but may include accounts receivable,
inventory, property, plant, and equipment and income-producing commercial
properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. The credit risk involved and collateral required in issuing letters
of credit are essentially the same as those involved in extending loan
facilities to customers.
The Bank is involved in certain claims and lawsuits occurring in the normal
course of business. Management, after consultation with outside legal counsel,
does not believe that the outcome of these actions would have a material impact
on the financial statements of the Company or the Bank.
The Bank leases certain premises and equipment under cancelable and
noncancelable lease arrangements. Total rentals charged to operating expenses
were $135, $187 and $192 in the period ended June 30, 1997, December 31, 1996
and December 31, 1995. Future lease commitments under noncancelable leases are
not material.
F-15
<PAGE> 85
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE J -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
The Company has incentive stock option plans, and at December 31, 1996,
600,000 shares of common stock were reserved for these plans. The exercise price
of each option is equal to the market price of the Company's stock on the date
of grant. The maximum term is 10 years and the shares vest 10% to 20% per year.
The Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its plans. The effect on net income of
recording compensation cost for the Company's plan, based on the fair value at
the grant date for awards under this plan, consistent with method SFAS No. 123,
Accounting for Stock-Based Compensation, is not significant. Following is a
summary of the status of the incentive option plans:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Options outstanding at January 1, 1994...................... 480,000 $1.40
Options granted ($3 a share)................................ 120,000 2.67
--------
Options outstanding at December 31, 1994 ($1 -- $3 a
share).................................................... 600,000 1.65
--------
Options outstanding at December 31, 1995 ($1 -- $3 a
share).................................................... 600,000 1.65
Options exercised ($1 -- $2 a share)........................ (147,000) .96
--------
Options outstanding at December 31, 1996 ($1 -- $3 a
share).................................................... 453,000 1.87
--------
Options granted ($4 a share) (unaudited).................... 240,000 4.17
Options exercised ($1 -- $2 a share) (unaudited)............ (93,000) 1.66
--------
Options outstanding at June 30, 1997 ($1 -- $4 a share)
(unaudited)............................................... 600,000 2.83
========
Options exercisable at
December 31, 1994......................................... 252,000 $1.26
December 31, 1995......................................... 342,000 1.44
December 31, 1996......................................... 285,000 1.84
June 30, 1997 (unaudited)................................. 174,000 1.53
</TABLE>
Following is a summary of the options outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OUTSTANDING
-------------------------
WEIGHTED
AVERAGE
REMAINING
EXERCISE CONTRACTUAL EXERCISABLE
PRICE NUMBER LIFE NUMBER
-------- -------- ----------- -----------
<S> <C> <C> <C>
$1........................ 165,000 2.1 years 105,000
$2........................ 168,000 6.0 years 132,000
$3........................ 120,000 7.4 years 48,000
--------
453,000
========
</TABLE>
NOTE K -- REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by state and federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material
F-16
<PAGE> 86
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE K -- REGULATORY MATTERS -- (CONTINUED)
effect on the Company's and the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's and the Bank's capital amounts
and classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1996, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
The most recent notification from the Federal Deposit Insurance Corporation
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------- ----------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ -------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1997 (unaudited)
Total Capital (to Risk
Weighted Assets):
Prime Bancshares, Inc. .... $64,201 14.92% $$34,415 $8.00% N/A
Prime Bank................. $63,885 14.85% $$34,415 $8.00% $$43,019 $10.00%
Tier 1 Capital (to Risk
Weighted Assets):
Prime Bancshares, Inc. .... $59,090 13.74% $$17,208 $4.00% N/A
Prime Bank................. $58,774 13.66% $$17,208 $4.00% $$25,811 $ 6.00%
Tier 1 Capital (to Average
Assets):
Prime Bancshares, Inc...... $59,090 6.31% $$37,508 $4.00% N/A
Prime Bank................. $58,774 6.27% $$37,494 $4.00% $$46,868 $ 5.00%
</TABLE>
F-17
<PAGE> 87
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE K -- REGULATORY MATTERS -- (CONTINUED)
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------- ----------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ -------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Total Capital (to Risk
Weighted Assets):
Prime Bancshares, Inc...... $64,311 18.62% $$27,620 $8.00% N/A
Prime Bank................. $63,951 18.51% $$27,620 $8.00% $$34,525 $10.00%
Tier 1 Capital (to Risk
Weighted Assets):
Prime Bancshares, Inc...... $59,995 17.37% $$13,810 $4.00% N/A
Prime Bank................. $59,635 17.26% $$13,810 $4.00% $$20,715 $ 6.00%
Tier 1 Capital (to Average
Assets):
Prime Bancshares, Inc...... $59,995 7.96% $$30,255 $4.00% N/A
Prime Bank................. $59,635 7.91% $$30,254 $4.00% $$37,818 $ 5.00%
As of December 31, 1995
Total Capital (to Risk
Weighted Assets):
Prime Bancshares, Inc. .... $56,385 21.66% $$20,821 $8.00% N/A
Prime Bank................. $55,974 21.51% $$20,821 $8.00% $$26,026 $10.00%
Tier 1 Capital (to Risk
Weighted Assets):
Prime Bancshares, Inc. .... $53,132 20.41% $$10,411 $4.00% N/A
Prime Bank................. $52,721 20.26% $$10,411 $4.00% $$15,616 $ 6.00%
Tier 1 Capital (to Average
Assets):
Prime Bancshares, Inc. .... $53,132 6.99% $$30,340 $4.00% N/A
Prime Bank................. $52,721 6.96% $$30,340 $4.00% $$37,925 $ 5.00%
</TABLE>
NOTE L -- ACQUISITIONS/DISPOSITIONS
On October 1, 1994, the Company purchased deposits and certain assets of
several branches of First Heights Bank at a premium of $1,212. During 1995, the
Bank sold the assets and liabilities of five branches resulting in a gain of
$2,445.
During 1997, the Company purchased deposits and certain assets of three
branches of a commercial bank. The purchase price was allocated based on the
fair value of the assets acquired and liabilities assumed, and the excess of
cost over the fair value of the net assets acquired of $1,835, is being
amortized over ten years using an accelerated method.
During 1997, the Company purchased all of the assets and liabilities of
First Northwestern Bank, N. A. and purchase accounting was applied. The
acquisition was for approximately $60,200 in deposits and $40,200 in loans. The
purchase price was allocated based on the fair value of the assets acquired and
liabilities assumed, and the excess of cost over the fair value of the net
assets acquired of $3,380, is being amortized over fifteen years using a
straight-line method.
F-18
<PAGE> 88
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE L -- ACQUISITIONS/DISPOSITIONS -- (CONTINUED)
The following summarized proforma information assumes the First
Northwestern acquisition had occurred on January 1, 1996:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------- YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996 DECEMBER 31, 1996
------------- ------------- -----------------
<S> <C> <C> <C>
Interest income............................. $32,669 $28,927 $58,982
Net earnings................................ $ 5,655 $ 5,586 $ 9,719
Earnings per common and common equivalent
share..................................... .61 .60 1.05
</TABLE>
NOTE M -- SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION
Cash paid during the period for:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------------- ---------------------------
1997 1996 1996 1995 1994
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest............................. $14,304 $11,994 $23,688 $26,873 $14,157
Income taxes......................... $ 2,690 $ 2,540 $ 4,838 $ 5,006 $ 4,386
</TABLE>
During 1996, the Company purchased $30,501 of U.S. Agency Securities. The
settlement of the transaction did not occur until January 1997.
During 1995, the Company issued 1,250,000 shares of Series B preferred
stock in exchange for 10,000 common shares.
NOTE N -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of financial instruments are based on management's
estimates and does not purport to represent the aggregate net fair value of the
Company. Further, the fair value estimates are based on various assumptions,
methodologies and subjective considerations, which vary widely among different
financial institutions and which are subject to change.
The following methods and assumptions were used by the Bank in estimating
financial instrument fair values:
- CASH AND CASH EQUIVALENTS, FEDERAL FUNDS PURCHASED AND REPURCHASE
AGREEMENTS
The balance sheet carrying amount approximates fair value.
- SECURITIES TO BE HELD-TO-MATURITY AND SECURITIES AVAILABLE-FOR-SALE
Fair values for investment securities are based on quoted market prices
or quotations received from securities dealers. If quoted market prices
are not available, fair value estimates may be based on quoted market
prices of similar instruments, adjusted for differences between the
quoted instruments and the instruments being valued.
- LOANS
Fair values of loans are estimated for segregated groupings of loans with
similar financial characteristics. Loans are segregated by type such as
commercial, real estate and consumer loans. Each of these categories is
further subdivided into fixed and adjustable rate loans and performing
and nonperforming
F-19
<PAGE> 89
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE N -- FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)
loans. The fair value of performing loans is calculated by discounting
scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk
inherent in the various types of loans. The fair value of nonperforming
loans is estimated at the value of the underlying collateral.
- DEPOSITS
The fair value of demand deposits, such as non-interest bearing demand
deposits and interest-bearing transaction accounts such as savings, NOW
and money market accounts are equal to the amount payable on demand as of
December 31, 1996 and 1995 (i.e. their carrying amounts).
The fair value of demand deposits is defined as the amount payable, and
prohibits adjustment for any value derived from the expected retention of
such deposits for a period of time. That value, commonly referred to as
the core deposit base intangible, is neither included in the following
fair value amounts nor recorded as an intangible asset in the balance
sheet.
The fair value of certificates of deposit is based on the discounted
value of contractual cash flows. The discount rate used represents rates
currently offered for deposits of similar remaining maturities. The
carrying amount of accrued interest payable approximates its fair value.
- OFF-BALANCE-SHEET INSTRUMENTS
Estimated fair values for the Bank's off-balance-sheet instruments are
based on fees, net of related expenses, currently charged to enter into
similar agreements, considering the remaining terms of the agreements and
the counterparties' credit standing.
The following table presents the carrying amounts and fair values of the
Bank's financial instruments at December 31, 1996 and 1995. The fair value of
financial instruments is defined as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale.
<TABLE>
<CAPTION>
1996 1995
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents........................... $ 34,006 $ 34,006 $ 34,904 $ 34,904
Securities
Available-for-sale............................... 324,723 324,723 377,837 377,837
Held-to-maturity................................. 115,902 114,309 96,074 95,236
Loans, net.......................................... 306,857 307,542 226,512 226,233
Financial liabilities:
Deposits
Noninterest-bearing.............................. $117,441 $117,441 $109,797 $109,797
Interest-bearing transaction and money market
accounts....................................... 241,775 241,775 241,166 241,166
Certificates of deposit.......................... 335,954 337,910 343,202 345,781
Federal funds purchased and securities sold under
repurchase agreements............................ 9,700 9,700 -- --
</TABLE>
F-20
<PAGE> 90
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE O -- EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
----------------------- ------------------------------------
JUNE 30, JUNE 30,
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net earnings....................... $ 5,493 $ 5,210 $ 9,222 $ 9,052 $ 7,848
Less: dividends on preferred
stock............................ 350 350 700 681 258
---------- ---------- ---------- ---------- ----------
Net earnings after preferred
dividends........................ 5,143 4,860 8,522 8,371 7,590
Divided by average common shares
and common share equivalents
Weighted average common shares... 8,857,920 8,798,970 8,808,090 8,861,100 9,160,770
Weighted average common share
equivalents................... 389,520 451,565 416,825 541,745 444,695
---------- ---------- ---------- ---------- ----------
Total weighted average
common and common
equivalent shares...... 9,247,440 9,250,535 9,224,915 9,402,845 9,605,465
---------- ---------- ---------- ---------- ----------
Earnings per common and common
equivalent share................. $ .56 $ .53 $ .92 $ .89 $ .79
========== ========== ========== ========== ==========
</TABLE>
NOTE P -- NEW PRONOUNCEMENTS
The FASB has issued Financial Accounting Standards No. 128, Earnings Per
Share, which is effective for financial statements issued after December 15,
1997. The new standard eliminates primary and fully diluted earnings per share
and requires the presentation of basic and diluted earnings per share together
with disclosure of how the per share amounts were computed. The pro forma effect
of adopting the new standard would be basic earnings per share of $.58 and $.55
and diluted earnings per share of $.56 and $.53 for the quarters ended June 30,
1997 and 1996.
The FASB has issued Financial Accounting Standards No. 130, Reporting
Comprehensive Income, which is effective for financial statements issued after
December 15, 1997. The new standard requires an entity to report and display
comprehensive income and its components. Comprehensive income will include net
income plus net unrealized gain or loss on securities.
NOTE Q -- SUBSEQUENT EVENT
On July 1, 1997, the Board of Directors of the Company declared and paid a
cash dividend of $.03 per share to all common shareholders of record as of July
1, 1997.
F-21
<PAGE> 91
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
IS UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE R -- PARENT-ONLY FINANCIAL STATEMENTS
PRIME BANCSHARES, INC.
(PARENT ONLY)
BALANCE SHEETS
DECEMBER 31,
ASSETS
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Cash and cash equivalents................................... $ 358 $ 407
Investment in subsidiaries.................................. 61,620 57,932
------- -------
$61,978 $58,339
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities........................................... $ 9 $ 9
------- -------
Total liabilities................................. 9 9
Commitments and contingencies............................... -- --
Shareholders' equity
Preferred stock........................................... 7,000 7,000
Common stock.............................................. 2,980 2,943
Additional capital........................................ 3,824 3,721
Retained earnings......................................... 50,113 42,768
Net unrealized appreciation on available-for-sale
securities, net of tax of $996 and $2,655.............. 1,934 5,154
------- -------
65,851 61,586
Less common stock in treasury -- at cost.................. 3,882 3,256
------- -------
61,969 58,330
------- -------
$61,978 $58,339
======= =======
</TABLE>
F-22
<PAGE> 92
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
IS UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE R -- PARENT-ONLY FINANCIAL STATEMENTS -- (CONTINUED)
PRIME BANCSHARES, INC.
(PARENT ONLY)
STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Costs and expenses
General and administrative................................ $ 1 $ -- $ 5
------ ------ ------
Operating loss......................................... (1) -- (5)
Current income tax benefit................................ -- -- 2
------ ------ ------
Loss before equity in net earnings of subsidiaries..... (1) -- (3)
Equity in net earnings of subsidiaries...................... 9,223 9,052 7,851
------ ------ ------
NET EARNINGS...................................... $9,222 $9,052 $7,848
====== ====== ======
</TABLE>
F-23
<PAGE> 93
PRIME BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
IS UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE R -- PARENT-ONLY FINANCIAL STATEMENTS -- (CONTINUED)
PRIME BANCSHARES, INC.
(PARENT ONLY)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings
Net earnings for the year................................ $ 9,222 $ 9,052 $ 7,848
Adjustments to reconcile net earnings to net cash used in
operating activities:
Earnings of subsidiaries.............................. (9,223) (9,052) (7,851)
Change in assets and liabilities
Decrease (increase) in other assets................. -- 1 (1)
Decrease in other liabilities....................... -- (4) --
-------- -------- --------
Net cash used in operating activities............ (1) (3) (4)
Cash flows from investing activities:
Dividend from subsidiary................................. 2,315 2,515 2,209
Capital contribution to subsidiary....................... -- -- (5,970)
-------- -------- --------
Net cash provided (used) by investing
activities..................................... 2,315 2,515 (3,761)
Cash flows from financing activities:
Purchase of treasury stock............................... (614) (100) --
Dividend payment......................................... (1,877) (1,871) (564)
Redemption of preferred stock............................ -- (250) (1,803)
Sale of preferred stock.................................. -- -- 6,000
Stock issuance costs..................................... -- -- (27)
Sale of common stock..................................... 128 -- --
-------- -------- --------
Net cash (used) provided in financing
activities..................................... (2,363) (2,221) 3,606
-------- -------- --------
Net (decrease) increase in cash and cash equivalents....... (49) 291 (159)
Cash and cash equivalents at beginning of year............. 407 116 275
-------- -------- --------
Cash and cash equivalents at end of year................... $ 358 $ 407 $ 116
======== ======== ========
</TABLE>
F-24
<PAGE> 94
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES OF COMMON STOCK OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
SOLICITATION OR OFFER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAIN HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Summary Consolidated Financial Data... 5
Risk Factors.......................... 7
The Company........................... 11
Use of Proceeds....................... 14
Dividend Policy....................... 14
Dilution.............................. 15
Capitalization........................ 16
Nature of the Trading Market and
Market Prices....................... 17
Selected Consolidated Financial
Data................................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Management............................ 48
Principal Shareholders................ 53
Selling Shareholders.................. 54
Supervision and Regulation............ 55
Description of Securities of the
Company............................. 62
Underwriting.......................... 66
Legal Matters......................... 68
Experts............................... 68
Available Information................. 68
Table of Contents to Financial
Statements.......................... F-1
</TABLE>
---------------------
UNTIL (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY
BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO
THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
2,169,310 SHARES
LOGO
PRIME BANCSHARES, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
KEEFE, BRUYETTE & WOODS, INC.
LEGG MASON WOOD WALKER
INCORPORATED
, 1997
======================================================
<PAGE> 95
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated fees and expenses incurred by the Registrant in connection
with this Offering are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 13,608
National Association of Securities Dealers, Inc. filing
fee....................................................... $ 4,991
Printing and engraving expenses............................. $ 35,000
Legal fees and expenses of counsel for the Registrant....... $ 85,000
Accounting fees and expenses................................ $ 64,000
Blue sky filing fees and expenses (including legal fees and
expenses)................................................. $ 5,000
Transfer Agent fees......................................... $ 1,000
Miscellaneous............................................... $ 41,401
--------
Total....................................................... $250,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Articles of Incorporation and Bylaws require the
Registrant to indemnify officers and directors of the Registrant to the fullest
extent permitted by Article 2.02-1 of the Business Corporation Act of the State
of Texas (the "TBCA"). The Articles of Incorporation and Bylaws of the
Registrant are filed as Exhibits 3.1 and 3.2 to the Registration Statement.
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 Registrant's Articles of Incorporation provide that a director of the
Registrant 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 its
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
act 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.
Pursuant to the Underwriting Agreement, a form of which is filed as Exhibit
1.1 to this Registration Statement, the Underwriters have agreed to indemnify
the directors, officers and controlling persons of the Registrant against
certain civil liabilities that may be incurred in connection with this Offering,
including certain liabilities under the Securities Act.
The Registrant may provide liability insurance for each director and
officer for certain losses arising from claims or changes made against them
while acting in their capabilities as directors or officers of Registrant,
whether or not Registrant would have the power to indemnify such person against
such liability, as permitted by law.
II-1
<PAGE> 96
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On March 27, 1996, the Registrant sold 120,000 shares of Common Stock to an
executive officer of the Registrant at a price of $0.833 per share pursuant to
the officer's exercise of options granted under the Registrant's 1993 Stock
Option Plan.
On June 20, 1996, the Registrant sold 12,000 shares of Common Stock to an
officer of the Bank at a price of $2.33 per share pursuant to the officer's
exercise of options granted under the Registrant's 1993 Stock Option Plan.
On December 12, 1996, the Registrant sold 15,000 shares of Common Stock to
an officer of the Bank at a price of $0.833 per share pursuant to the officer's
exercise of options granted under the Registrant's 1993 Stock Option Plan. The
consideration for these shares was 100 shares of Common Stock.
On January 28, 1997, the Registrant sold 3,000 shares of Common Stock to an
officer of the Bank at a price $2.33 per share pursuant to the officer's
exercise of options granted under the Registrant's 1993 Stock Option Plan.
On March 26, 1997, the Registrant sold 42,000 shares of Common Stock to an
executive officer of the Registrant at a price of $.833 per share pursuant to
the officer's exercise of options granted under the Registrant's 1984 Stock
Option Plan.
On March 26, 1997, the Registrant sold 48,000 shares of Common Stock to an
executive officer of the Registrant at a price of $2.33 per share pursuant to
the officer's exercise of options granted under the Registrant's 1993 Stock
Option Plan.
On January 18, 1995, the Registrant sold 1,250,000 shares of Series B 10%
Cumulative Preferred Stock to two directors of the Registrant at a price of
$1.00 per share.
Except for the shares issued on December 12, 1996, the consideration for
each sale was cash. Each sale was made pursuant to the registration exemption
provided by Section 3(a)(11) of the Securities Act of 1993. The number of shares
of Common Stock and the per share price for the Common Stock have been adjusted
to give effect to a 30 for 1 common stock split effected in the form of a stock
dividend issued to shareholders of record as of July 17, 1997.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The following documents are filed as exhibits to this Registration
Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1 -- Form of Purchase Agreement by and among the Underwriters,
the Company and the Selling Shareholders.
*3.1 -- Amended and Restated Articles of Incorporation of the
Company.
*3.2 -- Amended and Restated Bylaws of the Company.
*4 -- Form of Certificate representing shares of Common Stock.
*5 -- Opinion of Bracewell & Patterson, L.L.P. as to the
legality of the securities being registered.
*10.1 -- Prime Bancshares, Inc. 1997 Stock Incentive Plan
21 -- Subsidiaries of the Registrant
23.1 -- Consent of Grant Thornton LLP.
*23.2 -- Consent of Bracewell & Patterson, L.L.P. (included in the
opinion to be filed as Exhibit 5 to this Registration
Statement).
*24 -- Powers of Attorney.
*27 -- Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
II-2
<PAGE> 97
(b) Financial Statement Schedules
None.
All other schedules for which provision is made in Regulation S-X of the
Commission are not required under the related instructions or are inapplicable
and, therefore, have been omitted.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters 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.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officer 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 Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, 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 the purpose of determining any liability under the Securities
Act of 1933, 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-3
<PAGE> 98
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Prime Bancshares, Inc., has duly caused this Registration Statement or amendment
thereto to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Houston and State of Texas on September 23, 1997.
PRIME BANCSHARES, INC.
By: /s/ E. J. GUZZO
----------------------------------
E. J. Guzzo,
President
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
each of Fredric M. Saunders and E. J. Guzzo, with full power to act without the
other, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities (until revoked in writing) to sign this Registration
Statement and any and all amendments (including post-effective amendments) to
this Registration Statement, to file the same, together with all exhibits
thereto and documents in connection therewith, with the Securities and Exchange
Commission, to sign any and all applications, registration statements, notices
and other documents necessary or advisable to comply with the applicable state
securities authorities, granting unto said attorneys-in-fact and agents or any
of them, or their or his substitutes or substitute, full power and authority to
perform and do each and every act necessary and advisable as fully to all
intents and purposes as he might or could perform and do in person, thereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their or his substitutes or substitute, 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 or amendment thereto has been signed by the
following persons in the indicated capacities on September 23, 1997.
<TABLE>
<CAPTION>
SIGNATURE POSITIONS
--------- ---------
<S> <C>
/s/ FREDRIC M. SAUNDERS
- -----------------------------------------------------
Fredric M. Saunders Chairman of the Board, (principal executive officer)
/s/ L. ANDERSON CREEL
- ----------------------------------------------------- Treasurer (principal financial officer and principal
L. Anderson Creel accounting officer)
/s/ E. J. GUZZO
- -----------------------------------------------------
E. J. Guzzo President and Director
*
- -----------------------------------------------------
C. C. Smitherman Director
*
- -----------------------------------------------------
David Pasternak Director
*
- -----------------------------------------------------
Stuart D. Saunders Director
*
- -----------------------------------------------------
James B. Wesley Director
*
- -----------------------------------------------------
Jerry S. Dominy Director
*By: /s/ E. J. GUZZO
------------------------------------------------
E. J. Guzzo
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 99
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1 -- Form of Purchase Agreement by and among the Underwriters,
the Company and the Selling Shareholders.
*3.1 -- Amended and Restated Articles of Incorporation of the
Company.
*3.2 -- Amended and Restated Bylaws of the Company.
*4 -- Form of Certificate representing shares of Common Stock.
*5 -- Opinion of Bracewell & Patterson, L.L.P. as to the
legality of the securities being registered.
*10.1 -- Prime Bancshares, Inc. 1997 Stock Incentive Plan
21 -- Subsidiaries of the Registrant
23.1 -- Consent of Grant Thornton LLP.
*23.2 -- Consent of Bracewell & Patterson, L.L.P. (included in the
opinion to be filed as Exhibit 5 to this Registration
Statement).
*24 -- Powers of Attorney.
*27 -- Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PRIME BANCSHARES, INC.
(a Texas corporation)
2,169,310 Shares of Common Stock
PURCHASE AGREEMENT
Dated: o, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
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 Marketable Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
-------------------------
(iv) Due Execution of Power of Attorney and Custody Agreement . . . . . . . . . . . . . 11
--------------------------------------------------------
(v) Absence of Manipulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
-----------------------
(vi) Absence of Further Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . 11
-------------------------------
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
(vii) Restriction on Sale of Securities . . . . . . . . . . . . . . . . . . . . . . . . . 12
---------------------------------
(viii) Certificates Suitable for Transfer . . . . . . . . . . . . . . . . . . . . . . . . 12
----------------------------------
(ix) No Association with NASD . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
------------------------
(c) Officer's Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 2. Sale and Delivery to Underwriters; Closing . . . . . . . . . . . . . . . . . . . . . . . . 12
------------------------------------------
(a) Initial Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
(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 the Selling Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . 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) Certificate of the Selling Shareholders . . . . . . . . . . . . . . . . . . . . . . 21
---------------------------------------
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(iii) Opinion of Counsel of the Company . . . . . . . . . . . . . . . . . . . . . . . . . 21
---------------------------------
(iv) Opinion of Counsel of the Selling Shareholders . . . . . . . . . . . . . . . . . . 21
----------------------------------------------
(vi) Bring-down Comfort Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
-------------------------
(m) Additional Documents 21
(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 . . . . . . . . . . . . . . . . . . . . 23
(e) Other Agreements with Respect to Indemnification . . . . . . . . . . . . . . . . . . . . . 24
SECTION 7. Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
------------
SECTION 8. Representations, Warranties and Agreements to Survive Delivery . . . . . . . . . . . . . . 25
--------------------------------------------------------------
SECTION 9. Termination of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
------------------------
(a) Termination; General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
(b) Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 10. Default by One or More of the Underwriters . . . . . . . . . . . . . . . . . . . . . . . . 26
------------------------------------------
SECTION 11. Default by one or more of the Selling Shareholders or the Company . . . . . . . . . . . . . 27
-----------------------------------------------------------------
SECTION 12. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
-------
SECTION 13. Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
-------
SECTION 14. GOVERNING LAW AND TIME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
----------------------
SECTION 15. Effect of Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
------------------
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
Annex A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annex A-1
</TABLE>
iii
<PAGE> 5
Draft of 9/19/97
PRIME BANCSHARES, INC.
(a Texas corporation)
2,169,310 Shares of Common Stock
(Par Value $0.25 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:
Prime Bancshares, 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 $0.25 per share, of the Company ("Common
Stock") set forth in Schedules A and B hereto and (ii) the grant by the Company
and certain of the Selling Shareholders to the Underwriters, acting severally
and not jointly, of the option described in Section 2(b) hereof to purchase all
or any part of 325,397 additional shares of Common Stock to cover
over-allotments, if any. The aforesaid 2,169,310 shares of Common Stock (the
"Initial Securities") to be purchased by the Underwriters and all or any part
of the 325,397 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> 6
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-33001) 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 ______, 1997 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 the Company, are
2
<PAGE> 7
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 Regulations.
(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 with GAAP the information required to
3
<PAGE> 8
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 Schedule E hereto. Except for the shares of
4
<PAGE> 9
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.
(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
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<PAGE> 10
corporate action 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 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 threatened.
(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, could 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") material
to the business of the Company and its subsidiaries now operated by
them, and neither the Company nor any of its Subsidiaries has received
any written notice
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<PAGE> 11
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 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 marketable 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 written notice of
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<PAGE> 12
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 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 consequence of ownership of the
Common Stock,
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<PAGE> 14
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 such restrictions shall not apply to a bona fide gift of
shares of Common Stock by such person to a person or entity who, prior
to such transfer, shall have executed and delivered to KBW an
agreement, substantially in the form of the agreement contemplated by
this Section 1(a)(xxviii), not to take any action prohibited by such
agreement with respect to such shares of Common Stock.
(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 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. Such Selling Shareholder has
reviewed and is familiar with the Registration Statement and the
Prospectus and neither the Prospectus nor any amendments or
supplements thereto includes any untrue statement of a material fact
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; 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. 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
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<PAGE> 15
assets of such Selling Shareholder is subject, nor will such action
result in any violation of the provisions of 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 Marketable Title. Such Selling Shareholder
has and will at the Closing Time have good and marketable 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 upon delivery of such Securities and payment of the
purchase price therefor as herein contemplated, each of the
Underwriters will receive good and marketable 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 Frederic M. Saunders and E.J.
Guzzo, or any of them, as attorneys-in-fact (the "Attorneys-in-Fact")
and American Securities Transfer & Trust, 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(s) 5(l) and 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, 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.
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(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, (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 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 (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; provided, however, that such
restrictions shall not apply to a bona fide gift of shares of Common
Stock by such person to a person or entity who, prior to such
transfer, shall have executed and delivered to KBW an agreement,
substantially in the form of the agreement contemplated by this
Section 1(b)(vii), not to take any action prohibited by such agreement
with respect to such shares of Common Stock. The foregoing sentence
shall not apply to the Securities to be sold hereunder.
(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.
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
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<PAGE> 17
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, in addition to the
Initial Securities, the amount of Option Securities set forth opposite the name
of the Company on Schedule B and certain of the Selling Shareholders hereby
grant an option to the Underwrites, severally and not jointly, to purchase, in
addition to the Initial Securities, the amount of Option Securities set forth
opposite such Selling Shareholder's name in the appropriate column of Schedule
B, in each case 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 options 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 and the Selling Shareholders setting forth the aggregate number of
Option Securities as to which the several Underwriters are then exercising the
options 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 options, nor in any event prior to the
Closing Time, as hereinafter defined. If the options are exercised as to all
or any portion of the Option Securities, each of the Underwriters, acting
severally and not jointly, will purchase from the Company and each Selling
Shareholder (a) that proportion of the total number of Option Securities then
being purchased from the Company and each Selling Shareholder 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
[Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New York, New York
10022,] 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
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<PAGE> 18
time not later than ten business days after such date as shall be agreed upon
by the Representatives 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, the Company and the Selling Shareholders, on each Date of
Delivery as specified in the notice from the Representatives to the Company and
the Selling Shareholders.
Payment shall be made to the Company and each of 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
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<PAGE> 19
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
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
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<PAGE> 20
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 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.
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(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 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 or (D) any shares of Common Stock issued pursuant to any
non-employee director stock plan.
(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 and the Selling Shareholders will pay or cause to be paid all expenses
incident to the performance of their obligations 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, (iv) the fees and disbursements of the Company's counsel,
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<PAGE> 22
accountants and other advisors, (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 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 the Selling Shareholders. The Selling
Shareholders, jointly and severally, will pay all expenses incident to the
performance of their respective obligations under, and the consummation of the
transactions contemplated by this Agreement, including (i) any stamp duties,
capital duties and stock transfer taxes, if any, payable upon the sale of the
Securities to the Underwriters, and their transfer between the Underwriters
pursuant to an agreement between such Underwriters, and (ii) the fees and
disbursements of their respective counsel and accountants.
(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 and the Selling Shareholders 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
and/or the Selling Shareholders, on the other hand, shall not be affected by,
any agreement that the Company 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
18
<PAGE> 23
prospectus containing the Rule 430A Information shall have been filed
with the Commission in accordance with Rule 424(b) (or a
post-effective amendment 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 Bracewell & Patterson, 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 and to such further effect as counsel to the Underwriters may
reasonably request.
(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 Bracewell & Patterson, 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 and to such further effect as
counsel to the Underwriters may reasonably request.
(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 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
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<PAGE> 24
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 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 Grant Thornton 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 Grant Thornton 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 and the Selling
Shareholders contained herein and the statements in any certificates
furnished by the Company, any Subsidiary of the Company and the
Selling Shareholders 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 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
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<PAGE> 25
Closing Time pursuant to Section 5(e) hereof remains true and
correct as of such Date of Delivery.
(ii) Certificate of the Selling Shareholders. A
certificate, dated such Date of Delivery, of an
Attorney-in-Fact on behalf of each Selling Shareholder
confirming that the certificate delivered with respect to such
Selling Shareholder at the Closing Time pursuant to Section
5(f) hereof remains true and correct as of such Date of
Delivery. (iii) Opinion of Counsel of the Company. The
favorable opinion of Bracewell & Patterson, 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 Securities to be purchased on such Date of Delivery
and otherwise to the same effect as the opinion required by
Section 5(b) hereof.
(iv) Opinion of Counsel of the Selling Shareholders. The
favorable opinion of Bracewell & Patterson, L.L.P., counsel
for the Selling Shareholders, in form and substance
satisfactory to 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(c) hereof.
(v) 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.
(vi) Bring-down Comfort Letter. A letter from Grant
Thornton 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 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 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
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<PAGE> 26
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 and the
Selling Shareholders 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 Sections 1, 3(m), 6, 7 and 8
shall survive any such termination and remain in full force and
effect.
SECTION 6. Indemnification.
(a) Indemnification of Underwriters. The Company and the Selling
Shareholders, jointly and severally, agree 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 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
22
<PAGE> 27
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 any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto).
(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 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) 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, 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.
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<PAGE> 28
(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 and the Selling Shareholders 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 and the Selling Shareholders 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 and the Selling
Shareholders 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 the Company and the Selling Shareholders and
the total underwriting discount received by the Underwriters, 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 as set forth on such cover.
The relative fault of the Company and the Selling Shareholders 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 the Selling
Shareholders or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
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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, 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.
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
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. 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
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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.
(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, 3(m), 6, 7 and 8 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 and the Selling Shareholders 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.
26
<PAGE> 31
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 and the Selling
Shareholders 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 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 or at
the Date of Delivery 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 this Agreement without any liability on the fault of any
non-defaulting party except that the provisions of Sections 1, 3(m), 4, 6, 7
and 8 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 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 or at the Date of
Delivery 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, 3(m), 4, 6, 7 and 8 shall 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 Prime Bancshares, Inc., [12200 Northwest Freeway, Houston, TX 77092],
attention of [Stuart D. Saunders]; and notices to the Selling Shareholders
shall be directed to Prime Bancshares, Inc., [12200 Northwest Freeway,
Houston, TX 77092], attention of [Stuart D. Saunders].
27
<PAGE> 32
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 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.
28
<PAGE> 33
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,
PRIME BANCSHARES, INC.
By
-----------------------------------
Title:
[Names of Attorneys-in-Fact]
By
-----------------------------------
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.
29
<PAGE> 34
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Initial
Name of Underwriter Securities
------------------- ----------
<S> <C>
Keefe, Bruyette & Woods, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .
Legg Mason Wood Walker, Incorporated . . . . . . . . . . . . . . . . . . . . . .
---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,169,310
=========
</TABLE>
Sch A-1
<PAGE> 35
SCHEDULE B
<TABLE>
<CAPTION>
Number of Initial Maximum Number of Option
Securities to be Sold Securities to Be Sold
--------------------- -------------------------------
<S> <C> <C>
Prime Bancshares, Inc. 400,000 78,000
Mission-Heights Management Company, Ltd. 1,125,000 168,750
Jerry S. Dominy 316,500 47,475
C.C. Smitherman 120,000 0
E.J. Guzzo 38,250 5,738
David Pasternak 169,560 25,434
--------- -------
Total . . . . . . . . . . . . . . . . . 2,169,310 325,397
========= =======
</TABLE>
Sch B-1
<PAGE> 36
SCHEDULE C
PRIME BANCSHARES, INC.
2,169,310 Shares of Common Stock
(Par Value $0.25 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> 37
SCHEDULE D
L. Anderson Creel
James G. Dickson, Jr.
Jerry S. Dominy
E.J. Guzzo
Steven H. Jackson
Walter L. Kopycinski
David Pasternak
Frederic M. Saunders
Stuart D. Saunders
C.C. Smitherman
James B. Wesley
Mission-Heights Management
Company, Ltd.
Guzzo Partners, Ltd.
David and Lillian Pasternak
Family Investment Partnership,
Ltd.
David Pasternak Annuity Trust
Lillian Pasternak Annuity Trust
Stuart D. Saunders Trust #1
Meredith A. Saunders Mason Trust #1
Sch D-1
<PAGE> 38
SCHEDULE E
[List of Subsidiaries]
Sch E-1
<PAGE> 1
EXHIBIT 21
PRIME BANCSHARES, INC.
Subsidiary State of Incorporation
---------- ----------------------
Prime Bancshares, Inc. Texas
IBID, Inc. Delaware
Prime Bank Texas
Channelview Properties, Inc. Texas
Prime Home Mortgage, Inc. Texas
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 24, 1997 (except for the first
paragraph of Note H, as to which the date is August 4, 1997), accompanying the
financial statements of Prime Bancshares, Inc. and Subsidiaries contained in the
Registration Statement and Prospectus. We consent to the use of the
aforementioned report in the Registration Statement and Prospectus, and to the
use of our name as it appears under the caption "Experts".
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
Houston, Texas
September 23, 1997
