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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 6, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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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
- ----------------------------------------------------------------------------------------------------------------------------
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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.
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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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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 AUGUST 6, 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"). 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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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 EFFECT
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 EFFECTED 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 TO 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 from 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 this 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"
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(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:
Net earnings(1)................... $ 0.57 $ 0.54 $ 0.94 $ 0.91 $ 0.81 $ 0.69 $ 0.62
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).................. 9,090 9,071 9,046 9,224 9,426 9,150 9,238
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(2):
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(3)............... 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(4):
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(2)............. 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(5).......... 858.99 1,036.39 1,540.28 459.22 184.56 350.59 156.19
CAPITAL RATIOS(4):
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
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(1) Net earnings per share is based upon the weighted average number of common
and common equivalent shares outstanding during the period.
(2) All interim periods have been annualized.
(3) Calculated by dividing total noninterest expenses, excluding securities
losses, by net interest income plus noninterest income.
(4) At period end, except net loan charge-offs (recoveries) to average loans and
average shareholders' equity to average total assets.
(5) 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
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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. 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."
DIVIDEND HISTORY AND 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. 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.
CERTAIN CHARTER AND BYLAW 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. 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."
MANAGEMENT'S OWNERSHIP INTEREST AND POSSIBLE EFFECTS
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."
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 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
9
<PAGE> 11
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. The initial public offering price of the shares of
Common Stock will be determined by negotiations between the Company and the
Representatives and will not necessarily bear any relationship to the Company's
book value, past operating results, financial condition or other established
criteria of value and may not be indicative of the market price of the Common
Stock after the Offering. See "Underwriting" for information relating to the
method of determining the initial public offering price.
SHARES ELIGIBLE FOR FUTURE SALE
The Company will have approximately 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 from 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. 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.
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.
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 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."
14
<PAGE> 16
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>
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 8,158
Retained earnings......................................... 54,665 54,665
Net unrealized appreciation of available-for-sale
securities............................................. 1,001 1,001
------- --------
62,624 66,827
Less common stock held in treasury-at cost................ 4,290 2,580
------- --------
Total common shareholders' equity................. $58,334 $ 64,247
------- --------
Total shareholders' equity........................ $65,334 $ 65,247
======= ========
</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. 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:
Net earnings(1)......................... $ 0.57 $ 0.54 $ 0.94 $ 0.91 $ 0.81 $ 0.69 $ 0.62
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)............................ 9,090 9,071 9,046 9,224 9,426 9,150 9,238
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(2):
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(3)..................... 58.75 54.61 60.09 59.99 59.07 64.37 64.27
ASSET QUALITY RATIOS(4):
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(2)...................... 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(5)................ 858.99 1,036.39 1,540.28 459.22 184.56 350.59 156.19
CAPITAL RATIOS(4):
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) Net earnings per share is based upon the weighted average number of common
and common equivalent shares outstanding during the period.
(2) All interim periods have been annualized.
(3) Calculated by dividing total noninterest expenses, excluding securities
losses, by net interest income plus noninterest income.
(4) At period end, except net loan charge-offs (recoveries) to average loans and
average shareholders' equity to average total assets.
(5) 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 $0.57 for the six
months ended June 30, 1997 and $0.54 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>
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.
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 to assist in assessing the adequacy of
the allowance for loan losses.
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
28
<PAGE> 30
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.
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, 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
31
<PAGE> 33
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>
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>
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.
32
<PAGE> 34
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
-------------------------------------------------------
0-30 31-180 181-365 AFTER
DAYS DAYS DAYS ONE YEAR TOTAL
--------- --------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities...................... $ 40,827 $ 73,380 $ 64,786 $285,071 $464,064
Loans........................... 51,254 40,747 46,145 245,593 383,739
Federal funds sold and other
temporary investments........ 31,245 -- -- -- 31,245
--------- --------- --------- -------- --------
Total interest-earning
assets................ 123,326 114,127 110,931 530,664 879,048
--------- --------- --------- -------- --------
Interest-bearing liabilities:
Demand, money market and savings
deposits..................... 298,228 -- -- -- 298,228
Certificates of deposit and
other time deposits.......... 58,793 148,883 103,649 118,138 429,463
Federal funds purchased and
securities sold under
repurchase agreements........ 100 -- -- -- 100
--------- --------- --------- -------- --------
Total interest-bearing
liabilities........... 357,121 148,883 103,649 118,138 727,791
--------- --------- --------- -------- --------
Period GAP........................ $(233,795) $ (34,756) $ 7,282 $412,526 $151,257
Cumulative GAP.................... $(233,795) $(268,551) $(261,269) $151,257
Period GAP to total assets........ (24.66%) (3.67%) 0.77% 43.52%
Cumulative GAP to total assets.... (24.66%) (28.33%) (27.56%) 15.96%
</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 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
33
<PAGE> 35
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 primarily been met by growth in core deposits, as
previously discussed. Although access to purchased funds from correspondent
banks is available and has been utilized on occasion to take advantage of
investment opportunities, the Company does not generally rely on these external
funding sources. The cash and federal funds sold position, supplemented by
amortizing investment and loan portfolios, have generally created an adequate
liquidity position.
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.
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,"
34
<PAGE> 36
"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.
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 $0.94, $0.91 and $0.81 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
35
<PAGE> 37
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.
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.
36
<PAGE> 38
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>
37
<PAGE> 39
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>
38
<PAGE> 40
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
39
<PAGE> 41
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-
40
<PAGE> 42
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.
41
<PAGE> 43
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>
42
<PAGE> 44
<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>
43
<PAGE> 45
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
44
<PAGE> 46
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>
45
<PAGE> 47
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 AFTER
DAYS DAYS DAYS ONE YEAR TOTAL
--------- --------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities.......................... $ 48,590 $ 69,389 $ 67,024 $252,445 $437,448
Loans............................... 45,846 35,550 30,884 199,013 311,293
--------- --------- --------- -------- --------
Total interest-earning
assets..................... 94,436 104,939 97,908 451,458 748,741
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 79,448 335,954
Federal funds purchased and
securities sold under repurchase
agreements........................ 9,700 -- -- -- 9,700
--------- --------- --------- -------- --------
Total interest-bearing
liabilities................ 305,971 138,079 63,931 79,448 587,429
--------- --------- --------- -------- --------
Period GAP............................ $(211,535) $ (33,140) $ 33,977 $372,010 $161,312
Cumulative GAP........................ (211,535) (244,675) (210,698) 161,312
Period GAP to total assets............ (26.39)% (4.14)% 4.24% 46.42%
Cumulative GAP to total assets........ (26.39)% (30.53)% (26.29)% 20.13%
</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.
46
<PAGE> 48
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,
47
<PAGE> 49
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.
48
<PAGE> 50
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.
49
<PAGE> 51
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-
50
<PAGE> 52
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), Stephen 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,
51
<PAGE> 53
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 July 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.
52
<PAGE> 54
(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 Annuity Trust, and 243,840 shares owned by the Lillian
Pasternak 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 July
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. Saunders, Dominy, Smitherman,
Guzzo and Pasternak have each been a director of the Company for more than three
years. 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.
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<PAGE> 55
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
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<PAGE> 56
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> 57
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.
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<PAGE> 58
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> 59
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> 60
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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<PAGE> 61
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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<PAGE> 63
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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<PAGE> 64
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 -- Dividend
History and 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. A recently enacted Texas law, which becomes effective
September 1, 1997, generally prohibits certain mergers, sales of assets,
reclassifications and other transactions between a publicly-held Texas
corporation and any of its shareholders who beneficially own 20% or more of the
outstanding stock of such corporation ("affiliated shareholders") for a period
of three years following the date on which such shareholder acquired shares
representing 20% or more of the corporation's voting power unless two-thirds of
the unaffiliated shareholders approve the transaction at a meeting held no
earlier than six months after such date.
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
63
<PAGE> 65
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.
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.
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<PAGE> 66
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 will be
obligated, pursuant to the option, to sell such shares to the Underwriters.
The Company, each of its directors and executive officers, each of the
Selling Shareholders and certain other shareholders of the Company have agreed
not to sell or otherwise dispose of any shares of Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent of
the Representatives of the Underwriters, except that the Company may issue
shares of Common Stock upon the exercise of currently outstanding options. See
"Risk Factors -- Shares Eligible for Future Sale."
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
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
65
<PAGE> 67
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 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
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<PAGE> 68
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.
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<PAGE> 69
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> 70
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
F-2
<PAGE> 71
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> 72
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........................................ $ .57 $ .54 $ .94 $ .91 $ .81
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 73
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> 74
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> 75
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> 76
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. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to the
extent cash payments are received.
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 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
F-8
<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)
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. 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> 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 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> 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 -- (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> 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 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> 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, 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> 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 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> 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)
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> 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, 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> 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 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
------- ------ -------- ------ -------- -------
Greater Greater Greater Greater
Than or Than or Than or Than or
Equal To Equal To Equal To Equal To
<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> 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)
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------- ----------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ -------- ------ -------- -------
Greater Greater Greater Greater
Than or Than or Than or Than or
Equal To Equal To Equal To Equal To
<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> 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 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..................................... .62 .62 1.07
</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 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 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
F-19
<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)
NOTE N -- FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)
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> 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 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................... 231,660 272,220 237,480 362,400 265,350
---------- ---------- ---------- ---------- ----------
Total weighted average
common and common
equivalent shares...... 9,089,580 9,071,190 9,045,570 9,223,500 9,426,120
---------- ---------- ---------- ---------- ----------
Earnings per common and common
equivalent share................. $ .57 $ .54 $ .94 $ .91 $ .81
========== ========== ========== ========== ==========
</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 $.57 and $.54 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> 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)
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> 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 -- (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> 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 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> 93
================================================================================
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............................ 47
Principal Shareholders................ 52
Selling Shareholders.................. 53
Supervision and Regulation............ 54
Description of Securities of the
Company............................. 61
Underwriting.......................... 65
Legal Matters......................... 66
Experts............................... 66
Available Information................. 67
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
[PRIME BANCSHARES, INC. LOGO]
PRIME BANCSHARES, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
KEEFE, BRUYETTE & WOODS, INC.
LEGG MASON WOOD WALKER
INCORPORATED
, 1997
================================================================================
<PAGE> 94
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............................. $ *
Legal fees and expenses of counsel for the Registrant....... $ *
Accounting fees and expenses................................ $ *
Blue sky filing fees and expenses (including legal fees and
expenses)................................................. $ *
Transfer Agent fees......................................... $ *
Miscellaneous............................................... $ *
Total....................................................... $ *
</TABLE>
* To be supplied by Amendment.
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> 95
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 Underwriting Agreement by and between the
Underwriters and the Company.
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
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>
- ---------------
* To be supplied by Amendment.
II-2
<PAGE> 96
(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> 97
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Prime Bancshares, Inc., has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Houston and State of Texas on August 6, 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 has been signed by the following persons in the
indicated capacities on August 6, 1997.
<TABLE>
<CAPTION>
SIGNATURE POSITIONS
--------- ---------
<C> <S>
/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> 98
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
*1 -- Form of Underwriting Agreement by and between the
Underwriters and the Company.
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
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>
- ---------------
* To be supplied by Amendment.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
PRIME BANCSHARES, INC.
ARTICLE ONE
The name of the Corporation is Prime Bancshares, Inc.
ARTICLE TWO
The period of its duration is perpetual.
ARTICLE THREE
The purpose or purposes for which the Corporation is organized are:
(a) To engage in the acquisition and ownership of equity or debt
securities of national or state banks, the acquisition and
ownership of equity or debt securities of other corporations,
and the conduct of such other businesses as will not be in
violation of any state or national laws, including banking
laws, or rules or regulations promulgated from time to time
thereunder; and
(b) To engage in all other lawful acts or activities for which
corporations may be organized under the laws of the State of
Texas.
ARTICLE FOUR
Section 4.1. Authorized Shares. The aggregate number of all classes
of stock which the Corporation has authority to issue is 65,000,00 shares
divided into (A) one class of 50,000,000 shares of Common Stock with a par
value of $0.25 per share, and (B) one class of 15,000,000 shares of Preferred
Stock with a par value of $1.00 per share, which may be divided into and issued
in series as set forth in this Article Four.
Section 4. 2. Authorization of Directors to Determine Certain Rights
of Preferred Stock. The shares of Preferred Stock may be divided into and
issued in series. The Board of Directors shall have the authority to
established series of unissued shares of Preferred Stock by fixing and
determining the relative rights and preferences of the shares of any series so
established, and to increase or decreased the number of shares within each such
series; provided, however, that the Board of Directors may not decrease the
number of shares within a series of Preferred Stock to
1
<PAGE> 2
less than the number of shares within such series that are then issued. The
Preferred Stock of each such series shall have such designations, preferences
limitations, or relative rights, including voting rights, as shall be set
further in the resolution or resolutions establishing such series adopted by the
Board of Directors, including, but without limiting the generality of the
foregoing, the following:
(A) The distinctive designation of, and the number of shares of
Preferred Stock that shall constitute, such series, which number (except where
otherwise provided by the Board of Directors in the resolution establishing
such series) may be increased or decreased (but not below the number of shares
of such series then outstanding) from time to time by like action of the Board
of Directors;
(B) The rights in respect of dividends, if any, of such series of
Preferred Stock, the extent of the preference or relation, if any, of such
dividends to the dividends payable on any other class or classes or any other
series of the same or other class or classes of capital stock of the
Corporation and whether such dividends shall be cumulative or noncumulative;
(C) The right, if any, of the holders of such series of Preferred
Stock to convert the same into, or exchange the same for, shares of any other
class or classes or of any other series of the same or any other classes or
classes of capital stock, obligations, indebtedness, rights to purchase
securities or other securities of the Corporation or other entities, domestic
or foreign, or for other property or for any combination of the foregoing, and
the terms and conditions of such conversion or exchange;
(D) Whether or not shares of such series of Preferred Stock shall
be subject to redemption, and the redemption price or prices and the time or
times at which, and the terms and conditions on which, shares of such series of
Preferred Stock may be redeemed;
(E) The rights, if any, of the holders of such series of Preferred
Stock upon the voluntary or involuntary liquidation, dissolution or winding-up
of the Corporation or in the event of any merger or consolidation of or sale of
assets by the Corporation;
(F) The terms of any sinking fund or redemption or repurchase or
purchase account, if any, to be provided for shares of such series of Preferred
Stock;
(G) The voting powers, if any, of the holders of any series of
Preferred Stock generally or with respect to any particular matter, which may
be less than, equal to or greater than one vote per share, and which may,
without limiting the generality of the foregoing, include the right, voting as
a series of Preferred Stock as a class, to elect one or more directors of the
Corporation generally or under such specific circumstances and on such
conditions, as shall be provided in the resolution or resolutions of the Board
of Directors adopted pursuant hereto, including, without limitation, in the
event there shall have been a default in the payment of dividends on or
redemption of any one or more series of Preferred Stock; and
2
<PAGE> 3
(H) Such other powers, preferences and relative, participating,
optional and other special rights, and the qualifications, limitations and
restrictions thereof, as the Board of Directors shall determine.
Section 4.3. Preferences, Limitations and Relative Rights of All
Classes of Capital Stock.
(A) General. All shares of Common Stock shall have rights
identical to those of all other such shares. Except as they may vary among
series established pursuant to Section 4. 2 of this Article Four, all shares of
Preferred Stock shall have preferences, limitation, and relative rights
identical to those of all other such shares.
(B) Liquidation Preference. In the event of dissolution,
liquidation, or winding-up of the Corporation (whether voluntary or
involuntary), after payment or provision for payment of debts but before any
distribution to the holders of Common Stock, the holders of each series of
Preferred Stock then outstanding shall be entitled to receive the amount fixed
by the Board of Directors pursuant to Section 4.2 of this Article Four and no
more. All remaining assets shall be distributed pro rata among the holders of
Common Stock. If the assets distributable among the holders of Preferred Stock
are insufficient to permit full payment to them, the entire assets shall be
distributed among the holders of the Preferred Stock in proportion to their
respective liquidation preferences unless otherwise provided by the Board of
Directors pursuant to Section 4.2 of this Article Four. Neither the
consolidation, merger, or reorganization of the Corporation with any other
corporation or corporations, nor the sale of all or substantially all the
assets of the Corporation, nor the purchase or redemption by the Corporation of
any of its outstanding shares shall be deemed to be a dissolution, liquidation,
or winding-up within the meaning of this paragraph.
(C) Redemption.
(1) Right; Method. All or any part of any one or more series
of Preferred Stock may be redeemed at any time or times at the option of the
Corporation, by resolution of the Board of Directors, in accordance with the
terms and conditions of this Article Four and those fixed by the Board of
Directors pursuant to Section 4.2 of this Article Four. The Corporation may
redeem shares of any one or more series without redeeming shares of any other
series. If less than all the shares of any series are to be redeemed, the
shares of the series to be redeemed shall be selected ratably or by lot or by
any other equitable method determined by the Board of Directors.
(2) Notice. Notice shall be given to the holders of shares
to be redeemed, either personally or by mail, not less than twenty nor more
than fifty days before the date fixed for redemption.
(3) Payment. Holders of redeemed shares shall be paid in
cash the amount fixed by the Board of Directors pursuant to Section 4.2 of this
Article Four.
3
<PAGE> 4
(4) Provision for Payment. On or before the date fixed for
redemption, the Corporation may provide for payment of a sum sufficient to
redeem the shares called for redemption either (a) by setting aside the sum,
separate from its other funds, in trust for the benefit of the holders of the
shares to be redeemed, or (b) by depositing such sum in a bank or trust company
(either one in Texas having capital and surplus of at least $10,000,000
according to its latest statement of condition, or one anywhere in the United
States duly appointed and acting as transfer agent of the Corporation) as a
trust fund, with irrevocable instructions and authority to the bank or trust
company to give or complete the notice of redemption and to pay to the holders
of the shares to be redeemed, on or after the date fixed for redemption, the
redemption price on surrender of their respective share certificates. The
holders of shares to be redeemed may be evidenced by a list certified by the
Corporation (by its president or a vice president and by its secretary or an
assistant secretary) or by its transfer agent. If the Corporation so provides
for payment, then from and after the date fixed for redemption (a) the shares
shall be deemed to be redeemed, (b) dividends thereon shall cease to accrue,
(c) such setting aside or deposit shall be deemed to constitute full payment
for the shares, (d) the shares shall no longer be deemed to be outstanding, (e)
the holders thereof shall cease to be shareholders with respect to such shares,
and (f) the holders shall have no rights with respect thereto except the right
to receive (without interest) their proportionate shares of the funds so set
aside or deposited upon surrender of their respective certificates, and any
right to convert such shares which may exist. Any interest accrued on funds so
set aside or deposited shall belong to the Corporation. If the holders of the
shares do not, within six years after such deposit, claim any amount so
deposited for redemption thereof, the bank or trust company shall upon demand
pay over to the Corporation the balance of the funds so deposited, and the bank
or trust company shall thereupon be relieved of all responsibility to such
holders.
(5) Status of Redeemed Shares. Shares of Preferred Stock
which are redeemed shall be cancelled and shall be restored to the status of
authorized but unissued shares.
(D) Purchase. Except as fixed by the Board of Directors pursuant to
Section 4.2 of this Article Four or as otherwise expressly provided by law,
nothing herein shall limit the right of the Corporation to purchase any of its
outstanding shares in accordance with law, by public or private transaction.
ARTICLE FIVE
The Corporation will not commence business until it has received for
the issuance of its shares consideration of the value of at least $1,000.00.
ARTICLE SIX
The shareholders of the Corporation shall not be entitled to cumulate
their votes in the election of directors.
4
<PAGE> 5
ARTICLE SEVEN
No holder of any shares of any class of stock of the Corporation
shall, as such holder, have any preemptive or preferential right to receive,
purchase, or subscribe to (1) any unissued or treasury shares of any class of
stock (whether now or hereafter authorized) of the Corporation, (2) any
obligations, evidences of indebtedness, or other securities of the Corporation
convertible into or exchangeable for, or carrying or accompanied by any rights
to receive, purchase, or subscribe to, any such unissued or treasury shares,
(3) any right of subscription to or to receive, or any warrant or option for
the purchase of, any of the foregoing securities, (4) any other securities that
may be issued or sold by the Corporation, other than such (if any) as the
Board of Directors of the Corporation, in its sole and absolute discretion, may
determine from time to time.
ARTICLE EIGHT
The Corporation, at the option of the Board of Directors, may
purchase, directly or indirectly, its own shares to the extent of the aggregate
of unrestricted capital surplus available therefor and unrestricted reduction
surplus available therefor, and to any further extent that may be allowed by
law.
ARTICLE NINE
No contract or other transaction between the Corporation and one or
more of its Directors, officers, or security holders or between the Corporation
and another corporation, partnership, joint venture, trust or other enterprise
of which one or more of the Corporations's Directors, officers or security
holders are members, officers, security holders, directors or employees or in
which they are otherwise interested, directly or indirectly, shall be invalid
solely because of such relationship, or solely because such Director, officer
or security holder is present at or participates in the meeting of the Board of
Directors or committee thereof which authorizes the contract or other
transaction, or solely because his or there votes are counted for such purpose,
if (a) the material facts as to his relationship or interest and as to the
contract or other transaction are known or disclosed to the Board of Directors
or committee thereof, and such Board or committee in good faith authorizes the
contract or other transaction by the affirmative votes of a majority of the
disinterested Directors even though the disinterested Directors be less than a
quorum; or (b) the material facts as to his relationship or interest and as to
the contract or other transaction are known or disclosed to the shareholders
entitled to vote thereon, and the contract or other transaction is specifically
approved in good faith by vote of the shareholders; or (c) the contract or
other transaction is fair as to the Corporation as of the time it is
authorized, approved or ratified by the Board of Directors, a committee
thereof, or the shareholders.
ARTICLE TEN
The address of its Registered Office is 811 Sheldon Road, Channelview,
Texas, and the name of is Registered Agent at such address is Fredric M.
Saunders.
5
<PAGE> 6
ARTICLE ELEVEN
The number of initial Directors is four (4) and the names and
addresses of the Directors are:
<TABLE>
<S> <C>
Fredric M. Saunders 515 Hunterwood
Houston, TX 77024
Jerry Dominy 55 Uvalde
Houston, TX 77015
C. C. Smitherman 26 Magnolia
Highlands, TX 77562
Dave Pasternak 638 Sun Valley
Houston, TX 77025
</TABLE>
ARTICLE TWELVE
With respect to any matter for which the affirmative vote of a portion
of the shares of the Corporation entitled to vote greater than a majority of
such shares is required by the Texas Business Corporation Act (or any successor
or replacement statute), as the same now exists or may hereafter be amended,
the affirmative vote of the holders of a majority of the shares of the
Corporation entitled to vote on the matter shall be the act of the
shareholders.
ARTICLE THIRTEEN
No director of the Corporation shall be liable o the Corporation or
its shareholders for monetary damages for any act or omission in the director's
capacity as a director, except to the extent that the foregoing exculpation
from liability is not permitted under the applicable provisions of the Texas
Miscellaneous Corporation Laws Act (or any successor or replacement statute) as
the same now exists or may hereafter be amended. Any repeal or modification of
the provisions of the foregoing sentence shall not adversely affect any right
or protection of a director of the Corporation existing at the time of such
repeal or modification.
6
<PAGE> 7
ARTICLE FOURTEEN
Special meetings of the shareholders of the Corporation may be called
only (1) by the Chairman of the Board, by the President, by a majority of the
Board of Directors, or by such other person or persons as may be authorized in
the Bylaws or (2) by the holders of 50% of the outstanding shares of the
Corporation entitled to vote at the proposed special meeting.
EXECUTED THIS _____ DAY OF ______________________, 19 ___.
<TABLE>
<S> <C>
PRIME BANCSHARES, INC.
By: _______________________________
F. M. Saunders
its Chairman
</TABLE>
7
<PAGE> 1
AMENDED AND RESTATED BYLAWS
OF
PRIME BANCSHARES, INC.
A Texas Corporation
Date of Adoption
July 16, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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Page
Article 1
Offices
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Section 1.1. Registered Office......................................................................1
Section 1.2. Other Offices..........................................................................1
Article 2
Shareholders
Section 2.1. Place of Meetings......................................................................1
Section 2.2. Quorum; Adjournment of Meetings.......................................................1
Section 2.3. Annual Meetings........................................................................2
Section 2.4. Special Meetings.......................................................................2
Section 2.5. Record Date............................................................................2
Section 2.6. Notice of Meetings.....................................................................3
Section 2.7. Shareholder List.......................................................................3
Section 2.8. Proxies................................................................................3
Section 2.9. Voting; Election; Inspectors...........................................................4
Section 2.10. Conduct of Meetings....................................................................5
Section 2.12. Treasury Stock.........................................................................6
Article 3
Board of Directors
Section 3.1. Power; Number; Term of Office..........................................................6
Section 3.3. Quorum; Voting.........................................................................7
Section 3.4. Place of Meetings; Order of Business...................................................7
Section 3.5. First Meeting..........................................................................8
Section 3.6. Regular Meetings.......................................................................8
Section 3.7. Special Meetings.......................................................................8
Section 3.8. Removal................................................................................8
Section 3.9. Vacancies; Increases in the Number of Directors........................................8
Section 3.10. Compensation...........................................................................8
Section 3.11. Action Without a Meeting; Telephone Conference Meeting.................................9
Section 3.12. Approval or Ratification of Acts or Contracts by Shareholders..........................9
</TABLE>
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Article 4
Committees
<TABLE>
<CAPTION>
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Section 4.1. Designation; Powers....................................................................9
Section 4.2. Procedure; Meetings; Quorum...........................................................10
Section 4.3. Substitution and Removal of Members; Vacancies........................................10
Article 5
Officers
Section 5.1. Number, Titles and Term of Office.....................................................10
Section 5.2. Powers and Duties of the Chairman of the Board........................................11
Section 5.3. Powers and Duties of the President....................................................11
Section 5.4. Vice Presidents.......................................................................11
Section 5.5. Secretary.............................................................................11
Section 5.6. Assistant Secretaries.................................................................12
Section 5.7. Treasurer.............................................................................12
Section 5.8. Assistant Treasurers..................................................................12
Section 5.9. Action with Respect to Securities of Other Corporations...............................12
Section 5.10. Delegation............................................................................12
Article 6
Capital Stock
Section 6.1. Certificates of Stock.................................................................13
Section 6.2. Transfer of Shares....................................................................13
Section 6.3. Ownership of Shares...................................................................13
Section 6.4. Regulations Regarding Certificates....................................................14
Section 6.5. Lost or Destroyed Certificates........................................................14
Article 7
Miscellaneous Provisions
Section 7.1. Fiscal Year...........................................................................14
Section 7.2. Corporate Seal........................................................................14
Section 7.3. Notice and Waiver of Notice...........................................................14
</TABLE>
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<PAGE> 4
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Section 7.4. Facsimile Signatures..................................................................15
Section 7.5. Reliance upon Books, Reports and Records..............................................15
Section 7.6. Application of Bylaws.................................................................15
Article 8
Indemnification of Officers and Directors
Section 8.1. Indemnification.......................................................................15
Section 8.2. Nonexclusivity........................................................................16
Section 8.3. Insurance.............................................................................16
Section 8.4. Witnesses.............................................................................16
Article 9
Amendments
Section 9.1. Amendments............................................................................17
</TABLE>
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<PAGE> 5
BYLAWS
OF
PRIME BANCSHARES, INC.
Article 1
Offices
Section 1.1. Registered Office. The registered office of the
Corporation required by the State of Texas to be maintained in the State of
Texas shall be the registered office named in the Articles of Incorporation of
the Corporation, or such other office as may be designated from time to time by
the Board of Directors in the manner provided by law.
Section 1.2. Other Offices. The Corporation may also have offices at
such other places both within and without the State of Texas as the Board of
Directors may from time to time determine or the business of the Corporation
may require.
Article 2
Shareholders
Section 2.1. Place of Meetings. All meetings of the shareholders shall
be held at the principal office of the Corporation, or at such other place
within or without the State of Texas as shall be specified or fixed in the
notices or waivers of notice thereof.
Section 2.2. Quorum; Adjournment of Meetings. Unless otherwise
required by law or provided in the Articles of Incorporation of the Corporation
or these Bylaws, the holders of a majority of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at any meeting of shareholders for the transaction of
business. The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, subject to the provisions of clauses
(ii) and (iii) above.
Notwithstanding the other provisions of the Articles of Incorporation
of the Corporation or these Bylaws, the chairman of the meeting or the holders
of a majority of the issued and outstanding stock, present in person or
represented by proxy and entitled to vote thereat, at any meeting of
shareholders, whether or not a quorum is present, shall have the power to
adjourn such meeting from time to time, without any notice other than
announcement at the meeting of the time and place of the holding of the
adjourned meeting. If the adjournment is for more than thirty (30) days, or if
after
<PAGE> 6
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each shareholder of record entitled
to vote at such meeting. At such adjourned meeting at which a quorum shall be
present or represented any business may be transacted which might have been
transacted at the meeting as originally called.
Section 2.3. Annual Meetings. An annual meeting of the shareholders,
for the election of directors to succeed those whose terms expire and for the
transaction of such other business as may properly come before the meeting,
shall be held at such place (within or without the State of Texas), on such
date, and at such time as the Board of Directors shall fix and set forth in the
notice of the meeting, which date shall be within thirteen (13) months
subsequent to the last annual meeting of shareholders.
Section 2.4. Special Meetings. Unless otherwise provided in the
Articles of Incorporation of the Corporation, special meetings of the
shareholders for any purpose or purposes may be called at any time by the
Chairman of the Board, by the President, by a majority of the Board of
Directors, or by a majority of the executive committee (if any) or by the
holders of 50% of the outstanding shares of the Company entitled to vote at the
proposed special meeting, at such time and at such place as may be stated in
the notice of the meeting. Business transacted at a special meeting shall be
confined to the purpose(s) stated in the notice of such meeting.
Section 2.5. Record Date. For the purpose of determining shareholders
entitled to notice of or to vote at any meeting of shareholders, or any
adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of
any other lawful action, the Board of Directors of the Corporation may fix a
date as the record date for any such determination of shareholders, which
record date shall not precede the date on which the resolutions fixing the
record date are adopted and which record date shall not be more than sixty (60)
days nor less than ten (10) days before the date of such meeting of
shareholders, nor more than sixty (60) days prior to any other action to which
such record date relates.
If the Board of Directors does not fix a record date for any meeting
of the shareholders, the record date for determining shareholders entitled to
notice of or to vote at such meeting shall be at the close of business on the
day next preceding the day on which notice is given, or, if in accordance with
Article 7, Section 7.3 of these Bylaws notice is waived, at the close of
business on the day next preceding the day on which the meeting is held. The
record date for determining shareholders for any other purpose (other than the
consenting to corporate action in writing without a meeting) shall be at the
close of business on the day on which the Board of Directors adopts the
resolution relating thereto. A determination of shareholders of record entitled
to notice of or to vote at a meeting of
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<PAGE> 7
shareholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned
meeting.
For the purpose of determining the shareholders entitled to consent to
corporate action in writing without a meeting, the Board of Directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which date shall not be more than ten (10) days after the date upon which the
resolution fixing the record date is adopted by the Board of Directors. If the
Board of Directors does not fix the record date, the record date for
determining shareholders entitled to consent to corporate action in writing
without a meeting, when no prior action by the Board of Directors is necessary,
shall be the first date on which a signed written consent setting forth the
action taken or proposed to be taken is delivered to the Corporation at its
registered office in the State of Texas or at its principal place of business.
If the Board of Directors does not fix the record date, and prior action by the
Board of Directors is necessary, the record date for determining shareholders
entitled to consent to corporate action in writing without a meeting shall be
at the close of business on the day on which the Board of Directors adopts the
resolution taking such prior action.
Section 2.6. Notice of Meetings. Written notice of the place, date and
hour of all meetings, and, in case of a special meeting, the purpose or
purposes for which the meeting is called, shall be given by or at the direction
of the Board of Directors or the other person(s) calling the meeting to each
shareholder entitled to vote thereat not less than ten (10) nor more than sixty
(60) days before the date of the meeting. Such notice may be delivered either
personally or by mail. If mailed, notice is given when deposited in the United
States mail, postage prepaid, directed to the shareholder at such shareholder's
address as it appears on the records of the Corporation.
Section 2.7. Shareholder List. A complete list of shareholders
entitled to vote at any meeting of shareholders, arranged in alphabetical order
for each class of stock and showing the address of each such shareholder and
the number of shares registered in the name of such shareholder, shall be open
to the examination of any shareholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The shareholder list
shall also be produced and kept at the time and place of the meeting during the
whole time thereof, and may be inspected by any shareholder who is present.
Section 2.8. Proxies. Each shareholder entitled to vote at a meeting
of shareholders or to express consent or dissent to a corporate action in
writing without a meeting may authorize another person or persons to act for
him by proxy. Proxies for use at any meeting of shareholders shall be filed
with the Secretary, or such other officer as the Board of Directors may from
time to time
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<PAGE> 8
determine by resolution, before or at the time of the meeting. All proxies
shall be received and taken charge of and all ballots shall be received and
canvassed by the secretary of the meeting, who shall decide all questions
touching upon the qualification of voters, the validity of the proxies, and the
acceptance or rejection of votes, unless an inspector or inspectors shall have
been appointed by the chairman of the meeting, in which event such inspector or
inspectors shall decide all such questions.
No proxy shall be valid after eleven (11) months from its date, unless
the proxy provides for a longer period. Each proxy shall be revocable unless
expressly provided therein to be irrevocable and coupled with an interest
sufficient in law to support an irrevocable power.
Should a proxy designate two or more persons to act as proxies, unless
such instrument shall provide the contrary, a majority of such persons present
at any meeting at which their powers thereunder are to be exercised shall have
and may exercise all the powers of voting or giving consents thereby conferred,
or if only one be present, then such powers may be exercised by that one; or,
if an even number attend and a majority do not agree on any particular issue,
each proxy so attending shall be entitled to exercise such powers in respect of
such portion of the shares as is equal to the reciprocal of the fraction equal
to the number of proxies representing such shares divided by the total number
of shares represented by such proxies.
Section 2.9. Voting; Election; Inspectors. Unless otherwise required
by law or provided in the Articles of Incorporation of the Corporation, each
shareholder shall on each matter submitted to a vote at a meeting of
shareholders have one vote for each share of the stock entitled to vote which
is registered in his name on the record date for the meeting. For the purposes
hereof, each election to fill a directorship shall constitute a separate
matter. Shares registered in the name of another corporation, domestic or
foreign, may be voted by such officer, agent or proxy as the bylaws (or
comparable body) of such corporation may determine. Shares registered in the
name of a deceased person may be voted by the executor or administrator of such
person's estate, either in person or by proxy.
All voting, except as required by the Articles of Incorporation of the
Corporation or where otherwise required by law, may be by a voice vote;
provided, however, upon request of the chairman of the meeting or upon demand
therefor by shareholders holding a majority of the issued and outstanding stock
present in person or by proxy at any meeting a stock vote shall be taken. Every
stock vote shall be taken by written ballots, each of which shall state the
name of the shareholder or proxy voting and such other information as may be
required under the procedure established for the meeting. All elections of
directors shall be by written ballots, unless otherwise provided in the
Articles of Incorporation of the Corporation.
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At any meeting at which a vote is taken by written ballots, the
chairman of the meeting may appoint one or more inspectors, each of whom shall
subscribe an oath or affirmation to execute faithfully the duties of inspector
at such meeting with strict impartiality and according to the best of such
inspector's ability. Such inspector shall receive the written ballots, count
the votes, and make and sign a certificate of the result thereof. The chairman
of the meeting may appoint any person to serve as inspector, except no
candidate for the office of director shall be appointed as an inspector.
Unless otherwise provided in the Articles of Incorporation of the
Corporation, cumulative voting for the election of directors shall be
prohibited.
Section 2.10. Conduct of Meetings. The meetings of the shareholders
shall be presided over by the Chairman of the Board, or, if the Chairman of the
Board is not present, by the President, or, if the President is not present, by
any Vice President, or if no Vice President is present, by a chairman elected
at the meeting. The Secretary of the Corporation, if present, shall act as
secretary of such meetings, or, if the Secretary is not present, an Assistant
Secretary shall so act; if neither the Secretary or an Assistant Secretary is
present, then a secretary shall be appointed by the chairman of the meeting.
The chairman of any meeting of shareholders shall determine the order
of business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of discussion as seem to the chairman in
order.
Section 2.11. Notifications of Nominations and Proposed Business.
Subject to the rights of holders of any class of capital stock of the
Corporation (other than the common stock), nominations for the election of
directors and proposals for business to be brought before any shareholder
meeting may be made by the Board of Directors or by any shareholder entitled to
vote in the election of directors generally. However, any such shareholder may
nominate one or more persons for election as directors at a meeting or propose
business to be brought before a meeting, or both, only if such shareholder has
given timely notice in proper written form of his intent to make such
nomination or nominations or to propose such business. To be timely, a
shareholder's notice must be delivered to or mailed and received by the
Secretary of the Corporation not later than sixty (60) days prior to such
meeting. To be in proper written form, a shareholder's notice to the Secretary
shall set forth:
(i) the name and address of the shareholder who intends
to make the nominations or propose the business and, in the case of
nominations for the election of directors, of the person or persons to
be nominated;
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(ii) a representation that the shareholder is a holder
of record of stock of the Corporation entitled to vote at such meeting
and, if applicable, intends to appear in person or by proxy at the
meeting to nominate the person or persons specified in the notice or
propose the business specified in the notice;
(iii) if applicable, a description of all arrangements
or understandings between the shareholder and each nominee and any
other person or persons (naming such person or persons) pursuant to
which the nomination or nominations are to be made by the shareholder;
(iv) such other information regarding each nominee or
each matter of business to be proposed by such shareholder as would be
required to be included in a proxy statement filed pursuant to the
proxy rules of the Securities and Exchange Commission had the nominee
been nominated or the matter been proposed by the Board of Directors;
and
(v) if applicable, the consent of each nominee to
serve as director of the Corporation if so elected.
A nomination of any person or proposal of any business not made in
compliance with the foregoing procedures shall not be eligible to be voted upon
by the shareholders at the meeting.
Section 2.12. Treasury Stock. The Corporation shall not vote, directly
or indirectly, shares of its own stock owned by it and such shares shall not be
counted for quorum purposes. Nothing in this Section 2.11 shall be construed as
limiting the right of the Corporation to vote stock, including but not limited
to its own stock, held by it in a fiduciary capacity.
Article 3
Board of Directors
Section 3.1. Power; Number; Term of Office. The business and affairs
of the Corporation shall be managed by or under the direction of the Board of
Directors, and, subject to the restrictions imposed by law or the Articles of
Incorporation of the Corporation, the Board of Directors may exercise all the
powers of the Corporation.
The number of directors which shall constitute the whole Board of
Directors shall be determined from time to time by the Board of Directors
(provided that no decrease in the number of directors which would have the
effect of shortening the term of an incumbent director may be made by the Board
of Directors). If the Board of Directors makes no such determination, the
number of directors shall be three. Each director shall hold office for the
term for which such director is
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<PAGE> 11
elected, and until such director's successor shall have been elected and
qualified or until such director's earlier death, resignation or removal.
Unless otherwise provided in the Articles of Incorporation of the
Corporation, directors need not be shareholders nor residents of the State of
Texas.
Section 3.2. Classified Board. The directors of the Corporation shall
be divided into three classes, with respect to the time that they severally
hold office, as nearly equal in number as possible, with the initial term of
office of the first class of directors (the "Class I Directors") to expire at
the 1998 annual meeting of holders of capital stock of the Corporation, the
initial term of office of the second class of directors (the "Class II
Directors") to expire at the 1999 annual meeting of holders of capital stock of
the Corporation and the initial term of office of the third class of directors
(the "Class III Directors") to expire at the 2000 annual meeting of holders of
capital stock of the Corporation. Commencing with the 1998 annual meeting of
holders of capital stock of the Corporation, directors elected to succeed those
directors whose terms have thereupon expired shall be elected for a term of
office to expire at the third succeeding annual meeting of holders of capital
stock of the Corporation after their election. If the number of directors is
changed, any increase or decrease shall be apportioned among the classes so as
to maintain or attain, if possible, the equality of the number of directors in
each class, but in no case will a decrease in the number of directors shorten
the term of any incumbent director. If such equality is not possible, the
increase or decrease shall be apportioned among the classes in such a way that
the difference in the number of directors in any two classes shall not exceed
one.
Section 3.3. Quorum; Voting. Unless otherwise provided in the Articles
of Incorporation of the Corporation, a majority of the number of directors
fixed in accordance with Section 3.1 shall constitute a quorum for the
transaction of business of the Board of Directors and the vote of a majority of
the directors present at a meeting at which a quorum is present shall be the
act of the Board of Directors.
Section 3.4. Place of Meetings; Order of Business. The directors may
hold their meetings and may have an office and keep the books of the
Corporation, except as otherwise provided by law, in such place or places,
within or without the State of Texas, as the Board of Directors may from time
to time determine. At all meetings of the Board of Directors business shall be
transacted in such order as shall from time to time be determined by the
Chairman of the Board, or in the Chairman of the Board's absence by the
President, or in the President's absence by the Vice President, or by the Board
of Directors.
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<PAGE> 12
Section 3.5. First Meeting. Each newly elected Board of Directors may
hold its first meeting for the purpose of organization and the transaction of
business, if a quorum is present, immediately after and at the same place as
the annual meeting of the shareholders. Notice of such meeting shall not be
required. At the first meeting of the Board of Directors in each year at which
a quorum shall be present, held after the annual meeting of shareholders, the
Board of Directors shall elect the officers of the Corporation.
Section 3.6. Regular Meetings. Regular meetings of the Board of
Directors shall be held at such times and places as shall be designated from
time to time by the Chairman of the Board, or in the absence of the Chairman of
the Board, by the President, or in the President's absence, by the Vice
President, or in the absence of the Vice President, by another officer of the
Corporation. Notice of such regular meetings shall not be required.
Section 3.7. Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman of the Board, the President or, on the
written request of any director, by the Secretary, in each case on at least
twenty-four (24) hours' personal, written, telegraphic, cable or wireless
notice to each director. Such notice, or any waiver thereof pursuant to Article
7, Section 7.3 hereof, need not state the purpose or purposes of such meeting,
except as may otherwise be required by law or provided for in the Articles of
Incorporation of the Corporation or these Bylaws. Meetings may be held at any
time without notice if all the directors are present or if those not present
waive notice of the meeting in writing.
Section 3.8. Removal. Any director or the entire Board of
Directors may be removed, but only for cause, by the holders of a majority of
the shares then entitled to vote at an election of
directors.
Section 3.9. Vacancies; Increases in the Number of Directors. Unless
otherwise provided in the Articles of Incorporation of the Corporation,
vacancies existing on the Board of Directors for any reason may be filled by
the affirmative vote of a majority of the directors then in office, although
less than a quorum, or by a sole remaining director; and any director so chosen
shall hold office until the next annual meeting held for the election of
directors of the class of directors to which such director has been appointed
and until such director's successor shall have been elected and qualified, or
until such director's earlier death, resignation or removal.
Section 3.10. Compensation. Directors and members of standing
committees may receive such compensation as the Board of Directors from time to
time shall determine to be appropriate, and shall be reimbursed for all
reasonable expenses incurred in attending and returning from meetings of the
Board of Directors.
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Section 3.11. Action Without a Meeting; Telephone Conference Meeting.
Unless otherwise restricted by the Articles of Incorporation of the
Corporation, any action required or permitted to be taken at any meeting of the
Board of Directors or any committee designated by the Board of Directors may be
taken without a meeting if all members of the Board of Directors or committee,
as the case may be, consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the Board of Directors or committee.
Such consent shall have the same force and effect as a unanimous vote at a
meeting, and may be stated as such in any document or instrument filed with the
Secretary of State of the State of Texas.
Unless otherwise restricted by the Articles of Incorporation of the
Corporation, subject to the requirement for notice of meetings, members of the
Board of Directors, or members of any committee designated by the Board of
Directors, may participate in a meeting of such Board of Directors or
committee, as the case may be, by means of a conference telephone connection or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and participation in such a meeting shall
constitute presence in person at such meeting, except where a person
participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
Section 3.12. Approval or Ratification of Acts or Contracts by
Shareholders. The Board of Directors in its discretion may submit any act or
contract for approval or ratification at any annual meeting of the
shareholders, or at any special meeting of the shareholders called for the
purpose of considering any such act or contract, and any act or contract that
shall be approved or be ratified by the vote of the shareholders holding a
majority of the issued and outstanding shares of stock of the Corporation
entitled to vote and present in person or by proxy at such meeting (provided
that a quorum is present) shall be as valid and as binding upon the Corporation
and upon all the shareholders as if it has been approved or ratified by every
shareholder of the Corporation. In addition, any such act or contract may be
approved or ratified by the written consent of shareholders holding a majority
of the issued and outstanding shares of capital stock of the Corporation
entitled to vote, and such consent shall be as valid and binding upon the
Corporation and upon all the shareholders as if it had been approved or
ratified by every shareholder of the Corporation.
Article 4
Committees
Section 4.1. Designation; Powers. The Board of Directors may, by
resolution passed by a majority of the whole board, designate one or more
committees, including, if they shall so determine, an executive committee, with
each such committee to consist of one or more of the directors of the
Corporation. Any such designated committee shall have and may exercise such of
the powers and authority of the Board of Directors in the management of the
business and affairs of
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the Corporation as may be provided in such resolution, except that no such
committee shall have the power or authority of the Board of Directors in
reference to amending the Articles of Incorporation of the Corporation,
adopting an agreement of merger or consolidation, recommending to the
shareholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the shareholders a
dissolution of the Corporation or a revocation of a dissolution of the
Corporation, or amending, altering or repealing these Bylaws or adopting new
bylaws for the Corporation. Any such designated committee may authorize the
seal of the Corporation to be affixed to all papers which may require it. In
addition to the above, such committee or committees shall have such other
powers and limitations of authority as may be determined from time to time by
the Board of Directors.
Section 4.2. Procedure; Meetings; Quorum. Any committee designated
pursuant to this Article 4 shall keep regular minutes of its actions and
proceedings in a book provided for that purpose and report the same to the
Board of Directors at its meeting next succeeding such action, shall fix its
own rules or procedures, and shall meet at such times and at such place or
places as may be provided by such rules, or by such committee or the Board of
Directors. Should a committee fail to fix its own rules, the provisions of
these Bylaws, pertaining to the calling of meetings and conduct of business by
the Board of Directors, shall apply as nearly as may be possible. At every
meeting of any such committee, the presence of a majority of all the members
thereof shall constitute a quorum, except as provided in Section 4.3 of this
Article 4, and the affirmative vote of a majority of the members present shall
be necessary for the adoption by it of any resolution.
Section 4.3. Substitution and Removal of Members; Vacancies. The Board
of Directors may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
such committee. In the absence or disqualification of a member of a committee,
the member or members present at any meeting and not disqualified from voting,
whether or not constituting a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of the absent or
disqualified member. The Board of Directors shall have the power at any time to
remove any member(s) of a committee and to appoint other directors in lieu of
the person(s) so removed and shall also have the power to fill vacancies in a
committee.
Article 5
Officers
Section 5.1. Number, Titles and Term of Office. The officers of the
Corporation shall be a Chairman of the Board, a President, one or more Vice
Presidents (any one or more of whom may be designated Executive Vice President
or Senior Vice President), a Treasurer, a Secretary, and such other officers as
the Board of Directors may from time to time elect or appoint (including, but
not
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limited to, one or more Assistant Secretaries and one or more Assistant
Treasurers). Each officer shall hold office until such officer's successor
shall be duly elected and shall qualify or until such officer's death or until
such officer shall resign or shall have been removed. Any number of offices may
be held by the same person, unless the Articles of Incorporation of the
Corporation provide otherwise. Except for the Chairman of the Board, no officer
need be a director.
Section 5.2. Powers and Duties of the Chairman of the Board. The
Chairman of the Board shall be the chief executive officer of the Corporation.
Subject to the control of the Board of Directors and the Executive Committee
(if any), the Chairman of the Board shall have general executive charge,
management and control of the properties, business and operations of the
Corporation with all such powers as may be reasonably incident to such
responsibilities; may agree upon and execute all leases, contracts, evidences
of indebtedness and other obligations in the name of the Corporation and may
sign all certificates for shares of capital stock of the Corporation; and shall
have such other powers and duties as designated in accordance with these Bylaws
and as from time to time may be assigned to the Chairman of the Board by the
Board of Directors. The Chairman of the Board shall preside at all meetings of
the shareholders and of the Board of Directors.
Section 5.3. Powers and Duties of the President. Unless the Board of
Directors otherwise determines, the President shall have the authority to agree
upon and execute all leases, contracts, evidences of indebtedness and other
obligations in the name of the Corporation; and, unless the Board of Directors
otherwise determines, the President shall, in the absence of the Chairman of
the Board or if there be no Chairman of the Board, preside at all meetings of
the shareholders and of the Board of Directors; and the President shall have
such other powers and duties as designated in accordance with these Bylaws and
as from time to time may be assigned to the President by the Board of Directors
or the Chairman of the Board.
Section 5.4. Vice Presidents. Each Vice President shall at all times
possess power to sign all certificates, contracts and other instruments of the
Corporation, except as otherwise limited in writing by the Chairman of the
Board or the President of the Corporation. Each Vice President shall have such
other powers and duties as from time to time may be assigned to such Vice
President by the Board of Directors, the Chairman of the Board or the
President.
Section 5.5. Secretary. The Secretary shall keep the minutes of all
meetings of the Board of Directors, committees of the Board of Directors and
the shareholders, in books provided for that purpose; shall attend to the
giving and serving of all notices; may in the name of the Corporation affix the
seal of the Corporation to all contracts and attest the affixation of the seal
of the Corporation thereto; may sign with the other appointed officers all
certificates for shares of capital stock of the Corporation; shall have charge
of the certificate books, transfer books and stock ledgers,
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and such other books and papers as the Board of Directors may direct, all of
which shall at all reasonable times be open to inspection of any director upon
application at the office of the Corporation during business hours; shall have
such other powers and duties as designated in these Bylaws and as from time to
time may be assigned to the Secretary by the Board of Directors, the Chairman
of the Board or the President; and shall in general perform all acts incident
to the office of Secretary, subject to the control of the Board of Directors,
the Chairman of the Board or the President.
Section 5.6. Assistant Secretaries. Each Assistant Secretary shall
have the usual powers and duties pertaining to such offices, together with such
other powers and duties as designated in these Bylaws and as from time to time
may be assigned to an Assistant Secretary by the Board of Directors, the
Chairman of the Board, the President or the Secretary. The Assistant
Secretaries shall exercise the powers of the Secretary during that officer's
absence or inability or refusal to act.
Section 5.7. Treasurer. The Treasurer shall have responsibility for
the custody and control of all the funds and securities of the Corporation, and
shall have such other powers and duties as designated in these Bylaws and as
from time to time may be assigned to the Treasurer by the Board of Directors,
the Chairman of the Board or the President. The Treasurer shall perform all
acts incident to the position of Treasurer, subject to the control of the Board
of Directors, the Chairman of the Board or the President; and the Treasurer
shall, if required by the Board of Directors, give such bond for the faithful
discharge of the Treasurer's duties in such form as the Board of Directors may
require.
Section 5.8. Assistant Treasurers. Each Assistant Treasurer shall have
the usual powers and duties pertaining to such office, together with such other
powers and duties as designated in these Bylaws and as from time to time may be
assigned to each Assistant Treasurer by the Board of Directors, the Chairman of
the Board, the President, or the Treasurer. The Assistant Treasurers shall
exercise the powers of the Treasurer during that officer's absence or inability
or refusal to act.
Section 5.9. Action with Respect to Securities of Other Corporations.
Unless otherwise directed by the Board of Directors, the Chairman of the Board
or the President, together with the Secretary or any Assistant Secretary shall
have power to vote and otherwise act on behalf of the Corporation, in person or
by proxy, at any meeting of security holders of or with respect to any action
of security holders of any other corporation in which this Corporation may hold
securities and otherwise to exercise any and all rights and powers which this
Corporation may possess by reason of its ownership of securities in such other
corporation.
Section 5.10. Delegation. For any reason that the Board of
Directors may deem sufficient, the Board of Directors may, except where
otherwise provided by statute, delegate the powers or
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duties of any officer to any other person, and may authorize any officer to
delegate specified duties of such office to any other person. Any such
delegation or authorization by the Board shall be effected from time to time by
resolution of the Board of Directors.
Article 6
Capital Stock
Section 6.1. Certificates of Stock. The certificates for shares of the
capital stock of the Corporation shall be in such form, not inconsistent with
that required by law and the Articles of Incorporation of the Corporation, as
shall be approved by the Board of Directors. Every holder of stock represented
by certificates shall be entitled to have a certificate signed by or in the
name of the Corporation by the Chairman of the Board, the President or a Vice
President and the Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer of the Corporation representing the number of shares (and,
if the stock of the Corporation shall be divided into classes or series,
certifying the class and series of such shares) owned by such shareholder which
are registered in certified form; provided, however, that any of or all the
signatures on the certificate may be facsimile. The stock record books and the
blank stock certificate books shall be kept by the Secretary or at the office
of such transfer agent or transfer agents as the Board of Directors may from
time to time determine. In case any officer, transfer agent or registrar who
shall have signed or whose facsimile signature or signatures shall have been
placed upon any such certificate or certificates shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued by the
Corporation, such certificate may nevertheless be issued by the Corporation
with the same effect as if such person were such officer, transfer agent or
registrar at the date of issue. The stock certificates shall be consecutively
numbered and shall be entered in the books of the Corporation as they are
issued and shall exhibit the holder's name and number of shares.
Section 6.2. Transfer of Shares. The shares of stock of the
Corporation shall be transferable only on the books of the Corporation by the
holders thereof in person or by their duly authorized attorneys or legal
representatives upon surrender and cancellation of certificates for a like
number of shares. Upon surrender to the Corporation or a transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
Section 6.3. Ownership of Shares. The Corporation shall be entitled to
treat the holder of record of any share or shares of capital stock of the
Corporation as the holder in fact thereof and, accordingly, shall not be bound
to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person, whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of the State of
Texas.
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Section 6.4. Regulations Regarding Certificates. The Board of
Directors shall have the power and authority to make all such rules and
regulations as they may deem expedient concerning the issue, transfer and
registration or the replacement of certificates for shares of capital stock of
the Corporation.
Section 6.5. Lost or Destroyed Certificates. The Board of Directors
may determine the conditions upon which the Corporation may issue a new
certificate of stock in place of a certificate theretofore issued by it which
is alleged to have been lost, stolen or destroyed and may require the owner of
such certificate or such owner's legal representative to give bond, with surety
sufficient to indemnify the Corporation and each transfer agent and registrar
against any and all losses or claims which may arise by reason of the alleged
loss, theft or destruction of any such certificate or the issuance of such new
certificate in the place of the one so lost, stolen or destroyed.
Article 7
Miscellaneous Provisions
Section 7.1. Fiscal Year. The fiscal year of the Corporation
shall begin on the first day of January of each year.
Section 7.2. Corporate Seal. The corporate seal shall be circular in
form and shall have inscribed thereon the name of the Corporation and the state
of its incorporation, which seal shall be in the charge of the Secretary and
shall be affixed to certificates of stock, debentures, bonds, and other
documents, in accordance with the direction of the Board of Directors or a
committee thereof, and as may be required by law; however, the Secretary may,
if the Secretary deems it expedient, have a facsimile of the corporate seal
inscribed on any such certificates of stock, debentures, bonds, contract or
other documents. Duplicates of the seal may be kept for use by any Assistant
Secretary.
Section 7.3. Notice and Waiver of Notice. Whenever any notice is
required to be given by law, the Articles of Incorporation of the Corporation
or under the provisions of these Bylaws, said notice shall be deemed to be
sufficient if given (i) by telegraphic, cable or wireless transmission
(including by telecopy or facsimile transmission) or (ii) by deposit of the
same in a post office box or by delivery to an overnight courier service
company in a sealed prepaid wrapper addressed to the person entitled thereto at
such person's post office address, as it appears on the records of the
Corporation, and such notice shall be deemed to have been given on the day of
such transmission or mailing or delivery to courier, as the case may be.
Whenever notice is required to be given by law, the Articles of
Incorporation of the Corporation or under any of the provisions of these
Bylaws, a written waiver thereof, signed by the
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<PAGE> 19
person entitled to notice, whether before or after the time stated therein,
shall be deemed equivalent to notice. Attendance of a person, including without
limitation a director, at a meeting shall constitute a waiver of notice of such
meeting, except when the person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
shareholders, directors, or members of a committee of directors need be
specified in any written waiver of notice unless so required by the Articles of
Incorporation of the Corporation or these Bylaws.
Section 7.4. Facsimile Signatures. In addition to the provisions for
the use of facsimile signatures elsewhere specifically authorized in these
Bylaws, facsimile signatures of any officer or officers of the Corporation may
be used whenever and as authorized by the Board of Directors.
Section 7.5. Reliance upon Books, Reports and Records. A member of the
Board of Directors, or a member of any committee designated by the Board of
Directors, shall, in the performance of such person's duties, be protected to
the fullest extent permitted by law in relying upon the records of the
Corporation and upon information, opinion, reports or statements presented to
the Corporation.
Section 7.6. Application of Bylaws. In the event that any provisions
of these Bylaws is or may be in conflict with any law of the United States, of
the State of Texas or of any other governmental body or power having
jurisdiction over this Corporation, or over the subject matter to which such
provision of these Bylaws applies, or may apply, such provision of these Bylaws
shall be inoperative to the extent only that the operation thereof unavoidably
conflicts with such law, and shall in all other respects be in full force and
effect.
Article 8
Indemnification of Officers and Directors
Section 8.1. Indemnification. As permitted by Section G of Article
2.02-1 of the Texas Business Corporation Act or any successor statute (the
"Indemnification Article"), the Corporation hereby:
(a) makes mandatory the indemnification permitted under
Section B of the Indemnification Article as contemplated by Section G thereof;
(b) makes mandatory its payment or reimbursement of the
reasonable expenses incurred by a former or present director who was, is, or
is threatened to be made a named defendant
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<PAGE> 20
or respondent in a proceeding upon such director's compliance with the
requirements of Section K of the Indemnification Article; and
(c) extends the mandatory indemnification referred to in
Section 8.1(a) above and the mandatory payment or reimbursement of expenses
referred to in Section 8.1(b) above (i) to all former or present officers of
the Corporation and (ii) to all persons who are or were serving at the request
of the Corporation as a director, officer, partner or trustee of another
foreign or domestic corporation, partnership, joint venture, trust or employee
benefit plan, to the same extent that the Corporation is obligated to indemnify
and pay or reimburse expenses to directors.
Section 8.2. Nonexclusivity. The indemnification provided by this
Article shall not be deemed exclusive of any other rights to which the person
indemnified may be entitled under any bylaw, agreement, authorization of
shareholders or disinterested directors or otherwise, both as to action in such
person's official capacity and as to action in another capacity while holding
such office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall enure to the benefit of such person's
heirs and legal representatives.
Section 8.3. Insurance. The Corporation shall have power to purchase
and maintain insurance on behalf of any person who is or was a director,
officer, employee, or agent of the Corporation or who is or was serving at the
request of the Corporation as a director, officer, partner, venturer,
proprietor, trustee, employee, agent or similar functionary of another
business, foreign, domestic or non-profit corporation, partnership, joint
venture, sole proprietorship, trust or other enterprise or employee benefit
plan, against any liability asserted against such person and incurred by such
person in such a capacity or arising out of such person's status as such a
person, whether or not the Corporation would have the power to indemnify such
person against that liability under the provisions of this Article or the Texas
Business Corporation Act.
Section 8.4. Witnesses. Notwithstanding any other provision of this
Article, the Corporation shall pay or reimburse expenses incurred by any
director, officer, employee or agent in connection with such person's
appearance as a witness or other participation in a proceeding at a time when
such person is not a named defendant or respondent in such proceeding.
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Article 9
Amendments
Section 9.1. Amendments. The Board of Directors shall have the power
to adopt, amend and repeal from time to time Bylaws of the Corporation. The
shareholders of the Corporation shall not have the power to adopt, amend or
repeal the Bylaws of the Corporation.
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<PAGE> 1
PRIME BANCSHARES, INC.
1997 STOCK INCENTIVE PLAN
I. PURPOSE
The purpose of the PRIME BANCSHARES, INC. 1997 STOCK INCENTIVE PLAN
(the "Plan") is to provide a means through which PRIME BANCSHARES, INC., a
Texas corporation (the "Company"), and its subsidiaries, may attract able
persons to enter the employ of the Company and to provide a means whereby those
key employees upon whom the responsibilities of the successful administration
and management of the Company rest, and whose present and potential
contributions to the welfare of the Company are of importance, can acquire and
maintain stock ownership, thereby strengthening their concern for the welfare
of the Company and their desire to remain in its employ. A further purpose of
the Plan is to provide such key employees with additional incentive and reward
opportunities designed to enhance the profitable growth of the Company.
Accordingly, the Plan provides for granting Incentive Stock Options, options
which do not constitute Incentive Stock Options, Stock Appreciation Rights,
Restricted Stock Awards, Performance Awards, Phantom Stock Awards, or any
combination of the foregoing, as is best suited to the circumstances of the
particular employee as provided herein.
II. DEFINITIONS
The following definitions shall be applicable throughout the Plan
unless specifically modified by any paragraph:
(a) "Affiliates" means any "parent corporation" of the Company and any
"subsidiary" of the Company within the meaning of Code Sections 424(e) and (f),
respectively.
(b) "Award" means, individually or collectively, any Option, Restricted
Stock Award, Phantom Stock Award, Performance Award or Stock Appreciation
Right.
(c) "Board" means the Board of Directors of the Company.
(d) "Change of Control" means the occurrence of any of the following
events: (i) the Company shall not be the surviving entity in any merger,
consolidation or other reorganization (or survives only as a subsidiary of an
entity other than a previously wholly-owned subsidiary of the Company), (ii)
the Company sells, leases or exchanges all or substantially all of its assets
to any other person or entity (other than a wholly-owned subsidiary of the
Company), (iii) the Company is to be dissolved and liquidated, (iv) any person
or entity, including a "group" as contemplated by
<PAGE> 2
Section 13(d)(3) of the 1934 Act, acquires or gains ownership or control
(including, without limitation, power to vote) of more than 50% of the
outstanding shares of the Company's voting stock (based upon voting power), or
(v) as a result of or in connection with a contested election of directors, the
persons who were directors of the Company before such election shall cease to
constitute a majority of the Board.
(e) "Change of Control Value" shall mean (i) the per share price
offered to stockholders of the Company in any such merger, consolidation,
reorganization, sale of assets or dissolution transaction, (ii) the price per
share offered to stockholders of the Company in any tender offer or exchange
offer whereby a Change of Control takes place, or (iii) if such Change of
Control occurs other than pursuant to a tender or exchange offer, the Fair
Market Value per share of the shares into which Awards are exercisable, as
determined by the Committee, whichever is applicable. In the event that the
consideration offered to stockholders of the Company consists of anything other
than cash, the Committee shall determine the fair cash equivalent of the
portion of the consideration offered which is other than cash.
(f) "Code" means the Internal Revenue Code of 1986, as amended.
Reference in the Plan to any section of the Code shall be deemed to include any
amendments or successor provisions to any section and any regulations under
such section.
(g) "Committee" means the Compensation Committee of the Board which
shall be (i) constituted so as to permit the Plan to comply with Rule 16b-3 and
(ii) constituted solely of "outside directors," within the meaning of section
162(m) of the Code and applicable interpretive authority thereunder.
(h) "Company" means Prime Bancshares, Inc. and any of its Affiliates.
(i) "Director" means an individual elected to the Board by the
stockholders of the Company or by the Board under applicable corporate law who
is serving on the Board on the date the Plan is adopted by the Board or is
elected to the Board after such date.
(j) An "employee" means any person (including an officer or a
Director) in an employment relationship with the Company or any parent or
subsidiary corporation (as defined in section 424 of the Code).
(k) "1934 Act" means the Securities Exchange Act of 1934, as amended.
(l) "Fair Market Value" means, as of any specified date, the mean of
the high and low sales prices of the Stock (i) reported by the any interdealer
quotation system on which the Stock is
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quoted on that date or (ii) if the Stock is listed on a national stock
exchange, reported on the stock exchange composite tape on that date; or, in
either case, if no prices are reported on that date, on the last preceding date
on which such prices of the Stock are so reported. If the Stock is traded over
the counter at the time a determination of its fair market value is required to
be made hereunder, its fair market value shall be deemed to be equal to the
average between the reported high and low or closing bid and asked prices of
Stock on the most recent date on which Stock was publicly traded. In the event
Stock is not publicly traded at the time a determination of its value is
required to be made hereunder, the determination of its fair market value shall
be made by the Committee in such manner as it deems appropriate.
(m) "Holder" means an employee who has been granted an Award.
(n) "Incentive Stock Option" means an incentive stock option within the
meaning of section 422(b) of the Code.
(o) "Nonqualified Stock Option" means an option granted under
Paragraph VII of the Plan to purchase Stock which does not constitute an
Incentive Stock Option.
(p) "Option" means an Award granted under Paragraph VII of the Plan
and includes both Incentive Stock Options to purchase Stock and Nonqualified
Stock Options to purchase Stock.
(q) "Option Agreement" means a written agreement between the Company
and a Holder with respect to an Option.
(r) "Performance Award" means an Award granted under Paragraph X of
the Plan.
(s) "Performance Award Agreement" means a written agreement between
the Company and a Holder with respect to a Performance Award.
(t) "Phantom Stock Award" means an Award granted under Paragraph XI
of the Plan.
(u) "Phantom Stock Award Agreement" means a written agreement between
the Company and a Holder with respect to a Phantom Stock Award.
(v) "Plan" means the Prime Bancshares, Inc. 1997 Stock Incentive Plan,
as amended from time to time.
(w) "Restricted Stock Agreement" means a written agreement between the
Company and a Holder with respect to a Restricted Stock Award.
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(x) "Restricted Stock Award" means an Award granted under Paragraph IX
of the Plan.
(y) "Rule 16b-3" means SEC Rule 16b-3 promulgated under the 1934 Act,
as such may be amended from time to time, and any successor rule, regulation or
statute fulfilling the same or a similar function.
(z) "Spread" means, in the case of a Stock Appreciation Right, an
amount equal to the excess, if any, of the Fair Market Value of a share of
Stock on the date such right is exercised over the exercise price of such Stock
Appreciation Right.
(aa) "Stock" means the common stock, $0.25 par value, of the Company.
(bb) "Stock Appreciation Right" means an Award granted under Paragraph
VIII of the Plan.
(cc) "Stock Appreciation Rights Agreement" means a written agreement
between the Company and a Holder with respect to an Award of Stock Appreciation
Rights.
III. EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan shall be effective upon the date of its adoption by the
Board, provided that the Plan is approved by the stockholders of the Company
within twelve months thereafter. No further Awards may be granted under the
Plan after the expiration of ten years from the date of its adoption by the
Board. The Plan shall remain in effect until all Awards granted under the Plan
have been satisfied or expired.
IV. ADMINISTRATION
(a) Committee. The Plan shall be administered by the Committee.
(b) Powers. Subject to the provisions of the Plan, the Committee shall
have sole authority, in its discretion, to determine which employees shall
receive an Award, the time or times when such Award shall be made, whether an
Incentive Stock Option, Nonqualified Option or Stock Appreciation Right shall
be granted, the number of shares of Stock which may be issued under each
Option, Stock Appreciation Right or Restricted Stock Award, and the value of
each Performance Award and Phantom Stock Award. In making such determinations
the Committee may take into account the nature of the services rendered by the
respective employees, their present and potential contributions to the
Company's success and such other factors as the Committee in its discretion
shall deem relevant.
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<PAGE> 5
(c) Additional Powers. The Committee shall have such additional powers
as are delegated to it by the other provisions of the Plan. Subject to the
express provisions of the Plan, the Committee is authorized to construe the
Plan and the respective agreements executed thereunder, to prescribe such rules
and regulations relating to the Plan as it may deem advisable to carry out the
Plan, and to determine the terms, restrictions and provisions of each Award,
including such terms, restrictions and provisions as shall be requisite in the
judgment of the Committee to cause designated Options to qualify as Incentive
Stock Options, and to make all other determinations necessary or advisable for
administering the Plan. The Committee may correct any defect or supply any
omission or reconcile any inconsistency in any agreement relating to an Award
in the manner and to the extent it shall deem expedient to carry it into
effect. The determinations of the Committee on the matters referred to in this
Article IV shall be conclusive.
V. GRANT OF OPTIONS, STOCK APPRECIATION RIGHTS,
RESTRICTED STOCK AWARDS, PERFORMANCE AWARDS
AND PHANTOM STOCK AWARDS; SHARES SUBJECT TO THE PLAN
(a) Stock Grant and Award Limits. The Committee may from time to time
grant Awards to one or more employees determined by it to be eligible for
participation in the Plan in accordance with the provisions of Paragraph VI.
Subject to Paragraph XII, the aggregate number of shares of Stock that may be
issued under the Plan shall not exceed 1,000,000 shares. Shares of Stock shall
be deemed to have been issued under the Plan only to the extent actually issued
and delivered pursuant to an Award. To the extent that an Award lapses or the
rights of its Holder terminate or the Award is paid in cash, any shares of
Stock subject to such Award shall again be available for the grant of an Award.
To the extent that an Award lapses or the rights of its Holder terminate, any
shares of Stock subject to such Award shall again be available for the grant of
an Award. Separate stock certificates shall be issued by the Company for those
shares acquired pursuant the exercise of an Incentive Stock Option and for
those shares acquired pursuant to the exercise of a Nonqualified Stock Option.
(b) Stock Offered. The stock to be offered pursuant to the grant of an
Award may be authorized but unissued Stock or Stock previously issued and
outstanding and reacquired by the Company.
VI. ELIGIBILITY
Awards may be granted only to persons who, at the time of grant, are
key employees. Awards may not be granted to any Director who is not an
employee. An Award may be granted on more than one occasion to the same person,
and, subject to the limitations set forth in the Plan, such Award may include
an Incentive Stock Option or a Nonqualified Stock Option, a Stock Appreciation
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Right, a Restricted Stock Award, a Performance Award, a Phantom Stock Award or
any combination thereof.
VII. STOCK OPTIONS
(a) Option Period. The term of each Option shall be as specified by
the Committee at the date of grant.
(b) Limitations on Exercise of Option. An Option shall be exercisable
in whole or in such installments and at such times as determined by the
Committee.
(c) Special Limitations on Incentive Stock Options. To the extent that
the aggregate Fair Market Value (determined at the time the respective
Incentive Stock Option is granted) of Stock with respect to which Incentive
Stock Options are exercisable for the first time by an individual during any
calendar year under all incentive stock option plans of the Company and its
parent and subsidiary corporations exceeds $100,000, such Incentive Stock
Options shall be treated as Nonqualified Stock Options as determined by the
Committee. The Committee shall determine, in accordance with applicable
provisions of the Code, Treasury Regulations and other administrative
pronouncements, which of an optionee's Incentive Stock Options will not
constitute Incentive Stock Options because of such limitation and shall notify
the optionee of such determination as soon as practicable after such
determination. No Incentive Stock Option shall be granted to an individual if,
at the time the Option is granted, such individual owns stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company or of its parent or subsidiary corporation, within the meaning of
section 422(b)(6) of the Code, unless (i) at the time such Option is granted
the option price is at least 110% of the Fair Market Value of the Stock subject
to the Option and (ii) such Option by its terms is not exercisable after the
expiration of five years from the date of grant.
(d) Option Agreement. Each Option shall be evidenced by an Option
Agreement in such form and containing such provisions not inconsistent with the
provisions of the Plan as the Committee from time to time shall approve,
including, without limitation, provisions to qualify an Incentive Stock Option
under section 422 of the Code. An Option Agreement may provide for the payment
of the option price, in whole or in part, by the delivery of a number of shares
of Stock (plus cash if necessary) having a Fair Market Value equal to such
option price. Each Option Agreement shall provide that the Option may not be
exercised earlier than six months from the date of grant and shall specify the
effect of termination of employment on the exercisability of the Option.
Moreover, an Option Agreement may provide for a "cashless exercise" of the
Option by establishing procedures whereby the Holder, by a properly-executed
written notice, directs (i) an immediate market sale or margin loan respecting
all or a part of the shares of Stock to which he is entitled upon exercise
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<PAGE> 7
pursuant to an extension of credit by the Company to the Holder of the option
price, (ii) the delivery of the shares of Stock from the Company directly to a
brokerage firm and (iii) the delivery of the option price from the sale or
margin loan proceeds from the brokerage firm directly to the Company. Such
Option Agreement may also include, without limitation, provisions relating to
(i) vesting of Options, subject to the provisions hereof accelerating such
vesting on a Change of Control, (ii) tax matters (including provisions (y)
permitting the delivery of additional shares of Stock or the withholding of
shares of Stock from those acquired upon exercise to satisfy federal or state
income tax withholding requirements and (z) dealing with any other applicable
employee wage withholding requirements), and (iii) any other matters not
inconsistent with the terms and provisions of this Plan that the Committee
shall in its sole discretion determine. The terms and conditions of the
respective Option Agreements need not be identical.
(e) Option Price and Payment. The price at which a share of Stock may
be purchased upon exercise of an Option shall be determined by the Committee,
but (i) such purchase price shall not be less than the Fair Market Value of
Stock subject to an Incentive Stock Option on the date the Incentive Stock
Option is granted and (ii) such purchase price shall be subject to adjustment
as provided in Paragraph XII. The Option or portion thereof may be exercised by
delivery of an irrevocable notice of exercise to the Company. The purchase
price of the Option or portion thereof shall be paid in full in the manner
prescribed by the Committee.
(f) Stockholder Rights and Privileges. The Holder shall be entitled to
all the privileges and rights of a stockholder only with respect to such shares
of Stock as have been purchased under the Option and for which certificates of
stock have been registered in the Holder's name.
(g) Options and Rights in Substitution for Stock Options Granted by
Other Corporations. Options and Stock Appreciation Rights may be granted under
the Plan from time to time in substitution for stock options held by
individuals employed by corporations who become employees as a result of a
merger or consolidation of the employing corporation with the Company or any
subsidiary, or the acquisition by the Company or a subsidiary of the assets of
the employing corporation, or the acquisition by the Company or a subsidiary of
stock of the employing corporation with the result that such employing
corporation becomes a subsidiary.
VIII. STOCK APPRECIATION RIGHTS
(a) Stock Appreciation Rights. A Stock Appreciation Right is the right
to receive an amount equal to the Spread with respect to a share of Stock upon
the exercise of such Stock Appreciation Right. Stock Appreciation Rights may be
granted in connection with the grant of an Option, in which case the Option
Agreement will provide that exercise of Stock Appreciation Rights will result
in the surrender of the right to purchase the shares under the Option as to
which the Stock
-7-
<PAGE> 8
Appreciation Rights were exercised. Alternatively, Stock Appreciation Rights
may be granted independently of Options in which case each Award of Stock
Appreciation Rights shall be evidenced by a Stock Appreciation Rights Agreement
which shall contain such terms and conditions as may be approved by the
Committee. The Spread with respect to a Stock Appreciation Right may be payable
either in cash, shares of Stock with a Fair Market Value equal to the Spread or
in a combination of cash and shares of Stock. With respect to Stock
Appreciation Rights that are subject to Section 16 of the 1934 Act, however,
the Committee shall, except as provided in Paragraph XII(c), retain sole
discretion (i) to determine the form in which payment of the Stock Appreciation
Right will be made (i.e., cash, securities or any combination thereof) or (ii)
to approve an election by a Holder to receive cash in full or partial
settlement of Stock Appreciation Rights. Each Stock Appreciation Rights
Agreement shall provide that the Stock Appreciation Rights may not be exercised
earlier than six months from the date of grant and shall specify the effect of
termination of employment on the exercisability of the Stock Appreciation
Rights.
(b) Other Terms and Conditions. At the time of such Award, the
Committee, may in its sole discretion, prescribe additional terms, conditions
or restrictions relating to Stock Appreciation Rights, including, but not
limited to rules pertaining to termination of employment (by retirement,
disability, death or otherwise) of a Holder prior to the expiration of such
Stock Appreciation Rights. Such additional terms, conditions or restrictions
shall be set forth in the Stock Appreciation Rights Agreement made in
conjunction with the Award. Such Stock Appreciation Rights Agreements may also
include, without limitation, provisions relating to (i) vesting of Awards,
subject to the provisions hereof accelerating vesting on a Change of
Control,(ii) tax matters (including provisions covering applicable wage
withholding requirements), and (iii) any other matters not inconsistent with
the terms and provisions of this Plan, that the Committee shall in its sole
discretion determine. The terms and conditions of the respective Appreciation
Rights Agreements need not be identical.
(c) Exercise Price. The exercise price of each Stock Appreciation
Right shall be determined by the Committee, but such exercise price (i) shall
not be less than the Fair Market Value of a share of Stock on the date the
Stock Appreciation Right is granted (or such greater exercise price as may be
required if such Stock Appreciation Right is granted in connection with an
Incentive Stock Option that must have an exercise price equal to 110% of the
Fair Market Value of the Stock on the date of grant pursuant to Paragraph
VII(c)), and (ii) shall be subject to adjustment as provided in Paragraph XII.
(d) Exercise Period. The term of each Stock Appreciation Right shall
be as specified by the Committee at the date of grant.
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<PAGE> 9
(e) Limitations on Exercise of Stock Appreciation Right. A Stock
Appreciation Right shall be exercisable in whole or in such installments and at
such times as determined by the Committee.
IX. RESTRICTED STOCK AWARDS
(a) Forfeiture Restrictions to be Established by the Committee. Shares
of Stock that are the subject of a Restricted Stock Award shall be subject to
restrictions on disposition by the Holder and an obligation of the Holder to
forfeit and surrender the shares to the Company under certain circumstances
(the "Forfeiture Restrictions"). The Forfeiture Restrictions shall be
determined by the Committee in its sole discretion, and the Committee may
provide that the Forfeiture Restrictions shall lapse upon (i) the attainment of
targets established by the Committee that are based on (1) the price of a share
of Stock, (2) the Company's earnings per share, (3) the Company's revenue, (4)
the revenue of a business unit of the Company designated by the Committee, (5)
the return on stockholders' equity achieved by the Company, or (6) the
Company's pre-tax cash flow from operations, (ii) the Holder's continued
employment with the Company for a specified period of time, or (iii) a
combination of any two or more of the factors listed in clauses (i) and (ii) of
this sentence. Each Restricted Stock Award may have different Forfeiture
Restrictions, in the discretion of the Committee. The Forfeiture Restrictions
applicable to a particular Restricted Stock Award shall not be changed except
as permitted by Paragraph IX(b) or Paragraph XII.
(b) Other Terms and Conditions. Stock awarded pursuant to a Restricted
Stock Award shall be represented by a stock certificate registered in the name
of the Holder of such Restricted Stock Award. The Holder shall have the right
to receive dividends with respect to Stock subject to a Restricted Stock Award,
to vote Stock subject thereto and to enjoy all other stockholder rights, except
that (i) the Holder shall not be entitled to delivery of the stock certificate
until the Forfeiture Restrictions shall have expired, (ii) the Company shall
retain custody of the Stock until the Forfeiture Restrictions shall have
expired, (iii) the Holder may not sell, transfer, pledge, exchange, hypothecate
or otherwise dispose of the Stock until the Forfeiture Restrictions shall have
expired, and (iv) a breach of the terms and conditions established by the
Committee pursuant to the Restricted Stock Agreement, shall cause a forfeiture
of the Restricted Stock Award. At the time of such Award, the Committee may, in
its sole discretion, prescribe additional terms, conditions or restrictions
relating to Restricted Stock Awards, including, but not limited to, rules
pertaining to the termination of employment (by retirement, disability, death
or otherwise) of a Holder prior to expiration of the Forfeiture Restrictions.
Such additional terms, conditions or restrictions shall be set forth in a
Restricted Stock Agreement made in conjunction with the Award. Such Restricted
Stock Agreement may also include, without limitation, provisions relating to
(i) subject to the provisions hereof accelerating vesting on a Change of
Control, vesting of Awards, (ii) tax matters (including provisions (y) covering
any applicable employee wage withholding requirements and (z) prohibiting
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<PAGE> 10
an election by the Holder under section 83(b) of the Code), and (iii) any other
matters not inconsistent with the terms and provisions of this Plan that the
Committee shall in its sole discretion determine. The terms and conditions of
the respective Restricted Stock Agreements need not be identical.
(c) Payment for Restricted Stock. The Committee shall determine the
amount and form of any payment for Stock received pursuant to a Restricted
Stock Award, provided that in the absence of such a determination, a Holder
shall not be required to make any payment for Stock received pursuant to a
Restricted Stock Award, except to the extent otherwise required by law.
(d) Agreements. At the time any Award is made under this Paragraph IX,
the Company and the Holder shall enter into a Restricted Stock Agreement
setting forth each of the matters as the Committee may determine to be
appropriate. The terms and provisions of the respective Restricted Stock
Agreements need not be identical.
X. PERFORMANCE AWARDS
(a) Performance Period. The Committee shall establish, with respect to
and at the time of each Performance Award, a performance period over which the
performance of the Holder shall be measured.
(b) Performance Awards. Each Performance Award shall have a maximum
value established by the Committee at the time of such Award.
(c) Performance Measures. A Performance Award shall be awarded to an
employee contingent upon future performance of the employee, the Company or any
subsidiary, division or department thereof by or in which is he employed during
the performance period. The Committee shall establish the performance measures
applicable to such performance prior to the beginning of the performance period
but subject to such later revisions as the Committee shall deem appropriate to
reflect significant, unforeseen events or changes.
(d) Awards Criteria. In determining the value of Performance Awards,
the Committee shall take into account an employee's responsibility level,
performance, potential, other Awards and such other considerations as it deems
appropriate.
(e) Payment. Following the end of the performance period, the Holder
of a Performance Award shall be entitled to receive payment of an amount, not
exceeding the maximum value of the Performance Award, based on the achievement
of the performance measures for such performance period, as determined by the
Committee. Payment of a Performance Award may be made in cash,
-10-
<PAGE> 11
Stock or a combination thereof, as determined by the Committee. Payment shall
be made in a lump sum or in installments as prescribed by the Committee. Any
payment to be made in Stock shall be based on the Fair Market Value of the
Stock on the payment date. If a payment of cash is to be made on a deferred
basis, the Committee shall establish whether interest shall be credited, the
rate thereof and any other terms and conditions applicable thereto.
(f) Termination of Employment. A Performance Award shall terminate if
the Holder does not remain continuously in the employ of the Company at all
times during the applicable performance period, except as may be determined by
the Committee or as may otherwise be provided in the Award at the time granted.
(g) Agreements. At the time any Award is made under this Paragraph X,
the Company and the Holder shall enter into a Performance Award Agreement
setting forth each of the matters contemplated hereby, and, in addition such
matters are set forth in Paragraph IX(b) as the Committee may determine to be
appropriate. The terms and provisions of the respective agreements need not be
identical.
XI. PHANTOM STOCK AWARDS
(a) Phantom Stock Awards. Phantom Stock Awards are rights to receive
shares of Stock (or cash in an amount equal to the Fair Market Value thereof),
or rights to receive an amount equal to any appreciation in the Fair Market
Value of Stock (or portion thereof) over a specified period of time, which vest
over a period of time or upon the occurrence of an event (including without
limitation a Change of Control) as established by the Committee, without
payment of any amounts by the Holder thereof (except to the extent otherwise
required by law) or satisfaction of any performance criteria or objectives.
Each Phantom Stock Award shall have a maximum value established by the
Committee at the time of such Award.
(b) Award Period. The Committee shall establish, with respect to and
at the time of each Phantom Stock Award, a period over which or the event upon
which the Award shall vest with respect to the Holder.
(c) Awards Criteria. In determining the value of Phantom Stock Awards,
the Committee shall take into account an employee's responsibility level,
performance, potential, other Awards and such other considerations as it deems
appropriate.
(d) Payment. Following the end of the vesting period for a Phantom
Stock Award, the Holder of a Phantom Stock Award shall be entitled to receive
payment of an amount, not exceeding the maximum value of the Phantom Stock
Award, based on the then vested value of the Award.
-11-
<PAGE> 12
Payment of a Phantom Stock Award may be made in cash, Stock or a combination
thereof as determine by the Committee. Payment shall be made in a lump sum or
in installments as prescribed by the Committee in its sole discretion. Any
payment to be made in Stock shall be based on the Fair Market Value of the
Stock on the payment date. Cash dividend equivalents may be paid during or
after the vesting period with respect to a Phantom Stock Award, as determined
by the Committee. If a payment of cash is to be made on a deferred basis, the
Committee shall establish whether interest shall be credited, the rate thereof
and any other terms and conditions applicable thereto.
(e) Termination of Employment. A Phantom Stock Award shall terminate
if the Holder does not remain continuously in the employ of the Company at all
times during the applicable vesting period, except as may be otherwise
determined by the Committee or as set forth in the Award at the time of grant.
(f) Agreements. At the time any Award is made under this Paragraph XI,
the Company and the Holder shall enter into a Phantom Stock Award Agreement
setting forth each of the matters contemplated hereby and, in addition such
matters as are set forth in Paragraph IX(b) as the Committee may determine to
be appropriate. The terms and provisions of the respective agreements need not
be identical.
XII. RECAPITALIZATION OR REORGANIZATION
(a) The shares with respect to which Awards may be granted are shares
of Stock as presently constituted, but if, and whenever, prior to the
expiration of an Award theretofore granted, the Company shall effect a
subdivision or consolidation by the Company, the number of shares of Stock with
respect to which such Award may thereafter be exercised or satisfied, as
applicable, (i) in the event of an increase in the number of outstanding shares
shall be proportionately increased, and the purchase price per share shall be
proportionately reduced, and (ii) in the event of a reduction in the number of
outstanding shares shall be proportionately reduced, and the purchase price per
share shall be proportionately increased.
(b) If the Company recapitalizes or otherwise changes its capital
structure, thereafter upon any exercise or satisfaction, as applicable, of an
Award theretofore granted the Holder shall be entitled to (or entitled to
purchase, if applicable) under such Award, in lieu of the number of shares of
Stock then covered by such Award, the number and class of shares of stock and
securities to which the Holder would have been entitled pursuant to the terms
of the recapitalization if, immediately prior to such recapitalization, the
Holder had been the holder of record of the number of shares of Stock then
covered by such Award.
-12-
<PAGE> 13
(c) In the event of a Change of Control, all outstanding Awards shall
immediately vest and become exercisable or satisfiable, as applicable. The
Committee, in its discretion, may determine that upon the occurrence of a
Change of Control, each Award other than an Option outstanding hereunder shall
terminate within a specified number of days after notice to the Holder, and
such Holder shall receive, with respect to each share of Stock subject to such
Award, cash in an amount equal to the excess, if any, of the Change of Control
Value. Further, in the event of a Change of Control, the Committee, in its
discretion shall act to effect one or more of the following alternatives with
respect to outstanding Options, which may vary among individual Holders and
which may vary among Options held by any individual Holder: (i) determine a
limited period of time on or before a specified date (before or after such
Change of Control) after which specified date all unexercised Options and all
rights of Holders thereunder shall terminate, (2) require the mandatory
surrender to the Company by selected Holders of some or all of the outstanding
Options held by such Holders (irrespective of whether such Options are then
exercisable under the provisions of the Plan) as of a date, before or after
such Change of Control, specified by the Committee, in which event the
Committee shall thereupon cancel such Options and the Company shall pay to each
Holder an amount of cash per share equal to the excess, if any, of the Change
of Control Value of the shares subject to such Option over the exercise
price(s) under such Options for such shares, (3) make such adjustments to
Options then outstanding as the Committee deems appropriate to reflect such
Change of Control (provided, however, that the Committee may determine in its
sole discretion that no adjustment is necessary to Options then outstanding) or
(4) provide that thereafter upon any exercise of an Option theretofore granted
the Holder shall be entitled to purchase under such Option, in lieu of the
number of shares of Stock then covered by such Option the number and class of
shares of stock or other securities or property (including, without limitation,
cash) to which the Holder would have been entitled pursuant to the terms of the
agreement of merger, consolidation or sale of assets and dissolution if,
immediately prior to such merger, consolidation or sale of assets and
dissolution the Holder has been the holder of record of the number of shares of
Stock then covered by such Option. The provisions contained in this paragraph
shall be inapplicable to an Award granted within six (6) months before the
occurrence of a Change of Control if the Holder of such Award is subject to the
reporting requirements of Section 16(a) of the 1934 Act. The provisions
contained in this paragraph shall not terminate any rights of the Holder to
further payments pursuant to any other agreement with the Company following a
Change of Control.
(d) In the event of changes in the outstanding Stock by reason of
recapitalization, reorganizations, mergers, consolidations, combinations,
exchanges or other relevant changes in capitalization occurring after the date
of the grant of any Award and not otherwise provided for by this Paragraph XII,
any outstanding Awards and any agreements evidencing such Awards shall be
subject to adjustment by the Committee at its discretion as to the number and
price of shares of Stock or other consideration subject to such Awards. In the
event of any such change in the outstanding
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<PAGE> 14
Stock, the aggregate number of shares available under the Plan may be
appropriately adjusted by the Committee, whose determination shall be
conclusive.
(e) The existence of the Plan and the Awards granted hereunder shall
not affect in any way the right or power of the Board or the stockholders of
the Company to make or authorize any adjustment, recapitalization,
reorganization or other change in the Company's capital structure or its
business, any merger or consolidation of the Company, any issue of debt or
equity securities ahead of or affecting Stock or the rights thereof, the
dissolution or liquidation of the Company or any sale, lease, exchange or other
disposition of all or any part of its assets or business or any other corporate
act or proceeding.
(f) Any adjustment provided for in Subparagraphs (a), (b), (c) or (d)
above shall be subject to any required stockholder action.
(g) Except as hereinbefore expressly provided, the issuance by the
Company of shares of stock of any class or securities convertible into shares
of stock of any class, for cash, property, labor or services, upon direct sale,
upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares of obligations of the Company convertible into such shares
or other securities, and in any case whether or not for fair value, shall not
affect, and no adjustment by reason thereof shall be made with respect to, the
number of shares of Stock subject to Awards theretofore granted or the purchase
price per share, if applicable.
XIII. AMENDMENT AND TERMINATION OF THE PLAN
The Board in its discretion may terminate the Plan at any time with
respect to any shares for which Awards have not theretofore been granted. The
Board shall have the right to alter or amend the Plan or any part thereof from
time to time; provided that no change in any Award theretofore granted may be
made which would impair the rights of the Holder without the consent of the
Holder (unless such change is required in order to cause the benefits under the
Plan to qualify as performance-based compensation within the meaning of section
162(m) of the Code and applicable interpretive authority thereunder), and
provided, further, that the Board may not, without approval of the
stockholders, amend the Plan:
(a) to increase the maximum number of shares which may be issued on
exercise or surrender of an Award, except as provided in Paragraph XII;
(b) to change the Option price;
-14-
<PAGE> 15
(c) to change the class of employees eligible to receive Awards or
materially increase the benefits accruing to employees under the Plan;
(d) to extend the maximum period during which Awards may be granted
under the Plan;
(e) to modify materially the requirements as to eligibility for
participation in the Plan; or
(f) to decrease any authority granted to the Committee hereunder in
contravention of Rule 16b-3.
XIV. MISCELLANEOUS
(a) No Right to An Award. Neither the adoption of the Plan by the
Company nor any action of the Board or the Committee shall be deemed to give an
employee any right to be granted an Award to purchase Stock, a right to a Stock
Appreciation Right, a Restricted Stock Award, a Performance Award or a Phantom
Stock Award or any of the rights hereunder except as may be evidenced by an
Award or by an Option Agreement, Stock Appreciation Rights Agreement,
Restricted Stock Agreement, Performance Award Agreement or Phantom Stock Award
Agreement on behalf of the Company, and then only to the extent and on the
terms and conditions expressly set forth therein. The Plan shall be unfunded.
The Company shall not be required to establish any special or separate fund or
to make any other segregation of funds or assets to assure the payment of any
Award.
(b) No Employment Rights Conferred. Nothing contained in the Plan
shall (i) confer upon any employee any right with respect to continuation of
employment with the Company or any subsidiary or (ii) interfere in any way with
the right of the Company or any subsidiary to terminate his or her employment
at any time.
(c) Other Laws; Withholding. The Company shall not be obligated to
issue any Stock pursuant to any Award granted under the Plan at any time when
the shares covered by such Award have not been registered under the Securities
Act of 1933 and such other state and federal laws, rules or regulations as the
Company or the Committee deems applicable and, in the opinion of legal counsel
for the Company, there is no exemption from the registration requirements of
such laws, rules or regulations available for the issuance and sale of such
shares. No fractional shares of Stock shall be delivered, nor shall any cash in
lieu of fractional shares be paid. The Company shall have the right to deduct
in connection with all Awards any taxes required by law to be withheld and to
require any payments required to enable it to satisfy its withholding
obligations.
-15-
<PAGE> 16
(d) No Restriction on Corporate Action. Nothing contained in the Plan
shall be construed to prevent the Company or any subsidiary from taking any
corporate action which is deemed by the Company or such subsidiary to be
appropriate or in its best interest, whether or not such action would have an
adverse effect on the Plan or any Award made under the Plan. No employee,
beneficiary or other person shall have any claim against the Company or any
subsidiary as a result of any such action.
(e) Restrictions on Transfer. An Award shall not be transferable
otherwise than by will or the laws of descent and distribution or pursuant to a
"qualified domestic relations order" as defined by the Code or Title I of the
Employee Retirement Income Security Act of 1974, as amended, or the rules
thereunder, and shall be exercisable during the Holder's lifetime only by such
Holder or the Holder's guardian or legal representative.
(f) Rule 16b-3. It is intended that the Plan and any grant of an Award
made to a person subject to Section 16 of the 1934 Act meet all of the
requirements of Rule 16b-3. If any provision of the Plan or any such Award
would disqualify the Plan or such Award under, or would otherwise not comply
with, Rule 16b-3, such provision or Award shall be construed or deemed amended
to conform to Rule 16b-3.
(g) Section 162(m). If the plan is subject to 162(m) of the Code, it
is intended that the Plan comply fully with and meet all the requirements of
Section 162(m) of the Code so that Options and Stock Appreciation Rights
granted hereunder and, if determined by the Committee, Restricted Stock Awards,
shall constitute "performance-based" compensation within the meaning of such
section. If any provision of the Plan would disqualify the Plan or would not
otherwise permit the Plan to comply with Section 162(m) as so intended, such
provision shall be construed or deemed amended to conform to the requirements
or provisions of Section 162(m); provided that no such construction or
amendment shall have an adverse effect on the economic value to a Holder of any
Award previously granted hereunder.
(h) Governing Law. This Plan shall be construed in accordance with the
laws of the State of Texas.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 24, 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".
GRANT THORNTON LLP
Houston, Texas
August 6, 1997
<PAGE> 1
Exhibit 24
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.
IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney
this 5th day of August, 1997.
/s/ C.C. SMITHERMAN
---------------
C.C. Smitherman
<PAGE> 2
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.
IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney
this 5th day of August, 1997.
/s/ JERRY S. DOMINY
---------------
Jerry S. Dominy
<PAGE> 3
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.
IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney
this 5th day of August, 1997.
/s/ DAVID PASTERNAK
---------------
David Pasternak
<PAGE> 4
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 do be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney
this 5th day of August, 1997.
/s/ JAMES B. WESLEY
---------------
James B. Wesley
<PAGE> 5
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.
IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney
this 5th day of August, 1997.
/s/ STUART D. SAUNDERS
------------------
Stuart D. Saunders
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 34,006
<INT-BEARING-DEPOSITS> 0
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0
7,000
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</TABLE>
