<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 4, 1997.
REGISTRATION NO. 333-36185
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BAY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TEXAS 6711 76-0046244
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
<TABLE>
<S> <C>
L.D. WRIGHT
PRESIDENT
1001 HIGHWAY 146 SOUTH 1001 HIGHWAY 146 SOUTH
LAPORTE, TEXAS 77571 LAPORTE, TEXAS 77571
(281) 471-4400 (281) 471-4400
(Address, including zip code, and telephone number, (Name, address, including zip code and telephone
including area code, of registrant's principal number, including area code, of agent for service)
executive offices)
</TABLE>
--------------------------
COPIES TO:
<TABLE>
<S> <C>
JOHN R. BRANTLEY, ESQ. HERBERT H. DAVIS, III, ESQ.
WILLIAM T. LUEDKE IV, ESQ. ROTHGERBER, APPEL, POWERS & JOHNSON, LLP
BRACEWELL & PATTERSON, L.L.P. ONE TABOR CENTER, SUITE 3000
2900 SOUTH TOWER PENNZOIL PLACE 1200 SEVENTEENTH STREET
HOUSTON, TEXAS 77002-2781 DENVER, COLORADO 80202-5839
</TABLE>
--------------------------
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
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
<S> <C> <C> <C> <C>
Common Stock, $1.00 par value.......... 690,000 $15.00 $10,350,000 $3,136
</TABLE>
(1) Includes 90,000 shares of Common Stock subject to the Underwriter's
over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) The registration fee has been previously paid.
--------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 4, 1997
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.
<PAGE>
600,000 SHARES
[LOGO]
BAY BANCSHARES, INC.
COMMON STOCK
------------------
All of the shares of Common Stock (the "Common Stock") offered hereby (the
"Offering") are being sold by Bay Bancshares, Inc. (the "Company"). The Company,
which is headquartered in LaPorte, Texas, serves as a bank holding company for
its wholly-owned subsidiary, Bayshore National Bank of La Porte (the "Bank").
Simultaneously with the closing of the Offering, the Company intends to acquire
Texas Bank, Baytown, Texas ("Texas Bank"), and plans to consummate its
acquisition of Texas National Bank of Baytown ("TNB") and First Bank of Deer
Park ("First Bank") on or about November 21, 1997. The proceeds of the Offering
will be used to fund the purchase price for the acquisition of Texas Bank and to
fund a portion of the purchase price for the acquisitions of TNB and First Bank.
The closing of the Offering is contingent upon the closing of the acquisition of
Texas Bank, but is not contingent upon the closing of the acquisition of either
TNB or First Bank. See "The Acquisitions" and "Use of Proceeds."
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 Hoefer & Arnett, Incorporated (the
"Underwriter"). It is estimated that the initial public offering price will be
in the range of $14.00 to $16.00 per share. See "Underwriting." The shares of
Common Stock have been approved for quotation on The Nasdaq Stock Market's
National Market ("Nasdaq/ National Market") under the symbol "BAYB."
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT
ACCOUNTS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
BANK INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY.
SEE "RISK FACTORS" ON PAGE 16 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 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.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................................ $ $ $
Total(3)................................................. $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriter 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
$300,000.
(3) The Company has granted the Underwriter a 30-day option to purchase up to
90,000 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 Discounts and
Commissions and Proceeds to Company will be approximately $ , $ ,
and $ , respectively. See "Underwriting."
The shares of Common Stock to be distributed to the public are offered by
the Underwriter subject to prior sale, when, as and if received and accepted by
the Underwriter, subject to approval of certain legal matters by counsel for the
Underwriter and certain other conditions. 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.
--------------------------
HOEFER & ARNETT
INCORPORATED
The date of this Prospectus is , 1997
<PAGE>
[MAP OF LOCATIONS]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER 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 OF THE COMMON
STOCK, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
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 INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITER'S OVER-ALLOTMENT OPTION IS NOT EXERCISED. 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 FACTORS DESCRIBED HEREIN, INCLUDING THOSE FACTORS DESCRIBED IN
"RISK FACTORS" AND OTHER FACTORS BEYOND THE COMPANY'S CONTROL COULD CAUSE ACTUAL
EXPERIENCE TO VARY MATERIALLY FROM THE FUTURE RESULTS COVERED IN SUCH
FORWARD-LOOKING STATEMENTS.
THE COMPANY
Bay Bancshares, Inc. (the "Company") is a bank holding company headquartered
in La Porte, Texas, which is located in eastern Harris County, the county that
comprises most of the greater Houston metropolitan area. The Company currently
has seven full-service locations and three loan production offices ("LPOs"). The
acquisitions of Texas Bank, Baytown, Texas ("Texas Bank"), Texas National Bank
of Baytown ("TNB"), and First Bank of Deer Park ("First Bank") (collectively,
the "Acquisitions") will give the Company two branch locations in Baytown, one
in Deer Park and one in Mont Belvieu. At June 30, 1997, the Company had total
assets of $185.1 million, total loans of $115.2 million, total deposits of
$169.9 million and total stockholders' equity of $13.8 million. Assuming the
successful completion of the Acquisitions and the Offering as of June 30, 1997,
total assets, total loans, total deposits and total stockholders' equity on a
proforma basis would have been approximately $272.6 million, $153.4 million,
$246.9 million and $21.9 million, respectively.
The Company's strategic goal is to be the premier provider of financial
services to small and medium-sized businesses and individuals in the eastern
portion of the greater Houston metropolitan area. There is, however, no
guarantee that the Company will achieve its strategic goal or any estimate of
when such goal will be achieved. Management believes that its strategic goal can
be achieved and maintained through the following:
- Superior Customer Service--Through technology and a focus on prompt,
personal service, the Company has successfully competed with much larger
institutions. For example, the Company has enhanced its relationship
banking capabilities by marketing individually to the top 15% of its
customer base. The top 5% of the Company's customers are provided with a
pass key which enables them to enter the Bank through a private entrance
before and after normal banking hours and are assigned a specific Bank
officer to service their banking needs. The Company has made significant
investments in technology which management believes will allow it to
compete with any super-regional or national banking organization with
respect to communications and electronic convenience to the customer.
- Motivated Employees--The Company continually trains its employees in the
areas of successful sales and service, long-term customer relationships,
teller excellence, business development and consumer lending. As part of
this process, virtually every employee is placed on incentive and merit
standards which award compensation based on the achievement of sales goals
and other business development-related goals.
- A Full Range of Products--The Company offers a wide variety of lending
products including term loans, lines of credit and fixed asset loans to
small and medium-sized businesses, and offers its consumer customers a
full range of products, including automobile loans, home improvement loans
and personal loans. In addition, the Company has established "niche"
products such as loans guaranteed by the United States Small Business
Administration ("SBA"), commercial loans to
3
<PAGE>
owner-operated manufacturing and petrochemical service businesses,
"indirect" installment lending and factoring. To compliment its
traditional banking products, the Company endeavors to be a full financial
services organization and has developed additional financial services such
as brokerage services and annuity vehicles and is in the process of
forming an independent insurance agency offering a full line of commercial
and consumer insurance products.
- Enhanced Delivery System--The Company plans to enhance its existing
delivery system by expanding its branch network, either by acquisitions or
de novo branches, in the eastern portion of the Houston metropolitan area,
and through the establishment of additional LPOs outside of this area in
order to market the Company's niche products.
In addition to these strategic advantages, management believes the following
financial initiatives will help the Company increase profitability and maximize
stockholder value:
- Changing Loan Mix--In 1988, the Company initiated a program of purchasing
indirect loans, which are installment loans originated by automobile
dealers for the purpose of financing consumer purchases. The Company
purchases almost exclusively "A"-rated loans. There is no objective
standard for "A"-rated loans, but such loans are viewed by management as
the most creditworthy types of loans, in that they possess low loan to
value ratios and are made to stable borrowers with well established, good
credit histories. Management believes that the program has been successful
both from the standpoint of growth and credit quality. However, because of
increasing competition and accompanying pressure on net interest margins
in the indirect market, management has broadened its focus to expand its
other niche lending products, including SBA guaranteed credits via the
Company's three LPOs, commercial lending to local manufacturing and
petrochemical service companies and accounts receivable factoring. These
are generally higher yielding products which management views as having
strong growth potential in the Company's market area. If the Company is
successful in growing these niche products, its net interest margin should
be positively affected.
- Increasing Fee Income Sources--To supplement the noninterest income
produced from its niche lending and deposit products, the Company is
developing other sources of fee income. The Company currently has 12 Class
1 licensed insurance agents and four licensed brokers assisting customers
with fixed rate brokerage and annuity products. By the end of 1998,
management expects to have licensed agents offering alternative
investments at each branch location. The Bank has filed an application for
a license to operate a full service insurance agency from its Mont Belvieu
location and has received approval from the Office of the Comptroller of
the Currency ("OCC") to form an operating subsidiary to house the
insurance agency. The Bank expects to receive approval of its application
for a license to operate a full service insurance agency from Mont Belvieu
in the fourth quarter of 1997. The Company is also currently negotiating
to purchase an insurance agency which has operated with a historic record
of profitability. The Company has reached a verbal agreement to acquire
the insurance agency, but an agreement has not yet been reduced to
writing, and there is no assurance that such an acquisition will be
consummated. If the Company is successful in its plan to acquire the
insurance agency, it is expected that such acquisition will occur in the
second quarter of 1998. The revenues and earnings of the insurance agency
are not expected to materially affect the revenues and earnings of the
Company.
- Improved Efficiency--Management believes that the Acquisitions will create
economies of scale and help to improve the Company's efficiency ratio.
Significant cost savings opportunities exist, including headcount
reductions, cuts in director fees and reduced administrative expenses.
Although conversion of the acquired banks' data processing operations onto
the Company's proprietary system will result in significant initial costs,
management believes that substantial cost savings will be achieved on an
ongoing basis.
4
<PAGE>
- Core Deposit Base--The Company has a relatively low cost funding base made
up primarily of core deposits along with a relationship driven public
deposit network. At June 30, 1997, the Company's weighted average cost of
deposits was 3.24%, a slight decrease from the year end figure of 3.32%
and down significantly from the December 31, 1995 level of 3.55%. This low
cost of funds has allowed the Company to price its loan products
competitively while still maintaining an attractive net interest margin.
There is no assurance that the foregoing financial initiatives will be
realized or any estimate of when they will be achieved.
THE ACQUISITIONS
The Acquisitions will increase the Company's assets from $185.1 million to
$272.6 million as of June 30, 1997 on a proforma basis. In addition to the
immediate increase in asset size and the potential for improved future
profitability, the Acquisitions will allow the Company to expand its market area
into what it believes are desirable banking locations. Through the Acquisitions,
the Company will increase the number of its locations from seven to 11. The
resulting market area of the Company will extend from Seabrook, Texas in eastern
Harris County to Cleveland, Texas in western Liberty County. This expansion will
increase the geographic diversity of the Company's loan portfolio, which is
expected to decrease the Company's overall lending risks. See "The
Acquisitions--Texas Bank" "--Texas National Bank of Baytown" and "--First Bank
of Deer Park."
The Acquisitions are expected to be completed in the fourth quarter of 1997.
The acquisition of Texas Bank is expected to occur simultaneously with the
closing of the Offering, and the acquisitions of TNB and First Bank are expected
to occur on or about November 21, 1997. The closing of the acquisition of Texas
Bank is a condition to the closing of the Offering.
Texas Bank's main office is in Baytown, and it has a branch in Mont Belvieu.
The acquisition of Texas Bank will give the Company a presence in Baytown and
will allow it to expand its existing operations in the Mont Belvieu area.
Baytown is a community of over 60,000 people located on the Houston Ship Channel
in eastern Harris County. Baytown is home to a number of petrochemical plants
and refineries. Texas Bank is located on the north end of a north-south corridor
that is the center of Baytown's residential and business growth. Texas Bank is
the only commercial bank located on the northern end of the city. Due to a lack
of commercial bank competition, management believes that Baytown is
under-banked. In addition to the Baytown presence, the acquisition of Texas Bank
will give the Company an additional facility in Mont Belvieu. The Mont Belvieu
location will serve as the basis for the Company's expansion into the sale of
insurance products. At June 30, 1997, Texas Bank had assets of approximately
$41.5 million and deposits of $37.7 million.
TNB, which is also located in Baytown, will, when combined with Texas Bank,
broaden the Company's expansion into the Baytown market. TNB is located on the
south end of the north-south corridor on which Texas Bank is located. The
acquisition of TNB will enhance the Company's presence in the Baytown market and
provide a link to LaPorte, located to the south of Baytown. The TNB location
will give the Company access to industrial and blue collar neighborhoods as well
as the industrial, petrochemical and services areas of Baytown. TNB had assets
of $14.1 million and deposits of $12.4 million at June 30, 1997.
First Bank is located in Deer Park, Texas. The acquisition of First Bank
will provide the Company its first presence in Deer Park, a community of 27,000
people located on the south side of the Houston Ship Channel. The Deer Park
economy is closely linked to the petrochemical industry. First Bank is the only
community bank in Deer Park. The positive name recognition of both First Bank
and the Bank should allow the Company to acquire a larger market share in Deer
Park and capture some of the growth that the area is experiencing. A director of
the Bank who previously served as chairman of the Deer Park branch of one of the
large national banking organizations is expected to be instrumental in expanding
the Company's
5
<PAGE>
business in this market. At June 30, 1997, First Bank had assets of $32.9
million and deposits of $26.8 million.
Management of the Company believes that the Acquisitions present an
excellent opportunity for increased earnings and diversification of loan mix.
TNB and First Bank have traditionally maintained low loan to deposit ratios. The
Company believes that it can increase the amount of loans originated from these
locations by enhancing marketing efforts, expanding loan products and utilizing
the Company's approach to sales and service. Management of the Company also
believes that the opportunity exists for significant cost savings from the
Acquisitions, including data processing consolidations and other operational
efficiencies.
The table below presents certain unaudited condensed and consolidated
historical financial and operating data for the Company and certain unaudited
pro forma condensed financial and operating data for the Company after giving
effect to (i) the Offering, (ii) the Acquisitions as if they had each occurred
as of June 30, 1997 and (iii) the pro forma adjustments described in the Notes
to the Unaudited Pro Forma Condensed Financial Statements of the Company which
appear elsewhere in this Prospectus. The amount of pro forma combined net
earnings for the six-month period ended June 30, 1997, shown below reflects
adjustments which give effect to factors attributable to the Offering and the
Acquisitions. The pro forma net earnings assume that the Acquisitions and the
Offering were consummated at January 1, 1997. The pro forma financial
information should be read in conjunction with the financial statements and
footnotes thereto appearing elsewhere in this Prospectus. The pro forma
condensed balance sheet information and net earnings are not necessarily
indicative of the combined financial position at consummation of the
Acquisitions or the results of operations following consummation of the
Acquisitions and the Offering.
<TABLE>
<CAPTION>
AS OF AND FOR THE
SIX MONTHS ENDED
JUNE 30, 1997
------------------------
PRO FORMA
ACTUAL COMBINED
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Assets.................................................................................. $ 185,139 $ 272,638
Loans, net of unearned discount......................................................... 115,222 153,421
Deposits................................................................................ 169,874 246,867
Stockholders' equity.................................................................... 13,782 21,882
Net earnings............................................................................ 855 1,172
Leverage ratio.......................................................................... 7.25% 5.77%
Tier 1 risk-based capital ratio......................................................... 10.16 8.99
Total risk-based capital ratio.......................................................... 11.24 10.16
</TABLE>
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities offered by the
Company......................... 600,000 shares of Common Stock
Common Stock to be outstanding
after the Offering.............. 1,958,907 shares(1)
Use of Proceeds................... A portion of the estimated net proceeds of this Offering
(approximately $8.1 million assuming an offering price
of $15.00 per share, the mid-point of the estimated
offering range) will be used to fund the $5.5 million
purchase price for the acquisition of Texas Bank. The
remaining $2.6 million in net proceeds will be used to
fund a portion of the $10,370,000 aggregate purchase
price for the acquisitions of TNB and First Bank. The
$7,770,000 balance of the purchase price for the
acquisitions of TNB and First Bank will be funded
through a dividend from the Bank to the Company. See
"Use of Proceeds."
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..... "BAYB"
</TABLE>
- ------------------------
(1) Excludes 33,300 options outstanding under the Company's stock option plans
and 66,630 shares of phantom stock which may be issued in the form of shares
of Common Stock under the Company's Phantom Stock Plan ("Phantom Plan"). See
"Management--Stock Option and Incentive Plans." As of the date of this
Prospectus, the Company had outstanding 1,358,907 shares of Common Stock.
See "Capitalization."
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data of the Company is derived
from the Selected Consolidated Financial Data appearing elsewhere in this
Prospectus, and should be read in conjunction with the Consolidated Financial
Statements of the Company and the Notes thereto and the information contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
AS OF AND FOR THE
SIX MONTHS ENDED
JUNE 30, AS OF AND FOR THE 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.......................... $ 6,537 $ 6,214 $ 12,666 $ 11,244 $ 9,627 $ 9,999 $ 10,896
Interest expense......................... 2,732 2,619 5,443 5,391 4,285 4,091 4,892
--------- --------- --------- --------- --------- --------- ---------
Net interest income.................... 3,805 3,595 7,223 5,853 5,342 5,908 6,004
Provision for loan losses................ 168 219 510 150 75 400 575
--------- --------- --------- --------- --------- --------- ---------
Net interest income after provision for
loan losses.......................... 3,637 3,376 6,713 5,703 5,267 5,508 5,429
Noninterest income....................... 1,197 1,193 2,347 2,095 2,104 1,990 1,578
Noninterest expenses..................... 3,615 3,269 7,067 6,024 5,869 5,794 5,452
--------- --------- --------- --------- --------- --------- ---------
Earnings before taxes and cumulative
effect of accounting change.......... 1,219 1,300 1,993 1,774 1,502 1,704 1,555
Provision for income tax expense......... 364 408 591 559 271 371 20
Cumulative effect of accounting change... -- -- -- -- -- 631 --
--------- --------- --------- --------- --------- --------- ---------
Net earnings............................. $ 855 $ 892 $ 1,402 $ 1,215 $ 1,231 $ 1,964 $ 1,535
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
PER SHARE DATA:
Net earnings(1).......................... $ 0.59 $ 0.62 $ 0.97 $ 0.84 $ 0.86 $ 1.38 $ 1.43
Book value............................... 10.15 8.92 9.58 8.82 7.95 7.49 6.28
Tangible book value...................... 9.78 8.92 9.06 8.82 7.95 7.49 6.28
Cash dividends........................... 0.12 0.12 0.24 0.20 0.20 0.20 0.05
Dividend payout ratio.................... 19.05% 18.19% 23.11% 22.47% 22.18% 13.86% 3.41%
Weighted average common and common
equivalent shares outstanding (in
thousands)............................. 1,439 1,440 1,441 1,442 1,430 1,419 1,075
BALANCE SHEET DATA:
Total assets............................. $ 185,139 $ 178,399 $ 189,011 $ 167,091 $ 168,322 $ 147,161 $ 145,099
Securities............................... 44,255 43,893 43,745 38,588 42,618 40,862 35,833
Gross loans.............................. 115,222 113,350 119,880 105,796 106,830 94,919 94,084
Allowance for loan losses................ 1,425 1,360 1,430 1,185 1,230 1,344 1,280
Total deposits........................... 169,874 164,272 173,318 153,334 149,824 134,848 134,553
Total stockholders' equity............... 13,782 12,083 12,929 11,903 10,857 10,199 8,424
AVERAGE BALANCE SHEET DATA:
Total assets............................. $ 183,197 $ 171,176 $ 177,272 $ 164,596 $ 150,205 $ 143,261 $ 135,682
Average interest-earning assets.......... 170,688 159,164 164,905 152,781 140,187 133,119 125,343
Securities............................... 44,578 41,991 43,230 37,028 35,535 35,352 33,394
Gross loans.............................. 117,361 109,575 113,014 107,286 101,975 94,138 90,041
Allowance for loan losses................ 1,471 1,230 1,330 1,302 1,324 1,294 1,262
Total deposits........................... 167,990 157,410 162,522 151,013 135,329 131,809 126,006
Total stockholders' equity............... 13,355 11,783 12,416 11,354 10,502 9,311 6,907
PERFORMANCE RATIOS(2):
Return on average assets................. 0.93% 1.04% 0.82% 0.75% 0.80% 1.37% 1.13%
Return on average stockholders' equity... 12.80 15.14 11.29 10.70 11.72 21.09 22.23
Net interest margin...................... 4.46 4.52 4.38 3.83 3.81 4.44 4.79
Efficiency ratio(3)...................... 72.27 68.27 73.85 75.79 78.82 73.36 71.91
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE
SIX MONTHS ENDED
JUNE 30, AS OF AND FOR THE 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>
ASSET QUALITY RATIOS(4):
Nonperforming assets to total loans and
other real estate...................... 0.47% 0.46% 0.47% 0.56% 0.67% 0.90% 2.28%
Nonperforming loans to gross loans....... 0.18 0.19 0.18 0.22 0.23 0.37 0.78
Net loan charge-offs to average total
loans(2)............................... 0.29 0.08 0.23 0.18 0.19 0.36 0.49
Allowance for loan losses to total
loans.................................. 1.24 1.20 1.19 1.12 1.15 1.42 1.36
Allowance for loan losses to
nonperforming loans(5)................. 678.57 615.38 662.04 519.74 510.37 361.29 174.62
CAPITAL RATIOS(4):
Leverage ratio........................... 7.25% 7.46% 6.67% 7.33% 6.98% 6.99% 5.81%
Average stockholders' equity to average
total assets........................... 7.29 7.00 6.88 6.90 6.99 6.50 5.09
Tier 1 risk-based capital ratio.......... 10.16 10.02 9.39 10.14 9.33 8.85 7.05
Total risk-based capital ratio........... 11.24 11.11 10.45 11.14 10.35 10.07 8.54
</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 expense, excluding securities
losses, by net interest income plus noninterest income.
(4) At period end, except net loan charge-offs to average loans and average
stockholders' equity to average total assets.
(5) Nonperforming loans consist of nonaccrual loans and restructured loans.
9
<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma condensed financial statements give effect
to the Acquisitions, the Offering and the pro forma adjustments described in the
notes to the Unaudited Pro Forma Condensed Financial Statements of the Company.
The Acquisitions will be accounted for using the purchase method of accounting.
The unaudited pro forma condensed balance sheet gives effect to the
Acquisitions and the Offering as if they had occurred on June 30, 1997. The
unaudited pro forma condensed statements of earnings give effect to the
Acquisitions and the Offering as if they had occurred on January 1 of each
period presented.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions that management deems appropriate, but which
may be revised as additional information becomes available. The pro forma
financial information does not purport to represent what the Company's financial
position or results of operations would actually have been if such transactions
had in fact occurred on the dates assumed and are not necessarily representative
of the Company's financial position or results of operations for any future
period. The unaudited pro forma condensed financial statements should be read in
conjunction with the other financial statements and notes thereto included in
this Prospectus. See "Risk Factors" included in this Prospectus.
10
<PAGE>
PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
------------------ PRO FORMA
COMPANY TNB FIRST BANK TEXAS BANK DEBITS CREDITS COMBINED
-------- ------- ---------- ---------- ------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks.............................. $ 4,314 $ 2,153 $ 2,178 $ 3,297 $ 8,100(a) $ -- $ 20,042
Federal funds sold................................... 14,500 1,300 3,075 2,102 -- 15,870(c) 5,107
-------- ------- ---------- ---------- ------- ------- ---------
Total cash and cash equivalents.................. 18,814 3,453 5,253 5,399 8,100 15,870 25,149
Interest bearing deposits with banks................. 392 -- -- -- -- -- 392
Securities:
Available-for-sale................................. 44,255 3,144 6,951 14,920 -- -- 69,270
Held-to-maturity................................... -- 2,675 5,939 -- -- -- 8,614
-------- ------- ---------- ---------- ------- ------- ---------
Total securities................................. 44,255 5,819 12,890 14,920 -- -- 77,884
Loans:
Total loans, net of unearned discount.............. 115,222 4,428 14,216 19,555 -- -- 153,421
Allowance for possible loan losses................. (1,425) (88) (355) (174) -- -- (2,042)
-------- ------- ---------- ---------- ------- ------- ---------
Net loans........................................ 113,797 4,340 13,861 19,381 -- -- 151,379
Intangibles.......................................... 500 -- -- -- 6,140(b) -- 6,640
Investment in subsidiary............................. -- -- -- -- 15,870(c) 15,870(d) --
Premises and equipment............................... 4,806 299 331 890 584(b) -- 6,910
Other real estate owned.............................. 208 7 200 388 -- -- 803
Other assets......................................... 2,367 193 352 569 -- -- 3,481
-------- ------- ---------- ---------- ------- ------- ---------
Total assets..................................... $185,139 $14,111 $32,887 $41,547 $30,694 $31,740 $272,638
-------- ------- ---------- ---------- ------- ------- ---------
-------- ------- ---------- ---------- ------- ------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits........................................... $169,874 $12,437 $26,820 $37,736 $ -- $ -- $246,867
Funds borrowed/customer repurchase................. 162 -- 2,000 -- -- -- 2,162
Other liabilities.................................. 1,321 101 188 117 -- -- 1,727
-------- ------- ---------- ---------- ------- ------- ---------
Total liabilities................................ 171,357 12,538 29,008 37,853 -- -- 250,756
-------- ------- ---------- ---------- ------- ------- ---------
Stockholders' equity:
Common stock....................................... 1,400 389 577 291 1,257(d) 600(a) 2,000
Additional paid-in capital......................... 8,393 390 1,623 1,709 3,722(d) 7,500(a) 15,893
Retained earnings.................................. 4,352 813 1,711 1,706 4,230(d) -- 4,352
Treasury stock....................................... (274) -- -- -- -- -- (274)
Unrealized gain (loss) on available-for-sale
securities......................................... (89) (19) (32) (12) -- 63(b) (89)
-------- ------- ---------- ---------- ------- ------- ---------
Total stockholders' equity....................... 13,782 1,573 3,879 3,694 9,209 8,163 21,882
-------- ------- ---------- ---------- ------- ------- ---------
Total liabilities and stockholders' equity....... $185,139 $14,111 $32,887 $41,547 $39,903 $39,903 $272,638
-------- ------- ---------- ---------- ------- ------- ---------
-------- ------- ---------- ---------- ------- ------- ---------
</TABLE>
- --------------------------
(a) This adjustment represents the sale of 600,000 shares of Common Stock with a
par value of $1.00 at a $15.00 per share public offering price, the
mid-point of the estimated offering range, less $300,000 in offering
expenses and $600,000 in underwriting discounts and commissions, with net
proceeds to the Company of $8,100,000.
(b) This adjustment represents the purchase price adjustments to adjust the
assets and liabilities of TNB, First Bank, and Texas Bank to fair value upon
the Acquisitions and results in recording of $6,140,000 in intangibles.
(c) This adjustment represents the purchase of 100% of the outstanding shares of
stock of TNB ($2,400,000), First Bank ($7,970,000) and Texas Bank
($5,500,000) for $15,870,000 in cash.
(d) This adjustment represents the elimination of the capital of the three banks
against the investment in subsidiary of the Company.
11
<PAGE>
PRO FORMA CONDENSED STATEMENT OF EARNINGS
SIX-MONTH PERIOD ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
FIRST TEXAS ---------------- PRO FORMA
COMPANY TNB BANK BANK DEBITS CREDITS COMBINED
------- ---- ------ ------ ------ ------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans......................................... $4,951 $192 $ 649 $ 978 $ -- $ -- $6,770
Interest on securities............................................. 1,344 167 452 499 -- -- 2,462
Interest on federal funds sold..................................... 242 65 83 121 208(a) -- 303
------- ---- ------ ------ ------ ------- ---------
Total interest income.............................................. 6,537 424 1,184 1,598 208 -- 9,535
Interest expense:
Interest on deposits............................................... 2,718 137 279 656 -- -- 3,790
Interest on other borrowings....................................... 14 -- 79 -- -- -- 93
------- ---- ------ ------ ------ ------- ---------
Total interest expense............................................. 2,732 137 358 656 208(a) -- 3,883
------- ---- ------ ------ ------ ------- ---------
Net interest income.................................................. 3,805 287 826 942 208 -- 5,652
Provision for loan losses.......................................... 168 1 -- -- -- -- 169
------- ---- ------ ------ ------ ------- ---------
Net interest income after provision for loan losses.................. 3,637 286 826 942 208 -- 5,483
------- ---- ------ ------ ------ ------- ---------
Noninterest income:
Service charges.................................................... 741 131 163 253 -- -- 1,288
Other noninterest income........................................... 456 25 93 109 -- -- 683
------- ---- ------ ------ ------ ------- ---------
Total noninterest income........................................... 1,197 156 256 362 -- -- 1,971
Noninterest expense:
Salaries and employee benefits..................................... 1,843 148 247 482 -- -- 2,720
Net occupancy expense.............................................. 583 37 57 132 7(b) -- 816
Other noninterest expense.......................................... 1,189 127 242 442 154(c) -- 2,154
------- ---- ------ ------ ------ ------- ---------
Total noninterest expense.......................................... 3,615 312 546 1,056 161 -- 5,690
------- ---- ------ ------ ------ ------- ---------
Income before federal income taxes................................... 1,219 130 536 248 369 -- 1,764
Federal income taxes............................................... 364 42 177 82 -- 73(d) 592
------- ---- ------ ------ ------ ------- ---------
Net income....................................................... $ 855 $ 88 $ 359 $ 166 $369 $ 73 $1,172
------- ---- ------ ------ ------ ------- ---------
------- ---- ------ ------ ------ ------- ---------
Earnings per share:
Net income per share............................................... $0.59 $0.57
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Average shares outstanding............ 1,439,272 2,039,272
</TABLE>
- --------------------------
(a) This adjustment represents interest income that would have been lost on the
estimated cash payments to be made to the stockholders of TNB, First Bank
and Texas Bank ($15,870,000) in excess of the total net funds raised
($8,100,000) at an average federal funds rate of 5.40% for the six-month
period ended June 30, 1997.
(b) This adjustment represents additional depreciation on the acquired
buildings.
(c) This adjustment represents the amortization of $6,140,000 in intangibles
over a blended 20 years.
(d) This adjustment represents the tax effect of the above adjustments, except
for amortization of intangibles which is not deductible for tax purposes.
12
<PAGE>
PRO FORMA CONDENSED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
FIRST TEXAS ---------------- PRO FORMA
COMPANY TNB BANK BANK DEBITS CREDITS COMBINED
------- ---- ------ ------ ------ ------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans.......................................... $ 9,594 $376 $1,199 $2,061 $ -- $ -- $13,230
Interest on securities.............................................. 2,612 319 900 421 -- -- 4,252
Interest on federal funds sold...................................... 460 146 65 394 397(a) -- 668
------- ---- ------ ------ ------ ------- ---------
Total interest income............................................... 12,666 841 2,164 2,876 397 -- 18,150
Interest expense:
Interest on deposits................................................ 5,396 275 499 977 -- -- 7,147
Interest on other borrowings........................................ 47 -- 160 -- -- -- 207
------- ---- ------ ------ ------ ------- ---------
Total interest expense.............................................. 5,443 275 659 977 -- -- 7,354
------- ---- ------ ------ ------ ------- ---------
Net interest income................................................... 7,223 566 1,505 1,899 397 -- 10,796
Provision for loan losses........................................... 510 16 -- -- -- -- 526
------- ---- ------ ------ ------ ------- ---------
Net interest income after provision for loan losses................... 6,713 550 1,505 1,899 397 -- 10,270
------- ---- ------ ------ ------ ------- ---------
Noninterest income:
Service charges..................................................... 1,379 230 350 529 -- -- 2,488
Other noninterest income............................................ 968 55 183 203 -- -- 1,409
------- ---- ------ ------ ------ ------- ---------
Total noninterest income............................................ 2,347 285 533 732 -- -- 3,897
Noninterest expense:
Salaries and employee benefits...................................... 3,377 291 475 821 -- -- 4,964
Net occupancy expense............................................... 1,131 72 123 268 14(b) -- 1,608
Other noninterest expense........................................... 2,559 260 424 831 307(c) -- 4,381
------- ---- ------ ------ ------ ------- ---------
Total noninterest expense........................................... 7,067 623 1,022 1,920 321 -- 10,953
------- ---- ------ ------ ------ ------- ---------
Income before federal income taxes.................................... 1,993 212 1,016 711 718 -- 3,214
Federal income taxes................................................ 591 66 321 205 -- 140(d) 1,043
------- ---- ------ ------ ------ ------- ---------
Net income........................................................ $1,402 $146 $ 695 $ 506 $718 $140 $ 2,171
------- ---- ------ ------ ------ ------- ---------
------- ---- ------ ------ ------ ------- ---------
Earnings per share:
Net income per share................................................ $0.97 $1.06
Average shares outstanding..........................................
1,440,884 2,040,884
</TABLE>
- --------------------------
(a) This adjustment represents interest income that would have been lost on the
estimated cash payments to be made to the stockholders of TNB, First Bank
and Texas Bank ($15,870,000) in excess of the total net funds raised
($8,100,000) at an average federal funds rate of 5.15% for the year ended
December 31, 1997.
(b) This adjustment represents additional depreciation on the acquired
buildings.
(c) This adjustment represents the amortization of $6,140,000 in intangibles
over a blended 20 years.
(d) This adjustment represents the tax effect of the above adjustments, except
for amortization of intangibles which is not deductible for tax purposes.
13
<PAGE>
RECENT UNAUDITED SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected historical data for the Company for
the periods indicated. The selected financial data as of September 30, 1997 and
1996 and for the three and nine months ended September 30, 1997 and 1996,
respectively, is unaudited. In the opinion of management of the Company, the
information presented reflects all adjustments (consisting only of normal
recurring adjustments), considered necessary for a fair presentation of the
results of such periods. The information set forth below should be read in
conjunction with the financial statements of the Company and the notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" with respect to the six months ended June 30, 1997 and 1996 and the
years ended December 31, 1996, 1995 and 1994 included elsewhere in this
Prospectus. The results of operations for the three and nine months ended
September 30, 1997 and 1996 are not necessarily indicative of the future
operations of the Company.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income............................................... $ 1,968 $ 1,736 $ 5,773 $ 5,331
Provision for loan losses......................................... 144 144 312 363
Noninterest income................................................ 607 575 1,804 1,768
Noninterest expenses.............................................. 1,854 1,691 5,469 4,960
Earnings before income taxes...................................... 577 476 1,796 1,776
Net earnings...................................................... 380 288 1,235 1,180
Net earnings per share(1)....................................... 0.26 0.20 0.86 0.82
Weighted average common and common equivalent shares outstanding
(in thousands)................................................ 1,440 1,440 1,440 1,440
PERFORMANCE RATIOS:
Return on average assets.......................................... 0.82% 0.65% 0.90% 0.91%
Return on average stockholders' equity............................ 10.90 9.41 12.26 13.19
Net interest margin............................................... 4.60 4.20 4.51 4.41
Efficiency ratio.................................................. 72.00 73.17 72.18 69.87
<CAPTION>
SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
(UNAUDITED)
(DOLLARS IN
THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets...................................................... $ 187,102 $ 187,325
Securities........................................................ 42,502 45,051
Gross loans....................................................... 116,075 115,826
Allowance for loan losses......................................... 1,424 1,387
Total deposits.................................................... 171,291 171,711
Total stockholders' equity........................................ 14,198 12,469
Book value per share.............................................. 10.45 9.24
ASSET QUALITY RATIOS:
Nonperforming assets to total loans and other real estate......... 0.46% 0.48%
Allowance for loan losses to nonperforming loans(2)............... 687.92 633.33
</TABLE>
- --------------------------
(1) Net income per share is based upon the weighted average number of common and
common equivalent shares outstanding during the period.
(2) Nonperforming loans consist of nonaccrual loans and restructured loans.
14
<PAGE>
Net income for the three months ended September 30, 1997 was $380,000 or
$0.26 per share compared to $288,000 or $0.20 per share for the three months
ended September 30, 1996, an increase of 31.9%. Net income for the nine months
ended September 30, 1997 was $1,235,000 or $0.86 per share compared to
$1,180,000 or $0.82 per share in the first nine months of 1996, an increase of
4.7%. The improvement in both periods was primarily the result of an increase in
net interest income resulting from the Company's continued efforts to broaden
and expand its lending focus from the indirect consumer market into higher
yielding commercial, SBA, real estate and direct consumer loans along with the
resulting higher volume of earning assets from the acquisition of the deposits
of the branch of a commercial bank in August, 1996.
Nonperforming assets as a percentage of total loans and other real estate
were 0.46% at September 30, 1997, a slight improvement over 0.48% at September
30, 1996. Allowance for loan losses as a percentage of nonperforming loans was
687.9% at September 30, 1997 compared to 633.3% at September 30, 1996.
15
<PAGE>
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. MANAGEMENT BELIEVES THAT THE
FOLLOWING DESCRIBES ALL MATERIAL RISKS OF AN INVESTMENT IN COMMON STOCK.
POTENTIAL NEGATIVE IMPACT ON EARNINGS FROM THE ACQUISITIONS
As a result of the Acquisitions, the Company's asset size will increase
substantially. The Company has not previously consummated an acquisition on the
same scale as the Acquisitions. The future prospects of the Company will depend,
in significant part, on a number of factors, including, without limitation, the
Company's ability to integrate the Acquisitions; its ability to compete
effectively in the new market areas of Baytown and Deer Park; its success in
retaining earning assets, including loans, acquired in the Acquisitions; its
ability to generate new earning assets; its ability to achieve significant cost
savings; and its ability to attract and retain qualified management and other
appropriate personnel. No assurance can be given with respect to the Company's
ability to accomplish any of the foregoing or that the Company will be able to
achieve results in the future similar to those achieved in the past or that the
Company will be able to manage effectively the growth resulting from the
Acquisitions. Certain officers and directors of the institutions to be acquired
in the Acquisitions will not be subject to non-competition agreements and may
compete against the Company. As a result of the Acquisitions, the Company's
leverage ratio will fall from 7.25% at June 30, 1997 to 5.77% on a pro forma
basis. Similarly, the Company's Tier 1 capital to risk-based assets ratio will
decline from 10.16% to 8.99%, and the Company's total capital to risk-based
assets ratio will drop from 11.24% to 10.16%. See "The Acquisitions."
In addition, as a result of the Acquisitions, the Company's management must
successfully integrate the operations of Texas Bank, TNB and First Bank with
those of the Company. The operational areas requiring significant integration
include the consolidation of data processing operations, the combination of
employee benefit plans, the creation of joint account and lending products, the
development of unified marketing plans and other related issues. Accomplishment
of these goals will require additional expenditures by the Company which could
negatively impact the Company's net income. Completion of these tasks could
divert management's attention from other important issues. In addition, the
process of combining Texas Bank, TNB and First Bank with the Bank could have a
material adverse effect on the operation of their businesses, which could have
an adverse effect on their combined operations. The Company may also incur
additional unexpected costs in connection with the integration of the
Acquisitions that could negatively impact the Company's net income.
POTENTIAL CREDIT QUALITY ISSUES IN CONNECTION WITH THE ACQUISITIONS
In connection with the Acquisitions, the Company reviewed the loan
portfolios of Texas Bank, TNB and First Bank. The Company's examinations were
made using criteria, analyses and collateral evaluations that the Company has
traditionally used in the review of its existing business and other previous
acquisitions. Nonperforming assets at June 30, 1997 totaled approximately
$388,000 at Texas Bank (1.96% of total loans and other real estate), $7,000 at
TNB (0.16% of total loans and other real estate), and $200,000 at First Bank
(1.41% of total loans and other real estate). Nonperforming assets at December
31, 1996, totaled approximately $388,000 at Texas Bank (1.95% of total loans and
other real estate), $64,000 at TNB (1.56% of total loans and other real estate)
and $278,000 at First Bank (2.06% of total loans and other real estate).
At June 30, 1997, the Company's allowance for loan losses was 1.24% of total
loans, while on a pro forma basis assuming consummation of the Acquisitions, the
Company's allowance for loan losses would have been 1.33% at June 30, 1997. At
December 31, 1996, the Company's allowance for loan losses was 1.19% of total
loans, while on a consolidated basis as if the Acquisitions had occurred as of
December 31, 1996, the Company's allowance for loan losses would have been
1.29%.
16
<PAGE>
BUSINESS CONCENTRATION
Approximately 69.46% of the Company's total loan portfolio as of June 30,
1997, was comprised of consumer loans, 88.72% of which consisted of "indirect
dealer paper" (61.63% of the Company's total loan portfolio consisted of such
indirect dealer paper). These are installment loans, with typical maturities of
three to five years, which are originated by automobile dealers for the purpose
of financing consumer automobile purchases and are collateralized by the
automobile purchased by the borrower. The Company purchases such installment
loans without recourse from various automobile dealers located in the greater
Houston area and is solely responsible for the collection of such loans. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Loan Portfolio." Reduction in the amount of indirect dealer paper
sold by dealerships to the Company could adversely affect the Company's
financial condition and results of operations. In addition, the Company competes
for such "indirect dealer paper" with credit unions, other banks, financial
institutions and captive finance companies, some of which may have greater
financial resources than the Company.
EXPOSURE TO LOCAL ECONOMIC CONDITIONS
The Company's success is dependent to a significant extent upon general
economic conditions in the greater Houston metropolitan area and Texas in
general. The banking industry in the greater Houston metropolitan area and in
Texas is affected by general economic conditions such as inflation, recession,
unemployment and other factors beyond the Company's control. During the mid
1980s, severely depressed oil and gas prices materially and adversely affected
the Texas and Houston economies, causing recession and unemployment in the
region and resulting in excess vacancies in the Houston real estate market and
elsewhere in the state. Since 1987, the Texas and Houston economies have
improved in part due to their expansion into non-energy related industries.
Nevertheless, the economy in the market areas of the Company and the banks to be
acquired remain somewhat dependent on the petrochemical industry. Any material
downturn in this industry could have an adverse effect on the results of
operations and financial condition of the Company. In addition, as the Texas and
Houston economies have diversified away from the energy industry, 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 and
Houston economies would not have a material adverse effect on the Company's
financial condition, resulting 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 earned 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
governmental and regulatory authorities. Increases in the federal funds 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."
17
<PAGE>
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
nonfinancial institutions, including retail stores which may maintain their own
credit programs and certain governmental organizations which may offer more
favorable financing than the Company. Many of such competitors may have greater
financial and other resources than the Company. The Company has been able to
compete effectively with other financial institutions by emphasizing customer
service, technology and local office decision-making, by establishing long term
customer relationships and 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."
SUPERVISION AND REGULATION
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 national banking association, is subject
to regulation and supervision by the OCC and, as a result of the insurance of
its deposits, is also subject to supervision and regulation by the Federal
Deposit Insurance Corporation (the "FDIC"). These regulations are intended
primarily for the protection of depositors and consumers, rather than for the
benefit of investors. The Company and the Bank are subject to changes in federal
and state law, as well as changes in regulation and governmental policies,
income tax laws and accounting principles. In the past, governmental funding for
SBA loans has been suspended, causing a disruption of the Company's SBA program.
There can be no guarantee that a disruption of the SBA program will not occur in
the future or that the SBA program will not be significantly reduced or
eliminated. 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 which 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 ordered 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 stockholders. In addition, a bank holding company
in certain circumstances could be required to guarantee the capital plan of an
undercapitalized banking subsidiary. Neither the Bank nor any of the banks to be
acquired are currently undercapitalized, but there is no guarantee that they
will not become undercapitalized in the future. 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 December
of 1992 and currently pays quarterly dividends aggregating $0.24 per share per
annum, there is no assurance that the Company will pay dividends on the Common
Stock in the future. In the future, the declaration and payment of dividends on
the Common Stock will depend upon the earnings and financial condition of the
Company, liquidity and capital requirements, the general economic and regulatory
climate, the Company's
18
<PAGE>
ability to service any equity or debt obligations senior to the Common Stock and
other factors deemed relevant by the Company's Board of Directors. It is the
policy of the Federal Reserve Board that bank holding companies should pay cash
dividends on common stock only out of income available over the past year and
only if prospective earnings retention is consistent with the organization's
expected future needs and financial condition. The policy provides that bank
holding companies should not maintain a level of cash dividends that undermines
the bank holding company's ability to serve as a source of strength to its
banking subsidiaries. See "Dividend Policy."
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 banking laws, regulations and authorities. Prior
to declaring a dividend, a national bank must transfer to surplus 10% of its net
profits earned since its last dividend unless its surplus equals or exceeds
stated capital. As of September 30, 1997, the Bank's surplus exceeded its stated
capital. Without approval of the OCC, dividends may not be paid in excess of a
bank's total net profits for that year, plus its retained profits for the
preceding two years, less any required transfers to capital surplus. As of
September 30, 1997, an aggregate of approximately $4.1 million was available for
payment of dividends by the Bank to the Company under applicable restrictions,
without regulatory approval. In connection with the Acquisitions, the Bank
intends to pay a dividend of up to $8.3 million to the Company and has received
regulatory approval for this dividend. As a result of this dividend, the Bank
will eliminate its net profits for this year and retained profits for the two
prior years and absent prior regulatory approval, will be able to pay dividends
only out of future earnings. 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 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 L.
D. Wright and Albert D. Fields, who are 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 obtained "key man" life insurance on Mr. Wright in the amount of
$1.0 million and has entered into an employment agreement (which includes
certain non-competition covenants) with Mr. Wright in an effort to assure the
continued availability of his services to the Company.
POSSIBLE ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation and Bylaws contain certain
provisions which may delay, discourage or prevent an attempted acquisition or
change of control of the Company. These provisions include: (i) a Board of
Directors classified into three classes of directors with the directors of each
class having staggered, three-year terms, (ii) a provision that any special
meeting of stockholders 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 stockholders may not be
effected by consent in writing, (iii) a provision establishing certain advance
notice procedures for nomination of candidates for
19
<PAGE>
election as directors and for stockholder proposals to be considered at an
annual or special meeting of stockholders and (iv) a provision that denies
stockholders 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 stockholder 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 45.09% of the outstanding shares of Common
Stock, and approximately 43.11% of such shares of Common Stock if the
Underwriter's 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
stockholders 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 Stockholders" 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. The shares of Common Stock have been approved for quotation on the
Nasdaq/National Market under the symbol "BAYB." The Underwriter has advised the
Company that it intends to make a market in the Common Stock as long as the
volume of trading activity in the Common Stock and certain other market making
conditions justify doing so. Nonetheless, there can be no assurance that an
active public market will develop or be sustained after the Offering or that if
such a market develops, investors in the Common Stock will be able to resell
their shares at or above the initial public offering price. Making a market
involves maintaining bid and asked quotations for the Common Stock and being
available as principal to effect transactions in reasonable quantities at those
quoted prices, subject to various securities laws and other regulatory
requirements. A public trading market having the desired characteristics of
depth, liquidity and orderliness depends upon the presence in the marketplace of
willing buyers and sellers of the Common Stock at any given time, which presence
is dependent upon the individual decisions of investors over which neither the
Company, the Underwriter nor any other market maker has any control. After the
consummation of the Offering, approximately 45.09% of the outstanding Common
Stock will be held by the executive officers and directors of the Company. The
initial public offering price of the shares of Common Stock will be determined
by negotiations between the Company and the Underwriter 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
"Nature of the Trading Market and Market Prices" and "Underwriting" for
information relating to the method of determining the initial public offering
price. The stock market has from time to time experienced extreme price and
volume volatility. These market fluctuations may be unrelated to the operating
performance of particular companies whose shares are traded and may adversely
affect the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
The Company will have approximately 1,958,907 shares of Common Stock
outstanding after the Offering. The Company, its directors and executive
officers, the related interests of such directors and executive officers and
holders of 5.0% or more of the Common Stock (who collectively will own 45.09% of
the outstanding shares of Common Stock after the consummation of the Offering)
have agreed with the
20
<PAGE>
Underwriter 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 Underwriter. The currently outstanding
shares of Common Stock which are not subject to such agreement are held by
approximately 279 stockholders of record, and virtually 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 more
than 10% 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.
DILUTION OF COMMON STOCK
Investors purchasing shares of Common Stock in the Offering will incur
immediate dilution of approximately 48.1% in their investment, in that the pro
forma net tangible book value of the Company after the Offering will be
approximately $7.79 per share compared to an assumed initial public offering
price of $15.00 per share. An additional 90,000 shares of Common Stock may be
issued if the Underwriter's over-allotment is fully exercised. Options to
purchase a total 33,300 shares of Common Stock were outstanding under the
Company's stock option plans at June 30, 1997, of which 6,660 were exercisable
at a price of $7.05 per share. Pursuant to the Company's Phantom Plan, 66,630
shares of Common Stock may be issued. If the 90,000 shares of Common Stock
issuable pursuant to the Underwriter's over-allotment, the 6,660 shares of
Common Stock exercisable pursuant to the Company's stock option plans and the
66,630 shares of Common Stock issuable under the Phantom Plan were included in
the foregoing calculation, the pro forma net tangible and net book value of the
Common Stock would have been $8.02 and $11.15 per share, respectively, and the
per share dilution to new investors would be $6.98 and $3.85, respectively. The
Company's present stockholders, including officers and directors, will have an
increase in the net tangible and net book value of their shares as a result of
the Offering. The Acquisitions will result in a dilution to the net tangible
book value of the Company's present stockholders although such dilution will be
less than the dilution to new investors. See "Dilution."
POSSIBLE ADVERSE EFFECTS OF ISSUANCE OF PREFERRED STOCK
The effects of the issuance of shares of preferred stock, $1.00 per share
par value, of the Company ("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. See "Description of Securities of the
Company."
21
<PAGE>
THE COMPANY
STRATEGY
The Company is headquartered in LaPorte, Texas, located next to Galveston
Bay in eastern Harris County, the county that comprises most of the greater
Houston metropolitan area. The Company's strategic goal is to be the premier
provider of financial services to small and medium-sized businesses and
individuals in the eastern portion of the Houston metropolitan area. There is,
however, no guarantee that the Company will achieve its strategic goal or any
estimate of when such goal will be achieved. Management believes that its
strategic goal can be achieved and maintained through the following:
- Superior Customer Service--Through technology and a focus on prompt,
personal service the Company has successfully competed with much larger
institutions. For example, the Company has enhanced its relationship
banking capabilities by marketing to the top 15% of its customer base. The
top 5% of the Company's customers are provided with a pass key which
enables them to enter the Bank through a private entrance before and after
normal banking hours and are assigned a specific Bank officer to service
their banking needs. The Company has made significant investments in
technology which management believes will allow it to compete with any
super-regional or national banking organization with respect to
communications and electronic convenience to the customer.
- Motivated Employees--The Company continually trains its employees in the
areas of successful sales and service, long-term customer relationships,
teller excellence, business development and consumer lending. As part of
this process, virtually every employee is placed on incentive and merit
standards which award compensation based on the achievement of sales
ratios and other business development-related goals.
- A Full Range of Products--The Company offers a wide variety of lending
products including term loans, lines of credit and fixed asset loans to
small and medium-sized businesses, and offers its consumer customers a
full range of products, including automobile loans, home improvement loans
and personal loans. In addition, the Company has established "niche"
products such as loans guaranteed by the SBA, commercial loans to
owner-operated manufacturing and petrochemical service businesses,
"indirect" installment lending and factoring. To complement its
traditional banking products, the Company endeavors to be a full financial
services organization and has developed additional financial services such
as a brokerage services and annuity vehicles and is in the process of
forming an independent insurance agency offering a full line of commercial
and consumer insurance products.
- Enhanced Delivery System--The Company plans to enhance its existing
delivery system by expanding its branch network, either by acquisitions or
de novo branches, in the eastern portion of the Houston metropolitan area,
and through the establishment of additional LPOs outside of this area in
order to market the Company's niche products.
In addition to these strategic advantages, management believes the following
financial initiatives will help the Company increase profitability and maximize
stockholder value:
- Changing Loan Mix--In 1988, the Company initiated a program of purchasing
indirect loans, which are installment loans originated by automobile
dealers for the purpose of financing consumer purchases. The Company
purchases almost exclusively "A"-rated loans. There is no objective
standard for "A"-rated loans, but such loans are viewed by management as
the most creditworthy types of loans, in that they possess low loan to
value ratios and are made to stable borrowers with well established, good
credit histories. Management believes that the program has been successful
both from the standpoint of growth and credit quality. However, because of
increasing competition and accompanying pressure on net interest margins
in the indirect market, management has broadened its focus to expand its
other niche lending products, including SBA guaranteed credits
22
<PAGE>
via the Company's three LPOs, commercial lending to local manufacturing and
petrochemical service companies and accounts receivable factoring. These
are generally higher yielding products which management views as having
strong growth potential in the Company's market area. If the Company is
successful in growing these niche products, its net interest margin should
be positively affected.
- Increasing Fee Income Sources--To supplement the noninterest income
produced from its niche lending and deposit products, the Company is
developing other sources of fee income. The Company currently has 12 Class
1 licensed insurance agents and four licensed brokers assisting customers
with fixed rate brokerage and annuity products. By the end of 1998,
management expects to have licensed agents offering alternative
investments at each branch location. The Bank has filed an application for
a license to operate a full service insurance agency from its Mont Belvieu
location and has received approval from the OCC to form an operating
subsidiary to house the insurance agency. The Company expects to receive
approval of its application for a license to operate a full service
insurance agency from Mont Belvieu in the fourth quarter of 1997. The
Company is also currently negotiating to purchase an insurance agency
which has operated with a historic record of profitability. The Company
has reached a verbal agreement to acquire the insurance agency, but an
agreement has not yet been reduced to writing, and there is no assurance
that such an acquisition will be consummated. If the Company is successful
in its plan to acquire the insurance agency, it is expected that such
acquisition will occur in the second quarter of 1998. The revenues and
earnings of the insurance company are not expected to materially affect
the revenues and earnings of the Company.
- Improved Efficiency--Management believes that the Acquisitions will create
economies of scale and help to improve the Company's efficiency ratio.
Significant cost savings opportunities exist, including headcount
reductions, cuts in director fees and reduced administrative expenses.
Although conversion of the acquired banks' data processing operations onto
the Company's proprietary system will result in significant initial costs,
management believes that substantial cost savings will be achieved on an
ongoing basis.
- Core Deposit Base--The Company has a relatively low cost funding base made
up primarily of core deposits along with a relationship driven public
deposit network. At June 30, 1997, the Company's weighted average cost of
deposits was 3.24%, a slight decrease from the year end figure of 3.32%
and down significantly from the December 31, 1995 level of 3.55%. This low
cost of funds has allowed the Company to price its loan products
competitively while still maintaining an attractive net interest margin.
There is no assurance that the foregoing financial initiatives will be
realized or any estimate of when they will be achieved.
BUSINESS
The Company's commitment to being the premier provider of financial services
in the eastern portion of the greater Houston metropolitan area is reflected in
the types of products and services that it makes available to its business
customers and consumers. The Company offers a wide variety of lending products,
including term loans, lines of credit and fixed asset loans to small and
medium-sized businesses, and offers consumers automobile, home improvement and
personal loans. In addition, the Company has also established the following
niche products:
- Indirect Lending--In 1988, the Company initiated a program of purchasing
indirect loans from automobile dealers. The Company purchases almost
exclusively "A"-rated loans from a select list of dealers after performing
its own analysis of the loan package. At June 30, 1997, the Company's loan
portfolio held a total of $71.0 million in indirect loans with an
associated delinquency ratio of
23
<PAGE>
0.56%. Senior management of the Company has extensive experience in
indirect automobile financing as well as consumer lending in general.
Because of increasing competition and accompanying pressure on net interest
margins in the indirect market, management has shifted its focus to its other
niche lending products, as described below. The Company does not intend to exit
the indirect business, but rather to grow other niche products in order to
further diversity its lending risk.
- SBA Lending--The Bank is a Preferred Lender under the federally guaranteed
SBA lending program. Under this program, the Bank originates and funds SBA
7-A and 504 chapter loans qualifying for federal guarantees of 75% to 90%
of principal and accrued interest. The guaranteed portion of these loans
is generally sold into the secondary market with servicing retained.
Depending upon management's view of prepayment expectations, the
guaranteed portions are sold either at par, retaining a larger servicing
spread (generally 350-400 basis points), or at a premium (approximately
10% currently) with a small servicing spread retained. At June 30, 1997,
the Company's loan portfolio held a total of $5.1 million in the retained
portion of SBA commercial and real estate loans. The Company uses its
three LPOs which are located around the City of Houston to generate SBA
loans. The LPO lenders are specially trained in SBA loan production. Each
LPO lender is paid a salary plus a commission based upon closed loans
produced. The LPO lenders generate the potential customer prospects and
produce the SBA loan package using packaging software loaded in notebook
computers. Following loan committee approval, the LPO lenders direct the
customers to closing and servicing specialtists located in the main
banking office. As additional markets are identified and skilled lenders
become available, the Company expects to continue to expand its generation
of SBA and other government guaranteed business loan products through
additional LPOs.
- Commercial Lending--The Company's primary market is located in the heart
of the eastern Harris County manufacturing and petrochemical district. The
Company has gained an expertise in fulfilling the banking needs of the
businesses that service this industry, many of which are owner-operated,
and believes that it will better be able to serve the needs of these
businesses utilizing the increased lending limit which will result from
the Acquisitions. At June 30, 1997, the Company's loan portfolio held a
total of $13.2 million in commercial loans excluding factored receivables
and commercial SBA loans.
- Factoring--To better serve its commercial markets, in 1996 the Company
established a receivables factoring unit catering to service companies and
suppliers who deal with major corporations in the Houston area industrial
complex. The accounts receivable line of credit financing facility relies
heavily on the quality of the business customer's accounts receivable
which, if monitored and controlled properly, limits the financial risks to
the Company associated with this short-term business financing. The
Company plans to further develop its factoring capability and views this
business as a growth area. The Company's loan portfolio held a total of
$760,000 in factored receivables at June 30, 1997.
The Company funds its lending activities primarily from its core deposit
base. These deposits are gathered from the local market and no material portion
is dependent upon any one person, entity or industry. The Company also pursues
public deposits from entities such as schools, cities and colleges. At June 30,
1997, core deposits represented 93.1% and public deposits represented 3.0% of
total deposits. The Company has developed an ability to compete with regional
banks for public deposits by competitive pricing and developing continuing
relationships based on service with the individuals responsible for the
administration or selection of financial institutions to hold these funds.
The Company actively and continually trains its employees to develop and
maintain long-term banking relationships. The Company contracts with Omega
Performance, a leading trainer of bank employees in the United States, to
provide training in the areas of successful sales and service, establishing
24
<PAGE>
customer relationships, teller excellence, business development and consumer
lending. As part of this process, virtually every Company employee is placed on
incentive and merit standards which award compensation based on the achievement
of sales ratios and other business development-related indicia.
The Company has enhanced its relationship banking capabilities by marketing
individually to the top 5% of its customer base (Tier 1 accounts) and the next
10% of its customer base (Tier 2 accounts). The Tier 1 customers are provided
with a pass key which enables them to enter the Bank through a private entrance
before and after normal banking hours and are assigned a specific Bank officer
to service their banking needs. Each Tier 1 and Tier 2 customer is personally
contacted a minimum of eight times per year by an assigned officer. The Company
builds customer loyalty with responsive local decision making. Through Business
Development Board members, the Company monitors the financial service needs of
its customers.
The Company recently increased its commitment to technology by purchasing an
advanced line of software and installing new communication technology into its
branch network and communication systems. The Company believes that its new
technology will allow it to compete with any super-regional or national banking
organization with respect to communications and electronic convenience to the
customer. Among the products to be offered through this technology are cash
management, lockbox, home banking and Internet capabilities. The Company also
offers debit cards, direct deposit, ACH originations and direct debit services.
The communications network has enabled the Company to establish a call center
staffed by highly trained personnel which provides customers a one point
solution to information inquiries.
The Company's future strategy is to be able to compete effectively not just
with other commercial banks but with a variety of providers of financial
services by providing a responsive brand of relationship banking and a full line
of financial service products, including a full line of brokerage and insurance
products. The Company will be looking for additional acquisitions and branching
opportunities to enhance its retail delivery systems throughout the greater
Houston metropolitan area.
HISTORY
The Company was incorporated as a business corporation in 1982 under the
laws of the State of Texas to be a multi-bank holding company for the Bank,
which was chartered in 1965, and for Bay Port National Bank, which was chartered
in 1979. The two banks merged in 1985 in conjunction with a change in Texas
branching laws. In 1991, the Company began to expand its operations, diversify
its lending base and seek additional deposits by assuming the deposits of
Liberty County Federal Savings and Loan Association and Bayshore Federal Savings
and Loan, which added branch locations in the cities of Liberty, Cleveland and
Seabrook, Texas. In 1994, the Company established a new branch in Pasadena,
Texas. In 1996, the Company assumed the deposits of the Cleveland branch of a
commercial bank and in 1997 opened a grocery store branch in Mont Belvieu,
Texas. Additionally, the Company opened an LPO in the Clear Lake/NASA area in
1995 and two LPOs in Houston in 1996.
The Company currently serves its community from its headquarters in LaPorte
and six full-service branch locations in LaPorte, Liberty, Cleveland, Seabrook,
Pasadena and Mont Belvieu, Texas. The Company also has two LPOs in Houston and
another in the Clear Lake/NASA area. The Acquisitions will add two branch
offices in Baytown, Texas, one office in Mont Belvieu, Texas and one in Deer
Park, Texas.
FACILITIES
The Company conducts business at seven full-service banking locations and
three LPOs. As a result of the Acquisitions, the Company will acquire four
additional full-service branches. The following table sets
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<PAGE>
forth specific information on each such location. The Company's headquarters are
located at 1001 Highway 146 South in La Porte in a two story office building
owned by the Bank. Unless otherwise noted, all facilities are owned by the
Company.
<TABLE>
<CAPTION>
LOCATION
- ---------------------------------------------------------------------------------- DEPOSITS AT
JUNE 30, 1997
---------------
(IN THOUSANDS)
<S> <C>
Existing Offices:
La Porte--Main Office........................................................... $ 77,060
Liberty......................................................................... 23,296
Cleveland....................................................................... 22,864
La Porte--Spencer Office........................................................ 20,511
Pasadena........................................................................ 17,722
Seabrook........................................................................ 8,421
Mont Belvieu(1)................................................................. --
Southeast LPO--Clear Lake/NASA(2)(3)............................................ N/A
West LPO--Houston(2)(4)......................................................... N/A
Northwest LPO--Houston(2)(5).................................................... N/A
Offices to be Acquired:
Deer Park(6).................................................................... $ 26,820
Baytown--Texas Bank(7).......................................................... 23,738
Mont Belvieu(8)................................................................. 13,998
Baytown--TNB(9)................................................................. 12,437
</TABLE>
- ------------------------------
(1) Opened for business in June of 1997. This facility is leased month to month
at an annual cost of $9,000.
(2) Indicates loan production office.
(3) This facility is leased month to month at an annual cost of $5,100.
(4) This facility is leased month to month at an annual cost of $6,000.
(5) This facility is provided without charge by the officer of this LPO.
(6) Represents office of First Bank.
(7) Represents main office of Texas Bank.
(8) Represents Mont Belvieu branch of Texas Bank.
(9) Represents office of TNB.
EMPLOYEES
As of September 30, 1997, the Company had 116 full-time employees, 24 of
whom were officers. The Company provides medical and hospitalization insurance
to its full-time employees. The Company considers its relations with employees
to be excellent.
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
nonfinancial 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 on loans, 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."
26
<PAGE>
THE ACQUISITIONS
GENERAL
The Acquisitions will increase the Company's assets from $185.1 million to
$272.6 million as of June 30, 1997 on a pro forma basis. In addition to the
immediate increase in asset size, the Acquisitions are expected to improve
profitability with savings achieved through economies of scale as well as
increased loans through enhanced marketing efforts, expanded loan products and
additional employee training. Although there will be significant nonrecurring
costs incurred in connection with the Acquisitions, such as data processing
conversion operations, management believes that substantial cost savings will
result on an ongoing basis. Additionally, management of the Company views the
relatively low loan limits of each of the three banks to be acquired as a
hindrance to such banks' lending efforts. After the Acquisitions, the Company's
larger loan limit of approximately $4.1 million will allow it to solicit
customers whose loan demands may have been too large for any of the banks
individually. The consolidation in the banking industry has left many
communities with few banks that have the ability and desire to address the needs
of small businesses. The larger regional and national banks are not allocating
resources to address the needs of small business in these markets, and many of
the community banks do not offer the technological and product opportunities
that many small businesses desire. The Company's enhanced technology and product
development and delivery system will allow it to offer services traditionally
offered only by large regional and national banks. Local office decision making
as well as the Company's sales and service culture will give each branch a
community identification. Another significant reason for the Acquisitions is the
opportunity for the Company to expand its market area to desirable banking
locations. Through the Acquisitions, the Company will increase its locations
from seven to 11, and the resulting market area will extend from Seabrook in
eastern Harris County to Cleveland in western Liberty County. Locations in both
residential and work communities will provide convenience to customers and
facilitate the Company's ability to capture both business and individual
relationships.
TEXAS BANK
BUSINESS
Texas Bank was organized as a Texas banking association in 1971, and its
main office is located in Baytown. Baytown is located in eastern Harris County,
approximately 25 miles east of downtown Houston across the Houston Ship Channel
from LaPorte. In addition to its main office, Texas Bank has a branch in Mont
Belvieu, which is located approximately 35 miles east of downtown Houston in
western Chambers County. See the map located on page 2 of this Prospectus. At
June 30, 1997, Texas Bank had total assets of approximately $41.5 million, total
deposits of approximately $37.7 million and total stockholders' equity of
approximately $3.7 million.
Texas Bank is a community bank that offers interest and noninterest-bearing
deposit accounts and makes consumer, commercial and real estate loans. As of
June 30, 1997, Texas Bank's loan portfolio in aggregate book value and as a
percentage of the total loan portfolio consisted of $11.1 million of real estate
loans (56.6% of total loans), $5.9 million of commercial loans (30.1% of total
loans) and $2.6 million of consumer loans (13.3% of total loans). Texas Bank
reported no nonaccrual loans at June 30, 1997, December 31, 1996 or December 31,
1995. The allowance for possible loan losses at June 30, 1997 was $174,000 or
0.89% of the gross loan portfolio. As of June 30, 1997, net charge-offs equaled
0.13% of average loans, annualized. For the years ended December 31, 1996 and
1995, net charge-offs were 0.04% and 0.71% of average loans, respectively. Other
real estate owned by Texas Bank had an aggregate value at June 30, 1997 of
$388,000, or 0.93% of total assets. Other real estate owned equaled 1.00% of
total assets at December 31, 1996 and 1.06% of total assets at December 31,
1995. For the six months ended June 30, 1997, Texas Bank's net income after
taxes was $166,000, or an annualized return on average assets (ROAA) of 0.78%
and an annualized return on average equity (ROAE) of 9.04%. For the years ended
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December 31, 1996 and December 31, 1995, Texas Bank's ROAA equaled 1.31% and
1.21%, respectively, and its ROAE equaled 14.34% and 14.38%, respectively.
The acquisition of Texas Bank will be the Company's first expansion into
Baytown. Baytown is a community of over 60,000 people located on the Houston
Ship Channel in eastern Harris County. Baytown is home to a number of
petrochemical plants and refineries. Texas Bank is located on the north end of a
north-south corridor that is the center of Baytown's residential and business
growth. Texas Bank is the only commercial bank located on the northern end of
the city. Due to a lack of commercial bank competition, management believes that
Baytown is under-banked. In addition to the Baytown presence, the acquisition of
Texas Bank will give the Company an additional facility in Mont Belvieu. Mont
Belvieu is a growing bedroom community located approximately 35 miles east of
downtown Houston. Under current law, banks have the ability to operate
full-service insurance agencies in towns of 5,000 or less. With its location in
a town of less than 5,000, the Mont Belvieu office will serve as the basis for
the Company's expansion into the sale of insurance products.
ACQUISITION BY THE COMPANY
On June 24, 1997, the Company entered into an Agreement and Plan of
Reorganization (the "Texas Bank Acquisition Agreement") with Texas Bank and the
directors of Texas Bank and their related interests ("Texas Bank Principals")
pursuant to which the Company agreed to acquire all of the issued and
outstanding shares of Texas Bank's common stock (the "Texas Bank Common Stock")
through the consolidation of Texas Bank with a subsidiary of the Company formed
solely to facilitate the acquisition of Texas Bank. Texas Bank's stockholders
approved the Texas Bank Acquisition Agreement and the transactions contemplated
thereunder on July 29, 1997. Following the consummation of the acquisition of
Texas Bank by the Company, Texas Bank will be a wholly-owned subsidiary of the
Company, and, immediately thereafter, Texas Bank will be consolidated with the
Bank with the Bank surviving. The Company has received the necessary regulatory
approvals from the Federal Reserve Board, OCC, FDIC and the Texas Department of
Banking ("Banking Department").
CONSIDERATION FOR TEXAS BANK COMMON STOCK
The Texas Bank Acquisition Agreement provides that upon consummation of the
acquisition of Texas Bank, as aggregate consideration in exchange for their
shares of Texas Bank Common Stock, holders of Texas Bank Common Stock will
receive $5,500,000, subject to adjustment pursuant to the Texas Bank Acquisition
Agreement. If the stockholders' equity of Texas Bank is less than $3,690,000 on
the closing date of the acquisition of Texas Bank, the consideration for the
acquisition of Texas Bank will be reduced to an amount equal to the lesser of
$5,500,000 or the stockholders' equity of Texas Bank multiplied by 1.50042,
which represents the ratio of the equity of Texas Bank at September 30, 1996 to
the negotiated purchase price. In no event will the aggregate consideration to
Texas Bank exceed $5,500,000. The Texas Bank Acquisition Agreement does not
specify a minimum amount of equity for Texas Bank as a condition to closing, but
if the equity of Texas Bank were to fall such that it is a material adverse
change, the Company would not be obligated to consummate the transaction.
NON-COMPETITION AGREEMENTS
At or prior to the consummation of the acquisition of Texas Bank,
non-competition agreements are to be executed by each of the Texas Bank
Principals. The non-competition agreements provide, among other things, that for
two years following the acquisition of Texas Bank, none of the Texas Bank
Principals will (i) become affiliated with any business in Texas Bank's
Community Reinvestment Act assessment area that competes with the Company, (ii)
solicit business from the customers of Texas Bank or (iii) advise any customer
of Texas Bank to cease or diminish doing business with Texas Bank.
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LITIGATION
Texas Bank is a defendant in LIGHTHOUSE CHURCH OF CLOVERLEAF, ET AL V. TEXAS
BANK; which is pending in the 133rd Judicial District Court of Harris County,
Texas. The plaintiff claims that Texas Bank wrongfully entered into possession
of the church and school, upon which Texas Bank held a lien, and that Texas Bank
is guilty of conversion of certain personal property located on the premises.
The trial court originally granted summary judgment for Texas Bank, but the
decision was overturned and the matter was sent back to the trial court. The
amount of alleged damages is $2.1 million plus $10.0 million in exemplary
damages. Management of Texas Bank and its counsel, as well as the Company's
management and its independent litigation counsel, believe that the chance for
judgment in favor of the plaintiff is reasonably possible but the exposure of
Texas Bank, if any, will be less than $250,000. There is no guarantee, however,
that the actual liability will not be substantially greater. The Texas Bank
Acquisition Agreement does not provide for indemnification for losses incurred
in connection with this litigation.
CONDITIONS AT CLOSING
The obligations of the parties to complete the acquisition of Texas Bank are
subject to certain conditions, including the conditions that (i) all approvals
of any regulatory authority having jurisdiction over the transaction have been
received and all applicable statutory waiting periods have expired and (ii) at
the closing date, no action or litigation is pending or threatened, other than
the LIGHTHOUSE litigation, that would adversely affect certain aspects of the
acquisition of Texas Bank. In addition, the Company is not obligated to complete
the acquisition of Texas Bank unless certain conditions have been satisfied or
waived by the Company, including that (i) Texas Bank shall not have suffered a
material adverse change, (ii) Joseph D. Crook, the President and Chairman of
Texas Bank, shall have entered into an employment agreement regarding the
continuation of his employment, (iii) the Company receives releases from the
directors and officers of Texas Bank generally releasing Texas Bank from
virtually all claims by such individuals, (iv) the Company receives
noncompetition agreements from the Texas Bank Principals, (v) all accounting and
tax treatment entries and adjustments for the acquisition of Texas Bank are
satisfactory to the Company, and (vi) Texas Bank shall have been released from
all obligations under its data processing contract. There can be no assurance
that the foregoing conditions will be satisfied or waived or that the
acquisition of Texas Bank will be completed.
Approvals from all regulatory authorities having jurisdiction over the
transaction have been received, and all waiting periods will expire prior to
November 12, 1997. No action or litigation is pending or threatened that would
adversely affect the Company's acquisition of Texas Bank. As of the date of this
Prospectus, Texas Bank has not suffered a material adverse change. Joseph D.
Crook has not yet entered into an employment agreement regarding the
continuation of his employment, but the Company intends to waive this condition
to closing. Releases from the officers and directors of Texas Bank and non-
competition agreements from the Texas Bank Principals are expected to be
executed at the closing for the acquisition of Texas Bank. The Company is in the
process of evaluating accounting and tax treatment entries and adjustments to
verify that they are satisfactory. Texas Bank is in the process of obtaining
written confirmation that it is released from all obligations under its data
processing contracts.
The closing date of the acquisition of Texas Bank will be selected by mutual
agreement of the parties to the Texas Bank Acquisition Agreement following the
satisfaction or waiver of all conditions to closing but is expected to occur
simultaneously with the closing of the Offering. Although the acquisition of
Texas Bank is not explicitly conditioned upon the closing of the Offering, the
closing of the Offering is contingent upon the closing of the acquisition of
Texas Bank, and the Company plans to fund the acquisition of Texas Bank with
part of the net proceeds from the Offering.
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TEXAS NATIONAL BANK OF BAYTOWN
BUSINESS
TNB, a national banking association, was organized in 1969. The only office
of TNB is located in Baytown, Texas. See the map located on page 2 of this
Prospectus. At June 30, 1997, TNB had total assets of approximately $14.1
million, total deposits of approximately $12.4 million and total stockholders'
equity of approximately $1.6 million.
TNB is a community bank whose business includes conventional consumer and
commercial products and services, including interest and noninterest bearing
depository accounts and commercial, industrial, consumer and real estate
lending. At June 30, 1997, TNB's loan portfolio in aggregate book value and as a
percentage of the total loan portfolio consisted of $2.9 million in real estate
loans (64.4% of total loans), $1.1 million in commercial and industrial loans
(24.5% of total loans), and $500,000 in consumer loans (11.1% of total loans).
TNB reported no nonaccrual loans at June 30, 1997, December 31, 1996 or December
31, 1995. The allowance for possible loan losses at June 30, 1997 was $88,000,
or 1.98% of gross loans. As of June 30, 1997, there were no net charge-offs. For
the years ended December 31, 1996 and 1995, net charge-offs were 0.00% and 0.19%
of average loans, respectively. Other real estate owned by TNB had an aggregate
value at June 30, 1997 of $7,000, or .05% of total assets. Other real estate
owned equaled 0.46% of total assets at December 31, 1996 and 1.74% of total
assets at December 31, 1995. For the six months ended June 30, 1997, TNB's net
income after taxes was $88,000, or an annualized ROAA of 1.23% and an annualized
ROAE of 11.3%. For the year ended December 31, 1996, net income after taxes was
$146,000, or an ROAA of 1.06% and an ROAE of 9.46%. TNB's 1995 ROAA and ROAE
were 0.96% and 7.78%, respectively.
The acquisition of TNB, along with the acquisition of Texas Bank, will
broaden the Company's expansion into the Baytown market. TNB is located on the
south end of the north-south corridor on which Texas Bank is located. The
acquisition of TNB will enhance the Company's presence in the Baytown market and
provide a link to LaPorte to the south of Baytown. The TNB location will give
the Company access to industrial and blue collar neighborhoods as well as the
industrial, petrochemical and service areas of Baytown.
ACQUISITION BY THE COMPANY
On August 7, 1997, the Company and the Bank entered into an Agreement and
Plan of Consolidation (the "TNB Acquisition Agreement") with TNB pursuant to
which the Company will acquire all of the issued and outstanding shares of TNB's
common stock (the "TNB Common Stock") through the consolidation of TNB with a
subsidiary of the Company formed solely to facilitate the acquisition of TNB.
All officers and directors, certain principal stockholders and affiliates
thereof and certain other stockholders who are not officers, directors,
principal stockholders or affiliates thereof, which persons or entities held in
the aggregate 69.8% of the TNB Common Stock, have executed a Voting Agreement
and Irrevocable Proxy pursuant to which their shares will be voted in favor of
the TNB Acquisition Agreement. Following the consummation of the acquisition of
TNB by the Company, TNB will be a wholly-owned subsidiary of the Company, and,
immediately thereafter, TNB will be consolidated with the Bank with the Bank
surviving. The Company has received the necessary regulatory approvals from the
Federal Reserve Board and the OCC in connection with the acquisition of TNB.
CONSIDERATION FOR TNB STOCK
The TNB Acquisition Agreement provides that upon consummation of the
acquisition of TNB, holders of TNB Common Stock will receive $2.4 million in
cash as consideration in exchange for their shares of TNB Common Stock.
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NON-COMPETITION AGREEMENTS
At or prior to the closing of the acquisition of TNB, non-competition
agreements are to be executed by each of the officers of TNB who is offered and
accepts employment with the Company or the Bank. These agreements provide, among
other things, that for one year following the acquisition of TNB such persons
will not (i) solicit the banking business (loan, deposit or otherwise) of any
then existing customer of TNB or (ii) engage or participate in any business that
is in competition in any manner whatsoever with the business of the Company or
the Bank within a five-mile radius of TNB's existing facility in Baytown, Texas.
CONDITIONS TO CLOSING
The obligations of the parties to complete the acquisition of TNB are
subject to certain conditions, including the conditions that (i) all approvals
of any regulatory authority having jurisdiction have been received and all
applicable statutory waiting periods have expired and (ii) that the stockholders
of TNB shall have approved the transactions contemplated by the TNB Acquisition
Agreement. In addition, the Company is not obligated to complete the acquisition
of TNB unless certain conditions have been satisfied or waived by the Company,
including that (i) TNB shall not have suffered any material adverse change in
its financial condition, business or operations (ii) the Company shall have
received at least $8.5 million in net proceeds from this Offering; (iii) no
action or litigation is pending or threatened against TNB that might prevent the
acquisition of TNB or result in a material adverse change in TNB; (iv) the Bank
shall have received a letter from the OCC that loans to a certain borrower and
his affiliated interests which have been deemed by the OCC to have been issued
in excess of TNB's lending limits, will not represent a violation to the Bank
and its directors ("OCC Letter"); (v) TNB's data processing and ATM agreements
shall have been terminated without any penalty or additional liability; (vi) a
certain loan shall be removed from the books of TNB; (vii) the directors and
officers of TNB execute releases generally releasing TNB from virtually all
claims by such individuals; and (viii) each of the officers of TNB who is
offered and accepts employment with the Company or the Bank shall have executed
the non-competition agreements referred to above. TNB is not obligated to
complete the transactions if certain conditions are not met, including the
condition that the Company execute general releases in favor of the directors
and officers of TNB.
Approvals from all regulatory authorities having jurisdiction over the
transaction have been received and all applicable waiting periods will expire on
November 7, 1997. The stockholders of TNB will vote on the transactions
contemplated by the TNB Acquisition Agreement on November 5, 1997. As of the
date of this Prospectus, TNB has not suffered any material adverse change, and
no action or litigation is pending or threatened against TNB that might prevent
the acquisition of TNB or result in a material adverse change in TNB. The Bank
has received the OCC Letter. The Company and TNB are in the process of verifying
that TNB's data processing and ATM contracts will terminate without penalty or
additional liability. The loan to be removed from TNB is a loan to an executive
officer of an affiliate bank of TNB. The loan is performing and the loan balance
as of September 30, 1997 was approximately $240,000. The Board of Directors of
an affiliate bank of TNB has approved the purchase of this loan from TNB, but
the loan has not yet been removed from the books of TNB. The directors and
officers of TNB are expected to execute the releases at the closing of the
acquisition of TNB. Neither the Company nor the Bank has made any formal offers
of employment to any of the officers of TNB but may make such offers to certain
individuals in the near future. Although it is not expected that the Company
will receive net proceeds from the Offering in excess of $8.5 million, the
Company intends to waive this condition to closing provided that the net
proceeds to the Company from the Offering equal or exceed $7.5 million. The $8.5
million amount listed as a condition to closing was included in the TNB
Acquisition Agreement in order to give the Company maximum flexibility with
regard to balancing the funding for the purchase price for the Acquisitions
between existing capital and proceeds from the Offering.
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The closing date of the acquisition of TNB will be selected by mutual
agreement of the parties to the TNB Acquisition Agreement following the
satisfaction or waiver of all conditions to closing but is expected to occur on
or about November 21, 1997. The Company plans to fund the acquisition of TNB
through a combination of proceeds from the Offering and a dividend from the Bank
to the Company. There can be no assurance that the foregoing conditions will be
satisfied or waived or that the acquisition of TNB will be completed.
FIRST BANK OF DEER PARK
BUSINESS
First Bank, a Texas banking association, was organized in 1972. The only
office of First Bank is located in Deer Park which is located in eastern Harris
County. See the map located on page 2 of this Prospectus. At June 30, 1997,
First Bank had total assets of approximately $32.9 million, total deposits of
approximately $26.8 million and total stockholders' equity of approximately $3.9
million.
First Bank is a community bank whose business includes conventional consumer
and commercial products and services, including interest and noninterest bearing
depository accounts, commercial, industrial, consumer and real estate lending.
At June 30, 1997, First Bank's loan portfolio in aggregate book value and as a
percentage of the total loan portfolio consisted of $9.8 million in real estate
loans (69.2% of total loans), $3.5 million in commercial and industrial loans
(24.7% of total loans), and $864,000 in consumer loans (6.1% of total loans).
First Bank reported no nonaccrual loans at June 30, 1997, December 31, 1996 or
December 31, 1995. The allowance for possible loan losses at June 30, 1997
equaled $355,000, or 2.49% of gross loans. As of June 30, 1997, net charge-offs
equaled 0.01% of average loans, annualized. For the years ended December 31,
1996 and 1995, net charge-offs (recoveries) were (0.01)% and 0.04% of average
loans, respectively. Other real estate owned by First Bank had an aggregate
value at June 30, 1997 of $200,000, or 0.61% of total assets. Other real estate
owned equaled 0.83% of total assets at December 31, 1996 and 2.67% of total
assets at December 31, 1995. For the six months ended June 30, 1997, First
Bank's net income after taxes was $359,000, or an annualized ROAA of 2.06% and
an annualized ROAE of 19.24%. In 1996, First Bank reported an ROAA of 2.21% and
an ROAE of 18.73% and in 1995 First Bank reported an ROAA of 1.80% and an ROAE
of 14.94%.
The acquisition of First Bank will provide the Company a presence in Deer
Park. Deer Park is a community of 27,000 people located on the south side of the
Houston Ship Channel. The Deer Park economy is closely linked to the
petrochemical industry. First Bank is the only community bank in Deer Park. The
positive name recognition of both First Bank and the Bank should allow the
Company to acquire a larger market share in Deer Park and capture some of the
growth the area is experiencing. Wayne Slovacek, a director of the Bank who
previously served as chairman of the Deer Park branch of one of the large
national banking organizations, is expected to be instrumental in expanding the
Company's business in this market.
The Banking Department has alleged that First Bank violated certain laws and
regulations relating to loan concentrations and loan limits by entering into
certain loan participations. Management of First Bank vigorously opposed these
allegations. In April 1995, an appellate court upheld the ruling of the lower
court to affirm the cease and desist order originally issued by the Banking
Department to First Bank in 1992. Because the probability of reversal was
remote, management decided to take no further appellate action.
In an effort to fully comply with the cease and desist order and cooperate
with the Banking Department and without admitting any wrongdoing, First Bank
initiated efforts in 1995 to dispose of the loan participations. On January 27,
1995, First Bank received the payoff of twelve loans in which its participation
totaled approximately $6.1 million. The consideration received totaled
approximately $5.8 million. The $306,000 difference was reserved at December 31,
1994 and charged to other expenses.
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In an effort to fully comply with the cease and desist order and cooperate
with the Banking Department, First Bank is actively attempting to market the
remaining nine loans in order to reduce the loan concentration at least to First
Bank's legal lending limit of $550,000. These efforts are fully and timely
communicated to the Banking Department on a monthly basis to obtain approved
time extensions for full compliance. First Bank currently has an extension until
December 31, 1997 to reduce the loan concentration. Management of First Bank
also provides monthly reports to the Board of Directors of First Bank regarding
its efforts to reduce the loan concentration. The balance of the related loans
at September 30, 1997 was approximately $2.2 million, a reduction of
approximately $867,000 from the December 31, 1996 amount of approximately $3.0
million. The Banking Department has required First Bank to include approximately
$155,000 of specific reserves on these loans in its allowance for loan losses.
ACQUISITION BY THE COMPANY
On August 7, 1997, the Company and the Bank entered into an Agreement and
Plan of Consolidation (the "First Bank Acquisition Agreement") with First Bank
pursuant to which the Company will acquire all of the issued and outstanding
shares of First Bank's common stock (the "First Bank Common Stock") through the
merger of First Bank with a subsidiary of the Company formed solely to
facilitate the acquisition of First Bank. Stockholders holding 75.3% of the
First Bank Common Stock have executed a Voting Agreement and Irrevocable Proxy
pursuant to which their shares of stock will be voted in favor of the First Bank
Acquisition Agreement. Following the consummation of the acquisition of First
Bank by the Company, First Bank will be a wholly-owned subsidiary of the
Company, and, immediately thereafter, First Bank will be consolidated with the
Bank with the Bank surviving. The Company has filed the necessary regulatory
applications requesting approval from the Federal Reserve Board, OCC, FDIC and
Banking Department and has received the approval of all agencies except the
FDIC. It is currently expected that the approval of the FDIC will be received
shortly after the stockholders of First Bank approve the transactions
contemplated by the First Bank Acquisition Agreement on November 5, 1997.
CONSIDERATION FOR FIRST BANK STOCK
The First Bank Acquisition Agreement provides that upon consummation of the
acquisition of First Bank, holders of First Bank Common Stock will receive
$7,970,000 in cash as consideration in exchange for their shares of First Bank
Common Stock.
NON-COMPETITION AGREEMENTS
At or prior to the closing of the acquisition of First Bank, non-competition
agreements are to be executed by each of the officers of First Bank who is
offered and accepts employment with the Company or the Bank. These agreements
provide, among other things, that for one year following the acquisition of
First Bank such persons will not (i) solicit the banking business (loan, deposit
or otherwise) of any then existing customers of First Bank or (ii) engage or
participate in any business that is in competition in any manner whatsoever with
the business of the Company or the Bank within a five-mile radius of First
Bank's existing facility in Deer Park, Texas.
CONDITIONS TO CLOSING
The obligations of the parties to complete the acquisition of First Bank are
subject to certain conditions, including the conditions that (i) all approvals
of any regulatory authority having jurisdiction have been received and all
applicable statutory waiting periods have expired and (ii) that the stockholders
of First Bank shall have approved the transactions contemplated under the First
Bank Acquisition Agreement. In addition, the Company is not obligated to
complete the acquisition of First Bank unless certain conditions have been
satisfied or waived by the Company, including that (i) First Bank shall not have
suffered any material adverse change in its financial condition, business or
operations (ii) the Company shall have received at least $8,500,000 in net
proceeds from this Offering; (iii) no action or
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litigation is pending or threatened against First Bank that might prevent the
acquisition of First Bank or result in a material adverse change in First Bank;
(iv) the Bank shall have received the OCC Letter; (v) that the directors and
officers of First Bank execute releases generally releasing First Bank from
virtually all claims by such individuals referred to above; and (vi) that each
of the officers of First Bank who is offered and accepts employment with the
Company or the Bank shall have executed the non-competition agreements referred
to above. First Bank is not obligated to complete the transactions if certain
conditions are not met, including the condition that the Company execute general
releases in favor of the directors and officers of First Bank.
Approvals from all regulatory authorities having jurisdiction over the
transaction, except the FDIC, have been received. The approval from the FDIC is
expected to be received shortly after the stockholders of First Bank approve the
transactions contemplated by the First Bank Acquisition Agreement on November 5,
1997. All applicable waiting periods are expected to expire on or about November
21, 1997. As of the date of this Prospectus, First Bank has not suffered any
material adverse change, and no action or litigation is pending or threatened
against First Bank that might prevent the acquisition of First Bank or result in
a material adverse change in First Bank. The Bank has received the OCC Letter.
The directors and officers of First Bank are expected to execute the releases at
the closing of the acquisition of First Bank. Neither the Company nor the Bank
has made any formal offers of employment to any of the officers of First Bank
but may make such offers to certain individuals in the near future. Although it
is not expected that the Company will receive net proceeds from the Offering in
excess of $8.5 million, the Company intends to waive this condition to closing
provided that the net proceeds to the Company from the Offering equal or exceed
$7.5 million. The $8.5 million amount listed as a condition to closing was
included in the First Bank Acquisition Agreement in order to give the Company
maximum flexibility with regard to balancing the funding for the purchase price
for the Acquisitions between existing capital and proceeds from the Offering.
The closing date of the acquisition of First Bank will be selected by mutual
agreement of the parties to the First Bank Acquisition Agreement following the
satisfaction or waiver of all conditions to closing but is expected to occur on
or about November 21, 1997. The Company plans to fund the acquisition of First
Bank through a combination of proceeds from the Offering and a dividend from the
Bank to the Company. There can be no assurance that the foregoing conditions
will be satisfied or waived or that the acquisition of First Bank will be
completed.
USE OF PROCEEDS
The net proceeds to be received by the Company from the Offering (based on
an assumed initial public offering price of $15.00 per share, the mid-point of
the estimated offering range) after deducting underwriting discounts and
estimated offering expenses are estimated to be approximately $8.1 million, or
$9.3 million if the Underwriters' over-allotment option is fully exercised. The
Company will use a portion of the net proceeds from this Offering to fund the
$5.5 million purchase price for the acquisition of Texas Bank. The remaining
$2.6 million in net proceeds will be used to fund a portion of the $10,370,000
aggregate purchase price for the acquisitions of TNB and First Bank. The
$7,770,000 balance of the purchase price for the acquisitions of TNB and First
Bank will be funded through a dividend from the Bank to the Company. See "The
Acquisitions."
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
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dividends on its Common Stock since December of 1992 and currently pays
quarterly dividends aggregating $0.24 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 banking laws, regulations and authorities. Prior to declaring
a dividend, a national bank must transfer to surplus 10% of its net profits
earned since its last dividend unless its surplus equals or exceeds stated
capital. As of September 30, 1997, the Bank's surplus exceeded its stated
capital. Without approval of the OCC, dividends may not be paid in excess of a
bank's total net profits for that year, plus its retained profits for the
preceding two years, less any required transfers to capital surplus. 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 September 30, 1997, an aggregate of approximately $4.1 million was available
for payment of dividends by the Bank to the Company under applicable
restrictions, without regulatory approval. In connection with the Acquisitions,
the Bank intends to pay a dividend of up to $8.3 million to the Company and has
received regulatory approval for this dividend. As a result of this dividend,
the Bank will eliminate its net profits for the year and retained profits for
the two prior years and absent prior regulatory approval, will be able to pay
dividends only out of future earnings. 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."
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DILUTION
At June 30, 1997, the per share stockholders' equity, or net book value per
share, of the Company was $10.15 per share, and tangible book value was $9.78
per share. Net book value per share represents the Company's total assets less
total liabilities divided by the total number of shares of Common Stock
outstanding, exclusive of shares subject to currently exercisable options. Net
tangible book value reflects book value under generally accepted accounting
principles reduced by $500,000 in intangible assets such as goodwill and core
deposit intangible.
Net book value dilution per share represents the difference between the
amount per share paid by the purchasers of Common Stock in the Offering and the
pro forma net book value per share of Common Stock immediately after the
completion of the Offering and the Acquisitions. After giving effect to the
Acquisitions, including $6.1 million of goodwill and core deposit intangibles,
the sale by the Company of 600,000 shares of Common Stock offered hereby at the
public offering price of $15.00 per share (the midpoint of the estimated
offering range), and receipt by the Company of the net proceeds therefrom, the
pro forma net book value per share and net tangible book value per share of the
Company at June 30, 1997, would have been $11.18 per share and $7.79 per share,
respectively. This represents an immediate decrease in book value per share of
$3.82 per share and an immediate decrease in net tangible book value per share
of $7.21 per share to purchasers of shares in the Offering, as illustrated by
the following tables:
DILUTION IN NET BOOK VALUE PER SHARE TO NEW INVESTORS
<TABLE>
<S> <C> <C>
Public offering price per share............................................. $ 15.00
Net book value per share at June 30, 1997................................... $ 10.15
Increase in pro forma net book value per share attributable to new investors
in the Offering........................................................... 1.03
---------
Pro forma net book value per share after the Offering....................... 11.18
---------
Dilution in net book value per share to new investors....................... $ 3.82
---------
</TABLE>
DILUTION IN NET TANGIBLE BOOK VALUE PER SHARE TO NEW INVESTORS
<TABLE>
<S> <C> <C>
Public offering price per share............................................. $ 15.00
Net tangible book value per share at June 30, 1997.......................... $ 9.78
Decrease in net tangible book value per share attributable to the
Acquisitions.............................................................. (3.14)
Increase in pro forma net tangible book value per share attributable to new
investors in the Offering................................................. 1.15
---------
Pro forma net tangible book value per share after the Offering.............. 7.79
---------
Dilution in net tangible book value per share to new investors.............. $ 7.21
---------
---------
</TABLE>
The foregoing computations do not take into account the possible exercise of
outstanding stock options granted under the Company's stock option plans, the
Phantom Plan or the possible issuance of up to an additional 90,000 shares of
Common Stock to new investors pursuant to the exercise of an option granted by
the Company to the Underwriter solely to cover over-allotments, if any, in
connection with the Offering. See "Underwriting." Options to purchase a total of
33,300 shares of Common Stock were outstanding under the Company's stock option
plans at June 30, 1997, of which 6,660 were exercisable at a price of $7.05 per
share. Pursuant to the Phantom Plan, 66,630 shares of Common Stock may be
issued. See "Management--Stock Option and Incentive Plans." If the 90,000 shares
of Common Stock issuable to pursuant to the Underwriter's over-allotment, the
6,660 shares of Common Stock exercisable pursuant to the Company's stock option
plans and the 66,630 shares of Common Stock issuable under the Phantom Plan were
included in the foregoing calculation, the pro forma net tangible and net book
value of the
36
<PAGE>
Common Stock would be $8.02 and $11.15 per share, respectively, and the per
share dilution to new investors would be $6.98 and $3.85, respectively. The
Company's present stockholders, including officers and directors, will have an
increase in the net tangible and net book value of their shares as a result of
the Offering. The Acquisitions will result in a dilution to the net tangible
book value of the Company's present stockholders although such dilution will be
less than the dilution to new investors.
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
Acquisitions and (ii) the sale by the Company of 600,000 shares of Common Stock
offered hereby, at an assumed per share price of $15.00 (which is the mid-point
of the estimated offering range), less underwriting discounts and other
estimated offering expenses. See "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1997,
---------------------------------------
AS ADJUSTED FOR
THE
AS ADJUSTED ACQUISITIONS
FOR THE AND THE
ACTUAL ACQUISITIONS OFFERING
--------- ----------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Stockholders' Equity:
Common Stock, $1 par value; 50,000,000 shares authorized; 1,399,583
shares issued and 1,357,657 shares outstanding; 1,999,583 shares
issued and 1,957,657 shares outstanding, as adjusted for the
Offering(1)........................................................... $ 1,400 $ 1,400 $ 2,000
Additional capital.................................................... 8,393 8,393 15,893
Retained earnings..................................................... 4,352 4,352 4,352
Net unrealized appreciation (loss) on available-for-sale securities... (89) (89) (89)
Less Common Stock held in treasury-at cost............................ (274) (274) (274)
--------- ----------- -------
Total stockholders' equity............................................ $ 13,782 $ 13,782 $ 21,882
--------- ----------- -------
--------- ----------- -------
</TABLE>
- ------------------------
(1) Does not include 33,300 shares of Common Stock reserved for issuance upon
exercise of options granted under the Company's stock option plans, 66,630
shares of Common Stock that may be issued pursuant to the Phantom Plan or
the 90,000 shares Common Stock that may be issued to cover over-allotments.
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 Underwriter 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 Underwriter
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,
37
<PAGE>
the market conditions for new issues of securities and the demand for securities
of comparable companies at the time the Offering was made. See "Underwriting"
for information relating to the method of determining the initial public
offering price. The shares of Common Stock have been approved for quotation on
the Nasdaq/National Market under the symbol "BAYB."
38
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto, appearing elsewhere in 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.......................... $ 6,537 $ 6,214 $ 12,666 $ 11,244 $ 9,627 $ 9,999 $ 10,896
Interest expense......................... 2,732 2,619 5,443 5,391 4,285 4,091 4,892
--------- --------- --------- --------- --------- --------- ---------
Net interest income.................... 3,805 3,595 7,223 5,853 5,342 5,908 6,004
Provision for loan losses................ 168 219 510 150 75 400 575
--------- --------- --------- --------- --------- --------- ---------
Net interest income after provision for
loan losses.......................... 3,637 3,376 6,713 5,703 5,267 5,508 5,429
Noninterest income....................... 1,197 1,193 2,347 2,095 2,104 1,990 1,578
Noninterest expenses..................... 3,615 3,269 7,067 6,024 5,869 5,794 5,452
--------- --------- --------- --------- --------- --------- ---------
Earnings before taxes and cumulative
effect of accounting change.......... 1,219 1,300 1,993 1,774 1,502 1,704 1,555
Provision for income tax expense......... 364 408 591 559 271 371 20
Cumulative effect of accounting change... -- -- -- -- -- 631 --
--------- --------- --------- --------- --------- --------- ---------
Net earnings............................. $ 855 $ 892 $ 1,402 $ 1,215 $ 1,231 $ 1,964 $ 1,535
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
PER SHARE DATA:
Net earnings(1).......................... $ 0.59 $ 0.62 $ 0.97 $ 0.84 $ 0.86 $ 1.38 $ 1.43
Book value............................... 10.15 8.92 9.58 8.82 7.95 7.49 6.28
Tangible book value...................... 9.78 8.92 9.06 8.82 7.95 7.49 6.28
Cash dividends........................... 0.12 0.12 0.24 0.20 0.20 0.20 0.05
Dividend payout ratio.................... 19.05% 18.19% 23.11% 22.47% 22.18% 13.86% 3.41%
Weighted average common and common
equivalent shares outstanding (in
thousands)............................. 1,439 1,440 1,441 1,442 1,430 1,419 1,075
BALANCE SHEET DATA:
Total assets............................. $ 185,139 $ 178,399 $ 189,011 $ 167,091 $ 168,322 $ 147,161 $ 145,099
Securities............................... 44,255 43,893 43,745 38,588 42,618 40,862 35,833
Gross loans.............................. 115,222 113,350 119,880 105,796 106,830 94,919 94,084
Allowance for loan losses................ 1,425 1,360 1,430 1,185 1,230 1,344 1,280
Total deposits........................... 169,874 164,272 173,318 153,334 149,824 134,848 134,553
Total stockholders' equity............... 13,782 12,083 12,929 11,903 10,857 10,199 8,424
AVERAGE BALANCE SHEET DATA:..............
Total assets............................. $ 183,197 $ 171,176 $ 177,272 $ 164,596 $ 150,205 $ 143,261 $ 135,682
Total interest-earning assets............ 170,688 159,164 164,905 152,781 140,187 133,119 125,343
Securities............................... 44,578 41,991 43,230 37,028 35,535 35,352 33,394
Loans.................................... 117,361 109,575 113,014 107,286 101,975 94,138 90,041
Allowance for loan losses................ 1,471 1,230 1,330 1,302 1,324 1,294 1,262
Total deposits........................... 167,990 157,410 162,522 151,013 135,329 131,809 126,006
Total stockholders' equity............... 13,355 11,783 12,416 11,354 10,502 9,311 6,907
</TABLE>
39
<PAGE>
<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)
PERFORMANCE RATIOS(2):
<S> <C> <C> <C> <C> <C> <C> <C>
Return on average assets................. 0.93% 1.04% 0.82% 0.75% 0.80% 1.37% 1.13%
Return on average stockholders' equity... 12.80 15.14 11.29 10.70 11.72 21.09 22.23
Net interest margin...................... 4.46 4.52 4.38 3.83 3.81 4.44 4.79
Efficiency ratio(3)...................... 72.27 68.27 73.85 75.79 78.82 73.36 71.91
ASSET QUALITY RATIOS(4):
Nonperforming assets to total loans and
other real estate...................... 0.47% 0.46% 0.47% 0.56% 0.67% 0.90% 2.28%
Nonperforming loans to gross loans....... 0.18 0.19 0.18 0.22 0.23 0.37 0.78
Net loan charge-offs to average total
loans(2)............................... 0.29 0.08 0.23 0.18 0.19 0.36 0.49
Allowance for loan losses to total
loans.................................. 1.24 1.20 1.19 1.12 1.15 1.42 1.36
Allowance for loan losses to
nonperforming loans(5)................. 678.57 615.38 662.04 519.74 510.37 361.29 174.62
CAPITAL RATIOS(4):
Leverage ratio........................... 7.25% 7.46% 6.67% 7.33% 6.98% 6.99% 5.81%
Average stockholders' equity to average
total assets........................... 7.29 7.00 6.88 6.90 6.99 6.50 5.09
Tier 1 risk-based capital ratio.......... 10.16 10.02 9.39 10.14 9.33 8.85 7.05
Total risk-based capital ratio........... 11.24 11.11 10.45 11.14 10.35 10.07 8.54
</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 to average loans and average
stockholders' equity to average total assets.
(5) Nonperforming loans consist of nonaccrual loans and loans restructured.
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations 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 Company's performance during the six month period ended June 30, 1997,
as compared to the six month period ended June 30, 1996, was marked by several
significant events which occurred during 1996. In August 1996, the Company
assumed approximately $12.0 million in deposits related to a branch location in
Cleveland, Texas acquired from a commercial bank (the "Cleveland
Acquisition"),and the Company relocated its existing Cleveland office to the
newly acquired facility. In January 1996, the Company sold land adjacent to its
Spencer banking office located in LaPorte (the "Spencer Office") recognizing a
gain on the sale of $68,000. During the first half of 1996, the Company opened
two additional LPOs in Houston and received its designation as a Preferred SBA
Lender. Also during the first half of 1996, the Company initiated an accounts
receivable factoring program for small to medium size businesses called Cash
Flow Manager which by year end 1996, had outstanding balances in excess of $1.6
million. Balance sheet growth from June 30, 1996 to June 30, 1997 was primarily
due to the Cleveland Acquisition. The Company's average deposits increased 6.8%
and average gross loans increased 7.1% as a result of both the Cleveland
Acquisition and internally generated growth. Internal growth was a direct
reflection of the Company's commitment to its sales and service culture and to
the success of the Company's three LPOs. The Company's six month 1997 earnings,
however, were affected by certain incremental expenses (salary, occupancy,
communication and technological changes, advertising and other items) related to
the Cleveland Acquisition along with costs relating to the Company's SBA program
and the operation of the LPOs. Additionally, the Company has incurred increased
personnel costs related to its commitment to the development of its sales and
service culture and incentive based compensation.
Net earnings available to common stockholders for the six months ended June
30, 1997 were $855,000, which was $37,000 or 4.1% less than net earnings for the
six months ended June 30, 1996. Excluding the $68,000 gain on the sale of land
adjacent to the Spencer Office recognized by the Company in January 1996,
earnings for the six months ended June 30, 1997 would have been approximately
$7,500 or 1.0% greater than net earnings for the six months ended June 30, 1996.
Net earnings per share were $0.59 for the six months ended June 30, 1997 and
$0.62 for the six months ended June 30, 1996. Although net interest income was
higher for the six months ended June 30, 1997 than in the comparable 1996
period, this was offset by higher operating expenses which included expenses
related to the Cleveland Acquisition, increased salary and related other
personnel costs and increased advertising costs. The Company's commitment to its
sales and service culture and incentive based employee compensation, along with
maintaining its three LPOs during 1997, were the primary factors increasing
salary and advertising expenses. Annualized return on average assets and an
annualized return on average common equity were 0.93% and 12.80%, respectively,
for the six months ended June 30, 1997 compared to 1.04% and 15.14%
respectively, for the same period in 1996.
Total assets at June 30, 1997 increased to $185.1 million from $178.4
million at June 30, 1996, an increase of $6.7 million or 3.8%. Period-end
deposits rose to $169.9 million at June 30, 1997 from $164.3 million at June 30,
1996, an increase of $5.6 million or 3.4%. While the Cleveland Acquisition
created an approximate deposit increase of $12.0 million, the Company
experienced an internal $6.4 million decrease in deposits. This reduction in
deposits is primarily attributable to several large commercial and public funds
customers whose demand and time balances fluctuate with operational needs. Total
41
<PAGE>
stockholders' equity was $13.8 million at June 30, 1997, representing an
increase of $1.8 million or 14.05% over total stockholders' equity of $12.1
million at June 30, 1996. This increase is primarily attributable to the
retention of earnings.
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
income. 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 $3.8 million
compared to $3.6 million for the six months ended June 30, 1996, an increase of
$200,000 or 5.6%. Net interest income increased as a result of a higher dollar
amount of interest-earning assets derived from the Cleveland Acquisition and
internal loan growth over this period. Average interest-earning assets increased
from 92.98% of total average assets at June 30, 1996 to 93.17% of total average
assets at June 30, 1997. Average gross loans increased to $117.4 million for the
six months ended June 30, 1997 from $109.6 million for the six months ended June
30, 1996, an increase of $7.8 million or 7.1%. Internal loan growth accounted
for $7.0 million of this increase, and the Cleveland Acquisition accounted for
the remaining $800,000 of the increase. Additionally, net interest income
increased as a result of the Company's decision to restructure its loan mix from
lower yielding indirect automobile loans into higher yielding direct commercial
and real estate loans. See "--Loan Portfolio."
Net interest income was improved by a decrease in the cost of
interest-bearing liabilities from 4.03% to 3.95% through a non-material change
in the Company's overall interest-bearing deposit costs. Average
interest-bearing deposits increased to $138.4 million for the six months ended
June 30, 1997 from $129.9 million for the six months ended June 30, 1996, an
increase of $8.5 million or 6.5%. This growth was primarily attributable to the
Cleveland Acquisition.
The Company posted net interest margins of 4.46% and 4.52% and net interest
spreads of 3.71% and 3.78% for the periods ended June 30, 1997 and June 30,
1996, respectively. The slight decrease in the net interest margin from the
first half of 1996 to the first half of 1997 reflects a 15 basis point decrease
in the yield on average earning assets and an eight basis point reduction in the
cost of interest-bearing liabilities. The decrease in the yield on average
earning assets to 7.66% for the six months ended June 30, 1997 from 7.81% for
the six months ended June 30, 1996, was primarily attributable to a large
recovery of interest on a charged-off loan. The cost of interest-bearing
liabilities decreased slightly to 3.95% for the six months ended June 30, 1997
from 4.03% for the six months ended June 30, 1996. Net interest margin decreased
slightly from 4.52% at June 30, 1996 to 4.46% at June 30, 1997.
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. There were no nonaccruing loans during the periods covered.
42
<PAGE>
<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......................................... $ 117,361 $ 4,951 8.44% $ 109,575 $ 4,741 8.65%
Securities.................................... 44,578 1,344 6.03 41,991 1,252 5.96
Federal funds sold and other temporary
investments................................. 8,749 242 5.53 7,598 221 5.81
----------- --------- --- ----------- --------- ---
Total interest-earning assets............... 170,688 6,537 7.66% 159,164 6,214 7.81%
----------- --------- --- ----------- --------- ---
Less allowance for loan losses................ (1,471) (1,230)
----------- -----------
Total interest-earning assets, net of
allowance................................... 169,217 157,934
Nonearning assets............................. 13,980 13,241
----------- -----------
Total assets................................ $ 183,197 $ 171,175
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits.............. $ 19,332 112 1.16% $ 16,481 100 1.21%
Public fund deposits.......................... 5,551 48 1.73 6,236 55 1.76
Savings and money market accounts............. 41,691 697 3.34 40,875 660 3.23
Certificates of deposit....................... 71,263 1,861 5.22 66,023 1,795 5.44
Federal funds purchased, FHLB line of credit
and other borrowings........................ 548 14 5.10 329 9 5.48
----------- --------- --- ----------- --------- ---
Total interest-bearing liabilities.......... 138,385 2,732 3.95% 129,944 2,619 4.03%
----------- --------- --- ----------- --------- ---
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits........... 30,153 27,795
Other liabilities............................. 1,773 1,985
----------- -----------
Total liabilities........................... 170,311 159,724
----------- -----------
Stockholders' equity............................ 12,886 11,451
----------- -----------
Total liabilities and stockholders'
equity.................................... $ 183,197 $ 171,175
----------- -----------
----------- -----------
Net interest income........................... $ 3,805 $ 3,595
--------- ---------
--------- ---------
Net interest spread........................... 3.71% 3.78%
--- ---
--- ---
Net interest margin........................... 4.46% 4.52%
--- ---
--- ---
</TABLE>
43
<PAGE>
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............................................................................. $ 345 $ (135) $ 210
Securities........................................................................ 77 15 92
Federal funds sold and other temporary investments................................ 33 (12) 21
----- --------- ---------
Total increase (decrease) in interest income.................................... 455 (132) 323
----- --------- ---------
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits.................................................. 15 (10) 5
Savings and money market accounts................................................. 13 24 37
Certificates of deposit........................................................... 142 (76) 66
Other borrowings.................................................................. 6 (1) 5
----- --------- ---------
Total increase (decrease) in interest expense................................... 176 (63) 113
----- --------- ---------
Increase (decrease) in net interest income........................................ $ 279 $ (69) $ 210
----- --------- ---------
----- --------- ---------
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased slightly to $168,000 for the six
months ended June 30, 1997 from $219,000 for the same time period in 1996, a
decrease of $51,000 or 23.3%. See "--Allowance for Loan Losses."
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 $1.2 million, virtually no change from 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........................................ $ 741 $ 701
Gain on sale of SBA loans.................................................. 141 120
ATM fee income............................................................. 105 89
Alternative investments.................................................... 89 85
Other noninterest income................................................... 121 198
--------- ---------
Total noninterest income............................................... $ 1,197 $ 1,193
--------- ---------
--------- ---------
</TABLE>
44
<PAGE>
Service charges on deposit accounts is the largest component of noninterest
income and a significant source of revenue to the Company. Additionally, the
Company recognized increased gains on the sale of SBA loans generated by the
LPOs. The decrease in other noninterest income is attributable to the
nonrecurring gain on the sale of land adjacent to the Spencer Office totaling
$68,000 in January of 1996. ATM fee income increased as an additional ATM
facility was installed at the Liberty banking office and the ATM at the Spencer
Office was relocated to a new, more visible location.
NONINTEREST EXPENSE
In the six month period ended June 30, 1997, noninterest expenses increased
$300,000 or 9.1% to $3.6 million from $3.3 million for the period ended June 30,
1996. The increase reflects the additional expenses resulting from the Cleveland
Acquisition consummated in the third quarter of 1996, the additional salary and
related expenses associated with the commencement of the operation of two
additional LPOs opened in mid-1996 and increased salary costs, a result of the
Company's commitment to rewarding individual merit in its sales and service
culture.
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......................................... $ 1,843 $ 1,600
Non-staff expenses:
Net bank premises expense................................................ 274 252
Equipment rentals, depreciation and maintenance.......................... 309 320
Data processing.......................................................... 71 92
Professional fees........................................................ 159 111
Regulatory assessments/FDIC insurance.................................... 51 88
Ad valorem and franchise taxes........................................... 91 96
Other.................................................................... 817 710
--------- ---------
Total non-staff expenses............................................... 1,772 1,669
--------- ---------
Total noninterest expense.............................................. $ 3,615 $ 3,269
--------- ---------
--------- ---------
</TABLE>
Employee compensation and benefit expense for the six months ended June 30,
1997 was $1.8 million, an increase of $200,000 or 12.5% from $1.6 million in the
same period of 1996. The increase was principally due to additional staff
associated with the Cleveland Acquisition, the two new LPOs and additional
general staffing hired. Total full-time equivalent employees at June 30, 1997
increased to 116 from 101 at June 30, 1996.
Non-staff expenses increased to $1.8 million for the six month period ended
June 30, 1997 from $1.7 million for the same period in 1996, an increase of
$100,000 or 5.9%. This increase was largely due to additional expenses
associated with the Cleveland Acquisition, increased advertising costs related
to the Company's SBA program and increased professional fees related to the
sales and service culture, offset by lower data processing costs and ordinary
FDIC-assesssments.
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
45
<PAGE>
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 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 $364,000 for an effective tax rate of 29.9%, compared to $408,000, for an
effective tax rate of 31.4% for the six months ended June 30, 1996.
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
Total average gross loans, net of unearned interest, were $117.4 million at
June 30, 1997, an increase of $7.8 million or 7.1% from $109.6 million at June
30, 1996. The Cleveland Acquisition accounted for $800,000 of this growth, while
internally generated loans grew by $7.0 million or 6.4%.
The following table summarizes for the periods 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........................................ $ 15,420 13.38% $ 12,461 10.99%
Real estate:
Construction and land development.............................. 2,290 1.99 2,613 2.31
1-4 family residential......................................... 2,977 2.58 2,815 2.48
Multi-family residential....................................... 618 0.54 60 0.05
Non-farm/non-residential....................................... 13,889 12.05 13,213 11.66
Consumer:
Indirect....................................................... 71,008 61.63 74,318 65.57
Direct......................................................... 9,020 7.83 7,870 6.94
---------- ----------- ---------- -----------
Total loans.................................................... $ 115,222 100.00% $ 113,350 100.00%
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
</TABLE>
The lending focus of the Company is on small and medium-sized business loans
on a direct and SBA supported basis and on consumer direct and indirect loans.
The Company initiated an indirect auto paper lending program in 1988. Marketing
is directed to new car dealers with a niche in class "A" credit quality loans.
The Company offers a variety of commercial lending products including term
loans, lines of credit and equipment financing. A broad range of short to
medium-term commercial loans, 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.
46
<PAGE>
Although its legal lending limit is substantially higher, the Company
generally has not made loans larger than $1.2 million. Loans up to $300,000 are
evaluated and acted upon by an Officers' Loan Committee, which meets twice per
week. Loans above that amount must be approved by the Directors' Loan Committee,
which meets bi-weekly.
Generally, the Company's commercial loans are underwritten in the Company's
market area on the basis of the borrower's ability to service such debt from
identified cash flow. 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 of the business principals. 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 or will be completed and occupied by the borrower. The Company offers
a variety of mortgage loan products which generally are amortized over five to
20 years.
Loans collateralized by single-family residential real estate generally have
been originated in amounts of no more than 80% of appraised value. The Company
requires mortgage title insurance, hazard insurance and flood insurance when
applicable, in the amount of the loan. The Company generally retains and
services all of the originated mortgages. Customers requiring fixed rate full
term loans are accommodated via an automated interactive application process
direct from the Bank's premises to the acquiring mortgage company. As a result,
the Company is able to meet all of the mortgage needs of its present and
potential customer base.
The Company's commercial mortgage loans are secured by first liens on real
estate, typically have both fixed and variable interest rates and amortize over
a 10 to 20 year period with balloon payments due at the end of three to five
years. As a Preferred SBA lender, the Company also issues full term variable
rate real estate loan commitments when the facility is enhanced by the
underlying SBA guaranty. 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, environmental
assessments and a review of the financial condition of the borrower.
The Company makes loans to finance the construction of residential and
nonresidential properties. Construction loans generally are secured by first
liens on real estate and have floating rates. 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.
The Company is an active SBA lender, having achieved the "Preferred Lender"
status, the highest status awarded to a lender by the SBA. The Company uses a
system of satellite LPOs staffed by SBA loan specialists and located in the
Houston market. The LPO lenders generate the potential customer prospects and
produce the SBA loan package using packaging software loaded on notebook
computers. Following loan committee approval, the LPO lender passes the
customers to closing and servicing specialists located in the main banking
office.
The Company provides a factoring product known as "Cash Flow Manager" to
address the working capital needs of businesses which do not meet the loan
guidelines of the Company for commercial lines of credit but are deemed
creditworthy.
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.
47
<PAGE>
Approximately 88.72% of the Company's consumer loan portfolio as of June 30,
1997, was comprised of "indirect loans" (representing 61.63% of the Company's
total loan portfolio). These are installment loans, with typical maturities of
three to five years, which are originated 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 indirect lending program at the Company has successfully been in place
since 1988. The program, which forms the majority of outstanding loan balances
at the Company, provides for a predictable source of cash flow, liquidity, and
revenue stream which has been beneficial to the Company since its inception.
The Company's indirect loan programs are administered by an experienced
staff specially trained in evaluating and servicing this particular type of
loan. The Company uses three loan buyers with indirect loan experience ranging
from nine to 26 years. Mr. Wright, the Chief Executive Officer of the Company,
has managed an indirect product line in banks for over 30 years and holds
substantial expertise in the area, having lectured on indirect lending at the
American Bankers Association National Consumer Lending Schools. More recently,
the Company's indirect lending staff was requested by the OCC to conduct a
seminar for its Houston area examiners on the "how to and risks of" indirect
lending.
The Company competes for indirect 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 purchases primarily "A"-rated credit quality
loans from new car dealers. To obtain dealer response in this area the Company
must timely provide superior service while purchasing contracts on a consistent
basis. Additionally, the market requires that the Company price products below
the buy rates of the captive finance companies. However, because the niche is
quality driven, the performance of the portfolio warrants more aggressive
pricing.
The Company generally receives credit applications on a daily basis from one
or more of the 20 automobile dealerships from which it actively purchases
indirect auto 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 and
obtain payment promises. 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 0.56% as of June 30,
1997.
In addition to the underwriting of the individual loan contracts, the
Company requires the automobile dealerships to provide annual financial
information to the Company for financial analysis and review. The Company
believes that it represents a higher risk to do business with dealerships which
have demonstrated financial weakness and which would possibly be unable to
facilitate the return of any rebates due to the Company on payoffs and
repossessions.
48
<PAGE>
The following table summarizes with respect to the Company's indirect loans
information regarding the amounts of loans outstanding, the amounts of loans
charged off and the delinquency ratios for the periods indicated:
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS
AS OF AND FOR THE ENDED DECEMBER 31,
SIX MONTHS ENDED -------------------------------
JUNE 30, 1997 1996 1995 1994
----------------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans outstanding at end of period............................ $ 71,008 $ 74,883 $ 69,971 $ 77,875
Net loan charge-offs for the period........................... 143 259 227 238
Net loan charge-off ratio..................................... 0.20% 0.35% 0.34% 0.30%
Delinquency ratio at end of period............................ 0.56% 0.57% 0.52% 0.39%
</TABLE>
The contractual maturity ranges of the commercial and industrial and real
estate portfolio and the amount of 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............................................ $ 10,042 $ 4,118 $ 1,260 $ 15,420
Real estate.......................................................... 5,405 7,179 7,190 19,774
--------- ----------- ----------- ---------
Total............................................................ $ 15,447 $ 11,297 $ 8,450 $ 35,194
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
Loans with a predetermined interest rate............................. $ 5,025 $ 6,520 $ 3,674 $ 15,219
Loans with a floating interest rate.................................. 10,422 4,777 4,776 19,975
--------- ----------- ----------- ---------
Total............................................................ $ 15,447 $ 11,297 $ 8,450 $ 35,194
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</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. Nonperforming assets
(nonaccrual loans, repossessed assets, restructured loans and other real estate)
at June 30, 1997 were $537,000 compared to $520,000 at June 30, 1996. The
Company's ratio of nonperforming assets to capital remains low at 3.9% at June
30, 1997 compared to 4.3% at June 30, 1996. The Company records real estate
acquired by foreclosure and repossessed assets at the fair value at the time of
foreclosure, 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 costs to sell. Repossessed assets are
primarily automobiles and trucks and are presented on the balance sheet as a
component of other assets.
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 performing restructured loans at June 30, 1997
49
<PAGE>
of $210,000 and $221,000 at 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 reviews collateral value on loans secured by real estate during
the internal review process. New appraisals are acquired when loans are
categorized as nonperforming loans or potential problem loans. In instances
where updated appraisals reflect reduced collateral values, an evaluation of the
borrower's overall financial condition is made to determine the need, if any,
for possible write downs or appropriate additions to the allowance for loan
losses.
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>
Repossessions................................................................. $ 119 $ 65
Nonaccrual loans.............................................................. -- --
Restructured loans............................................................ 210 221
Other real estate............................................................. 208 234
--------- ---------
Total nonperforming assets................................................ $ 537 $ 520
--------- ---------
--------- ---------
Nonperforming assets to total loans and other real estate..................... 0.47% 0.46%
</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 watch 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/potential loss" 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 "potential loss" are those loans which are identified as having a
high probability of being liquidated with loss within the next 12 months.
50
<PAGE>
In addition to the loans on the watch list classified as substandard or
doubtful/potential loss, the Company maintains additional classifications on the
watch list which further aid the Company in monitoring loan portfolios. These
additional loan classifications reflect 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/potential loss)
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 their classification or
delinquent status. Additionally, the Company uses three approaches for the
analysis of the performing portfolio: migration, historical and examiner rule of
thumb. These methods are further broken down to identified loan pools within the
Company's portfolio. Using these methodologies, the Company allocates reserves
to each identified loan classification and to performing loan pools. 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 charge-offs totaled $173,000 or
0.29% of average loans outstanding for the period, compared to $44,000 in net
charge-offs or 0.08% of average loans for the six months ended June 30, 1996.
The Company experienced a $75,000 recovery in the first six months of 1996.
During the six months ended June 30, 1997, the Company recorded a provision for
loan losses of $168,000 compared to $219,000 for the six months ended June 30,
1996. At June 30, 1997, the allowance totaled $1.4 million, or 1.24% of total
loans. Unallocated reserves at June 30, 1997 were $1.2 million.
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............................................. $ 117,361 $ 109,575
---------- ----------
Gross loans outstanding at end of period.............................. $ 115,222 $ 113,350
---------- ----------
Allowance for loan losses at beginning of period...................... $ 1,430 $ 1,185
Provision for loan losses............................................. 168 219
Charge-offs:
Commercial and industrial........................................... (6) (0)
Real estate......................................................... (0) (0)
Consumer............................................................ (225) (177)
Recoveries:
Commercial and industrial........................................... 11 7
Real estate......................................................... -- 93
Consumer............................................................ 47 33
---------- ----------
Net (charge-offs) recoveries.......................................... (173) (44)
---------- ----------
Allowance for loan losses at end of period............................ $ 1,425 $ 1,360
---------- ----------
---------- ----------
Ratio of allowance to end of period loans............................. 1.24% 1.20%
Ratio of net charge-offs to average loans (annualized)................ 0.29 0.08
Ratio of allowance to end of period nonperforming loans............... 678.57 615.38
</TABLE>
51
<PAGE>
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......................................... $ 97 13.38% $ 8 10.99%
Real estate:
Construction and land development............................... 12 1.99 30 2.31
1-4 family residential.......................................... 6 2.58 1 2.48
Non-farm/non-residential........................................ 21 12.05 27 11.66
Multi-Family.................................................... -- 0.54 -- 0.05
Consumer.......................................................... 118 69.46 65 72.51
Unallocated....................................................... 1,171 1,229
--------- ----------- --------- ------
Total allowance for loan losses................................. $ 1,425 100.00% $ 1,360 100.00%
--------- ----------- --------- ------
--------- ----------- --------- ------
</TABLE>
Reflected above are specific allocations for credits by loan type or pool in
each case. Except for the consumer pool, loans are assessed for risk by an
analysis of the potential exposure to loss, coupled with available cash flow and
secondary sources of repayment.
The largest specific allocation is associated with consumer loans which at
June 30, 1997, represented $80.0 million or 69.46% of the Company's loan
portfolio of $115.2 million. The Company is an active purchaser of indirect auto
loans, which are installment loans originated by automobile dealers, for the
purpose of financing consumer auto purchases. These loans represented $71.0
million of the Company's consumer portfolio at June 30, 1997. This loan pool is
classified by payment status and allocations in the reserve are generated by
past due category. Loans which are 60 days past due are classified as
substandard with the associated specific substandard reserve. Loans which are 90
days past due, and in the process of collection, are classified as
doubtful/potential loss and the specific allocation for this category is
reserved.
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 PORTFOLIO
The Company uses its securities portfolio to ensure liquidity for cash flow
requirements, to manage interest rate risk, to provide a source of income, to
ensure collateral is available for municipal pledging requirements and to manage
asset quality diversification. At June 30, 1997, investment securities totaled
$44.3 million, an increase of $400,000 from $43.9 million at June 30, 1996. The
increase was primarily attributable to the investment of additional funds
acquired in the Cleveland Acquisition. At June 30, 1997, investment securities
represented 24.0% of total assets, compared to 24.6% of total assets at June 30,
1996. The yield on the investment portfolio for the six months ended June 30,
1997 was 6.03% compared to a yield of 5.96% for the six months ended June 30,
1996.
52
<PAGE>
To provide flexibility and to actively manage investments held in the
securities portfolio, the Company currently classifies 100% of all securities as
available-for-sale. The following table presents the amount of these securities
and their approximate 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. Treasury securities........................................... $ 7,030 $ 8 $ (41) $ 6,997
U. S. Government agency securities................................. 10,547 12 (59) 10,500
Mortgage-backed securities......................................... 22,632 112 (227) 22,517
Other securities................................................... 4,180 61 -- 4,241
----------- ----- ----- ---------
Total.......................................................... $ 44,389 $ 193 ($ 327) $ 44,255
----------- ----- ----- ---------
----------- ----- ----- ---------
</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 $17.9 million in agency-issued collateralized
mortgage obligations.
At June 30, 1997, 7.8% 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. Therefore, the average life, or the average amount of time until the
Company receives the total amount invested, of the mortgage backed security will
be shorter than the contractual maturity. The Company estimates the remaining
average life of the fixed-rate mortgage backed security portfolio to be less
than two years. 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 $5.7 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.
53
<PAGE>
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 YEAR BUT AFTER FIVE YEARS BUT
WITHIN ONE YEAR AFTER TEN
WITHIN FIVE YEARS WITHIN TEN YEARS YEARS
----------------------- ----------------------- ----------------------- -----------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
----------- ---------- ----------- ---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities.............. $ -- --% $ 7,030 5.60% $ -- --% $ --
U. S. Government agency securities.... 1,000 5.25 8,055 6.34 1,492 7.34 --
Mortgage-backed and other
securities.......................... 4,206 4.51 13,844 6.14 2,335 6.74 2,247
Other securities...................... 711 5.75 510 5.16 1,591 5.89 1,368
Federal funds sold and other temporary
investments......................... 14,500 5.52 -- -- -- -- --
----------- ----- ----------- ----- ----------- ----- -----------
Totals................................ $ 20,417 4.52% $ 29,439 5.90% $ 5,418 6.71% $ 3,615
----------- ----- ----------- ----- ----------- ----- -----------
----------- ----- ----------- ----- ----------- ----- -----------
<CAPTION>
TOTAL
-----------------------
YIELD TOTAL YIELD
---------- ----------- ----------
<S> <C> <C> <C>
U.S. Treasury securities.............. --% $ 7,030 5.60%
U. S. Government agency securities.... -- 10,547 6.38
Mortgage-backed and other
securities.......................... 7.76 22,632 6.23
Other securities...................... 5.32 4,180 5.71
Federal funds sold and other temporary
investments......................... -- 14,500 5.69
----- ----------- -----
Totals................................ 6.81% $ 58,889 6.12%
----- ----------- -----
----- ----------- -----
</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
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 stockholders' equity until
realized. In order to pro-actively manage the investment portfolio and
asset/liability position and to respond to changes in the fixed income market,
the Company maintains 100% of securities owned as available-for-sale.
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, customer service, and employee goals and referrals 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 $167.9 million or 6.7% over average total deposits during the same period
in 1996. The Company's total deposits at June 30, 1997, were $169.9 million, up
$5.6 million or 3.3% over total deposits at June 30, 1996.
The Company's lending and investing activities are funded principally by
deposits, approximately 56.8% of which are demand and savings deposits. Average
noninterest-bearing demand deposits at June 30, 1997 were $30.2 million as
compared to $27.8 million for the first six months of 1996, an increase of $2.4
million or 8.6% over 1996. Approximately 17.9% of average deposits for the six
months ended June 30, 1997 were noninterest-bearing, including demand deposits.
The amount of deposits grew due to the Cleveland Acquisition and internally
generated growth, both commercial and retail, at all other locations.
54
<PAGE>
The daily average balances and weighted average rates paid on
interest-bearing deposits for the six months ended June 30, 1997 are presented
below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30, 1997
-----------------------
AMOUNT RATE
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
NOW..................................................................... $ 19,332 1.15%
Public funds............................................................ 5,551 1.73
Regular savings......................................................... 8,838 2.23
Money market............................................................ 12,207 2.58
Investor's savings...................................................... 20,646 4.28
Time deposits less than $100,000........................................ 64,335 5.19
Time deposits $100,000 and over......................................... 6,928 5.49
---------- ---
Total interest-bearing deposits..................................... 137,837 3.94
Noninterest-bearing deposits............................................ 30,153 --
---------- ---
Total deposits...................................................... $ 167,990 3.24%
---------- ---
---------- ---
</TABLE>
The following table sets forth the amount of the Company's time deposits
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........................................................ $ 680
Between 3 months and 6 months........................................... 2,246
Between 6 months and 1 year............................................. 1,300
Over 1 year............................................................. 2,515
------
Total............................................................... $ 6,741
------
------
</TABLE>
INTEREST RATE SENSITIVITY AND LIQUIDITY
The Company's Asset/Liability Management and Interest Rate Risk Policy,
along with the Company's Investment Policy, provides management with the
necessary guidelines for effective funds management. The Company has established
a measurement system for monitoring its net interest rate sensitivity position.
The Company manages its sensitivity position within established guidelines.
An interest rate sensitive asset or liability is one that, within a defined
time period, either matures or experiences an interest rate change in line with
general market interest rates. The management of interest rate risk is performed
by analyzing the maturity and repricing relationships between interest-earning
assets and interest-bearing liabilities at specific points in time ("GAP") and
by analyzing the effects of interest rate changes on net interest income over
specific periods of time by projecting the performance of the mix of assets and
liabilities in varied interest rate environments. Interest rate sensitivity
reflects the potential effect on net interest income of a movement in interest
rates. A company is considered to be asset sensitive, or having a positive GAP,
when the amount of its interest-earning assets maturing or repricing within a
given period exceeds the amount of its interest-bearing liabilities also
maturing or repricing within that time period. Conversely, a company is
considered to be liability sensitive, or having a negative GAP, when the amount
of its interest-bearing liabilities maturing or repricing within a given period
exceeds the amount of its interest-earning assets also maturing or repricing
within that time period. During a period of rising interest rates, a negative
GAP would tend to affect adversely net interest income, while a positive GAP
would tend to result in an increase in net interest income. During a period of
falling interest rates, a
55
<PAGE>
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. However, it is
management's intent to achieve a proper balance so that incorrect rate forecasts
should not have a significant impact on earnings.
The following table sets forth an interest rate sensitivity analysis for the
Company at June 30, 1997:
<TABLE>
<CAPTION>
VOLUMES SUBJECT TO REPRICING WITHIN
-------------------------------------------------------------------
0-90 91-180 181-365 AFTER
DAYS DAYS DAYS ONE YEAR TOTAL
------------- ------------- ------------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities................................ $ 1,394 $ 996 $ 4,823 $ 37,042 $ 44,255
Loans..................................... 15,607 10,697 17,368 71,550 115,222
Federal funds sold and other temporary
investments............................. 14,500 -- -- -- 14,500
------------- ------------- ------------- ---------- ----------
Total interest-earning assets........... 31,501 11,693 22,191 108,592 173,977
------------- ------------- ------------- ---------- ----------
Interest-bearing liabilities:
Demand, money market and savings
deposits................................ 65,619 -- -- -- 65,619
Certificates of deposit and other time
deposits................................ 6,964 11,780 19,092 35,566 73,402
------------- ------------- ------------- ---------- ----------
Total interest-bearing liabilities...... 72,583 11,780 19,092 35,566 139,021
------------- ------------- ------------- ---------- ----------
Period GAP................................ $ (41,082) $ (87) $ 3,099 $ 73,026 $ 34,956
Cumulative GAP............................ $ (41,082) $ (41,169) $ (38,070) $ 34,956
Period GAP to total assets................ (22.19)% (0.50)% 1.63 % 39.44%
Cumulative GAP to total assets............ (22.19)% (22.23)% (20.50)% 18.88%
</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. Contractual maturities and repricing opportunities
of loans are incorporated in the model as are prepayment assumptions, maturity
data and call options within the investment portfolio. Assumptions based on past
experience are incorporated into the model for non-maturity deposit accounts.
The Company has found that historically, interest rates on these deposits change
more slowly in a rising rate environment than in a declining rate environment.
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 12 month period
would have an impact of less than 4.0% on its net interest income for the same
period. The change is relatively small as the Company's goal is to achieve a
proper balance between rate sensitive assets and rate sensitive liabilities to
limit exposure to changes in interest rates. At June 30, 1997, the Company had a
liability sensitive GAP position in the short term (one year and under) and
therefore, would be expected to experience a moderate upward movement in net
interest margin in a declining rate environment and a moderate downward movement
in a rising rate environment. However, as indicated previously, deposit rates
tend to lag the movement in earning assets and this can be incorporated into the
simulation model and is generally not fully reflected in a GAP analysis. The
Company maintains a Senior Management Investment Committee and both a Director
and Senior Officer Asset and Liability Management Committee which reviews the
Company's interest rate risk position on a weekly or monthly basis,
respectively.
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. The Company's liquidity needs are primarily met by
growth in core deposits. Although access to purchased funds from correspondent
banks is available and has been
56
<PAGE>
utilized on occasion to take advantage of investment opportunities, the Company
does not rely on these external funding sources. The cash and federal funds sold
position, supplemented by amortizing investment along with payments and
maturities within the loan portfolio, have historically created an adequate
liquidity position.
Federal Home Loan Bank ("FHLB") advances may be utilized from time to time
as either a short term funding source or a longer-term funding source. FHLB
advances can be particularly attractive as a longer-term funding source to
balance interest rate sensitivity and reduce interest rate risk. The Company is
eligible for two borrowing programs through the FHLB. The first, called "Short
Term Fixed," requires delivery of eligible securities for collateral. Maturities
under this program range from 1-35 days. The Company does not currently have any
borrowings under this program. The Company currently maintains the majority of
its investment securities in safekeeping at the FHLB. At June 30, 1997, the
Company had approximately $21.3 million available for pledging.
The second borrowing program, the "Blanket Borrowing Program," is under a
borrowing agreement which does not require the delivery of specific collateral.
Borrowings are limited to a maximum of 65% of the Company's 1-4 family mortgage
loans. At June 30, 1997, the Company had approximately $1.9 million in potential
borrowings available under this program.
CAPITAL RESOURCES
Capital management consists of providing equity to support both current and
future operations. The Company is subject to capital adequacy requirements
imposed by the Federal Reserve Board and the Bank is subject to capital adequacy
requirements imposed by the OCC. Both the Federal Reserve Board and the OCC have
adopted risk-based capital requirements for assessing bank holding company and
bank capital adequacy. These standards define capital and establish minimum
capital requirements in relation to assets and off-balance sheet exposure,
adjusted for credit risk. The risk-based capital standards currently in effect
are designed to make regulatory capital requirements more sensitive to
differences in risk profiles among bank holding companies and banks, to account
for off-balance sheet exposure and to minimize disincentives for holding liquid
assets. Assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate relative risk weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance sheet items.
Bank regulatory authorities in the United States have issued risk-based
capital standards by which all bank holding companies and banks are evaluated in
terms of capital adequacy. The risk-based capital standards issued by the
Federal Reserve Board apply to the Company. 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
stockholders' equity and qualifying perpetual preferred stock together with
related surpluses and retained earnings, less deductions for goodwill and
various other intangibles. "Tier 2 capital" is limited to the amount of Tier 1
capital and 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
57
<PAGE>
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 OCC that
are substantially similar to the Federal Reserve Board's guidelines. Also
pursuant to FDICIA, the OCC has promulgated regulations setting the levels at
which an insured institution such as the Bank would be considered "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." Under the OCC's
regulations, the Bank is classified "well capitalized" for purposes of prompt
corrective action. See "Supervision and Regulation--The Company" and "--The
Bank."
Stockholders' equity increased from $12.1 million at June 30 , 1996 to $13.8
million at June 30, 1997, an increase of $1.7 million or 14.0%. This increase
was primarily the result of net income of $1.3 million, less the payment of cash
dividends of $325,000, a decrease in net unrealized loss on available-for-sale
securities net of taxes of $101,000, additional Common Stock issued totaling
approximately $56,000, less stock purchased from stockholders by the Company
during this period totaling approximately $3,000.
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 7.25%
Tier 1 risk-based capital ratio............................. 4.00% N/A 10.16%
Risk-based capital ratio.................................... 8.00% N/A 11.24%
THE BANK
Leverage ratio.............................................. 3.00% (2) 5.00% 7.28%
Tier 1 risk-based capital ratio............................. 4.00% 8.00% 10.19%
Risk-based capital ratio.................................... 8.00% 10.00% 11.29%
</TABLE>
- ------------------------
(1) The Federal Reserve Board has established 3.00% as the minimum leverage
ratio for institutions with well-diversified risk, including no undue
interest rate risk exposure; excellent asset quality; high liquidity; and
good earnings; and which in general are considered strong and rated
composite 1 under the rating system of bank holding companies. The Federal
Reserve Board may require the Company to maintain a leverage ratio of up to
200 basis points above the required minimum if the Company is not meeting
these characteristics or if there is a supervisory, financial or operational
weakness.
(2) The OCC has established 3.00% as the minimum leverage ratio for institutions
with well-diversified risks, including no undue interest rate risk exposure;
excellent control systems; good earnings; high asset quality; high
liquidity; and well-managed on- and off-balance sheet activities; and which
in general are considered strong and rated composite 1 under the rating
system for banks. The OCC may require the Bank to maintain a leverage ratio
of up to 200 basis points above the required minimum if the Bank is not
meeting these characteristics or if there is a supervisory, financial or
operational weakness.
58
<PAGE>
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
February 1994, the Company engaged consultants and began developing its sales
and service culture. In May 1994, the Company opened a de novo banking office
location in Pasadena, Texas. Deposits and customer repurchase agreements at this
location totaled $21.0 million at December 31, 1996. In December 1994, the
Company sold a grocery store branch located in Kingwood, Texas recognizing a
$145,000 gain on the sale (the "Kingwood Sale"). In January 1995, the Company
opened its first LPO. In January 1996, the Company sold land adjacent to the
Spencer Office recognizing a gain on the sale of $68,000. During the first half
of 1996, the Company opened two additional LPOs in Houston and received
designation as a Preferred SBA Lender. Also during the first half of 1996, the
Company initiated an accounts receivable factoring program for small to medium
size businesses called Cash Flow Manager, which by year end 1996, had
outstanding balances in excess of $1.6 million. In August 1996, the Company
completed the Cleveland Acquisition. In 1996, the Company paid a one-time FDIC
assessment of $287,000 with respect to the Company's deposits insured by the
Savings Association Insurance Fund ("SAIF") of the FDIC which were acquired from
failed savings and loan associations in June and September 1991.
Net earnings available to stockholders were $1.4 million, $1.2 million and
$1.2 million for the years ended December 31, 1996, 1995 and 1994, respectively,
and net earnings per share were $0.97, $0.84 and $0.86 for these same periods.
Earnings growth from 1995 to 1996 resulted principally from strong internal loan
growth, growth of the Pasadena banking office, a higher net interest margin,
gains on the sale of SBA loans generated by the LPOs, the gain on the sale of
the Spencer Office land and income generated through the Cash Flow Manager
program. During 1994, the Company fully utilized its net operating loss
carryforwards, reducing the tax expense for the year. From 1994 to 1995,
earnings before tax adjustments increased from $1.5 million to $1.8 million, an
increase of 13.3%. The increase in earnings before tax adjustments from 1994 to
1995 was due primarily to higher earning assets, gains on sale of SBA loans and
the gain on the Kingwood Sale. The Company posted returns on average assets of
0.82%, 0.75% and 0.80% and returns on average common equity of 11.29%, 10.70%
and 11.72% 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 0.89% and 12.81%.
Total assets at December 31, 1996, 1995 and 1994 were $189.0 million, $167.1
million and $168.3 million, respectively. Total deposits at December 31, 1996,
1995 and 1994 were $173.3 million, $153.3 million and $149.8 million,
respectively. The Company retained the majority of the deposits acquired in the
Cleveland Acquisition and continues to reprice maturing deposits into a lower
price structure. Additionally, the de novo Pasadena banking office has developed
a strong core commercial and retail deposit and lending base. The result was an
improved net interest margin and increasing deposit levels from 1995 to 1996.
Loans, net of allowance for loan losses, were $119.9 million at December 31,
1996, an increase of $14.1 million or 13.32% from $105.8 million at the end of
1995. Loans were $105.6 million at year end 1994. Common stockholders' equity
was $12.9 million, $11.9 million and $10.9 million at December 31, 1996, 1995
and 1994, respectively.
RESULTS OF OPERATIONS
NET INTEREST INCOME
1996 VERSUS 1995. Net interest income totaled $7.2 million in 1996 compared
to $5.9 million in 1995, an increase of $1.3 million or 22.0%. The increase is
mainly a result of higher interest income on loans and the interest income
generated on Cash Flow Manager outstanding balances. Interest expense increased
$52,000 but was totally offset by the increase of $1.5 million in interest
income. This resulted in net interest margins of 4.38% and 3.83% and net
interest spreads of 3.64% and 3.07% for 1996 and 1995, respectively.
59
<PAGE>
The volume increase in interest expense from 1995 to 1996 was offset by
decreases in rate as the Company repriced maturing deposits from the Cleveland
Acquisition into a lower price structure and successfully priced deposit
products to remain competitive but minimize costs. Additionally, noninterest-
bearing deposits, as a percent of total deposits, increased from 18.5% of total
deposits in 1995 to 19.9% of total deposits in 1996. Interest income on loans
increased to $9.6 million in 1996 from $8.5 million in 1995. The increase was
driven by growth in the average loan portfolio of $5.7 million or 5.3% and an
increase in the yield on average loans to 8.49% in 1996 from 7.93% in 1995 as
the Company continued to generate higher yielding SBA, commercial and real
estate loans. Meanwhile, the average securities portfolio increased 16.7% as a
direct result of funds acquired in the Cleveland Acquisition and its yield rose
9 basis points.
1995 VERSUS 1994. Net interest income increased $600,000 in 1995 from $5.3
million in 1994 to $5.9 million in 1995, primarily due to growth in interest
income of $1.7 million resulting from increases in both volumes and yields. This
increase was partially offset by an increase in interest expense of $1.1 million
resulting primarily from higher rates paid on interest-bearing liabilities as
well as increases in volumes. This resulted in a net interest margin increase to
3.83% in 1995 from 3.81% in 1994 and a net interest spread decrease to 3.07% in
1995 from 3.19% in 1994.
The yield on average loans increased to 7.93% in 1995 from 7.40% in 1994 and
the yield on average securities increased to 5.95% in 1995 from 5.47% in 1994.
The increase in the yield on average loans is a result of volume changes within
the loan categories with an increased emphasis on higher yielding SBA,
commercial and real estate loans. The increase in the securities yield resulted
mainly from higher yielding U.S. Treasury securities. The increase in interest
expense was driven primarily by growth in investor savings balances, a more
market sensitive product but one that is competitive with other financial
service businesses.
60
<PAGE>
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made and
all average balances are 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
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING
BALANCE PAID RATE BALANCE PAID RATE BALANCE
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans......................... $ 113,014 $ 9,594 8.49% $ 107,286 $ 8,505 7.93% $ 101,975
Securities.................... 43,230 2,612 6.04 37,028 2,203 5.95 35,535
Fed funds sold and other
temporary investments....... 8,661 460 5.31 8,467 536 6.33 2,677
----------- ----------- --- ----------- ----------- ----- -----------
Total interest-earning
assets.................... 164,905 12,666 7.68% 152,781 11,244 7.36% 140,187
----------- ----------- --- ----------- ----------- ----- -----------
Less allowance for loan
losses...................... (1,330) (1,302) (1,324)
----------- ----------- -----------
Total interest-earning assets,
net of allowance............ 163,575 151,479 138,863
Nonearning assets............. 13,697 13,117 11,342
----------- ----------- -----------
Total assets................ $ 177,272 $ 164,596 $ 150,205
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS'
EQUITY........................
Interest-bearing liabilities:
Interest-bearing demand
deposits.................... $ 17,232 206 1.20% $ 15,374 232 1.50% $ 15,910
Public fund deposits.......... 5,696 104 1.83 9,105 332 365 5,179
Savings and money market
accounts.................... 42,289 1,388 3.28 33,636 1,167 3.47 27,183
Certificates of deposit....... 68,588 3,698 5.39 66,933 3,630 5.42 65,012
Federal funds purchased, FHLB
line of credit and other
borrowings.................. 889 47 5.29 541 30 5.55 3,285
----------- ----------- --- ----------- ----------- ----- -----------
Total interest-bearing
liabilities............... 134,694 5,443 4.04% 125,589 5,391 4.29% 116,569
----------- ----------- --- ----------- ----------- ----- -----------
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits.................... 28,717 25,965 22,045
Other liabilities............. 1,445 1,688 1,089
----------- ----------- -----------
Total liabilities........... 164,856 153,242 139,703
----------- ----------- -----------
Stockholders' equity............ 12,416 11,354 10,502
----------- ----------- -----------
Total liabilities and
stockholders' equity...... $ 177,272 $ 164,596 $ 150,205
----------- ----------- -----------
----------- ----------- -----------
Net interest income........... $ 7,223 $ 5,853
----------- -----------
----------- -----------
Net interest rate spread...... 3.64% 3.07%
--- -----
--- -----
Net interest margin........... 4.38% 3.83%
--- -----
--- -----
<CAPTION>
INTEREST AVERAGE
EARNED/ YIELD/
PAID RATE
----------- -----------
<S> <C> <C>
ASSETS
Interest-earning assets:
Loans......................... $ 7,550 7.40%
Securities.................... 1,944 5.47
Fed funds sold and other
temporary investments....... 133 4.97
----------- -----
Total interest-earning
assets.................... 9,627 6.87%
----------- -----
Less allowance for loan
losses......................
Total interest-earning assets,
net of allowance............
Nonearning assets.............
Total assets................
LIABILITIES AND STOCKHOLDERS'
EQUITY........................
Interest-bearing liabilities:
Interest-bearing demand
deposits.................... 304 1.91%
Public fund deposits.......... 57 1.10
Savings and money market
accounts.................... 709 2.61
Certificates of deposit....... 3,067 4.72
Federal funds purchased, FHLB
line of credit and other
borrowings.................. 148 4.51
----------- -----
Total interest-bearing
liabilities............... 4,285 3.68%
----------- -----
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits....................
Other liabilities.............
Total liabilities...........
Stockholders' equity............
Total liabilities and
stockholders' equity......
Net interest income........... $ 5,342
-----------
-----------
Net interest rate spread...... 3.19%
-----
-----
Net interest margin........... 3.81%
-----
-----
</TABLE>
61
<PAGE>
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..................................................... $ 463 $ 626 $ 1,089 $ 398 $ 557 $ 955
Securities................................................ 369 40 409 82 177 259
Fed funds sold and other temporary investments............ 12 (88) (76) 288 115 403
----- --------- --------- ----- --------- ---------
Total increase (decrease) in interest income............ 844 578 1,422 768 849 1,617
----- --------- --------- ----- --------- ---------
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits.......................... (36) (218) (254) 58 145 203
Savings and money market accounts......................... 300 (79) 221 168 290 458
Certificates of deposit................................... 90 (22) 68 91 472 563
Other borrowings.......................................... 20 (3) 17 (123) 5 (118)
----- --------- --------- ----- --------- ---------
Total increase (decrease) in interest expense........... 374 (322) 52 194 912 1,106
----- --------- --------- ----- --------- ---------
Increase (decrease) in net interest income................ $ 470 $ 900 $ 1,370 $ 574 $ (63) $ 511
----- --------- --------- ----- --------- ---------
----- --------- --------- ----- --------- ---------
</TABLE>
PROVISION FOR LOAN LOSSES
The 1996 provision for loan losses increased to $510,000 from $150,000 in
1995, an increase of $360,000 or 240%. The increased provision is a direct
reflection of the volume increase within the loan portfolio and the Company's
conservative nature and methodology for determining an appropriate provision
amount, which includes an analysis of the loan portfolio, economic trends and
other portfolio risks. The provision for the year 1995 increased by $75,000 or
100% for the year ended 1994.
NONINTEREST INCOME
Noninterest income for the year ended December 31, 1996 was $2.3 million, up
from $2.1 million in 1995, and noninterest income in 1994 was $2.1 million. The
year ended December 31, 1994 included a gain of $145,000 resulting from the
Kingwood Sale. The year ended 1996 included a gain of $68,000 on the sale of
land adjacent to the Spencer Office. Excluding these gains, noninterest income
was $87,000 greater in 1995 than in 1994 and $207,000 greater in 1996 than in
1995. The Company consistently performs in the
62
<PAGE>
top 25th percentile of its national peer group in the generation of noninterest
income. 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.............................. $ 1,379 $ 1,375 $ 1,249
Gain on sale of SBA loans........................................ 263 162 99
ATM fee income................................................... 201 142 100
Alternative investments.......................................... 136 98 124
Land sale gain................................................... 68 -- --
Branch sale premium.............................................. -- -- 145
Other noninterest income......................................... 300 318 387
--------- --------- ---------
Total noninterest income..................................... $ 2,347 $ 2,095 $ 2,104
--------- --------- ---------
--------- --------- ---------
</TABLE>
After excluding the gain from the sale of land adjacent to the Spencer
Office in 1996, noninterest income from 1995 to 1996 increased $207,000
primarily as a result of increased gains on the sale of SBA loans, increased
revenue generated through the ATMs and the increased emphasis on fee based
services, such as the sale of alternative investments. Excluding the Kingwood
Sale in 1994, noninterest income increased $87,000 or 4.33% from 1994 to 1995.
This increase is primarily a result of increased service charge income
attributable to the opening of the Pasadena office and ATM fee income.
NONINTEREST EXPENSE
For the years ended 1996, 1995 and 1994, noninterest expenses totaled $7.1
million, $6.0 million and $5.8 million, respectively. The increase in 1996
reflects several major factors: the $287,000 FDIC assessment on SAIF deposits,
increased expenses, both operational and staffing, expanded operation of the
branch network, the Cleveland Acquisition and expenses related to the Company's
commitment to developing its sales and service culture. The increase in 1995 was
$155,000 or 2.6%, primarily due to higher employee compensation and benefits,
reflecting a full year of operation of the Pasadena banking office. 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........................... $ 3,377 $ 2,823 $ 2,636
Non-staff expenses:
Net bank premises expense.................................. 526 471 468
Equipment rentals, depreciation and maintenance............ 605 557 540
Data processing............................................ 181 150 140
Professional fees.......................................... 280 250 252
Special FDIC assessment.................................... 287 -- --
Regulatory assessments/FDIC insurance...................... 148 329 367
Ad valorem and franchise taxes............................. 192 180 116
Other...................................................... 1,471 1,264 1,350
--------- --------- ---------
Total non-staff expenses................................. 3,690 3,201 3,233
--------- --------- ---------
Total noninterest expense................................ $ 7,067 $ 6,024 $ 5,869
--------- --------- ---------
--------- --------- ---------
</TABLE>
Employee compensation and benefit expense for the year ended December 31,
1996 was $3.3 million, an increase of $500,000 or 17.9% from $2.8 million for
1995. Employee compensation and benefit expense
63
<PAGE>
for the year 1995 was up $200,000 or 7.7% from 1994. The increase in 1996 is
primarily due to staff acquired in the Cleveland Acquisition in the third
quarter of 1996, the full operation of three LPOs and additional operational and
lending staff hired. The increase in 1995 resulted mainly from additional staff
hired to reflect a full year of operating the Pasadena office location.
Additionally, the Company makes an entry to provide for stock to be issued under
the Phantom Stock Plan. See "Management--Stock Option and Incentive Plans."
These amounts were $144,000, $96,000 and $114,000 in 1996, 1995 and 1994,
respectively. The amounts are based on the market value of the Common Stock
along with the vesting period of each grant. Full-time equivalent employees for
1996, 1995 and 1994 were 101, 95 and 92, respectively.
Non-staff expenses were $3.7 million in 1996, an increase of $500,000 from
$3.2 million in 1995. The increase is primarily due to a special assessment from
the FDIC on SAIF deposits totaling $287,000. The effect of this special
assessment was partially offset by lower FDIC insurance fees on all deposits.
Additionally, data processing expenses increased as the Company networked all
banking office locations to establish increased efficiencies and effective
product delivery. Professional fees increased as the Company expanded training
and emphasis on its sales and service culture. The 1995 non-staff expenses
decreased $32,000 primarily due to the effects of lower FDIC premiums through
the Bank's reclassification by the FDIC as a well-capitalized institution.
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 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. Income tax
expense was $591,000 in 1996, $559,000 in 1995 and $271,000 in 1994. During
1994, the Company had regular and alternative minimum tax net operating loss
carryforwards of approximately $2.4 million and $1.3 million, respectively.
During 1995 and 1994, the Company utilized regular tax net operating loss
carryforwards of approximately $1.0 million and $1.4 million, respectively. No
loss carryforwards were available at December 31, 1995. The effective tax rates
in 1996, 1995 and 1994, respectively, were 29.65%, 31.51% and 18.04%. Income
taxes for financial purposes in the consolidated statements of earnings differ
from the amount computed by applying the statutory income tax rate of 34% to
earnings before income taxes. The difference in the statutory rate is primarily
due to tax exempt interest, utilization of tax credits and loss carryforwards,
and alternative minimum tax.
FINANCIAL CONDITION
LOAN PORTFOLIO
Total gross loans increased by $14.1 million or 13.3% to $119.9 million at
December 31, 1996, from $105.8 million at December 31, 1995 due primarily to
growth in the indirect loan portfolio and direct loan growth from the Pasadena
branch and the main office in La Porte. During 1995, total loans decreased
slightly, $1.03 million or 0.94%, from $106.8 million at December 31, 1994 due
to a lower volume of indirect installment loans offset in part by growth in
commercial loans. The changes in loan balances from 1995 to 1996 reflected both
the Cleveland Acquisition and the Kingwood Sale along with the Company's
investment in loan production capability.
At December 31, 1996, total gross loans represented 69.2% of deposits and
63.42% of total assets. Total loans as a percentage of deposits were 69.00% at
December 31, 1995, compared to 71.3% at December 31, 1994.
64
<PAGE>
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
---------------------- ---------------------- ---------------------- ------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ----------- --------- ----------- --------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
industrial........... $ 17,407 14.52% $ 11,378 10.76% $ 10,477 9.81% $ 8,498 8.95%
Real estate:
Construction and land
development........ 3,306 2.76 3,390 3.20 2,114 1.98 1,116 1.18
1-4 family
residential........ 3,115 2.60 2,879 2.72 2,470 2.31 3,500 3.68
Multi-family
residential........ 625 0.52 62 0.06 933 0.87 188 0.20
Non-farm/non-
residential........ 11,834 9.87 11,388 10.76 8,513 7.97 7,498 7.90
Consumer:
Indirect............. 74,657 62.28 69,087 65.30 75,069 70.27 71,084 74.89
Direct............... 8,936 7.45 7,612 7.20 7,254 6.79 3,035 3.20
--------- ----------- --------- ----------- --------- ----------- ----------- -----------
Total loans........ $ 119,880 100.00% $ 105,796 100.00% $ 106,830 100.00% $ 94,919 100.00%
--------- ----------- --------- ----------- --------- ----------- ----------- -----------
--------- ----------- --------- ----------- --------- ----------- ----------- -----------
<CAPTION>
1992
------------------------
AMOUNT PERCENT
----------- -----------
<S> <C> <C>
Commercial and
industrial........... $ 10,209 10.85%
Real estate:
Construction and land
development........ 988 1.05
1-4 family
residential........ 3,531 3.75
Multi-family
residential........ 174 0.19
Non-farm/non-
residential........ 7,335 7.80
Consumer:
Indirect............. 66,245 70.41
Direct............... 5,602 5.95
----------- -----------
Total loans........ $ 94,084 100.00%
----------- -----------
----------- -----------
</TABLE>
The contractual maturity ranges of the commercial and industrial and real
estate loan portfolio and the amount of such loans with fixed interest rates and
floating rates in each maturity range as of December 31, 1996 are summarized in
the following table.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------
AFTER ONE
ONE YEAR THROUGH AFTER FIVE
OR LESS FIVE YEARS YEARS TOTAL
--------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and industrial............................................ $ 12,323 $ 2,095 $ 2,989 $ 17,407
Real estate.......................................................... 4,319 7,285 7,276 18,800
--------- ----------- ----------- ---------
Total............................................................ $ 16,642 $ 9,380 $ 10,265 $ 36,287
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
Loans with a predetermined interest rate............................. $ 3,635 $ 6,080 $ 3,328 $ 13,043
Loans with a floating interest rate.................................. 13,007 3,300 6,937 23,244
--------- ----------- ----------- ---------
Total............................................................ $ 16,642 $ 9,380 $ 10,265 $ 36,287
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</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-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, has resulted in strong asset quality. Nonperforming assets at December
31, 1996 were $567,000, compared to $598,000 at December 31, 1995 and $719,000
at December 31, 1994. This resulted in a ratio of nonperforming assets to
65
<PAGE>
total loans plus other real estate of 0.47%, 0.56% and 0.67% 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>
Repossessions.......................................... $ 143 $ 136 $ 66 $ 49 $ 51
Nonaccrual loans....................................... -- -- -- 121 317
Restructured loans..................................... 216 228 241 251 416
Other real estate...................................... 208 234 413 427 1,394
--------- --------- --------- --------- ---------
Total nonperforming assets........................... $ 567 $ 598 $ 720 $ 848 $ 2,178
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Nonperforming assets to total loans and other real
estate............................................... 0.47% 0.56% 0.67% 0.90% 2.28%
</TABLE>
ALLOWANCE FOR LOAN LOSSES
For the year ended 1996, net charge-offs totaled $265,000 or 0.23% of
average loans outstanding for the period, compared to $195,000 or 0.18% in net
charge-offs during 1995. During 1996, the Company recorded a provision for loan
losses of $510,000 compared to $150,000 for 1995. At December 31, 1996, the
allowance totaled $1.4 million or 1.19% of total loans. The Company made a
provision for loan losses of $150,000 during 1995 compared to a provision of
$75,000 for 1994. At December 31, 1995, the allowance aggregated $1.2 million,
or 1.12% of total loans.
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.............................. $ 113,014 $ 107,286 $ 101,975 $ 94,138 $ 90,041
---------- ---------- ---------- --------- ---------
Gross loans outstanding at end of period............... $ 119,880 $ 105,796 $ 106,830 $ 94,919 $ 94,084
---------- ---------- ---------- --------- ---------
Allowance for loan losses at beginning of period....... $ 1,185 $ 1,230 $ 1,344 $ 1,280 $ 1,142
Provision for loan losses.............................. 510 150 75 400 575
Charge-offs:
Commercial and industrial............................ -- (2) (50) (75) (2)
Real estate.......................................... -- (29) -- (172) (92)
Consumer............................................. (483) (349) (328) (466) (518)
Recoveries:
Commercial and industrial............................ 29 14 19 36 24
Real estate.......................................... 103 82 93 228 48
Consumer............................................. 86 89 77 113 103
---------- ---------- ---------- --------- ---------
Net (charge-offs) recoveries........................... (265) (195) (189) (336) (437)
---------- ---------- ---------- --------- ---------
Allowance for loan losses at end of period............. $ 1,430 $ 1,185 $ 1,230 $ 1,344 $ 1,280
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
Ratio of allowance to end of period loans.............. 1.19% 1.12% 1.15% 1.42% 1.36%
Ratio of net charge-offs to average loans.............. 0.23 0.18 0.19 0.36 0.49
Ratio of allowance to end of period nonperforming
loans................................................ 662.04 519.74 510.37 361.29 174.62
</TABLE>
66
<PAGE>
The following tables describe the allocation of the allowance for loan
losses among various categories of loans and certain other information for the
dates indicated. The allocation is made for analytical purposes and is not
necessarily indicative of the categories in which future losses may occur. The
total allowance is available to absorb losses from any segment of loans. See
"--Allowance for Loan Losses" for the six months ended June 30, 1997 and 1996
for a discussion of the allocation of the allowance for loan losses.
<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......................................... $ 105 14.52% $ 8 10.76%
Real estate:
Construction and land development............................... 7 2.76 -- 3.20
1-4 family residential.......................................... 19 2.60 1 2.72
Commercial mortgage............................................. 11 9.87 61 10.76
Farmland........................................................ -- -- -- --
Multi-family.................................................... -- 0.52 -- 0.06
Consumer.......................................................... 89 69.73 53 72.50
Unallocated....................................................... 1,199 1,062
--------- ----------- --------- -----------
Total allowance for loan losses................................... $ 1,430 100.00% $ 1,185 100.00%
--------- ----------- --------- -----------
--------- ----------- --------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
1994 1993 1992
---------------------- ---------------------- ----------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
--------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance of allowance for loan losses
applicable to:
Commercial and industrial.................. $ 11 9.81% $ 16 8.95% $ 22 10.85%
Real estate:
Construction and land development........ -- 1.98 -- 1.18 -- 1.05
1-4 family residential................... -- 2.31 3 3.68 76 3.75
Commercial mortgage...................... 47 7.97 67 7.90 83 7.80
Farmland................................. -- -- -- --
Multi-family............................. -- 0.87 -- 0.20 -- 0.19
Consumer................................... 57 77.06 83 78.09 63 76.36
Unallocated................................ 1,115 1,175 1,036
--------- ----------- --------- ----------- --------- -----------
Total allowance for loan losses............ $ 1,230 100.00% $ 1,344 100.00% $ 1,280 100.00%
--------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- -----------
</TABLE>
67
<PAGE>
SECURITIES PORTFOLIO
The following table presents the amount of securities classified as
available-for-sale, and their approximate values at December 31, 1996, December
31, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------------------------------- ---------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED
COST GAIN LOSS VALUE COST GAIN LOSS
----------- ------------- ----------- --------- ----------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities......... $ 6,024 $ -- $ (47) $ 5,977 $ 6,974 $ 15 $ (83)
U. S. Government agency
securities..................... 9,557 30 (62) 9,525 7,751 64 (23)
Mortgage-backed securities....... 25,844 61 (321) 25,584 22,835 42 (260)
Other securities................. 2,606 56 (3) 2,659 1,266 8 --
----------- ----- ----- --------- ----------- ----- -----
Total.......................... $ 44,031 $ 147 $ (433) $ 43,745 $ 38,826 $ 129 $ (366)
----------- ----- ----- --------- ----------- ----- -----
----------- ----- ----- --------- ----------- ----- -----
<CAPTION>
FAIR
VALUE
---------
<S> <C>
U.S. Treasury securities......... $ 6,906
U. S. Government agency
securities..................... 7,792
Mortgage-backed securities....... 22,617
Other securities................. 1,274
---------
Total.......................... $ 38,589
---------
---------
</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. Treasury securities........................................... $ 1,996 $ -- $ (53) $ 1,943
U. S. Government agency securities................................. 11,998 -- (186) 11,812
Mortgage-backed securities......................................... 5,559 -- (301) 5,258
Other securities................................................... 585 -- -- 585
----------- ----- ----- ---------
Total............................................................ $ 20,138 $ -- $ (540) $ 19,598
----------- ----- ----- ---------
----------- ----- ----- ---------
</TABLE>
In December 1995, the Company classified all of its securities as
available-for-sale, and the Company has continued to classify all of its
securities as available-for-sale. The following table presents the amount of
securities classified as held-to-maturity and their approximate values at
December 31, 1994:
<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. Treasury securities........................................... $ 5,992 $ -- $ (561) $ 5,431
Mortgage-backed securities......................................... 17,028 -- (1,550) 15,478
----------- ----- ----------- ---------
Total............................................................ $ 23,020 $ -- $ (2,111) $ 20,909
----------- ----- ----------- ---------
----------- ----- ----------- ---------
</TABLE>
68
<PAGE>
The following table summarizes the contractual maturity of investment
securities and their weighted average yields:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN YEAR BUT WITHIN YEARS BUT WITHIN
ONE YEAR FIVE YEARS TEN YEARS AFTER TEN YEARS
------------------------ ---------------------- ---------------------- ------------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
----------- ----- --------- ----- --------- ----- ----------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Treasury
securities.............. $ -- --% $ 6,024 5.51% $ -- --% $ -- --%
U.S. Government agency
securities.............. -- -- $ 5,725 6.14% 3,832 6.63 -- --
Mortgage-backed and other
securities.............. 7,061 6.28 -- -- 12,192 5.92 $ 9,197 5.64
----------- --- --------- --- --------- --- ----------- ---
Totals.................... $ 7,061 6.28% $ 11,749 5.79% $ 16,024 6.09% $ 9,197 5.64%
----------- --- --------- --- --------- --- ----------- ---
----------- --- --------- --- --------- --- ----------- ---
<CAPTION>
TOTAL YIELD
--------- -----
<S> <C> <C>
U. S. Treasury
securities.............. $ 6,024 5.51%
U.S. Government agency
securities.............. 9,557 6.33
Mortgage-backed and other
securities.............. 28,450 5.93
--------- ---
Totals.................... $ 44,031 5.96%
--------- ---
--------- ---
</TABLE>
At December 31, 1996, securities totaled $44.0 million, an increase of $5.2
million from $38.8 million at December 31, 1995. The increase occurred in U. S.
Government agency securities, mortgage-backed securities and tax free municipal
security investments. The funds invested were a direct result of excess funds
received following the Cleveland Acquisition. During 1995, securities decreased
$4.3 million from $43.1 million at December 31, 1994, representing primarily
maturities within the treasury and government agency portfolios and was
reflective of the Kingwood Sale.
DEPOSITS
Total deposits at December 31, 1996 increased to $173.3 million from $153.3
million at December 31, 1995, an increase of $20.0 million or 13.1%. The
increase resulted primarily from the Cleveland Acquisition in the third quarter
of 1996. The bulk of this growth was in Investor's Savings Accounts. This
account is a market rate sensitive account, with a ten day withdrawal
notification period, designed to compete against brokerage house accounts. While
the balances represent primarily core deposits, customers' deposits in this
investment vehicle may fluctuate from time to time pending other alternative
investments or cash needs. Deposits in 1995 rose to $153.3 million from $149.8
million in 1994, an increase of $3.5 million or 2.3%. The Company's ratio of
average noninterest-bearing demand deposits to average total deposits for years
ended December 31, 1996, 1995 and 1994 were 17.67%, 17.19% and 16.29%,
respectively.
The daily average balances and weighted average rates paid on interest
bearing 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>
NOW................................................. $ 17,232 1.20% $ 15,374 1.51% $ 15,910 1.91%
Public funds........................................ 5,696 1.83 9,105 3.65 5,179 1.10
Regular savings..................................... 8,414 2.17 8,867 2.38 8,858 2.18
Money market........................................ 10,735 2.34 10,058 2.38 12,749 2.35
Investor's savings.................................. 23,140 4.12 14,711 4.87 5,575 3.89
Time deposits less than $100,000.................... 60,897 5.37 57,574 5.41 56,586 4.77
Time deposits $100,000 and over..................... 7,691 5.57 9,359 5.42 8,427 4.38
--------- --- --------- --- --------- ---
Total interest-bearing deposits................... 133,805 4.03 125,048 4.29 113,284 3.65
Noninterest-bearing deposits........................ 28,717 -- 25,965 -- 22,045 --
--------- --- --------- --- --------- ---
Total deposits.................................... $ 162,522 3.32% $ 151,013 3.55% $ 135,329 3.06%
--------- --- --------- --- --------- ---
--------- --- --------- --- --------- ---
</TABLE>
69
<PAGE>
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......................................................... $ 700
Between 3 months and 6 months............................................ 1,617
Between 6 months and 1 year.............................................. 2,475
Over 1 year.............................................................. 2,151
------
Total.................................................................. $ 6,943
------
------
</TABLE>
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
---------------------------------------------------------------
181-365 AFTER ONE
0-90 DAYS 91-180 DAYS DAYS YEAR TOTAL
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities.................................. $ 267 $ 257 $ 2,232 $ 40,989 $ 43,745
Loans....................................... 20,080 10,468 17,182 72,150 119,880
Federal funds sold and other temporary
investments............................... 10,378 -- -- -- 10,378
----------- ----------- ----------- ----------- -----------
Total interest-earning assets............. 30,725 10,725 19,414 113,139 174,003
----------- ----------- ----------- ----------- -----------
Interest-bearing liabilities:
Demand, money market and savings deposits... 66,410 -- -- -- 66,410
Certificates of deposit and other time
deposits.................................. 12,689 13,545 16,404 29,829 72,467
Fed funds purchased and securities sold
under repurchase agreements............... 1,000 -- -- -- 1,000
----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities........ 80,099 13,545 16,404 29,829 139,877
----------- ----------- ----------- ----------- -----------
Period GAP.................................. $ (49,374) $ (2,820) $ 3,010 $ 83,310 $ 34,126
Cumulative GAP.............................. $ (49,374) $ (52,194) $ (49,184) $ 34,126
Period GAP to total assets.................. (26.12)% (0.15)% 1.59% 44.08%
Cumulative GAP to total assets.............. (26.12)% (27.61)% (26.02)% 18.06%
</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
Stockholders' equity increased to $12.9 million at December 31, 1996 from
$11.9 million at December 31, 1995, an increase of $1.0 million or 8.4%. This
increase was primarily the result of net income of $1.4 million offset by cash
dividends of $324,000, treasury stock purchases totaling $48,000, the issuance
of additional stock totaling $30,000 and an increase in the net unrealized loss
on available-for-sale securities, net of tax, of $34,000. During 1995,
stockholders' equity increased by $1.1 million or 10.2% from $10.8 million at
December 31, 1994. In addition to net income of $1.2 million, the increase was
offset primarily by cash dividends of $273,000, treasury stock purchases
totaling $130,000, the issuance of additional Common Stock totaling $30,000 and
a reduction in the net unrealized loss on available-for-sale securities of
$201,375.
70
<PAGE>
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 6.67%
Tier 1 risk-based capital ratio.......................... 4.00% N/A 9.39%
Risk-based capital ratio................................. 8.00% N/A 10.45%
THE BANK
Leverage ratio........................................... 3.00%(2) 5.00% 6.67%
Tier 1 risk-based capital ratio.......................... 4.00% 6.00% 9.36%
Risk-based capital ratio................................. 8.00% 10.00% 10.43%
</TABLE>
- ------------------------
(1) The Federal Reserve Board has established 3.00% as the minimum leverage
ratio for institutions with well-diversified risk, including no undue
interest rate risk exposure; excellent asset quality; high liquidity; and
good earnings; and which in general are considered strong and rated
composite 1 under the rating system of bank holding companies. The Federal
Reserve Board may require the Company to maintain a leverage ratio of up to
200 basis points above the required minimum if the Company is not meeting
these characteristics or if there is a supervisory, financial or operational
weakness.
(2) The OCC has established 3.00% as the minimum leverage ratio for institutions
with well-diversified risks, including no undue interest rate risk exposure;
excellent control systems; good earnings; high asset quality; high
liquidity; and well-managed on- and off-balance sheet activities; and which
in general are considered strong and rated composite 1 under the rating
system for banks. The OCC may require the Bank to maintain a leverage ratio
of up to 200 basis points above the required minimum if the Bank is not
meeting these characteristics or if there is a supervisory, financial or
operational weakness.
71
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND THE BANK
The following is a list of all of the directors, advisory directors and
executive officers of the Company and the Bank, their respective positions with
the Company and the Bank and their ages.
<TABLE>
<CAPTION>
NAME POSITION AGE
- ---------------------------------------------- ------------------------------------------------------------ ---
<S> <C> <C>
Knox W. Askins................................ Director of the Company and the Bank 60
Jerry Cornelius............................... Director of the Bank 66
Emery Farkas.................................. Director of the Company and the Bank 73
Albert D. Fields.............................. Treasurer of the Company, President of the Bank and Director 47
of the Company and the Bank
Eddie V. Gray................................. Director of the Company and the Bank 62
W. E. Gwaltney, Jr............................ Director of the Company and the Bank 70
Doug Latimer.................................. Chairman of the Board of the Company and the Bank 54
Kim E. Love................................... Controller of the Company and Chief Financial Officer of the 37
Bank
Jay Marks..................................... Director of the Company and the Bank 73
Lester A. Marks............................... Advisory Director of the Bank 44
L. H. McKey................................... Director of the Company and the Bank 71
Harold P. Pfeiffer............................ Senior Advisory Director of the Company and the Bank 75
Lindsay R. Pfeiffer........................... Vice Chairman of the Board of the Company and the Bank 47
Wayne Slovacek................................ Director of the Bank 74
Ken Strum..................................... Director of the Company and the Bank 63
James N. Wallace.............................. Director of the Company and the Bank 56
Ruede M. Wheeler, D.D.S....................... Director of the Company and the Bank 62
Alice W. Worthington.......................... Executive Vice President and Secretary of the Company, Chief 44
Operating Officer of the Bank and Director of the Company
and the Bank
L. D. Wright.................................. Chief Executive Officer, President and Director of the 50
Company and the Chief Executive Officer and Director of
the Bank
</TABLE>
KNOX W. ASKINS. Mr. Askins has been a director of the Bank since 1967. He
became a director of the Company when it was formed in 1982. He serves as a
member of the Bank's Audit Committee, Asset/ Liability Committee and the
Watchlist Committee. Mr. Askins also serves on the Audit Committee of the
Company. Mr. Askins is the President of Askins & Armstrong, P.C., where he has
been practicing law since 1965. He received a B.A. in General Studies from the
University of Houston and his Juris Doctorate from the University of Houston Law
Center.
JERRY L. CORNELIUS. Mr. Cornelius has served as a director of the Bank
since 1986. He has been a member of the Bank's Directors' Loan Committee for
seven years, and also serves on the Bank's Internal Credit Review Committee. Mr.
Cornelius is the President and owner of Cornelius Construction Co., which
72
<PAGE>
he formed in 1973. He is very active in the Deer Park area, where he is a member
of the Chamber of Commerce, Rotary, Shriner's Lodge, and Masonic Lodge. In
addition, Mr. Cornelius is a Director of the Southeast Texas Housing Board.
EMERY FARKAS. Mr. Farkas has been a director of the Bank since 1967. He
became a director of the Company when it was formed in 1982. Mr. Farkas serves
as the Chairman of the Audit Committee of the Company and the Bank. He also
serves on the Bank's Asset/Liability Committee and Watchlist Committee and on
the Company's Compliance Committee. Mr. Farkas owned and operated a local
pharmacy in the La Porte area from 1955 until 1983. From 1983 to 1990, he was an
independent pharmaceutical consultant. Since 1990, he has served as the Chief
Pharmacist in Charge/Consultant for Surgicare of Pasadena, Texas, the Texas
Institute of Surgery, and San Jacinto Methodist Hospital. He received a B. S. in
Pharmacy from the University of Houston, and attended medical school at the
University of Masaryk in Brno, Czechoslovakia.
ALBERT D. FIELDS. Mr. Fields has been employed by the Bank since 1978. He
became a director of the Company in 1982, a director of the Bank in 1984 and was
promoted to President of the Bank in 1985. He was named Treasurer of the Company
in 1982. Mr. Fields began his banking career at American Bank in Odessa, Texas
in 1972. Next, he worked for Allied Merchants Bank in Port Arthur, Texas from
1976 to 1978, serving as Assistant Comptroller, and was then promoted to Vice
President in 1977. He has B.B.A. from Southwest Texas State University. In
addition, he is a graduate of the School of Banking of the South at Louisiana
State University, as well as the National Commercial Lending School at the
University of Oklahoma.
EDDIE V. GRAY. Mr. Gray became a director of both the Company and the Bank
in 1991. He has been a member of the Bank's Directors' Loan Committee for five
years. Mr. Gray is the owner of Gray Enterprises, a real estate development
company. He received a B.S. in Geology and a M.S. in Geology from Texas A&M
University. He is very active in the Baytown area, where he is a member of
Rotary and the Goose Creek Stream Greenbelt Development Committee. Mr. Gray was
honored in 1996 as the Citizen of the Year by the Baytown Sun and as the Exxon
Refiner of the Year.
W. E. GWALTNEY, JR.. Mr. Gwaltney has been a director of the Bank since
1973. He became a director of the Company when it was formed in 1982. He serves
as Chairman of the Bank's Asset/Liability Committee, and also serves on the
Bank's Executive Committee, the Company's Audit Committee and the Company's
Compensation Committee. Mr. Gwaltney retired as President and 50% owner of
Tex-A-Mation Engineering, Inc. in 1987. He currently serves as the managing
partner of GMS Enterprises. Mr. Gwaltney received a B.S. in Mechanical
Engineering from the University of Houston, and is a Registered Professional
Engineer.
DOUG LATIMER. Mr. Latimer became a director of both the Company and the
Bank in 1989. In June of 1997, he was elected Chairman of the Board of both the
Company and the Bank. He also serves on the Bank's Loan Committee, Internal
Credit Review Committee and Watchlist Committee, and on the Company's
Compensation Committee. In addition, he is the Chairman of the Bank's Executive
Committee. Mr. Latimer is the President and owner of Mechanical Repair &
Engineering, Inc., a specialty machine shop which he formed in 1974. He received
a B.S. in Mechanical Engineering from Louisiana State University, and a M.B.A.
from the University of Houston.
KIM E. LOVE, CPA. Mrs. Love joined the Bank in 1989 as Cashier. She was
promoted to Chief Financial Officer of the Bank in 1992. In addition, she serves
as Controller of the Company. Mrs. Love began her banking career in 1977 at
First City Bank - Bellaire. She was promoted to Vice President and Cashier in
1984. Next, Mrs. Love was the Cashier at Charter National Bank - Westheimer from
1984 through 1986. She has a B.S. in Accounting from Virginia Commonwealth
University, where she graduated Magna Cum Laude.
73
<PAGE>
JAY MARKS. Mr. Marks is one of the original founders of the Bank. He has
been a director of the Bank since 1965. He became a director of the Company when
it was formed in 1982. Mr. Marks is a member of the Bank's Executive Committee
and the Company's Compensation Committee. He is the President and owner of Jay
Marks Investment Co., which owns and operates several car dealerships.
LESTER A. MARKS. Mr. Marks has been an advisory director of the Company and
the Bank since 1990. He is the son of Jay Marks, one of the original founders of
the Bank. Mr. Marks owns and operates automobile dealerships within the Houston
area, serving as Chief Executive Officer of Marks Automotive Group. He is a Phi
Beta Kappa graduate of Tulane University, and is an active volunteer for the
arts, serving on numerous executive boards of local art museums.
L. H. MCKEY. Mr. McKey has been a director of the Bank since 1979. He
became a director of the Company when it was formed in 1982. Mr. McKey owns a
working ranch in Liberty, Texas and is owner of McKey Enterprises, a heavy
equipment and commercial property business. He is also a member of the Trinity
Valley Expedition Board in Liberty.
HAROLD P. PFEIFFER. Mr. Pfeiffer is one of the original founders of the
Bank. He served as a director of the Bank from 1965 until 1997. He became a
director of the Company when it was formed in 1982. In June of 1997, Mr.
Pfeiffer stepped down as Chairman of the Board after 23 years, and became a
Senior Advisory Director. He currently serves on the Bank's Audit Committee,
Asset/Liability Committee and Director's Watchlist Committee, as well as the
Bank's Executive Committee. Mr. Pfeiffer is a native resident of La Porte, and
served on the city council from 1954 to 1958, and as mayor of La Porte from 1958
to 1970. He is retired from Pfeiffer & Son, an electrical contracting company
which his father started in 1921.
LINDSAY R. PFEIFFER. Mr. Pfeiffer has been an Advisory Director of the Bank
since 1990. He was elected Vice Chairman of the Board of both the Company and
the Bank in June, 1997, when his father, Harold Pfeiffer, retired as Chairman of
the Board. Mr. Pfeiffer serves on the Bank's Loan Committee, Watchlist
Committee, Internal Credit Review Committee and Asset/Liability Committee and on
the Compensation Committee of the Company. In addition, he is Vice Chairman of
the Bank's Executive Committee. He is the President of Pfeiffer & Son, an
electrical contractor, where he as worked since 1973. Mr. Pfeiffer received a
B.A. in Business Administration from the University of Texas, and an A.S. in
Electrical Technology from San Jacinto College.
WAYNE SLOVACEK. Mr. Slovacek has been a director of the Bank since 1994. He
serves on the Bank's Audit Committee, Asset/Liability Committee and Watchlist
Committee. Although Mr. Slovacek retired as a Vice President of Port Operations
of United Equities, an international importer and exporter of grain, in 1988, he
is very active in the Deer Park area, where he is a member of the Rotary,
Chamber of Commerce, Deer Park ISD Education Foundation, and the San Jacinto
Education Foundation. In addition, he serves on the Board of Trustees of the San
Jacinto College in Pasadena, Texas, and is a Director of the Southeast Economic
Development Board. He received a B.S. in Business Administration from Phillips
University in Enid, Oklahoma, and was a commissioned officer in World War II.
KEN STRUM. Mr. Strum became a director of the Bank in 1980 and a director
of the Company in 1988. He is the Chairman of the Bank's Directors' Loan
Committee, and also serves on the Bank's Internal Loan Committee. Mr. Strum is
the President and owner of Ken Strum Insurance Agency, Inc., which he founded in
1972. He received a B.B.A. from the University of Mississippi.
JAMES N. WALLACE. Mr. Wallace became a director of both the Company and the
Bank in 1990. He is the Co-Chairman of the Internal Credit Review Committee, and
also serves on the Bank's Directors' Loan Committee, Internal Credit Review
Committee and Watchlist Committee and on the Compensation Committee of the
Company. In addition, he is a member of the Bank's Executive Committee. Mr.
Wallace is the Chairman of Bayou Properties Co, a commercial real estate
development firm, where he has worked
74
<PAGE>
since 1976. He received a B.S. in Education from Southwest Texas State
University and a M. A. from Southwest Texas State University.
RUEDE M. WHEELER, D.D.S.. Dr. Wheeler has been a director of the Bank since
1977. He became a director of the Company when it was formed in 1982. He is the
Co-Chairman of the Bank's Internal Credit Review Committee, and also serves on
the Bank's Directors' Loan Committee. He has been practicing general dentistry
since 1962. Dr. Wheeler received a B.S. from Texas A&M University, and a Doctor
of Dental Sciences from the University of Texas.
ALICE W. WORTHINGTON. Mrs. Worthington joined the Bank in 1992 as Executive
Vice President and Chief Operating Officer, and became a director of both the
Company and the Bank. In addition, she serves as the Executive Vice President
and Secretary for the Company. In banking since 1974, Mrs. Worthington worked
for First City Bank from 1975 through June, 1992. She was promoted to Vice
President and Cashier, First City Bank - Almeda Genoa in 1981, and then to
Senior Vice President and Chief Financial Officer in 1986. Next, Mrs.
Worthington was the Senior Vice President and Cashier of First City Bank -
Windsor Park in San Antonio, Texas for a brief period until transferring to
First City Bank - Highland Village, Houston, Texas as Senior Vice President and
Chief Financial Officer in 1987.
L. D. WRIGHT. Mr. Wright joined the Bank in 1987 as the Chief Executive
Officer and as a director of both the Company and the Bank. His banking career
began in 1966 at Irwin Union Bank and Trust Company in Columbus, Indiana, where
he served as the Credit Card Manager. Next, Mr. Wright served as Vice President
and Manager of Retail Banking at First Galesburg National Bank, Galesburg,
Illinois, in 1972, and was promoted to Senior Vice President and Manager of the
Lending Division in 1977. Next, Mr. Wright served as President and Chief
Executive Officer of First City Bank - Almeda Genoa in 1982, and was promoted to
Cluster Manager/ President and Chief Executive Officer of First City Bank -
Almeda Genoa in 1987, where he was responsible for the supervision of six banks
with total assets of $350 million. He attended Vincennes University and
graduated from the Stonier Graduate School of Banking at Rutgers University.
Directors are elected for three year terms, classified into Classes I, II
and III. Messrs. Askins, Fields, Strum and Wright are Class I directors with
terms of office expiring on the date of the Company's annual meeting of
stockholders in 1998; Messrs. Farkas and McKey, Dr. Wheeler and Mrs. Worthington
are Class II directors with terms of office expiring on the date of the
Company's annual meeting in 1999; and Messrs. Gray, Gwaltney, Latimer, Marks,
Pfeiffer and Wallace are Class III directors with terms of office expiring on
the date of the Company's annual meeting of stockholders 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.
Farkas (Chairman), Askins and Gwaltney, 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. Latimer, Jay Marks,
Gwaltney, Wallace and Lindsay Pfeiffer, each of whom is an outside director.
75
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the formation of the Compensation Committee in 1997, matters
related to compensation, employee benefits and stock options were considered by
the Executive Committee of the Bank, which included Messrs. Latimer, Jay Marks,
Gwaltney, Wallace, Lindsay Pfeiffer, Wright and Harold Pfeiffer. As a member of
this committee, Mr. Wright participated in determinations as to compensation and
grants of stock options to executive officers, including himself. 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 $500 for each meeting of the
Bank's Board of Directors attended. Fees are not paid for committee meetings.
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
Chief Executive Officer and the other executive officer of the Company whose
compensation exceeded $100,000 (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>
VALUE OF SECURITIES
OTHER ANNUAL OPTIONS UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION GRANTED OPTIONS(#) COMPENSATION(1)
- -------------------------------- --------- ---------- --------- ------------- ---------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
L. D. Wright, Chief Executive 1996 $ 156,000 $ 52,500 $ 51,583(2) $ 110,868(3) 18,478 $ 3,120
Officer of the Company and the
Bank
Albert D. Fields, Treasurer of 1996 97,500 11,375 850 -- -- 1,950
the Company and President of
the Bank
</TABLE>
- ------------------------
(1) Consists of contributions by the Company to the 401(k) Plan.
(2) Includes $36,000 as the fair market value of Common Stock issued to Mr.
Wright pursuant to the Phantom Plan and $7,937 received by Mr. Wright as
dividends on the shares of phantom stock granted under the Phantom Plan.
(3) Consists of shares of phantom stock granted under the Phantom Plan. As of
December 31, 1996, Mr. Wright held options for 37,219 shares of phantom
stock under the Phantom Plan, and the estimated value of these shares was
$262,394. At December 31, 1996, 19,447 of these shares were vested with each
grant vesting over a three year period. Mr. Wright receives dividends on the
shares of phantom stock granted to him under the Phantom Plan.
STOCK OPTION AND INCENTIVE PLANS
Pursuant to the Phantom Plan, the Company may issue shares of phantom stock
to certain officers and key employees. The purpose of the Phantom Plan is to
attract, retain and incentivize officers of the Company and the Bank, to provide
a means whereby such persons may sustain a sense of proprietorship and personal
involvement in the continued development and financial success of the Company,
and to encourage such persons to remain with and devote their best efforts to
the business of the Company,
76
<PAGE>
thereby advancing the interests of the Company and its stockholders. The only
individual to participate in the Phantom Plan is L.D. Wright, the President and
Chief Executive Officer of the Company. The aggregate number of shares of
phantom stock that may be issued under the Phantom Plan is limited to 135,000
shares. The number of shares issued is determined based on a financial
performance test for the Bank. The financial performance test is based on
certain targeted percentages of the return on equity of the Bank and is set
annually by the Board of Directors of the Company. The minimum return on equity
for shares of phantom stock to be awarded is 15%. The phantom stock is
nonvoting, accrues dividends equal to those declared on the Common Stock, and is
granted subject to a vesting schedule.
The shares of phantom stock may be redeemed when vested. Such redemption is
payable, at the Company's discretion, in shares of Common Stock or cash at the
then fair market value of the Common Stock. In 1996 and 1995, 18,478 and 16,357
shares of phantom stock were granted, respectively, and 6,000 shares of phantom
stock were redeemed for 6,000 shares of the Common Stock in each year. The
compensation cost charged against income for the Phantom Plan was approximately
$114,000 and $66,000 for 1996 and 1995, respectively. As of September 30, 1997,
66,630 shares of phantom stock were granted but unexercised pursuant to the
Phantom Plan, 39,538 of which are fully vested. No additional shares of phantom
stock will be granted pursuant to the Phantom Plan.
The Company has outstanding options to purchase 33,300 shares of Common
Stock issued pursuant to an incentive stock option plan approved by stockholders
in 1997 (the "1997 Stock Plan"). The 1997 Stock Plan authorizes the issuance of
options for up to 150,000 shares of Common Stock. Under the 1997 Stock Plan, the
vesting of options is governed by individual option agreements. Each of the
option agreements currently outstanding provides that 20% of the options granted
vest immediately following the date of grant and an additional 20% each year
thereafter. Options granted under the 1997 Stock Plan generally must be
exercised within 10 years following the date of grant. The fair market value of
stock options is based on trades in the Common Stock and on an appraisal from an
independent investment banking firm.
The Company's Board of Directors and stockholders approved a new stock
option plan in 1997 (the "1997 Incentive 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 Incentive 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 Incentive 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 Incentive Plan.
The Company has a cash incentive plan which provides guidelines pursuant to
which key executive employees can earn bonus compensation based on the
profitability of the Bank. The bonus amounts are determined based on achievement
by the Bank of certain targeted percentages of return on equity. At December 31,
1996 and 1995, a bonus pool of approximately $78,000 and $72,000, respectively,
had been accrued for distribution in the following year.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("SFAS 123"). This statement established fair value based
accounting and reporting standards for all transactions in which a company
acquires goods or services by issuing its equity investments, which includes
stock-based compensation plans. Under SFAS 123, compensation cost is measured at
the grant date based on the value of the award and is recognized over the
service period, which is usually the vesting period. Fair value of stock options
is determined using an option-pricing model. This statement encourages companies
to adopt as prescribed the fair value based method of accounting to recognize
compensation expense for employee stock compensation plans. However, it does not
require the fair value based method to be adopted but a company must comply with
77
<PAGE>
the disclosure requirements set forth in the statement. The Company has
continued to apply accounting in Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, ("APB 25") and related
Interpretations, and, accordingly, will in its annual reporting provide the pro
forma disclosures of net income and earnings per share.
OPTION GRANTS DURING 1996
The following table sets forth certain information concerning the number and
value of stock options granted in fiscal 1996 to the named executive officers:
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL
NUMBER OF RATES
SECURITIES OF STOCK PRICE
UNDERLYING % OF TOTAL FAIR MARKET APPRECIATION
OPTIONS OPTIONS GRANTED EXERCISE OR VALUE AT FOR OPTION TERM
NAME AND PRINCIPAL POSITION WITH GRANTED TO EMPLOYEES IN BASE PRICE DATE OF EXPIRATION --------------------
THE COMPANY (#)(1) FISCAL YEAR ($/SH) GRANT DATE 5% ($) 10% ($)
- --------------------------------- ------------- --------------- ----------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
L.D. Wright, 18,478 100% $ 0.00 $ 6.00 10 years $ 180,592 $ 287,563
Chief Executive Officer of the
Company and the Bank
Albert D. Fields, -- -- -- -- -- -- --
Treasurer of the Company and
President of the Bank
<CAPTION>
NAME AND PRINCIPAL POSITION WITH
THE COMPANY 0% ($)
- --------------------------------- ---------
<S> <C>
L.D. Wright, $ 110,868
Chief Executive Officer of the
Company and the Bank
Albert D. Fields, --
Treasurer of the Company and
President of the Bank
</TABLE>
- ------------------------------
(1) Represents options granted under the Phantom Plan. Options vest at a rate of
33% per year on or about each anniversary of the date of grant.
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 executive officers at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
NUMBER OF SHARES DOLLAR DECEMBER 31, 1996 DECEMBER 31, 1996(2)
ACQUIRED UPON VALUE -------------------------- --------------------------
NAME OPTION EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- ----------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
L.D. Wright.................. 6,000 $ 36,000 19,447 17,772 $ 137,101 $ 125,293
Albert D. Fields............. -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Market value of the underlying securities at exercise date, minus the
exercise price.
(2) 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
"Benefit Plan"). The Company has hired the Hand Group to serve as the Benefit
Plan administrator and investment advisor. Each year the Company determines, in
its discretion, the amount of matching contributions. The Company has elected to
match 50% of employee contributions not to exceed 3% of the employee's annual
compensation. Total Benefit Plan expense charged to the Company's operations for
1996, 1995 and 1994 were approximately $27,000, $24,000 and $24,000,
respectively. The Company has budgeted $60,000 for 1997 contributions. In
addition, the Company elected to allow employees to invest the matching portion
in shares of Common Stock.
78
<PAGE>
INTERESTS OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
Many of the directors, executive officers and principal stockholders 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 stockholders 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, executive officers and principal stockholders 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 stockholders satisfy the foregoing
standards. On June 30, 1997, all of such loans aggregated $2.9 million, which
was approximately 18.9% of the Company's Tier 1 capital at such date.
Approximately 69.5% of the Company's total loan portfolio as of June 30, 1997
was comprised of consumer installment loans, 88.7% of which consisted of
indirect dealer loans. As of such date, approximately $8.5 million (12.0%) of
the Company's installment loan portfolio consisted of indirect loans purchased
from automobile dealerships controlled by Director Jay Marks and Bank Advisory
Director Lester Marks. All of these transactions were made in the ordinary
course of business 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 normal risk
of collectibility or present unfavorable features. The Company expects to have
such transactions or transactions on a similar basis with its directors,
executive officers and principal stockholders and their associates in the
future.
79
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 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 stockholder 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>
Knox Askins.......................................................... 8,402 * *
Emery Farkas......................................................... 28,203 2.08% 1.44%
Albert D. Fields..................................................... 11,428(2) * *
Eddie V. Gray........................................................ 29,321(3) 2.16% 1.50%
W. E. Gwaltney, Jr................................................... 143,343(4) 10.55% 7.32%
Doug Latimer......................................................... 83,563 6.15% 4.27%
Kim E. Love.......................................................... 1,850(5) * *
Jay Marks............................................................ 87,283 6.43% 4.46%
L. H. McKey.......................................................... 65,620 4.83% 3.35%
Harold Pfeiffer...................................................... 149,615 11.01% 7.64%
Lindsay R. Pfeiffer.................................................. 39,470(6) 2.91% 2.02%
Ken Strum............................................................ 25,051(7) 1.84% 1.28%
James N. Wallace..................................................... 36,667 2.70% 1.87%
Ruede M. Wheeler, D.D.S.............................................. 43,713(8) 3.22% 2.23%
Alice F. Worthington................................................. 1,250(9) * *
L. D. Wright......................................................... 128,571(10) 9.46% 6.56%
Directors and Executive Officers as a Group(16)...................... 883,350 65.00% 45.09%
</TABLE>
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* Indicates ownership which does not exceed 1.0%
(1) Assumes the issuance of 600,000 shares in the Offering.
(2) Includes 1,000 shares which may be acquired pursuant to options granted
under the 1997 Stock Plan and 299 shares held of record by Albert D. Fields
(custodian for Brad Fields, Minor).
(3) Includes 26,797 shares held of record by Grayco Development Co.
(4) Consists of shares held by Gwaltney Interests, Limited, a Texas limited
partnership.
(5) Includes 1,000 shares which may be acquired pursuant to options granted
under the 1997 Stock Plan.
(6) Includes 17,525 shares held by Pfeiffer & Sons, Inc., of which Lindsay
Pfeiffer is President, 1,203 shares held of record by the Katy Knox
Education Trust, 1,203 shares held of record by the Nicholas Riley Education
Trust, 1,203 shares held of record by the Noah Riley Education Trust, 1,203
shares held of record by the Jessica Bullock Education Trust, 1,203 shares
held of record by the Christopher Bullock Education Trust, 1,203 shares held
of record by the Charles Pfeiffer Education Trust, 1,203 shares held of
record by the Joseph Pfeiffer Education Trust, 1,203 shares held of record
by the Jonathan Pfeiffer Education Trust, 1,203 shares held of record by the
Philip Shane Paschal Education Trust, 1,203 shares held of record by the
Charles Wayne Paschal Education Trust, 703 shares held of record by the
Philip Pfeiffer, Jr. Education Trust and 703 shares held of record by the
Shannon Pfeiffer Education Trust. Lindsay Pfeiffer is the co-trustee of each
of these education trusts and has shared voting and investment power with
respect to the shares of Common Stock held by these trusts.
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(7) Includes 2,245 shares held of record by Ken Strum Insurance Agency, Inc.
(8) Includes 11,044 shares held of record by the Ruede Wheeler, DDS, Inc. Profit
Sharing Trust, 2,000 shares held of record by Ruede Wheeler, DDS, Inc., 450
shares held of record by Ruede Wheeler, IRA and 450 shares held of record by
Charlcya Wheeler IRA.
(9) Includes 1,000 shares which may be acquired pursuant to options granted
under the 1997 Stock Plan.
(10) Includes 39,538 shares which may be acquired pursuant to the Phantom Plan.
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 stockholders 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
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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 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 10.16% and its ratio of total capital to total
risk-weighted assets was 11.24%. 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
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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 7.25%.
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.
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% or 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 national banking association, the deposits of which are
insured by the Bank Insurance Fund ("BIF") and the SAIF of the FDIC. The Bank is
subject to supervision and regulation by the OCC.
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Such supervision and regulation subjects the Bank to special restrictions,
requirements, potential enforcement actions and periodic examination by the OCC.
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.
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
stockholders 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 OCC 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. Until a national
bank's capital surplus equals or exceeds its capital stock, the bank must
transfer ten percent of its net income to capital surplus prior to paying a
dividend. Without the prior approval of the OCC, a national bank may not pay
dividends in excess of the bank's total net profits for that year, plus its
retained profits for the preceding two years, less any required transfers to
capital surplus. Additionally, a national bank may not pay dividends in excess
of total retained profits, including current year's earnings. Under federal law,
the Bank cannot pay a dividend if, after paying the dividend, the Bank will be
"undercapitalized." The OCC 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 stockholders, including any depository institution holding
company (such as the Company) or any stockholder or creditor thereof.
EXAMINATIONS. The OCC periodically examines and evaluates national banks.
Based upon such an evaluation, the OCC may revalue the assets of the institution
and require that it establish specific reserves to compensate for the difference
between the OCC-determined value and the book value of such assets.
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
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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 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 OCC has adopted regulations establishing
minimum requirements for the capital adequacy of insured institutions. The OCC
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 OCC's risk-based capital guidelines generally require national 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
10.19% and its ratio of total capital to total risk-weighted assets was 11.29%.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operation of the Company--Capital Resources."
The OCC's leverage guidelines require national 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. As of June 30, 1997, the Bank's ratio of Tier 1 capital to average total
assets (leverage ratio) was 7.28%. 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," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." 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 "undercapitalized" 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 OCC'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 OCC has only
very limited discretion in dealing with a critically undercapitalized
institution and is virtually required to appoint a receiver or conservator.
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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 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.
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, such
as the OCC, have broad enforcement powers, including the power to terminate
deposit insurance, impose substantial fines and other civil and criminal
penalties and appoint a conservator or receiver. Failure to comply with
applicable laws, regulations and supervisory agreements could subject the
Company or 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.
BROKERED DEPOSIT RESTRICTIONS. Adequately capitalized institutions cannot
accept, renew or roll over brokered deposits except with a waiver from the OCC,
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
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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 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,
OCC 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
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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.
DESCRIPTION OF SECURITIES OF THE COMPANY
AUTHORIZED CAPITAL STOCK
The authorized capital stock of the Company consists of (i) 10,000,000
shares of Preferred Stock, $1.00 per share par value, issuable in series, none
of which are issued and outstanding and (ii) 50,000,000 shares of Common Stock,
$1.00 per share par value, of which 1,400,833 shares were issued and 1,358,907
shares were outstanding as of September 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 September
30, 1997, an additional 33,300 shares of Common Stock were issuable upon
exercise of the Company's outstanding employee and director incentive stock
options, and 66,630 shares of Common Stock were issuable under the Phantom Plan.
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 10,000,000 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 stockholder 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;
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(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 Board of Directors does not intend to seek stockholder approval prior to
any issuance of Preferred Stock or any series thereof, unless otherwise required
by law. Under the Texas Business Corporation Act ("TBCA"), stockholder 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 stockholder approval of a specific issuance could be to
the detriment of the Company and its stockholders. 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 stockholders.
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.
Holders of Common Stock will be entitled to receive dividends out of funds
legally available therefor, if and when properly declared by the Board of
Directors. However, the Board of Directors may not declare or pay cash dividends
on Common Stock, and no Common Stock may be purchased by the Company, unless
full dividends on outstanding Preferred Stock are paid 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
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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 became 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
stockholders who beneficially own 20% or more of the outstanding stock of such
corporation ("affiliated stockholders") for a period of three years following
the date on which the stockholder acquired shares representing 20% or more of
the corporation's voting power unless two-thirds of the unaffiliated
stockholders 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 stockholders 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 stockholders only for cause and that vacancies on the Board of
Directors may be filled by the remaining directors.
ADVANCE NOTICE OF STOCKHOLDER PROPOSALS AND NOMINATIONS. The Company's
Bylaws establish an advance notice procedure for stockholders to make
nominations of candidates for election as directors or bring other business
before an annual meeting of stockholders of the Company (the "Stockholder Notice
Procedure"). The Stockholder Notice Procedure provides that only persons who are
nominated by, or at the direction of, the Board, or by a stockholder 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 stockholder who has given timely written notice to
the Secretary of the Company of such stockholder's intention to bring such
business before such meeting.
Under the Stockholder Notice Procedure, for notice of stockholder
nominations or other business to be made at an annual meeting to be timely, such
notice must be received by the Company not less than 70 days prior to the first
anniversary of the previous year's annual meeting (or if the date of the annual
meeting is advanced by more than 20 days not later than the tenth day after
public announcement of the date of such meeting is first made). Notwithstanding
the foregoing, in the event that the number of directors to be elected is
increased and there is no public announcement naming all of the nominees for
director or specifying the size of the increased Board made by the Company at
least 80 days prior to the first anniversary of the preceding year's annual
meeting, a stockholder'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 tenth day after such public announcement is first
made by the Company. The Bylaws further provide that, for notice of a
stockholder 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.
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Under the Stockholder Notice Procedure, a stockholder'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 stockholder, the class and
number of shares of stock of the Company owned by such stockholder, 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 stockholder proposes to bring before the
meeting, the reasons for conducting such business at such meeting and any
material interest of such stockholder in the business so proposed.
The Stockholder Notice Procedure may have the effect of precluding a contest
for the election of directors or the consideration of stockholder 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 stockholders.
SPECIAL MEETINGS OF STOCKHOLDERS. The Articles of Incorporation provide
that special meetings of stockholders can be called by stockholders 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 STOCKHOLDER 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 stockholder 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 stockholder 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 stockholders may be
taken by written consent in lieu of a meeting of stockholders.
AMENDMENT OF BYLAWS. The Company's Articles of Incorporation and Bylaws
provide that the Bylaws may be amended only by the Board of Directors.
Stockholders do not have the power to amend the Company Bylaws.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement between
the Company and the Underwriter, the Underwriter has agreed to purchase from the
Company 600,000 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.
The Underwriting Agreement provides that the obligation of the Underwriter
is subject to certain conditions precedent and that the Underwriter will
purchase all such shares of the Common Stock if any of such shares are
purchased. The Underwriter is 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 Underwriter that the Underwriter
proposes 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
Underwriter may allow, and such dealers may re-allow, a concession not in excess
of $ per share to
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certain other dealers. After the initial pubic offering, the offering price and
other selling terms may be changed by the Underwriter.
Pursuant to the Underwriting Agreement, the Company has granted to the
Underwriter an option, exercisable not later than 30 days after the date of this
Prospectus, to purchase up to 90,000 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 Underwriter exercises such option, the Underwriter will become
obligated, subject to certain conditions, to purchase such shares, and the
Company will be obligated, pursuant to the option, to sell such shares to the
Underwriter.
The Company and each of its directors and executive officers, the related
interests of such directors and executive officers and holders of 5.0% or more
of the Common Stock 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 Underwriter, 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 Company has agreed to indemnify the Underwriter 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 Underwriter and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the Underwriter is 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 Underwriter creates a short position in the Common Stock in
connection with the Offering, i.e., if it sells a greater aggregate number of
shares of Common Stock than is set forth on the cover page of this Prospectus,
the Underwriter may reduce the short position by purchasing shares of Common
Stock in the open market. The Underwriter may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
The Underwriter may also impose a penalty bid on certain selling group
members. This means that if the Underwriter purchases 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 Underwriter makes 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 Underwriter makes any representation that the Underwriter
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
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 Underwriter. 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 Underwriter
believed to be comparable to the
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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.
The shares of Common Stock have been approved for quotation 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 Underwriter by Rothgerber, Appel, Powers & Johnson, LLP, Denver,
Colorado.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1996 and
1995 and the related consolidated Statements of Earnings, Stockholders' Equity,
and Cash Flows for each of the three years in the period ended December 31,
1996, have been included in this Prospectus in reliance upon the reports of
Grant Thornton LLP, independent certified public accountants, given on the
authority of said firm as experts in accounting and auditing.
The audited financial statements of Texas Bank included in this Prospectus
have been audited by McClelland, Samuel & Fehnel, L.L.P., independent certified
public accountants, for the periods set forth in their report thereupon
appearing elsewhere herein and are included in reliance upon such report given
upon authority of such firm as experts in accounting and auditing.
The audited financial statements of TNB included in this Prospectus have
been audited by Killingsworth & Company, independent certified public
accountants, for the periods set forth in their report thereupon appearing
elsewhere herein and are included in reliance upon such report given upon
authority of such firm as experts in accounting and auditing.
The audited financial statements of First Bank included in this Prospectus
have been audited by Killingsworth & Company, independent certified public
accountants, for the periods set forth in their report thereupon appearing
elsewhere herein and are included in reliance upon such report given upon
authority of such 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 but do contain all material provisions of such contracts, agreements
and other documents. 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
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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 stockholders with annual reports
containing audited financial statements certified by independent auditors and
make available quarterly reports containing unaudited financial statements for
the first three quarters of each fiscal year.
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TABLE OF CONTENTS TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
BAY BANCSHARES, INC.
Report of Independent Certified Public Accountants......................................................... F-3
Consolidated Balance Sheets as of June 30, 1997 (Unaudited) and
December 31, 1996 and 1995............................................................................... F-4
Consolidated Statements 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-5
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1994, 1995 and 1996 and
for the Six Months Ended June 30, 1997 (Unaudited)....................................................... F-6
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-7
Notes to Consolidated Financial Statements................................................................. F-9
TEXAS BANK
Report of Independent Certified Public Accountants......................................................... F-26
Balance Sheets as of June 30, 1997 (Unaudited) and December 31, 1996 and 1995.............................. F-27
Statements of Income for the Six Months Ended June 30, 1997 (Unaudited) and June 30, 1996 (Unaudited) and
for the Years Ended December 31, 1996 and 1995........................................................... F-28
Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1996 and 1995 and for the
Six Months Ended June 30, 1997 (Unaudited)............................................................... F-29
Statements 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 and 1995....................................................... F-30
Notes to Financial Statements.............................................................................. F-31
TEXAS NATIONAL BANK OF BAYTOWN
Report of Independent Certified Public Accountants......................................................... F-39
Balance Sheets as of June 30, 1997 (Unaudited) and December 31, 1996 and 1995.............................. F-40
Statements 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-41
Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 and for
the Six Months Ended June 30, 1997 (Unaudited)........................................................... F-42
Statements 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 and 1995....................................................... F-43
Notes to Financial Statements.............................................................................. F-44
FIRST BANK OF DEER PARK
Report of Independent Certified Public Accountants......................................................... F-53
Balance Sheets as of June 30, 1997 (Unaudited) and December 31, 1996 and 1995.............................. F-54
Statements of Income 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-55
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 and for
the Six Months Ended June 30, 1997 (Unaudited)........................................................... F-56
Statements 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 and 1995....................................................... F-57
Notes to Financial Statements.............................................................................. F-58
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Bay Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of Bay
Bancshares, Inc. and Subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of earnings, stockholders' 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 Bay Bancshares, Inc. and
Subsidiary 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, Bay Bancshares, Inc. and Subsidiary adopted
Statement of Accounting Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES.
GRANT THORNTON LLP
Houston, Texas
January 24, 1997 (except for last sentence of
the penultimate paragraph of Note I, as to
which the date is August 26, 1997 and
the third sentence of the second paragraph
of Note K, as to which the date is June 24, 1997)
F-3
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
JUNE 30, ----------- -----------
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents
Cash and due from banks................................................. $ 4,314 $ 8,094 $ 6,118
Federal funds sold...................................................... 14,500 10,378 10,138
----------- ----------- -----------
Total cash and cash equivalents....................................... 18,814 18,472 16,256
Interest-bearing deposits with banks...................................... 392 392 490
Securities available-for-sale............................................. 44,255 43,745 38,588
Loans, net of allowance for credit losses of $1,425, $1,430 and $1,185.... 113,797 118,450 104,611
Bank premises and equipment, net.......................................... 4,806 4,883 4,831
Other real estate......................................................... 208 208 234
Accrued interest receivable............................................... 1,090 974 909
Other assets.............................................................. 1,777 1,887 1,172
----------- ----------- -----------
$ 185,139 $ 189,011 $ 167,091
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing................................................... $ 30,853 $ 34,441 $ 28,316
Interest-bearing deposits............................................. 139,021 138,877 125,018
----------- ----------- -----------
Total deposits........................................................ 169,874 173,318 153,334
Accrued interest payable................................................ 437 467 416
Securities sold under agreements to repurchase.......................... -- 1,000 --
Borrowings.............................................................. 162 162 329
Other liabilities....................................................... 884 1,135 1,109
----------- ----------- -----------
Total liabilities..................................................... 171,357 176,082 155,188
Commitments and contingencies............................................. -- -- --
Stockholders' equity
Common stock, $1 par value, 5,000,000 shares authorized; 1,399,583,
1,391,441 and 1,385,441 shares issued 1,400 1,391 1,385
Additional paid-in capital.............................................. 8,393 8,344 8,320
Retained earnings....................................................... 4,352 3,660 2,582
Net unrealized loss on available-for-sale securities, net of taxes of
$45, $97 and $80...................................................... (89) (189) (155)
----------- ----------- -----------
14,056 13,206 12,132
Less 41,926, 42,445 and 35,199 shares of common stock in treasury--at
cost.................................................................. 274 277 229
----------- ----------- -----------
Total stockholders' equity............................................ 13,782 12,929 11,903
----------- ----------- -----------
$ 185,139 $ 189,011 $ 167,091
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Interest income
Loans, including fees........................................ $ 4,951 $ 4,741 $ 9,594 $ 8,505 $ 7,550
Securities................................................... 1,344 1,252 2,612 2,203 1,944
Federal funds sold........................................... 242 221 460 536 133
--------- --------- --------- --------- ---------
Total interest income...................................... 6,537 6,214 12,666 11,244 9,627
Interest expense
Deposits..................................................... 2,718 2,610 5,396 5,361 4,137
Other........................................................ 14 9 47 30 148
--------- --------- --------- --------- ---------
Total interest expense..................................... 2,732 2,619 5,443 5,391 4,285
--------- --------- --------- --------- ---------
Net interest income........................................ 3,805 3,595 7,223 5,853 5,342
Provision for credit losses.................................... 168 219 510 150 75
--------- --------- --------- --------- ---------
Net interest income after provision for
credit losses............................................ 3,637 3,376 6,713 5,703 5,267
Noninterest income
Service charges.............................................. 741 701 1,379 1,375 1,249
Other........................................................ 456 492 968 720 855
--------- --------- --------- --------- ---------
Total noninterest income................................... 1,197 1,193 2,347 2,095 2,104
Noninterest expense
Salaries and employee benefits............................... 1,843 1,600 3,377 2,823 2,636
Occupancy expenses, net...................................... 583 572 1,131 1,028 1,008
Other operating expenses..................................... 1,189 1,097 2,559 2,173 2,225
--------- --------- --------- --------- ---------
Total noninterest expenses................................. 3,615 3,269 7,067 6,024 5,869
--------- --------- --------- --------- ---------
Earnings before income taxes............................... 1,219 1,300 1,993 1,774 1,502
Provision for income taxes
Current...................................................... (19) 243 766 427 34
Deferred..................................................... 383 165 (175) 132 237
--------- --------- --------- --------- ---------
364 408 591 559 271
--------- --------- --------- --------- ---------
NET EARNINGS............................................... $ 855 $ 892 $ 1,402 $ 1,215 $ 1,231
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings per common and common equivalent share................ $ .59 $ .62 $ .97 $ .84 $ .86
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS)
ON AVAILABLE- COMMON
ADDITIONAL RETAINED FOR-SALE STOCK IN
SHARES AMOUNT CAPITAL EARNINGS SECURITIES TREASURY
----------- --------- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994................ 1,373 $ 1,373 $ 8,272 $ 682 $ -- $ (93)
Unrealized gain at January 1, 1994 on
available-for-sale securities from the
initial adoption of Financial Accounting
Standard 115, net of taxes of $17....... -- -- -- -- 33 --
Net earnings for the year................. -- -- -- 1,231 -- --
Issuance of stock......................... 6 6 24 -- -- --
Treasury stock purchases.................. -- -- -- -- -- (14)
Treasury stock sold....................... -- -- -- -- -- 5
Dividends paid............................ -- -- -- (273) -- --
Unrealized loss on available-for-sale
securities, net of taxes of $200........ -- -- -- -- (389) --
----- --------- ----------- ----------- ----- -----
Balance at December 31, 1994.............. 1,379 1,379 8,296 1,640 (356) (102)
Net earnings for the year................. -- -- -- 1,215 -- --
Issuance of stock......................... 6 6 24 -- -- --
Treasury stock purchased.................. -- -- -- -- -- (130)
Treasury stock sold....................... -- -- -- -- -- 3
Dividends paid............................ -- -- -- (273) -- --
Unrealized gain on available-for-sale
securities, net of taxes of $103........ -- -- -- -- 201 --
----- --------- ----------- ----------- ----- -----
Balance at December 31, 1995.............. 1,385 1,385 8,320 2,582 (155) (229)
Net earnings for the year................. -- -- -- 1,402 -- --
Issuance of stock......................... 6 6 24 -- -- --
Treasury stock purchased.................. -- -- -- -- -- (48)
Dividends paid............................ -- -- -- (324) -- --
Unrealized loss on available-for-sale
securities, net of taxes of $17......... -- -- -- -- (34) --
----- --------- ----------- ----------- ----- -----
Balance at December 31, 1996.............. 1,391 1,391 8,344 3,660 (189) (277)
Issuance of stock (unaudited)............. 9 9 49 -- -- --
Dividends (unaudited)..................... -- -- -- (163) -- --
Treasury stock sold (unaudited)........... -- -- -- -- -- 3
Unrealized gain on available-for-sale
securities, net ot taxes of $52
(unaudited)............................. -- -- -- -- 100 --
Net earnings (unaudited).................. -- -- -- 855 -- --
----- --------- ----------- ----------- ----- -----
Balance at June 30, 1997
(unaudited)............................. 1,400 $ 1,400 $ 8,393 $ 4,352 $ (89) $ (274)
----- --------- ----------- ----------- ----- -----
----- --------- ----------- ----------- ----- -----
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
------------
<S> <C>
Balance at January 1, 1994................ $ 10,234
Unrealized gain at January 1, 1994 on
available-for-sale securities from the
initial adoption of Financial Accounting
Standard 115, net of taxes of $17....... 33
Net earnings for the year................. 1,231
Issuance of stock......................... 30
Treasury stock purchases.................. (14)
Treasury stock sold....................... 5
Dividends paid............................ (273)
Unrealized loss on available-for-sale
securities, net of taxes of $200........ (389)
------------
Balance at December 31, 1994.............. 10,857
Net earnings for the year................. 1,215
Issuance of stock......................... 30
Treasury stock purchased.................. (130)
Treasury stock sold....................... 3
Dividends paid............................ (273)
Unrealized gain on available-for-sale
securities, net of taxes of $103........ 201
------------
Balance at December 31, 1995.............. 11,903
Net earnings for the year................. 1,402
Issuance of stock......................... 30
Treasury stock purchased.................. (48)
Dividends paid............................ (324)
Unrealized loss on available-for-sale
securities, net of taxes of $17......... (34)
------------
Balance at December 31, 1996.............. 12,929
Issuance of stock (unaudited)............. 58
Dividends (unaudited)..................... (163)
Treasury stock sold (unaudited)........... 3
Unrealized gain on available-for-sale
securities, net ot taxes of $52
(unaudited)............................. 100
Net earnings (unaudited).................. 855
------------
Balance at June 30, 1997
(unaudited)............................. $ 13,782
------------
------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30, YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net earnings........................................ $ 855 $ 892 $ 1,402 $ 1,215 $ 1,231
Adjustments to reconcile net earnings to net cash
provided by operating activities
Provision for credit losses....................... 168 219 510 150 75
Depreciation...................................... 290 323 619 546 508
Amortization of premiums, net of (accretion) of
discounts on securities......................... 32 40 51 (16) 81
Gain on sale of other real estate................. -- -- -- -- (67)
Loss (gain) on sale of bank premises and
equipment....................................... 4 104 (69) (1) (158)
(Gain) loss on sale of available-for-sale
securities...................................... (12) (20) 19 5 14
Write-down of other real estate................... -- -- 5 -- 24
Effect of phantom stock plan...................... 72 83 144 96 114
Change in assets and liabilities, net of effects
resulting from the purchase and sale of certain
branch assets and liabilities
Increase in accrued interest receivable and
other assets.................................. (57) (179) (227) (611) (64)
(Decrease) increase in accrued interest
payable....................................... (30) 122 15 (41) 81
Decrease in other liabilities................... (264) (39) (108) (4,895) (69)
---------- ---------- ---------- ---------- ----------
Net cash provided (used) by operating
activities.................................... 1,058 1,545 2,361 (3,552) 1,770
Cash flows from investing activities
Maturities of interest-bearing deposits with
banks............................................. -- -- 98 -- 294
Purchase of interest-bearing deposits with banks.... -- -- -- (98) --
Proceeds from maturities and principal repayments of
available-for-sale securities..................... 1,218 1,970 4,238 19,092 2,152
Proceeds from principal repayments of held-
to-maturity securities............................ -- -- -- 215 2,478
Proceeds from sale of available-for-sale
securities........................................ 1,012 1,989 3,954 5,250 9,037
Purchase of available-for-sale securities........... (2,609) (10,080) (13,468) (20,214) (11,978)
Purchase of held-to-maturity securities............. -- -- -- -- (4,080)
Decrease (increase) in loans, net of the effects
resulting from the purchase and sale of certain
branch assets and liabilities..................... 4,485 (7,598) (13,544) 839 (12,491)
</TABLE>
F-7
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30, YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Proceeds from sale of other assets.................. $ -- $ -- $ 21 $ 179 $ 229
Purchases of bank premises and equipment............ (240) (491) (606) (554) (1,232)
Proceeds from sale of bank premises and equipment... 22 103 198 3 --
Net increase in cash resulting from the acquisition
of certain branch assets and the assumption of
certain liabilities............................... -- -- 10,354 -- --
Cash of branch contracted for sale.................. (50)
---------- ---------- ---------- ---------- ----------
Net cash provided (used) by investing
activities...................................... 3,888 (14,107) (8,755) 4,712 (15,641)
Cash flows from financing activities
Net increase in securities and under agreements to
repurchase........................................ (1,000) -- 1,000 -- 20,291
Change in deposits, net of the effects resulting
from the purchase and sale of certain branch
assets and liabilities............................ (3,444) 10,938 8,136 3,510 750
Repayment of borrowings............................. -- -- (167) (917) (167)
Purchase of treasury stock.......................... -- (42) (48) (130) (14)
Sale of treasury stock.............................. 3 -- -- 3 5
Dividends paid...................................... (163) (162) (311) (273) (273)
---------- ---------- ---------- ---------- ----------
Net cash provided (used) by financing
activities...................................... (4,604) 10,734 8,610 2,193 20,592
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents..................................... 342 (1,828) 2,216 3,353 6,721
Cash and cash equivalents at beginning of period...... 18,472 16,256 16,256 12,903 6,182
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of period............ $ 18,814 $ 14,428 $ 18,472 $ 16,256 $ 12,903
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARY
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
The following is a summary of the significant accounting policies followed
in the preparation of the consolidated financial statements. The policies
conform to generally accepted accounting principles and to general practices
within the banking industry.
1. PRINCIPLES OF CONSOLIDATION AND INVESTMENT IN SUBSIDIARY
The consolidated financial statements include the accounts of Bay
Bancshares, Inc. (BBI) and its wholly-owned subsidiary, Bayshore National Bank
of La Porte (BNB), collectively (the Company). All significant intercompany
accounts and transactions have been eliminated in consolidation.
2. CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks with a maturity at date of purchase of three
months or less, and federal funds sold.
3. SECURITIES
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT
AND EQUITY SECURITIES (Statement 115). At the date of purchase, the Company
classifies debt and equity securities into one of three categories: held-to-
maturity, trading, or available-for-sale. At each reporting date, the
appropriateness of the classification is reassessed. Investments in debt
securities are classified as held-to-maturity and measured at amortized cost in
the financial statements only if management has the positive intent and ability
to hold those securities to maturity. Securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading and are measured at fair value in the financial statements with
unrealized gains and losses included in earnings. Investments not classified as
held-to-maturity or trading are classified as available-for-sale and are
measured at fair value in the financial statements with unrealized gains and
losses reported, net of tax, in a separate component of stockholders' equity
until realized. The Company has classified all investment securities as
available-for-sale.
Gains or losses on disposition are recorded in other income on the trade
date, based on the net proceeds and the adjusted carrying amount of the
securities sold using the specific identification method.
Declines in the fair values 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.
4. LOANS
The Company grants loans to customers primarily in Harris County, Texas and
surrounding counties. Although the Company has a diversified loan portfolio, a
substantial portion of its debtors' ability to honor their contracts is
dependent upon the economy in this area.
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal, adjusted for unearned discounts, any chargeoffs and the
allowance for credit losses. Accretion of unearned discount on certain
installment loans
F-9
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARY
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)
is recognized principally using the sum-of-the-periodic balance method which
approximates the level yield method. For other loans, interest income is
recognized using the simple interest method.
In 1995, the Company adopted SFAS No. 114, ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN and SFAS No. 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF
A LOAN-INCOME RECOGNITION AND DISCLOSURES. A loan is identified as impaired when
it is probable that interest and principal will not be collected according to
the contractual terms of the loan agreement.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due. All loans past due 90 days are placed on nonaccrual status unless the loan
is both well-secured and in the process of collection. When interest accrual is
discontinued, all unpaid accrued interest is reversed. Interest income is
subsequently recognized only to the extent cash payments are received. Loans are
not again placed on accrual status until payments are brought current and, in
management's judgment, the loan will continue to pay as agreed.
5. ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is considered adequate to provide for credit
losses based on past loan loss experience and management's evaluation of the
loan portfolio under current economic conditions. While management uses
available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions. Recognized
losses, net of recoveries, are charged to the allowance for loan losses.
Additions to the allowance are included in the consolidated statements of
earnings as provision for credit losses.
6. BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed on the straight-line method over the
estimated useful lives of the related assets. Maintenance, repairs and minor
improvements are charged to noninterest expense as incurred.
7. OTHER REAL ESTATE AND REPOSSESSED ASSETS
Real estate properties acquired by foreclosure and repossessed assets are
recorded at fair value at the date of foreclosure, establishing a new cost
basis. After foreclosure, valuations are periodically performed by management
and the real estate is carried at the lower of carrying amount or fair value
less cost to sell. Revenue and expenses from operations and changes in the
valuation allowance are included in other non-interest expenses. Repossessed
assets are primarily automobiles and trucks and are presented on the Balance
Sheet as a component of other assets.
8. INCOME TAXES
The Company files a consolidated federal income tax return. By agreement
with BBI, BNB records a provision or benefit for federal income taxes on the
same basis as if it filed a separate federal income tax return.
F-10
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARY
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)
Deferred income tax assets and liabilities are reported for temporary
differences between items of income or expense reported in the financial
statements and those reported for income tax purposes. For income tax purposes,
BNB deducts the statutory provision for possible loan losses and depreciates
bank premises and equipment using accelerated methods. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
9. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company 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.
Related fees are recognized when they are incurred or received.
10. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
11. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES
Earnings per common and common equivalent share is calculated by dividing
net income available for common stockholders by the weighted average number of
common stock and common stock equivalents. Stock options are regarded as common
stock equivalents and are therefore considered in earnings per stock
calculations, if dilutive. Options granted within one year of the initial public
offering have been treated as outstanding for all periods as a component of
weighted average common share equivalents. The number of common stock
equivalents is determined using the treasury stock method.
12. 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.
NOTE B--RESERVE REQUIREMENTS
Cash and balances maintained at the Federal Reserve of approximately $1,551,
$1,469 and $1,135 satisfy regulatory reserve requirements at June 30, 1997,
December 31, 1996 and December 31, 1995.
F-11
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARY
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 C--SECURITIES
The Company has classified all securities as available-for-sale, which are
carried at fair value. The carrying amounts of securities and their approximate
fair value 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............................ $ 7,030 $ 8 $ (41) $ 6,997
Obligations of U.S. government agencies.............. 10,547 12 (59) 10,500
Mortgage-backed securities........................... 22,632 112 (227) 22,517
Other................................................ 4,180 61 -- 4,241
----------- ----- ----- ---------
$ 44,389 $ 193 $ (327) $ 44,255
----------- ----- ----- ---------
----------- ----- ----- ---------
December 31, 1996
U. S. Treasury securities............................ $ 6,024 $ -- $ (47) $ 5,977
Obligations of U.S. government agencies.............. 9,557 30 (62) 9,525
Mortgage-backed securities........................... 25,844 61 (321) 25,584
Other................................................ 2,606 56 (3) 2,659
----------- ----- ----- ---------
$ 44,031 $ 147 $ (433) $ 43,745
----------- ----- ----- ---------
----------- ----- ----- ---------
December 31, 1995
U. S. Treasury securities............................ $ 6,974 $ 15 $ (83) $ 6,906
Obligations of U.S. government agencies.............. 7,750 64 (23) 7,791
Mortgage-backed securities........................... 22,835 42 (260) 22,617
Other................................................ 1,266 8 -- 1,274
----------- ----- ----- ---------
$ 38,825 $ 129 $ (366) $ 38,588
----------- ----- ----- ---------
----------- ----- ----- ---------
</TABLE>
Gross realized gains and gross realized losses on sales of
available-for-sale securities for the periods ended are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Gross realized gains
U. S. Treasury securities..................................... $ -- $ 20 $ 20 $ -- $ 24
Mortgage-backed securities.................................... 12 -- -- 9 6
--------- --------- --------- --------- ---------
$ 12 $ 20 $ 20 $ 9 $ 30
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Gross realized losses
Mortgage-backed securities.................................... $ -- $ -- $ -- $ 3 $ 44
U.S. Treasury securities...................................... -- -- 39 8 --
U.S. Government securities.................................... -- -- -- 3 --
--------- --------- --------- --------- ---------
$ -- $ -- $ 39 $ 14 $ 44
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-12
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARY
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 C--SECURITIES (CONTINUED)
The scheduled maturities of available-for-sale securities at December 31,
1996 are as follows.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
----------- -----------
<S> <C> <C>
Due in one year or less.......................................................... $ -- $ --
Due after one through five years................................................. 11,750 11,693
Due after five through ten years................................................. 3,831 3,810
Mortgage-backed securities and other............................................. 28,450 28,242
----------- -----------
$ 44,031 $ 43,745
----------- -----------
----------- -----------
</TABLE>
Contractual maturities will differ from expected maturities because
borrowers may call or prepay obligations with or without call or prepayment
penalties.
The carrying value of securities pledged to secure public deposits, as
required or permitted by law, is approximately $22,000, $32,000 and $26,300 at
June 30, 1997, December 31, 1996 and 1995.
Securities with an amortized cost of $20,968 and an estimated market value
of $20,653 classified as held-to-maturity were transferred to the
available-for-sale category in December 1995.
NOTE D--LOANS AND ALLOWANCE FOR CREDIT LOSSES
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
JUNE 30, ------------ ------------
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
Commercial................................................... $ 15,420 $ 17,407 $ 11,378
Real estate
Construction and land development.......................... 2,290 3,306 3,390
1-4 family residential..................................... 2,977 3,115 2,879
Multi-family residential................................... 618 625 62
Non-farm/non-residential................................... 13,889 11,834 11,388
Consumer................................................... 80,138 83,820 77,583
----------- ------------ ------------
115,332 120,107 106,680
Less unearned interest..................................... (110) (227) (884)
Allowance for credit losses................................ (1,425) (1,430) (1,185)
----------- ------------ ------------
$ 113,797 $ 118,450 $ 104,611
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
As of June 30, 1997, December 31, 1996 and December 31, 1995, the Company
has no significant loans which meet the impairment definition; therefore, no
valuation for credit losses related to impaired loans has been established.
The Company has loans, deposits and other transactions with its principal
stockholders, officers, directors and organizations with which such persons are
associated which were made in the ordinary course
F-13
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARY
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--LOANS AND ALLOWANCE FOR CREDIT LOSSES (CONTINUED)
of business. The aggregate amount of loans outstanding to related parties at
June 30, 1997, December 31, 1996 and December 31, 1995 is approximately $2,859,
$2,517 and $2,597. In addition, the Company makes consumer loans through several
automobile dealerships which are controlled by two members of the board of
directors. Loans obtained through these dealerships totaled approximately
$8,533, $9,475 and $8,718 at June 30, 1997, December 31, 1996 and December 31,
1995.
Changes in the allowance for credit 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................................... $ 1,430 $ 1,185 $ 1,185 $ 1,230 $ 1,344
Provision.............................................. 168 219 510 150 75
Charge-offs............................................ (231) (177) (483) (380) (378)
Recoveries............................................. 58 133 218 185 189
--------- --------- --------- --------- ---------
Balance at end of period............................... $ 1,425 $ 1,360 $ 1,430 $ 1,185 $ 1,230
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
NOTE E--BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
JUNE 30, ------------- -------------
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
Land......................................................... $ 1,426 $ 1,426 $ 1,496
Building and improvements.................................... 4,497 4,466 4,118
Furniture and fixtures....................................... 3,230 3,113 3,195
Automobiles.................................................. 47 19 19
----------- ------ ------
9,200 9,024 8,828
Less accumulated depreciation................................ 4,394 4,141 3,997
----------- ------ ------
$ 4,806 $ 4,883 $ 4,831
----------- ------ ------
----------- ------ ------
</TABLE>
NOTE F--INTEREST BEARING DEPOSITS
The types of accounts and their respective balances included in
interest-bearing deposits are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
JUNE 30, ------------ ------------
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
NOW accounts................................................. $ 23,214 $ 23,131 $ 19,892
Money market accounts........................................ 13,990 12,243 9,659
Savings accounts............................................. 28,415 31,036 31,825
Other time deposits.......................................... 73,402 72,467 63,642
----------- ------------ ------------
$ 139,021 $ 138,877 $ 125,018
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
F-14
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARY
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 F--INTEREST BEARING DEPOSITS (CONTINUED)
Included in time accounts at June 30, 1997, December 31, 1996 and December
31, 1995 are approximately $6,741, $6,943 and $8,189, in certificates of deposit
in denominations of $100,000 or more.
As of December 31, 1996, the scheduled maturities of other time deposits are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, AMOUNT
- --------------------------------------------------------------------------------------------- ---------
<S> <C>
1997......................................................................................... $ 42,623
1998......................................................................................... 17,002
1999......................................................................................... 3,398
2000......................................................................................... 2,189
2001 and Thereafter.......................................................................... 7,255
---------
$ 72,467
---------
---------
</TABLE>
NOTE G--BORROWINGS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------
1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
Borrowings at December 31, are as follows:
Note payable to the City of LaPorte Industrial Development Corporation; principal due
in annual installments of $167,000 through November 1996, with a final principal
payment of $162,000 due in November 1997; interest due quarterly at 65% of prime;
collateralized by deed of trust on bank premises and equipment of BNB............... $ 162 $ 162 $ 329
----- --------- ---------
----- --------- ---------
</TABLE>
NOTE H--INCOME TAXES
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 credit losses........................................................... $ 182 $ 9 $ --
Net operating losses.................................................................. -- -- 342
Unrealized loss on available for sale securities...................................... 97 83 184
Stock grant expense................................................................... 133 84 51
Difference in basis of other real estate.............................................. 22 72 111
Tax credits........................................................................... -- -- 181
Other................................................................................. -- 137 54
Valuation allowance................................................................... (126) (228) (272)
--------- --------- ---------
$ 308 $ 157 $ 651
--------- --------- ---------
--------- --------- ---------
Deferred tax liabilities:
Depreciation and amortization differences............................................. $ (208) $ (248) $ (277)
Allowance for credit loss............................................................. -- -- (42)
Other................................................................................. (4) -- (97)
--------- --------- ---------
$ (212) $ (248) $ (416)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-15
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARY
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 H--INCOME TAXES (CONTINUED)
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...................................... 34.00% 34.00% 34.00%
Decrease in valuation allowance........................................ (5.07)% (2.53)% (10.25)%
Tax exempt income...................................................... (0.95)% (0.37)% (0.73)%
Effect of utilization of tax credits................................... -- -- (4.98)%
Other.................................................................. 1.67% .41% --
----- ----- -----------
Effective income tax rate.............................................. 29.65% 31.51% 18.04%
----- ----- -----------
----- ----- -----------
</TABLE>
The valuation allowance on the deferred tax asset was decreased by
approximately $102,000, $44,000 and $154,000 during 1996, 1995 and 1994 based on
management's reevaluation of the likelihood of realization.
NOTE I--COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company enters into various
transactions which, in accordance with generally accepted accounting principles,
are not included in the consolidated balance sheets. These transactions are
referred to as "off-balance sheet commitments". The Company enters into these
transactions to meet the financing needs of its customers. These transactions
include commitments to extend credit and letters of credit which involve
elements of credit risk in excess of the amounts recognized in the consolidated
balance sheets. The Company minimizes its exposure to loss under these
commitments by subjecting them to credit approval and monitoring procedures.
The Company enters into contractual commitments to extend credit, normally
with fixed expiration dates or termination clauses, at specified rates and for
specific purposes. Customers use credit commitments to ensure that funds will be
available for working capital purposes, for capital expenditures and to ensure
access to funds at specified terms and conditions. Substantially all of the
Company's commitments to extend credit are contingent upon customers maintaining
specific credit standards at the time of loan funding. Management assesses the
credit risk associated with certain commitments to extend credit in determining
the level of the allowance for credit losses.
Letters of credit are written conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The Company's
policies generally require that letters of credit arrangements contain security
and debt covenants similar to those contained in loan agreements.
F-16
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARY
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 I--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Outstanding commitments and letters of credit are approximately as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------
1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Commitments to extend credit.......................................... $ 11,592 $ 11,537 $ 8,293
----------- --------- ---------
----------- --------- ---------
Letters of credit..................................................... $ 107 $ 161 $ 76
----------- --------- ---------
----------- --------- ---------
</TABLE>
The Company 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.
BNB implemented a 401(k) plan covering substantially all employees in 1993.
BNB matches 33% of each employee's contribution up to 6% of annual salary. Total
contributions accrued or paid for the period ended June 30, 1997, December 31,
1996 and December 31, 1995 are approximately $30, $27 and $24. Beginning January
1, 1997, the Company began matching 50% of each employee's contribution up to 6%
of the annual salary.
During 1997, the Company created the 1997 Stock Plan (the "1997 Stock
Plan"). This plan authorizes the issuance of up to 150,000 shares of common
stock. Under the 1997 Stock Plan, the vesting of options is governed by
individual option agreements. Each of the option agreements currently
outstanding provides that 20% of the options granted vest immediately following
the date of grant and an additional 20% each year thereafter. Options granted
under the 1997 Stock Plan generally must be exercised within 10 years following
the date of grant. At June 30, 1997, the Company had outstanding 20,000 shares
under this plan with an exercise price of $7.05 a share and 6,660 of these
shares are exercisable at June 30, 1997. On August 26, 1997, the Company granted
an additional 13,300 shares with an exercise price of $7.05 a share.
The Company's Board of Directors and shareholders approved a new stock
option plan in 1997 (the "1997 Incentive 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" options to directors who are not
employees. Generally, the options vest 60% at the end of the third year
following the date of grant and an additional 20% at the end of the next two
years; however, an individual option may vest as much as 20% a year during the
first two years following the date of the grant if necessary to maximize the
"incentive" tax treatment to the optionee for the particular option being
granted. Options under the 1997 Incentive Plan must be exercised within 10 years
following the date of grant. No options have been granted under the 1997
Incentive Plan.
NOTE J--ACQUISITIONS
On August 22, 1996, the Company acquired in a purchase and assumption
transaction, certain assets and liabilities of First Bank of Texas. The
acquisition has been accounted for as a purchase and resulted in the Company
acquiring approximately $800 in loans, $200 in fixed assets and $12,000 in
deposits. The excess of the cost over the fair value of the net assets acquired
in the amount of $533 is being amortized over fifteen years.
F-17
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARY
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--ACQUISITIONS (CONTINUED)
During June 1997, the Company entered into agreements whereby the Company
would purchase three banks for approximately $15,870 in cash. As of June 30,
1997, these banks totaled approximately $38,000 in loans and $77,000 in
deposits.
NOTE K--EXECUTIVE COMPENSATION
The Company has a phantom stock grant plan whereby the Company may issue
shares of phantom stock to certain officers and key employees. The aggregate
number of shares that may be issued under the Plan is limited to 135,000. The
number of shares issued is determined based on a financial performance test for
BNB. The phantom stock is nonvoting, accrues dividends declared on the Company's
common stock, and is granted subject to a vesting schedule.
The shares of phantom stock may be redeemed, as vested, at a maximum rate of
6,000 shares per year. Such redemption is payable, at the Company's discretion,
in shares of the Company's common stock or cash at the then fair market value of
the Company's common stock. In 1996, 1995 and 1994, 18,478, 16,357 and 20,384
shares of phantom stock were granted and 6,000 shares of phantom stock were
redeemed for 6,000 shares of the Company's common stock each year. Effective
June 24, 1997, the plan was amended and 35,411 shares were granted. Total
compensation expense charged to the Company's operations for the six months
ended June 30, 1997 and 1996 was $72 and $83, respectively, and for the years
ended December 31, 1996, 1995 and 1994 was $114, $66 and $114, respectively.
The Bank has a cash incentive plan which provides guidelines whereby key
executive employees can earn bonus compensation based on the profitability of
BNB. The bonus amounts are determined based on achievement by BNB of certain
percentages of return on equity targets. Total expense under this plan for the
six months ended June 30, 1997 and 1996 was $69 and $39, respectively, and for
the years ended December 31, 1996, 1995 and 1994 was $78, $72 and $67,
respectively.
NOTE L--REPURCHASE AGREEMENT
During 1996, the Company signed a repurchase agreement with a customer.
Securities sold under agreements to repurchase generally mature within one to
four days from the transaction date.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
<CAPTION>
1996
---------
<S> <C>
Average balance during the year...................................................... $ 1,000
Average interest rate during the year................................................ 5%
Maximum month-end balance during the year............................................ 1,000
Mortgage-backed securities underlying the agreements at year-end:
Carrying value..................................................................... $ 1,000
Estimated fair value............................................................... $ 1,000
</TABLE>
F-18
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARY
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 M--FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURE ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS (Statement 107) and Statement of Financial
Accounting Standards No. 119, DISCLOSURES ABOUT DERIVATIVE FINANCIAL INSTRUMENTS
AND FAIR VALUE OF FINANCIAL INSTRUMENTS (Statement 119) requires that the
Company disclose estimated fair values for its financial instruments. Such
information, which pertains to financial instrument assets and liabilities, is
based on the requirements in Statements 107 and 119 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 Company 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, commercial real estate, residential mortgage and consumer loans.
Each of these categories is further subdivided into fixed and adjustable rate
loans and performing and nonperforming loans. The fair value of performing loans
is calculated by discounting scheduled cash flows through the estimated maturity
using estimated market discount rates that reflect the credit and interest rate
risk inherent in the various types of loans.
DEPOSITS
Under Statement 107, 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 (i.e., their carrying amounts).
Statement 107 defines the fair value of demand deposits 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 above 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.
F-19
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARY
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 M--FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
OFF-BALANCE SHEET INSTRUMENTS
Estimated fair values for the Company'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 estimated fair values
of the Company's financial instruments at December 31.
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents............................ $ 18,472 $ 18,472 $ 16,256 $ 16,256
Securities........................................... 43,745 43,745 38,588 38,588
Loans, net........................................... 118,450 118,521 104,611 106,957
Financial liabilities:
Deposits
Noninterest-bearing................................ 34,441 34,441 28,316 28,316
Interest-bearing transaction accounts.............. 66,410 66,410 61,376 61,370
Certificates of deposits........................... 72,467 72,803 63,642 64,179
</TABLE>
The total fair value of the Company's commitments to extend credit and
stand-by letters of credit was immaterial at December 31, 1996 and 1995.
NOTE N--REGULATORY MATTERS
BBI and BNB are subject to various regulatory capital requirements
administered by the 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 effect on their financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, BBI and BNB must meet
specific capital guidelines that involve quantitative measures of the assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The 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 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) be
maintained. Management believes, as of December 31, 1996, that BBI and BNB meet
all capital adequacy requirements to which they are subject.
The most recent notification the Office of the Comptroller of the Currency
categorized BNB 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 1 risk-based, and Tier 1 leverage ratios
F-20
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARY
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--REGULATORY MATTERS (CONTINUED)
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
BBI and BNB's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL ADEQUACY PROMPT CORRECTIVE
ACTUAL: PURPOSES: ACTION PROVISIONS:
-------------------------- ---------------------------- --------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1997
(unaudited):
TOTAL CAPITAL (TO RISK
WEIGHTED ASSETS)
Bay Bancshares, Inc....... $ 14,707 11.24% $10,463 8.00% N/A
Bayshore National Bank.... $ 14,745 11.29% $10,453 8.00% $13,066 >=10.0%
TIER 1 CAPITAL (TO RISK
WEIGHTED ASSETS)
Bay Bancshares, Inc....... $ 13,282 10.16% $ 5,232 4.00% N/A
Bayshore National Bank.... $ 13,320 10.19% $ 5,226 4.00% $ 7,839 >=6.0%
TIER 1 CAPITAL (TO AVERAGE
ASSETS)
Bay Bancshares, Inc....... $ 13,282 7.25% $ 7,328 3.00% N/A
Bayshore National Bank.... $ 13,320 7.28% $ 7,323 3.00% $ 6,533 >=5.0%
As of December 31, 1996
TOTAL CAPITAL (TO RISK
WEIGHTED ASSETS)
Bay Bancshares, Inc....... $ 14,031 10.45% >=$ 10,741 >=8.0% N/A
Bayshore National Bank.... $ 13,980 10.43% >=$ 10,723 >=8.0% >=$ 13,404 >=10.0%
TIER 1 CAPITAL (TO RISK
WEIGHTED ASSETS)
Bay Bancshares, Inc....... $ 12,601 9.39% >=$ 5,368 >=4.0% N/A
Bayshore National Bank.... $ 12,550 9.36% >=$ 5,363 >=4.0% >=$ 8,045 >=6.0%
TIER 1 CAPITAL (TO AVERAGE
ASSETS)
Bay Bancshares, Inc....... $ 12,601 6.67% >=$ 7,557 >=3.0% N/A
Bayshore National Bank.... $ 12,550 6.67% >=$ 7,526 >=3.0% >=$ 9,408 >=5.0%
As of December 31, 1995
TOTAL CAPITAL (TO RISK
WEIGHTED ASSETS)
Bay Bancshares, Inc....... $ 13,243 11.14% >=$ 9,510 >=8.0% N/A
Bayshore National Bank.... $ 12,981 10.92% >=$ 9,444 >=8.0% >=$ 9,444 >=10.0%
TIER 1 CAPITAL (TO RISK
WEIGHTED ASSETS)
Bay Bancshares, Inc....... $ 12,058 10.14% >=$ 4,757 >=4.0% N/A
Bayshore National Bank.... $ 11,706 9.92% >=$ 4,720 >=4.0% >=$ 4,720 >=6.0%
TIER 1 CAPITAL (TO AVERAGE
ASSETS)
Bay Bancshares, Inc....... $ 12,058 7.33% >=$ 6,580 >=3.0% N/A
Bayshore National Bank.... $ 11,706 7.01% >=$ 6,680 >=3.0% >=$ 6,680 >=5.0%
</TABLE>
F-21
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARY
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--SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION
Cash paid during the period for:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Interest....................................................... $ 2,761 $ 2,496 $ 5,392 $ 5,432 $ 4,220
Income taxes................................................... $ 323 $ 363 $ 811 $ 393 $ 15
Noncash transactions during the period:
Dividends payable.............................................. $ 81 $ 81 $ 81 $ 68 $ 68
</TABLE>
NOTE P--EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------------------
1997 1996 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net earnings....................................... $ 855 $ 892 $ 1,402 $ 1,215 $ 1,231
Divided by average common shares and common share
equivalents
Weighted average common shares................... 1,356,260 1,350,867 1,351,872 1,365,741 1,364,201
Weighted average common share equivalents........ 83,012 89,012 89,012 76,534 66,177
------------ ------------ ------------ ------------ ------------
Total weighted average common and common equivalent
shares........................................... 1,439,272 1,439,879 1,440,884 1,442,275 1,430,378
------------ ------------ ------------ ------------ ------------
Earnings per common and common equivalent share.... $ .59 $ .62 $ .97 $ .84 $ .86
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
NOTE Q--NEW PRONOUNCEMENTS
The FASB has issued Financial Accounting Standards No. 125 Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.
This statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities. The statement
is effective for transfers and servicing of financial assets and extinguishment
of liabilities occurring after December 31, 1996. The Company does not expect
this pronouncement to have a material effect on its financial statements.
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 $.63 and $.66
and diluted earnings per share of $.59 and $.64 for the six months ended June
30, 1997 and 1996.
F-22
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARY
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 Q--NEW PRONOUNCEMENTS (CONTINUED)
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 R--PARENT-ONLY FINANCIAL STATEMENTS
BAY BANCSHARES, INC.
(PARENT ONLY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Cash and cash equivalents......................................................... $ 58 $ 367
Interest bearing deposits with banks.............................................. -- 98
Investment in subsidiary.......................................................... 13,029 11,552
Other assets...................................................................... 188 113
--------- ---------
$ 13,275 $ 12,130
--------- ---------
--------- ---------
LIABILITIES
Other liabilities................................................................. $ 346 $ 227
--------- ---------
Total liabilities............................................................... 346 227
Commitments and contingencies..................................................... -- --
Stockholders' equity
Common stock.................................................................... 1,391 1,385
Additional paid-in capital...................................................... 8,344 8,320
Net unrealized loss on available-for-sale securities, net of taxes of $97 in
1996 and $80 in 1995.......................................................... (189) (155)
Retained earnings............................................................... 3,660 2,582
--------- ---------
13,206 12,132
Less common stock in treasury--at cost.......................................... (277) (229)
--------- ---------
12,929 11,903
--------- ---------
$ 13,275 $ 12,130
--------- ---------
--------- ---------
</TABLE>
F-23
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARY
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 R--PARENT-ONLY FINANCIAL STATEMENTS (CONTINUED)
BAY BANCSHARES, INC.
(PARENT ONLY)
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Interest income
Securities......................................................................... $ 4 $ 4 $ 4
--------- --------- ---------
4 4 4
Costs and expenses
General and administrative......................................................... 152 102 102
--------- --------- ---------
Loss before income taxes and equity in net earnings of subsidiary.................. (148) (98) (98)
Income taxes (benefit)
Current............................................................................ 52 (343) (497)
Deferred........................................................................... (92) 317 274
--------- --------- ---------
(Loss) earnings before equity in net earnings of subsidiary........................ (108) (72) 125
Equity in net earnings of subsidiary................................................. 1,510 1,287 1,106
--------- --------- ---------
NET EARNINGS..................................................................... $ 1,402 $ 1,215 $ 1,231
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-24
<PAGE>
BAY BANCSHARES, INC. AND SUBSIDIARY
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 R--PARENT-ONLY FINANCIAL STATEMENTS (CONTINUED)
BAY BANCSHARES, INC.
(PARENT ONLY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings
Net earnings for the year....................................................... $ 1,402 $ 1,215 $ 1,231
Adjustments to reconcile net earnings to net cash used in operating activities:
Earnings of subsidiary........................................................ (1,510) (1,287) (1,106)
Phantom stock plan............................................................ 144 96 114
Change in assets and liabilities
Decrease (increase) in other assets......................................... (75) 230 273
Increase (decrease) in other liabilities.................................... (77) (14) 23
--------- --------- ---------
Net cash (used) provided in operating activities.......................... (116) 240 535
Cash flows from investing activities:
Maturities of interest-bearing deposits with banks............................ 98 -- 294
Purchases of interest-bearing deposits with banks............................. -- (98) --
--------- --------- ---------
Net cash provided (used) by investing activities.......................... 98 (98) 294
Cash flows from financing activities:
Purchase of treasury stock.................................................... (48) (130) (14)
Sale of treasury stock........................................................ -- 3 5
Dividend payment.............................................................. (243) (273) (273)
--------- --------- ---------
Net cash used in financing activities..................................... (291) (400) (282)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents.............................. (309) (258) 547
Cash and cash equivalents at beginning of year.................................... 367 625 78
--------- --------- ---------
Cash and cash equivalents at end of year.......................................... $ 58 $ 367 $ 625
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-25
<PAGE>
INDEPENDENT AUDITOR'S REPORT
April 24, 1997
To the Board of Directors and Stockholders
Texas Bank
Baytown, Texas
We have audited the accompanying balance sheets of Texas Bank as of December
31, 1996 and 1995, and the related statements of income, changes in
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit 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 Texas Bank as of December
31, 1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
McClelland, Samuel, & Fehnel, L.L.P.
Beaumont, Texas
F-26
<PAGE>
TEXAS BANK
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
JUNE 30, ------------- -------------
1997
-------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks............................................. $ 2,796,455 $ 2,912,551 $ 1,933,741
Interest bearing deposits with banks................................ 500,000 1,000,000
Federal funds sold.................................................. 2,102,000 5,905,000 9,660,000
Securities available for sale (Note 2).............................. 14,919,880 7,600,746 6,353,166
Loans, net (Note 3)................................................. 19,381,418 19,622,010 18,803,271
Properties and equipment, net (Note 4).............................. 890,213 911,167 988,312
Accrued income...................................................... 439,026 249,638 243,738
Other real estate................................................... 388,057 388,057 406,557
Other assets........................................................ 129,987 314,642 107,695
------------- ------------- -------------
$ 41,547,036 $ 38,903,811 $ 38,496,480
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand.......................................................... $ 12,244,582 $ 11,625,391 $ 11,649,293
NOW............................................................. 2,958,484 3,163,457 3,084,129
Savings......................................................... 2,830,861 2,922,624 2,366,271
Money Market.................................................... 5,139,369 2,980,220 3,730,593
Time, $100,000 and over......................................... 2,942,389 2,852,209 2,115,179
Other time...................................................... 11,620,723 11,664,803 11,982,059
------------- ------------- -------------
37,736,408 35,208,704 34,927,524
Accrued interest and other liabilities 116,624 21,585 163,780
------------- ------------- -------------
37,853,032 35,230,289 35,091,304
------------- ------------- -------------
Commitments and Contingent Liabilities (Note 8)
STOCKHOLDERS' EQUITY
Common stock, par value $3.75; 77,616 shares authorized, issued,
and outstanding................................................. 291,060 291,060 291,060
Surplus........................................................... 1,708,940 1,708,940 1,708,940
Retained earnings................................................. 1,705,974 1,662,941 1,362,989
Net unrealized appreciation (depreciation) on securities available
for sale, net of tax of $6,166, $5,451 and $0................... (11,970) 10,581 42,187
------------- ------------- -------------
3,694,004 3,673,522 3,405,176
------------- ------------- -------------
$ 41,547,036 $ 38,903,811 $ 38,496,480
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-27
<PAGE>
TEXAS BANK
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------- --------------------------
1997 1996 1996 1995
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans............................. $ 977,680 $ 1,028,111 $ 2,060,907 $ 2,126,686
Interest on investment securities...................... 499,146 212,450 420,710 563,578
Interest on federal funds sold......................... 121,258 216,898 394,554 219,911
------------ ------------ ------------ ------------
1,598,084 1,457,459 2,876,171 2,910,175
------------ ------------ ------------ ------------
INTEREST EXPENSE
Interest on deposits................................... 656,462 492,614 977,460 933,221
------------ ------------ ------------ ------------
NET INTEREST INCOME.................................. 941,622 964,845 1,898,711 1,976,954
PROVISION FOR LOAN LOSSES (Note 3)....................... -0- -0- -0- 150,000
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES............................................. 941,622 964,845 1,898,711 1,826,954
------------ ------------ ------------ ------------
OTHER INCOME (LOSS)
Service charges on deposit accounts.................... 252,788 251,292 529,048 513,305
Other service charges and fees......................... 70,919 77,482 149,936 101,819
Other income........................................... 41,352 27,180 53,352 53,462
Net loss on sale of securities available-for-sale...... (4,393) -0- -0- -0-
Net gain (loss) on the sale of assets.................. 1,065 357 431 -0-
------------ ------------ ------------ ------------
361,731 356,311 732,767 668,586
------------ ------------ ------------ ------------
OTHER EXPENSE
Salaries and employee benefits......................... 482,020 391,526 820,745 736,779
Occupancy and equipment expense........................ 132,367 128,497 267,899 282,534
Other expenses......................................... 441,408 456,742 831,457 870,457
------------ ------------ ------------ ------------
1,055,795 976,765 1,920,101 1,889,770
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES........................... 247,558 344,391 711,377 605,770
PROVISIONS FOR INCOME TAXES (Note 6)..................... 81,555 92,680 204,986 195,788
------------ ------------ ------------ ------------
NET INCOME........................................... $ 166,003 $ 251,711 $ 506,391 $ 409,982
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
EARNINGS PER SHARE....................................... $ 2.14 $ 3.24 $ 6.52 $ 5.28
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-28
<PAGE>
TEXAS BANK
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
AND THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
NET
UNREALIZED
APPRECIATION
(DEPRECIATION)
COMMON STOCK ON AVAILABLE- TOTAL
--------------------- RETAINED FOR-SALE STOCKHOLDER'S
SHARES PAR VALUE SURPLUS EARNINGS SECURITIES EQUITY
--------- ---------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994............ 77,616 $ 291,060 $ 1,708,940 $ 1,051,580 $ (170,283) $2,881,297
Dividends paid.......................... (98,573) (98,573)
Net income.............................. 409,982 409,982
Net change in unrealized appreciation
(depreciation) on securities available
for sale.............................. 212,470 212,470
--------- ---------- ------------ ------------ ------------- ------------
Balance at December 31, 1995............ 77,616 291,060 1,708,940 1,362,989 42,187 3,405,176
Dividends paid.......................... (206,439) (206,439)
Net income.............................. 506,391 506,391
Net change in unrealized appreciation
(depreciation) on securities available
for sale.............................. (31,606) (31,606)
--------- ---------- ------------ ------------ ------------- ------------
Balance at December 31, 1996............ 77,616 291,060 1,708,940 1,662,941 10,581 3,673,522
--------- ---------- ------------ ------------ ------------- ------------
Dividends paid (unaudited).............. (122,970) (122,970)
Net income (unaudited).................. 166,003 166,003
Net change in unrealized appreciation
(depreciation) on securities available
for sale (unaudited).................. (22,551) (22,551)
--------- ---------- ------------ ------------ ------------- ------------
Balance at June 30, 1997 (unaudited).... 77,616 $ 291,060 $ 1,708,940 $ 1,705,974 $ (11,970) $3,694,004
--------- ---------- ------------ ------------ ------------- ------------
--------- ---------- ------------ ------------ ------------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-29
<PAGE>
TEXAS BANK
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------------------- --------------------------
1997 1996 1996 1995
------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.......................................... $ 166,003 $ 251,711 $ 506,391 $ 409,982
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 46,984 50,031 86,939 142,994
Write-down of other real estate................... 17,076
Provision for loan losses......................... 150,000
Net loss on sale of securities available for
sale............................................ 4,393
Deferred income taxes............................. (242) 30,482
Gain on sale of properties and equipment.......... (1,065) (357) (431)
(Increase) decrease in accrued income............. (189,388) (12,978) (5,900) 23,488
(Increase) decrease in other assets............... 184,655 22,711 (206,705) 85,750
Increase (decrease) in accrued interest and other
liabilities..................................... 95,039 (4,068) (147,646) 95,875
------------- ------------ ------------ ------------
306,621 307,050 232,406 955,647
------------- ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits
with banks........................................ 500,000 (1,000,000)
Net (increase) decrease in federal funds sold....... 3,803,000 2,255,000 3,755,000 (6,625,000)
Proceeds from maturities of securities available for
sale.............................................. 2,630,000 417,924 2,310,000 4,044,454
Proceeds from sales of securities available for
sale.............................................. 6,389,879
Purchases of securities available for sale.......... (16,367,314) (2,048,783) (3,548,783)
Net (increase) decrease in loans.................... 240,592 (1,114,552) (818,739) (160,669)
Proceeds from other real estate..................... 18,500 18,500
Proceeds from disposition of properties and
equipment......................................... 15,116
Purchases of properties and equipment............... (23,608) (59,431) (43,746)
------------- ------------ ------------ ------------
(2,827,451) (471,911) 671,663 (2,784,961)
------------- ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in demand deposits, NOW,
money market, and savings accounts................ 2,481,604 223,677 (138,594) 23,376
Net increase in time deposits....................... 46,100 85,118 419,774 1,460,058
Dividends paid...................................... (122,970) (49,674) (206,439) (98,573)
------------- ------------ ------------ ------------
2,404,734 259,121 74,741 1,384,861
------------- ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... (116,096) 94,260 978,810 (444,453)
CASH AND CASH EQUIVALENTS
Beginning of the period............................. 2,912,551 1,933,741 1,933,741 2,378,194
------------- ------------ ------------ ------------
End of the period................................... $ 2,796,455 $ 2,028,001 $ 2,912,551 $ 1,933,741
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
SUPPLEMENTARY DISCLOSURE
Interest paid....................................... $ 487,196 $ 485,277 $ 965,251 $ 906,671
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
Income taxes paid................................... $ 81,048 $ 145,500 $ 315,500 $ 129,474
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-30
<PAGE>
TEXAS BANK
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: The Bank provides a variety of financial services for
its customers, through its two locations in Baytown and Mont Belvieu, Texas. The
Bank's primary deposit products are checking and certificate of deposit
accounts, and its primary lending products are real estate and commercial loans.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures of loans. In
connection with the determination of the valuation of other real estate,
management obtains independent appraisals for significant properties.
INVESTMENTS IN SECURITIES: The Bank's investments in securities are all
classified as Securities Available for Sale. Securities available for sale
consist of bonds and notes not classified as securities to be held to maturity.
The Bank does not consider any of its securities as "securities to be held to
maturity," which are securities for which the Bank has the positive intent and
ability to hold to maturity or "trading securities," which would be any
securities held principally for resale in the near term.
Unrealized holding gains and losses, net of tax, on securities available for
sale are reported as a net amount in a separate component of shareholders'
equity until realized.
Gains and losses on the sale of securities available for sale are determined
using the specific-identification method.
If declines in the fair value below cost of individual held to maturity
securities and available for sale securities are other than temporary, the
individual security would be written down to its fair value. The related write
down would be included in earnings as realized losses.
ALLOWANCE FOR LOAN LOSSES: The allowance is maintained at a level adequate
to absorb probable losses. Management determines the adequacy of the allowance
based upon review of individual loans, recent loss experience, current economic
conditions, the risk characteristics of the various categories of loans, and
other pertinent factors. Loans deemed uncollectible are charged to the
allowance. Provisions for loan losses, which are charged to expense, and
recoveries on loans previously charged off are added to the allowance. Because
of uncertainties inherent in the estimation process, management's estimate of
credit losses inherent in the loan portfolio and the related allowance may
change in the near term.
PROPERTIES AND EQUIPMENT: Properties and equipment are stated at cost, less
accumulated depreciation. The provision for depreciation is computed on the
straight-line method over the expected asset life.
INTEREST INCOME ON LOANS: Unearned discount on installment loans is
recognized as income over the terms of the loans by the sum of the periodic
balances method. Interest on other loans is accrued and credited to income based
on the principal amount outstanding. The accrual of interest on loans is
discontinued when, in the opinion of management, there is an indication that the
borrower may be unable
F-31
<PAGE>
TEXAS BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to meet payments as they become due. Upon such discontinuance, all unpaid
accrued interest is reversed. As a matter of policy, unsecured loans over 90
days past due are placed on nonaccrual status. Secured loans over 90 days past
due are placed on nonaccrual status following review by management to determine
whether the circumstances surrounding each loan in question indicate that
cessation of interest accruals is appropriate.
OTHER REAL ESTATE: Other real estate, acquired through partial or total
satisfaction of loans, is initially carried at the lower of the fair market
value of the other real estate or the balance of the loan which was secured by
the other real estate. At the date of acquisition, losses are charged to the
allowance for loan losses. If the fair market value of the other real estate
subsequently decreases, the carrying amount is adjusted and write downs are
charged to the current period operations. Gains or losses on disposition of
other real estate are also recorded under current period operations.
OFF BALANCE SHEET FINANCIAL INSTRUMENTS: In the ordinary course of business
the Bank has entered into off balance sheet financial instruments consisting of
commitments to extend credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when they become payable.
CASH AND CASH EQUIVALENTS: For purposes of presentation in the Statements
of Cash Flows, cash and cash equivalents are defined as those amounts included
in the balance sheet caption "Cash and Due from Banks."
INCOME TAXES: Provisions for income taxes are based on taxes payable or
refundable for the current year (after exclusion of non-taxable income such as
interest on state and municipal securities) and deferred taxes on temporary
differences between the amount of taxable income and pretax financial income and
between the tax bases of assets and liabilities and their reported amounts in
the financial statements. Deferred tax assets and liabilities are included in
the financial statements at currently enacted income tax rates applicable to the
period in which the deferred tax assets and liabilities are expected to be
realized or settled as prescribed in FASB Statement No. 109, Accounting for
Income Taxes. As change in tax laws or rates are enacted, deferred tax assets
and liabilities are adjusted through the provision for income taxes.
INTERIM FINANCIAL INFORMATION: Financial information as of June 30, 1997,
and for the six months ended June 30, 1997 and 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 1996 are not
necessarily indicative of the results for the full fiscal year.
F-32
<PAGE>
TEXAS BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED)
NOTE 2--INVESTMENT SECURITIES
The carrying amounts of investment securities as shown in the balance sheet
of the Bank and their approximate fair values were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Securities available for sale--
June 30, 1997 (unaudited):
U.S. Treasury securities....................... $ 2,700,573 $ 330 $ 5,377 $ 2,695,526
Municipals..................................... 1,844,872 7,490 640 1,851,722
U.S. Government and agency securities.......... 10,392,571 1,841 21,780 10,372,632
------------- ----------- ----------- -------------
$ 14,938,016 $ 9,661 $ 27,797 $ 14,919,880
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
December 31, 1996:
Municipals..................................... $ 2,378,729 $ 11,341 $ 954 $ 2,389,116
U.S. Government and agency securities.......... 5,202,602 12,168 6,514 5,208,256
Other mortgage-backed securities............... 3,383 9 3,374
------------- ----------- ----------- -------------
$ 7,584,714 $ 23,509 $ 7,477 $ 7,600,746
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
December 31, 1995:
Municipals..................................... $ 2,898,181 $ 10,087 $ 14,704 $ 2,893,564
U.S. Government and agency securities.......... 3,304,415 46,280 156 3,350,539
Other mortgage-backed securities............... 108,383 680 109,063
------------- ----------- ----------- -------------
$ 6,310,979 $ 57,047 $ 14,860 $ 6,353,166
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
Securities with an aggregate book value of $10,461,802; $3,631,922; and
$3,638,065 at June 30, 1997; December 31, 1996; and December 31, 1995;
respectively, were pledged as collateral to secure public deposits.
The scheduled maturities of securities available for sale at December 31,
1996, were as follows:
<TABLE>
<CAPTION>
COST FAIR VALUE
------------ ------------
<S> <C> <C>
Due in one year or less..................................................... $ 3,953,328 $ 3,966,386
Due from one year to five years............................................. 3,628,003 3,630,986
Due from five to ten years..................................................
Due after ten years.........................................................
------------ ------------
7,581,331 7,597,372
Variable rate debt securities............................................... 3,383 3,374
------------ ------------
$ 7,584,714 $ 7,600,746
------------ ------------
------------ ------------
</TABLE>
For the six months ended June 30, 1997, the Bank had gross realized gains of
$483 and gross realized losses of $4,876 on sales of available for sale
securities. There were no sales of securities available for sale for the years
ended December 31, 1996 and 1995.
F-33
<PAGE>
TEXAS BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED)
NOTE 3--LOANS AND ALLOWANCE FOR LOAN LOSSES
The components of loans in the balance sheets were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
JUNE 30, 1997 ------------- -------------
-------------
(UNAUDITED)
<S> <C> <C> <C>
Construction.............................................. $ 1,157,977 $ 1,592,846 $ 1,020,407
Commercial................................................ 5,943,812 5,467,064 6,041,346
Real estate............................................... 9,932,051 10,059,149 8,986,192
Agricultural.............................................. 10,804 20,860 40,250
Personal and other........................................ 2,600,788 2,822,961 3,134,269
------------- ------------- -------------
19,645,432 19,962,880 19,222,464
Unearned discount......................................... (90,277) (153,598) (223,653)
------------- ------------- -------------
19,555,155 19,809,282 18,998,811
Allowance for loan losses................................. (173,737) (187,272) (195,540)
------------- ------------- -------------
$ 19,381,418 $ 19,622,010 $ 18,803,271
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
An analysis of the change in the allowance for loan losses follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
---------------------- ----------------------
1997 1996 1996 1995
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance January 1...................................... $ 187,272 $ 195,540 $ 195,540 $ 179,554
---------- ---------- ---------- ----------
Loans charged off...................................... (19,759) (14,472) (27,724) (166,824)
Recoveries............................................. 6,224 1,337 19,456 32,810
---------- ---------- ---------- ----------
Net loans charged off................................ (13,535) (13,135) (8,268) (134,014)
Provision for loan losses.............................. -0- -0- -0- 150,000
---------- ---------- ---------- ----------
Balance at end of period............................... $ 173,737 $ 182,405 $ 187,272 $ 195,540
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The maturities of fixed rate loans at December 31, 1996, were as follows:
<TABLE>
<S> <C>
Due in one year of less................................................ $3,578,589
Due from one to five years............................................. 5,590,259
Due from five to ten years............................................. 2,761,541
----------
11,930,389
Variable rate loans.................................................... 8,032,491
----------
$19,962,880
----------
----------
</TABLE>
As of June 30, 1997, December 31, 1996 and December 31, 1995, the Bank has
no significant loans which meet the impairment definition; therefore, no
valuation for credit losses related to impaired loans has been established.
F-34
<PAGE>
TEXAS BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED)
NOTE 4--PROPERTIES AND EQUIPMENT
Components of properties and equipment included in the balance sheets were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
JUNE 30, ------------ ------------
1997
------------
(UNAUDITED)
<S> <C> <C> <C>
Cost:
Land........................................................ $ 178,132 $ 178,132 $ 178,132
Buildings and improvements.................................. 723,872 712,718 712,718
Furniture and equipment..................................... 545,837 533,384 473,953
Automobiles................................................. 41,997 41,997 69,821
------------ ------------ ------------
1,489,838 1,466,231 1,434,624
Less accumulated depreciation............................... 599,625 555,064 446,312
------------ ------------ ------------
$ 890,213 $ 911,167 $ 988,312
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Depreciation expense of $121,891 for 1996 and $142,468 for 1995 is included
as part of occupancy and equipment expense.
NOTE 5--DEPOSITS
The scheduled maturities of time deposits at December 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997................................................................... $8,916,916
1998................................................................... 4,872,681
1999................................................................... 289,820
2000................................................................... 220,510
2001................................................................... 217,085
----------
$14,517,012
----------
----------
</TABLE>
NOTE 6--INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Currently payable............................................................... $ 205,224 $ 165,306
Deferred federal income taxes................................................... (242) 30,482
---------- ----------
$ 204,986 $ 195,788
---------- ----------
---------- ----------
</TABLE>
F-35
<PAGE>
TEXAS BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED)
NOTE 6--INCOME TAXES (CONTINUED)
The provision for federal income taxes is less than that computed by
applying the federal statutory rate of 34 percent as shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Tax based on statutory rate..................................................... $ 241,868 $ 205,962
Effect of tax-exempt income..................................................... (37,928) (42,572)
Depreciation.................................................................... 4,225 1,904
Interest and other nondeductible expenses....................................... 9,528 32,399
Recognized tax benefits on losses from the disposition of assets................ (12,707) (23,661)
Unrecognized tax benefits on loan loss provision................................ 36,804
Other (net)..................................................................... (15,048)
---------- ----------
$ 204,986 $ 195,788
---------- ----------
---------- ----------
</TABLE>
The components of the deferred income tax asset included in other assets on
the balance sheets are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax asset................................................................ $ 49,150 $ 48,908
Deferred tax liability............................................................ 3,795 3,795
--------- ---------
Net deferred tax asset.......................................................... $ 45,355 $ 45,113
--------- ---------
--------- ---------
</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
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses....................................................... $ 24,246 $ 24,246
Difference in basis of other real estate........................................ 1,965 1,965
Other........................................................................... 22,939 22,697
--------- ---------
$ 49,150 $ 48,908
--------- ---------
--------- ---------
Deferred tax liability:
Depreciation and amortization differences....................................... $ 3,795 $ 3,795
--------- ---------
--------- ---------
</TABLE>
NOTE 7--RELATED PARTIES
The Bank has entered into transactions with its executive officers,
directors, significant shareholders, and their affiliates (Related Parties).
Such transactions were made in the ordinary course of business on substantially
the same terms and conditions, including interest rates and collateral, as those
prevailing at
F-36
<PAGE>
TEXAS BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED)
NOTE 7--RELATED PARTIES (CONTINUED)
the same time for comparable transactions with other customers. In the opinion
of management, loans to related parties do not involve more than normal credit
risk or present other unfavorable features. Following is a summary of
transactions and balances with related parties.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
Loans............................................................ $ 797,921 $ 749,962 $ 539,100
------------ ---------- ----------
------------ ---------- ----------
Commitments to fund additional loans............................. $ -0- $ 203,516 $ 25,657
------------ ---------- ----------
------------ ---------- ----------
Deposits......................................................... $ 1,998,529 $ 598,054 $ 117,808
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
SIX MONTHS 31,
ENDED JUNE --------------------
30, 1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
Consulting fees paid to director...................................... $ -0- $ -0- $ 64,633
----------- --------- ---------
----------- --------- ---------
Payments for legal services paid to director.......................... $ 1,308 $ 3,133 $ 5,316
----------- --------- ---------
----------- --------- ---------
</TABLE>
In addition, a director and principal stockholder of the Bank had use of a
bank owned vehicle for most of 1995.
NOTE 8--COMMITMENTS AND CONTINGENT LIABILITIES
The Bank has various commitments and contingent liabilities which arise in
the normal course of business and which involve elements of credit risk,
interest rate risk, and liquidity risk. These commitments and contingent
liabilities are commitments to extend credit and standby letters of credit. A
summary of the Bank's commitments and contingent liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Commitments to extend credit.................................. $ 2,033,331 $ 2,668,157 $ 2,318,558
Standby letters of credit..................................... $ 148,480 $ 148,480 $ 172,980
</TABLE>
Commitments to extend credit and standby letters of credit all include
exposure to some credit loss in the event of nonperformance of the customer. The
Bank's credit policies and procedures for credit commitments and financial
guarantees are the same as those for extensions of credit that are recorded in
the balance sheets. Because these instruments have fixed maturity dates, and
because many of them expire without being drawn upon, they do not generally
present any significant liquidity risk to the Bank.
In addition, the Bank is a defendant on various legal proceedings arising in
connection with its business. It is the opinion of the Bank's legal counsel that
neither the financial position nor results of operations of the Bank will be
materially affected by the final outcome of these legal proceedings, and the
Bank's management concurs with that opinion.
The Bank is a defendant in a lawsuit in which the final outcome cannot be
determined at this time. The possible range of loss is from $0 to $250,000.
Employees of the Bank are entitled to paid vacation, paid sick days, and
personal days off, depending on job classification, length of service, and other
factors. It is impracticable to estimate the amount of
F-37
<PAGE>
TEXAS BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED)
NOTE 8--COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
compensation for future absences, and, accordingly, no liability has been
recorded in the accompanying financial statements. The Bank's policy is to
recognize the cost of compensated absences when actually paid to employees.
On June 24, 1997, the Bank signed an agreement with Bay Bancshares, Inc.,
whereby Bay Bancshares, Inc., would purchase all of the outstanding stock of
Texas Bank and immediately thereafter merge Texas Bank with Bayshore National
Bank. The transaction is awaiting regulatory approval with closure anticipated
to occur in October 1997.
The Bank has an employment agreement with its president which provides a
minimum salary of $87,666 plus bonus and certain other benefits. The Bank and
president have agreed, subsequent to June 30, 1997, to a settlement of
approximately $115,000 for termination of the contract upon completion of the
above referenced merger.
Upon completion of the pending merger, Texas Bank will terminate its current
data processing contract. The agreement provides for payment to the data
processing provider for at least 180 days after notification of termination. At
this time it is not possible to determine the amount which will need to be paid
after ceasing use of the current data processor.
NOTE 9--CONCENTRATIONS OF CREDIT
All of the Bank's loans, commitments, and standby letters of credit have
been granted to customers in the Bank's market area. Most customers are
depositors of the Bank. The concentrations of credit by type of loan are set
forth in Note 3. The Bank, as a matter of policy, does not extend credit to any
single borrower or group of related borrowers in excess of $500,000.
NOTE 10--RETIREMENT PLAN
The Bank has a profit sharing plan that covers the employees of the Bank.
Contributions to the plan are at the discretion of the Board of Directors.
Contributions to the plan charged to operations were $30,458 in 1996 and $28,121
in 1995. The Bank has accrued for anticipated 1997 contributions to the plan of
approximately $32,000.
NOTE 11--REGULATORY MATTERS
The Bank is required to maintain minimum amounts of capital to total "risk
weighted" assets, as defined by the banking regulator. At June 30, 1997, and
December 31, 1996 and 1995, the Bank was required to have minimum Tier 1 and
total capital ratios of 4 percent and 8 percent, respectively. The Bank's actual
ratios at June 30, 1997, were 17.11 and 8.77 percent, respectively, at December
31, 1996, the actual ratios were 17.01 percent and 9.98 percent, respectively,
and at December 31, 1995, the actual ratios were 14.28 percent and 15.11
percent, respectively. The Bank's leverage ratios at June 30, 1997, and December
31, 1996 and 1995, were 9.54 percent, 8.41 percent, and 9.30 percent,
respectively.
NOTE 12--SUBSEQUENT EVENTS
On July 24, 1997, the Bank paid a cash dividend totaling $25,613 to its
shareholders.
F-38
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Texas National Bank of Baytown:
We have audited the accompanying balance sheets of Texas National Bank of
Baytown as of December 31, 1996 and 1995, and the related statements of
earnings, changes in stockholders' equity, and cash flows for each of the three
years ended December 31, 1996. These financial statements are the responsibility
of the Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Texas National Bank of
Baytown as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years ended December 31, 1996, in
conformity with generally accepted accounting principles.
KILLINGSWORTH & COMPANY, P.C.
Houston, Texas
May 28, 1997
F-39
<PAGE>
TEXAS NATIONAL BANK OF BAYTOWN
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
JUNE 30, 1997 ------------- -------------
-------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks............................................. $ 2,153,033 $ 2,000,901 $ 1,693,431
Federal funds sold.................................................. 1,300,000 2,700,000 2,400,000
Investment securities (notes 1 and 2):
Held to maturity.................................................. 2,675,297 1,673,826 4,762,566
Available for sale................................................ 3,143,930 3,163,259 --
Loans, net (note 3)................................................. 4,340,342 4,037,074 3,478,432
Bank premises and equipment, net (notes 1 and 4) 299,163 278,147 295,132
Other real estate (note 1).......................................... 7,200 63,575 226,427
Other assets........................................................ 192,260 152,778 100,099
------------- ------------- -------------
$ 14,111,225 $ 14,069,560 $ 12,956,087
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note 5):
Demand............................................................ $ 3,875,815 $ 3,738,456 $ 3,655,911
NOW accounts...................................................... 2,324,485 2,498,363 1,899,602
Savings........................................................... 1,481,331 1,519,278 1,464,970
Time ($100,000 and over).......................................... 927,559 705,264 780,000
Other time........................................................ 3,827,784 3,921,119 3,409,994
------------- ------------- -------------
Total deposits................................................ 12,436,974 12,382,480 11,210,477
Dividends payable................................................... 38,962 38,962 116,886
Accrued interest and other liabilities.............................. 62,444 72,958 58,439
Commitments and contingent liabilities (note 7)..................... -- -- --
Stockholders' equity (note 9):
Common stock of $10 par value per share.
Authorized, issued and outstanding 38,962 shares................ 389,620 389,620 389,620
Surplus........................................................... 389,620 389,620 389,620
Retained earnings................................................. 812,784 802,256 791,045
Unrealized loss on securities available for sale.................. (19,179) (6,336) --
------------- ------------- -------------
Total stockholders' equity.................................... 1,572,845 1,575,160 1,570,285
------------- ------------- -------------
$ 14,111,225 $ 14,069,560 $ 12,956,087
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-40
<PAGE>
TEXAS NATIONAL BANK OF BAYTOWN
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans (note 1)................ $ 192,116 $ 188,286 $ 375,844 $ 382,880 $ 676,892
U. S. Treasury securities.......................... 63,644 52,240 116,611 111,284 30,190
Other securities................................... 7,452 17,564 25,718 49,172 48,767
Interest on Federal funds sold..................... 65,230 66,802 146,258 173,039 58,722
U. S. agency securities............................ 95,566 82,385 176,842 78,069 --
---------- ---------- ---------- ---------- ----------
Total interest income............................ 424,008 407,277 841,273 794,444 814,571
Interest expense on deposits......................... 136,724 134,286 275,033 244,695 193,795
---------- ---------- ---------- ---------- ----------
Net interest income.............................. 287,284 272,991 566,240 549,749 620,776
Provision for loan losses (notes 1 and 3)............ 750 9,000 16,500 10,000 (100,000)
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan
losses......................................... 286,534 263,991 549,740 539,749 720,776
---------- ---------- ---------- ---------- ----------
Other income:
Service fees on deposit accounts................... 130,904 109,511 230,218 216,974 200,142
Commissions, fees and other........................ 12,471 8,877 16,115 8,264 7,981
Net gain (loss) on sale of assets.................. 12,476 38,531 38,531 1,668 --
---------- ---------- ---------- ---------- ----------
Total other income............................... 155,851 156,919 284,864 226,906 208,123
---------- ---------- ---------- ---------- ----------
Other expenses:
Salaries and employee benefits..................... 148,005 142,694 291,149 260,920 222,697
Occupancy expenses, net............................ 36,932 38,333 72,061 69,007 70,902
Other operating expenses (note 7).................. 127,396 127,521 259,639 262,052 450,600
---------- ---------- ---------- ---------- ----------
Total other expenses............................. 312,333 308,548 622,849 591,979 744,199
---------- ---------- ---------- ---------- ----------
Net income before Federal income tax............. 130,052 112,362 211,755 174,676 184,700
Federal income tax (note 6)........................ 41,600 33,923 66,125 52,485 51,500
---------- ---------- ---------- ---------- ----------
Net income....................................... $ 88,452 $ 78,439 $ 145,630 $ 122,191 $ 133,200
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net income per common share (note 1)............... 2.27 2.01 3.73 3.13 3.41
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted Average shares outstanding................ 38,962 38,962 38,962 38,962 38,962
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE>
TEXAS NATIONAL BANK OF BAYTOWN
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
UNREALIZED
HOLDING
GAINS RETAINED
SHARES PAR VALUE SURPLUS (LOSSES) EARNINGS TOTAL
--------- ---------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993............. 38,962 $ 389,620 $ 389,620 $ -- $ 788,907 $ 1,568,147
Net income, 1994....................... -- -- -- -- 133,200 133,200
Cash dividends declared
$3.50 per share...................... -- -- -- -- (136,367) (136,367)
--------- ---------- ---------- ----------- ----------- ------------
Balance, December 31, 1994............. 38,962 $ 389,620 389,620 -- 785,740 1,564,980
Net income, 1995....................... -- -- -- -- 122,191 122,191
Cash dividends declared
$3.00 per share...................... -- -- -- -- (116,886) (116,886)
--------- ---------- ---------- ----------- ----------- ------------
Balance, December 31, 1995............. 38,962 389,620 389,620 -- 791,045 1,570,285
Net income, 1996....................... -- -- -- -- 145,630 145,630
Cash dividends declared
$3.45 per share...................... -- -- -- -- (134,419) (134,419)
Unrealized loss on securities available
for sale............................. -- -- -- (6,336) -- (6,336)
--------- ---------- ---------- ----------- ----------- ------------
Balance, December 31, 1996............. 38,962 389,620 389,620 (6,336) 802,256 1,575,160
Net income, 1997 (unaudited)........... -- -- -- -- 88,452 88,452
Cash dividends declared
$2.00/share (unaudited).............. -- -- -- -- (77,924) (77,924)
Unrealized loss on securities available
for sale (unaudited)................. -- -- -- (12,843) -- (12,843)
--------- ---------- ---------- ----------- ----------- ------------
Balance, June 30, 1997 (unaudited)..... $ 38,962 $ 389,620 $ 389,620 $ (19,179) $ 812,784 $ 1,572,845
--------- ---------- ---------- ----------- ----------- ------------
--------- ---------- ---------- ----------- ----------- ------------
</TABLE>
See accompanying notes to financial statements.
F-42
<PAGE>
TEXAS NATIONAL BANK OF BAYTOWN
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------------------- ------------------------------------------
1997 1996 1996 1995 1994
------------- ------------- ------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................... $ 88,452 $ 78,439 $ 145,630 $ 122,191 $ 133,200
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, accretion and amortization... 11,469 9,832 27,174 19,007 19,059
Loan recoveries (charge-off), net.......... (294) 253 253 (7,297) 254
Provision for loan losses.................. 750 9,000 16,500 10,000 (100,000)
Loss on sale of loans...................... -- -- -- -- 160,268
Decrease (increase) in accrued interest and
other assets............................. (45,341) (15,851) (76,079) 30,963 (60,791)
Increase (decrease) in accrued interest and
other liabilities........................ (10,514) 45,178 14,519 (7,359) 32,132
------------- ------------- ------------- ------------- ------------
Net cash provided by operating
activities............................... 44,522 126,851 127,997 167,505 184,122
------------- ------------- ------------- ------------- ------------
Cash flows from investing activities:
Proceeds from maturities of held-to-maturity
securities................................. -- 2,750,000 4,550,000 -- --
Purchase of held-to-maturity securities...... (1,001,602) -- (1,492,031) (3,015,001) (888,937)
Purchase of available-for-sale securities.... -- (2,615,342) (3,155,177) -- --
Net decrease (increase) in loans............. (303,724) (458,506) (575,395) 3,509,245 144,594
Purchase of premises and equipment........... (32,485) -- (2,822) (8,130) (25,845)
Net expenditures on foreclosed real estate... -- -- -- (94,478) --
Proceeds from sale of other real estate...... 68,851 183,574 195,237 -- --
------------- ------------- ------------- ------------- ------------
Net cash provided by (used in) investing
activities............................... (1,268,960) (140,274) (480,188) 391,636 (770,188)
------------- ------------- ------------- ------------- ------------
Cash flow from financing activities:
Cash dividends paid.......................... (77,924) (144,159) (212,342) (136,367) (155,848)
Net increase in deposits..................... 54,494 1,386,602 1,172,003 574,370 660,403
------------- ------------- ------------- ------------- ------------
Net cash provided by financing
activities............................... (23,430) 1,242,443 959,661 438,003 504,555
------------- ------------- ------------- ------------- ------------
Net increase (decrease) in cash and cash
equivalents.............................. (1,247,868) 1,229,020 607,470 997,144 (81,511)
Cash and cash equivalents at beginning of
year......................................... 4,700,901 4,093,431 4,093,431 3,096,287 3,177,798
------------- ------------- ------------- ------------- ------------
Cash and cash equivalents at end of year....... $ 3,453,033 $ 5,322,451 $ 4,700,901 $ 4,093,431 $ 3,096,287
------------- ------------- ------------- ------------- ------------
------------- ------------- ------------- ------------- ------------
Supplemental information:
Taxes paid................................... $ 36,236 $ 29,604 $ 84,131 $ 13,441 $ 48,000
------------- ------------- ------------- ------------- ------------
------------- ------------- ------------- ------------- ------------
Interest paid................................ $ 133,880 $ 123,185 $ 275,033 $ 244,695 $ 193,795
------------- ------------- ------------- ------------- ------------
------------- ------------- ------------- ------------- ------------
</TABLE>
See accompanying notes to financial statements.
F-43
<PAGE>
TEXAS NATIONAL BANK OF BAYTOWN
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF/AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND JUNE 30, 1996 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements follow:
Texas National Bank of Baytown is operates a single location in Baytown,
Texas, offering full service banking to its customers primarily in the
Baytown area.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
a) STATEMENT OF CASH FLOWS--The real estate owned was acquired in a
non-cash transaction. For purpose of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks, and Federal
funds sold.
b) INVESTMENT SECURITIES--Management determines the appropriate
classification of securities at the time of purchase. If management has
the intent and the Bank has the ability at the time of purchase to hold
securities until maturity or on a long-term basis, they are classified as
held to maturity and carried at amortized historical cost. Securities to
be held for indefinite periods of time and not intended to be held to
maturity or on a long-term basis are classified as available for sale and
carried at market value. Securities held for indefinite periods of time
include securities that management intends to use as part of its asset
and liabilities management strategy and that may be sold in response to
changes in interest rate, resultant prepayment risk and other factors,
related to interest rate and resultant prepayment risk changes.
Realized gains and losses on dispositions are based on the net
proceeds and the adjusted book value of the securities sold, using the
specific identification method. Unrealized gains and losses on investment
securities classified as available for sale are based on difference
between book value and market value of each security. These gains and
losses are credited or charged to stockholders' equity, whereas realized
gains and losses flow through the Bank's yearly operations.
c) LOANS AND ALLOWANCE FOR LOAN LOSSES--Loans are stated at the
amount of unpaid principal, reduced by unearned discount and an allowance
for loan losses. Unearned discount on installment loans is recognized as
income over the terms of the loans by the interest method. Interest on
other loans is calculated by using the simple interest method on daily
balances of the principle amount outstanding. The allowance for loan
losses is established through a provision for loan losses charged to
expense. Loans are charged against the allowance for loan losses when
management believes the collectibility of the principal is unlikely. The
allowance is an amount that management believes will be adequate to
absorb possible losses on existing loans that may become uncollectible,
based on evaluations of the collectibility of loans and prior loan loss
experience. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic
conditions that may affect the borrowers' ability to pay. Accrual of
interest is discontinued on a loan 90 days past due or sooner if
management believes, after considering economic and business conditions
and collection efforts, that the borrowers' financial condition is such
that collection of interest is doubtful.
F-44
<PAGE>
TEXAS NATIONAL BANK OF BAYTOWN
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF/AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND JUNE 30, 1996 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
d) DEPRECIATION--Office equipment and buildings are stated at cost
less accumulated depreciation computed principally on the straight-line
method over the estimated useful lives of the assets.
e) INCOME TAXES--Income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of taxes
currently due plus deferred taxes related to differences between the
basis of accumulated depreciation and allowance for loan losses for
financial and income tax reporting. The deferred tax assets and
liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled.
f) EARNINGS PER COMMON SHARE--Earnings per common share equivalent
is calculated by dividing net income by the weighted average number of
common shares outstanding during the period.
g) INTERIM FINANCIAL INFORMATION--Financial information as of June
30, 1997 and 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.
(2) INVESTMENT SECURITIES
The amortized cost and market values of investment securities available for
sale at June 30, 1997 are summarized as follows: Carrying Unrealized Unrealized
Market Amount Gains Losses Value
<TABLE>
<CAPTION>
CARRYING UNREALIZED UNREALIZED
AMOUNT GAINS LOSSES MARKET VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
U. S. Government Agencies.......................... $ 3,149,588 $ -- $ 29,058 $ 3,120,530
Other.............................................. 23,400 -- -- 23,400
------------ ----------- ----------- ------------
$ 3,172,988 $ -- $ 29,058 $ 3,143,930
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
The amortized cost and market values of investment securities held to
maturity at June 30, 1997 are summarized as follows:
<TABLE>
<CAPTION>
CARRYING UNREALIZED UNREALIZED
AMOUNT GAINS LOSSES MARKET VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
U. S. Treasury securities.......................... $ 2,495,297 $ -- $ 297 $ 2,495,000
Foreign government debt securities................. 180,000 -- -- 180,000
------------ ----------- ----------- ------------
$ 2,675,297 $ -- $ 297 $ 2,675,000
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
F-45
<PAGE>
TEXAS NATIONAL BANK OF BAYTOWN
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF/AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND JUNE 30, 1996 IS UNAUDITED)
(2) INVESTMENT SECURITIES (CONTINUED)
The amortized cost and market values of investment securities available for
sale at December 31, 1996 are summarized as follows: Carrying Unrealized
Unrealized Market Amount Gains Losses Value
<TABLE>
<CAPTION>
CARRYING UNREALIZED UNREALIZED
AMOUNT GAINS LOSSES MARKET VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
U. S. Government Agencies.......................... $ 3,149,457 $ 8,203 $ 17,801 $ 3,139,859
Other.............................................. 23,400 -- -- 23,400
------------ ----------- ----------- ------------
$ 3,172,857 $ 8,203 $ 17,801 $ 3,163,259
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
The amortized cost and market values of investment securities held to
maturity at December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
CARRYING UNREALIZED UNREALIZED
AMOUNT GAINS LOSSES MARKET VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
U. S. Treasury securities.......................... $ 1,493,826 $ 6,950 $ -- $ 1,500,776
Foreign government debt securities................. 180,000 -- -- 180,000
------------ ----------- ----------- ------------
$ 1,673,826 $ 6,950 $ -- $ 1,680,776
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
The amortized cost and market values of investment securities held to
maturity at December 31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
CARRYING UNREALIZED UNREALIZED
AMOUNT GAINS LOSSES MARKET VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
U. S. Treasury securities.......................... $ 1,809,437 $ 13,438 $ -- $ 1,822,875
Corporate debt securities.......................... 449,729 2,634 -- 452,363
Foreign government debt securities................. 180,000 -- -- 180,000
U. S. agency securities............................ 2,300,000 3,750 -- 2,303,750
Other securities................................... 23,400 -- -- 23,400
------------ ----------- ----------- ------------
$ 4,762,566 $ 19,822 $ -- $ 4,782,388
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
The following schedule presents the maturity distribution of the investment
portfolio at December 31, 1996:
<TABLE>
<CAPTION>
CARRYING
AMOUNT MARKET VALUE
------------ ------------
<S> <C> <C>
Due in one year or less..................................................... $ 999,781 $ 1,003,120
Due after one year through five years....................................... 3,643,503 3,637,515
Due after five years through ten years...................................... 180,000 180,000
------------ ------------
$ 4,823,284 $ 4,820,635
------------ ------------
------------ ------------
</TABLE>
There were no realized gains or losses during the six months ended June 30,
1997 or years ended December 31, 1996, 1995 or 1994.
Investment securities with a carrying amount and market value of $23,400 and
$23,400, respectively, are pledged to secure deposits in 1995.
F-46
<PAGE>
TEXAS NATIONAL BANK OF BAYTOWN
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF/AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND JUNE 30, 1996 IS UNAUDITED)
(3) LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
JUNE 30, ------------ ------------
1997
------------
(UNAUDITED)
<S> <C> <C> <C>
Commercial.................................................... $ 1,073,981 $ 703,635 $ 884,169
Real estate................................................... 2,904,869 3,051,520 2,440,612
Installment................................................... 506,547 419,388 249,377
------------ ------------ ------------
4,485,397 4,174,543 3,574,158
Unearned discount............................................. (56,954) (49,824) (24,834)
------------ ------------ ------------
4,428,443 4,124,719 3,549,324
Allowance for loan losses..................................... (88,101) (87,645) (70,892)
------------ ------------ ------------
$ 4,340,342 $ 4,037,074 $ 3,478,432
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1996 1995 1994
JUNE 30, ----------- ----------- -----------
1997
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance, beginning of year........................ $ 87,645 $ 70,892 $ 68,189 $ 167,935
Provision charged (credited) to operations........ 750 16,500 10,000 (100,000)
Loans charged off................................. (294) -- (7,670) (550)
Recoveries........................................ -- 253 373 804
----------- ----------- ----------- -----------
Balance, end of year.............................. $ 88,101 $ 87,645 $ 70,892 $ 68,189
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
There were no impaired loans at June 30, 1997, December 31, 1996 and 1995.
(4) BANK PREMISES AND EQUIPMENT
Major classifications of these assets are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
JUNE 30, ----------- -----------
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
Land............................................................ $ 145,917 $ 145,917 $ 145,917
Building........................................................ 291,656 291,656 291,656
Equipment....................................................... 350,014 317,529 314,707
----------- ----------- -----------
787,587 755,102 752,280
Accumulated depreciation........................................ 488,424 476,955 457,148
----------- ----------- -----------
$ 299,163 $ 278,147 $ 295,132
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Depreciation expense amounted to $11,469, $19,807 and $21,064 for the six
months ended June 30, 1997 and years ended December 31, 1996 and 1995,
respectively.
F-47
<PAGE>
TEXAS NATIONAL BANK OF BAYTOWN
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF/AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND JUNE 30, 1996 IS UNAUDITED)
(5) TIME DEPOSITS
The time deposits greater than or equal to $100,000 and their maturities are
shown below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
JUNE 30, 1997 ---------- ----------
-------------
(UNAUDITED)
<S> <C> <C> <C>
One to three months.............................................. $ 105,264 $ 200,000 $ 480,000
Three to six months.............................................. 200,000 200,000 200,000
Six months to one year........................................... 622,295 305,264 100,000
------------- ---------- ----------
$ 927,559 $ 705,264 $ 780,000
------------- ---------- ----------
------------- ---------- ----------
</TABLE>
(6) FEDERAL INCOME TAX
Income tax at the Federal statutory rate of 34% is reconciled to the Bank's
actual provision as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Tax at statutory rate.................................................. $ 71,997 $ 59,400 $ 62,800
Non-deductible expenses................................................ 252 314 490
Surtax exclusion....................................................... (6,124) (8,026) (7,390)
Other.................................................................. -- 797 (4,400)
--------- --------- ---------
$ 66,125 $ 52,485 $ 51,500
--------- --------- ---------
--------- --------- ---------
</TABLE>
The components of Federal income tax are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Current expense........................................................ $ 73,302 $ 64,630 $ 15,200
Deferred (benefit)..................................................... (7,177) (12,145) 36,300
--------- --------- ---------
$ 66,125 $ 52,485 $ 51,500
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred Federal income taxes, according to the timing differences which
caused them, were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
--------- ---------- ---------
<S> <C> <C> <C>
Depreciation expense.................................................. $ (3,981) $ (1,332) $ 2,300
Book bad debt deduction over tax deduction............................ (5,610) (3,400) 34,000
Reserve for other real estate owned................................... 2,414 (7,413) --
--------- ---------- ---------
$ (7,177) $ (12,145) $ 36,300
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
F-48
<PAGE>
TEXAS NATIONAL BANK OF BAYTOWN
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF/AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND JUNE 30, 1996 IS UNAUDITED)
(6) FEDERAL INCOME TAX (CONTINUED)
The components of deferred income taxes are principally related to the
allowance for loan losses, depreciation, and the write-down of Other Real Estate
Owned. The total deferred tax assets and deferred tax liabilities at December
31, 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax assets--
Reserve for loss on other real estate................................ $ 5,634 $ 7,413 $ --
--------- --------- ---------
--------- --------- ---------
Deferred tax liabilities:
Allowance for loan losses............................................ $ 25,524 $ 34,076 $ 37,476
Depreciation differences............................................. 2,942 4,169 4,634
--------- --------- ---------
$ 28,466 $ 38,245 $ 42,110
--------- --------- ---------
--------- --------- ---------
</TABLE>
(7) COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business the Bank makes various commitments and
incurs certain contingent liabilities that are not presented in the accompanying
financial statements. The commitments and contingent liabilities include various
guarantees, commitments to extend credit, and standby letters of credit. At June
30, 1997 and December 31, 1996 and 1995, commitments to extend credit and
commitments under standby letters of credit aggregated $18,000, $-0-and $72,000,
respectively. The Bank does not anticipate any material losses as a result of
the commitments and contingent liabilities.
Since 1992 the Bank has been party to administrative and judicial
proceedings with its regulatory agency. The regulatory agency alleged that the
Bank violated certain laws relating to loan concentration and loan limit by
originating certain loan participations. From inception management has
vigorously opposed the allegations. Solely in an effort to placate the
regulatory agency and without admitting any wrongdoing the Bank initiated
efforts in 1994 to dispose of the certain loans. The Bank currently has an
extension until December 31, 1997 to reduce the remaining loans below the Bank's
legal lending limit.
The Bank contracts for data-processing services under a contract which
expires in 1997. Total contract expense for June 30, 1997, and December 31, 1996
and 1995 was $38,044, $69,920 and $63,793, respectively. The following is a
schedule of the related future minimum contract payments:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ---------------------------------------------------------------
<S> <C>
1997........................................................... $ 49,500
---------
---------
</TABLE>
(8) RELATED PARTY TRANSACTIONS
At June 30, 1997, and December 31, 1996 and 1995, certain officers and
directors, and companies in which they had 10 percent or more beneficial
ownership, were indebted to the Bank in the aggregate amount of $36,880, $86,628
and $377,149, respectively.
F-49
<PAGE>
TEXAS NATIONAL BANK OF BAYTOWN
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF/AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND JUNE 30, 1996 IS UNAUDITED)
(8) RELATED PARTY TRANSACTIONS (CONTINUED)
At June 30, 1997, the Bank maintained deposits at the following banks which
are owned 10 percent or more by directors and officers of the Bank:
<TABLE>
<CAPTION>
PARTICIPATIONS PARTICIPATIONS DUE FROM
PURCHASED SOLD (TO)
------------- ------------- -----------
<S> <C> <C> <C>
Mayde Creek Bank............................................... $ 135,141 $ 33,999 $ --
First Bank of Deer Park........................................ 309,244 416,298 4,245
First National Bank of Bellaire................................ 1,938,592 -- 2,498
</TABLE>
At December 31, 1996, the Bank maintained deposits at the following banks
which are owned 10 percent or more by the directors and officers of the Bank:
<TABLE>
<CAPTION>
PARTICIPATIONS PARTICIPATIONS DUE FROM
PURCHASED SOLD (TO)
------------- ------------- -----------
<S> <C> <C> <C>
Mayde Creek Bank............................................... $ 141,442 $ 40,000 $ --
First Bank of Deer Park........................................ 70,879 -- 1,595
First National Bank of Bellaire................................ 1,969,171 -- 13,746
</TABLE>
(9) RETAINED EARNINGS
Banking regulations limit the amount of dividends that may be paid without
prior approval of the Bank's regulatory agency.
(10) REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the 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 effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 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 Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Office of the
Comptroller of the Currency 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-
F-50
<PAGE>
TEXAS NATIONAL BANK OF BAYTOWN
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF/AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND JUNE 30, 1996 IS UNAUDITED)
(10) REGULATORY MATTERS (CONTINUED)
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.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
---------------------- --------------------------- ---------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- --------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1997 (Unaudited):
Total Capital
(To Risk Weighted Assets)........ $ 1,680,125 31.478% >=426,992 >=8.00% >=533,740 >=10.00%
Tier I Capital*
(To Risk Weighted Assets)........ $ 1,592,024 29.820% >=213,496 >=4.00% >=320,244 >=6.00%
Tier I Capital
(To Average Assets).............. $ 1,592,024 11.116% >=572,840 >=4.00% >=716,051 >=5.00%
As of December 31, 1996:
Total Capital
(To Risk Weighted Assets)........ $ 1,669,139 29.794% >=448,176 >=8.00% >=560,220 >=10.00%
Tier I Capital*
(To Risk Weighted Assets)........ $ 1,581,495 28.229% >=224,088 >=4.00% >=336,132 >=6.00%
Tier I Capital
(To Average Assets)............ $ 1,581,495 11.262% >=561,675 >=4.00% >=702,094 >=5.00%
As of December 31, 1995:
Total Capital
(To Risk Weighted Assets)........ $ 1,641,175 30.080% >=436,478 >=8.00% >=545,597 >=10.00%
Tier I Capital*
(To Risk Weighted Assets)...... $ 1,570,284 28.780% >=218,239 >=4.00% >=327,358 >=6.00%
Tier I Capital
(To Average Assets)............ $ 1,570,284 12.408% >=506,182 >=4.00% >=632,727 >=5.00%
</TABLE>
- ------------------------
* Ratio must equal or exceed 13% to be in compliance with cease and desist
order issued by Office of the Comptroller of the Currency. (Note 7)
F-51
<PAGE>
TEXAS NATIONAL BANK OF BAYTOWN
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF/AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND JUNE 30, 1996 IS UNAUDITED)
(11) FINANCIAL INSTRUMENTS WITH OFF-BALANCE RISK
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual notational amount of
those instruments (See note 7). The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount and type of collateral obtained,
if deemed necessary by the Bank upon extension of credit, varies and is based on
management's credit evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Standby letters of
credit generally have fixed expiration dates or other termination clauses and
may require payment of a fee. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers. The Bank's policy for obtaining collateral and the nature of such
collateral is essentially the same as that involved in making commitments to
extend credit.
(12) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 requires management to
estimate the fair value of financial instruments as of the balance sheet date.
Management is unable to estimate the fair value of financial instruments
included in the statements other than investment securities which are disclosed
in footnote 2. However, management is of the opinion that the fair value does
not differ significantly from the recorded value of those financial instruments.
F-52
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
First Bank of Deer Park:
We have audited the accompanying balance sheets of First Bank of Deer Park
as of December 31, 1996 and 1995, and the related statements of income, changes
in stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of First Bank of Deer Park as
of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years ended December 31, 1996, in conformity with
generally accepted accounting principles.
KILLINGSWORTH & COMPANY, P.C.
Houston, Texas
June 2, 1997
F-53
<PAGE>
FIRST BANK OF DEER PARK
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
JUNE 30, 1997 ------------ -------------
-------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 2,177,878 $ 2,732,356 $ 1,752,908
Investment securities (notes 1 and 2):
Available for sale................................................ 6,951,000 6,931,213 6,012,862
Held to maturity.................................................. 5,939,453 5,907,013 9,339,254
Federal funds sold.................................................. 3,075,000 3,800,000 200,000
Loans, net (notes 1 and 3).......................................... 13,860 421 13,126,550 11,183,268
Bank premises and equipment (notes 1 and 4)......................... 331,042 348,346 354,867
Accrued interest receivable and other assets........................ 351,897 325,506 317,463
Other real estate owned............................................. 200,378 277,530 799,295
------------- ------------ -------------
$ 32,887,069 $ 33,448,514 $ 29,959,917
------------- ------------ -------------
------------- ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (notes 2 and 5):
Demand............................................................ $ 11,622,030 $ 10,707,024 $ 8,569,292
Savings and other time............................................ 13,362,188 13,324,946 12,316,196
Public funds--time................................................ 1,835,643 2,191,069 3,782,862
------------- ------------ -------------
Total deposits.................................................. 26,819,861 26,223,039 24,668,350
Dividends payable................................................... 57,750 485,100 265,650
Accrued interest and other liabilities.............................. 130,574 117,825 86,548
Repurchase agreements............................................... 2,000,000 3,000,000 1,300,000
------------- ------------ -------------
Total liabilities............................................... 29,008,185 29,825,964 26,320,548
Commitments and contingent liabilities (notes 8 and 10)............. -- -- --
Stockholders' equity:
Common stock of $5 par value.
Authorized, issued and outstanding
115,500 shares................................................ 577,500 577,500 577,500
Surplus........................................................... 1,622,500 1,622,500 1,622,500
Unrealized holding gains (losses) (notes 1 and 2)................. (32,340) (45,400) 8,489
Retained earnings................................................. 1,711,224 1,467,950 1,430,880
------------- ------------ -------------
Total stockholders' equity...................................... 3,878,884 3,622,550 3,639,369
------------- ------------ -------------
$ 32,887,069 $ 33,448,514 $ 29,959,917
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
See accompanying notes to financial statements.
F-54
<PAGE>
FIRST BANK OF DEER PARK
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------------------
1997 1996 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans (note 1)...... $ 649,261 $ 584,740 $ 1,198,877 $ 1,084,991 $ 1,571,455
U. S. Treasury securities (note 1)....... 168,431 236,114 419,836 837,238 272,071
Obligations of state and political
subdivisions........................... -- 23,110 30,186 18,677 22,940
U. S. government agencies................ 283,116 208,400 450,098 45,823 --
Interest on Federal funds sold........... 82,919 25,622 65,327 111,136 76,501
------------ ------------ ------------ ------------ ------------
Total interest income.................. 1,183,727 1,077,986 2,164,324 2,097,865 1,942,967
Interest expense on deposits............... 357,241 329,388 659,044 619,743 445,119
------------ ------------ ------------ ------------ ------------
Net interest income.................... 826,486 748,598 1,505,280 1,478,122 1,497,848
Provision for loan losses (notes 1 and
3)....................................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Net interest income after provisions
for loan losses...................... 826,486 748,598 1,505,280 1,478,122 1,497,848
Other income:
Service fees on deposit accounts......... 163,133 176,561 350,102 374,814 433,253
Commissions, fees and other.............. 92,234 60,458 182,932 65,003 30,162
------------ ------------ ------------ ------------ ------------
255,367 237,019 533,034 439,817 463,415
------------ ------------ ------------ ------------ ------------
Other expenses:
Salaries................................. 246,614 218,391 474,526 415,026 421,325
Occupancy expenses....................... 36,278 43,197 88,817 66,446 58,497
Equipment expense........................ 20,673 22,093 33,694 25,384 33,421
Other operating expenses
(note 8)............................... 242,964 190,443 424,699 611,551 908,086
------------ ------------ ------------ ------------ ------------
546,529 474,124 1,021,736 1,118,407 1,421,329
------------ ------------ ------------ ------------ ------------
Income before Federal income tax....... 535,324 511,493 1,016,578 799,532 539,934
Federal income tax (notes 1 and 7)......... 176,550 159,950 321,158 253,250 170,195
------------ ------------ ------------ ------------ ------------
Net income............................. $ 358,774 $ 351,543 $ 695,420 $ 546,282 $ 369,739
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net income per common share (note 1)....... $ 3.10 $ 3.05 $ 6.02 $ 4.72 $ 3.20
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Weighted average shares outstanding........ 115,500 115,500 115,500 115,500 115,500
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-55
<PAGE>
FIRST BANK OF DEER PARK
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
UNREALIZED
HOLDING
RETAINED GAINS
SHARES PAR VALUE SURPLUS EARNINGS (LOSSES) TOTAL
--------- ---------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993................... 115,500 $ 577,500 $ 1,622,500 $ 1,427,309 $ -- $ 3,627,309
Net income................................... -- -- -- 369,739 -- 369,739
Cash dividends $1.40 per share............... -- -- -- (473,550) -- (473,550)
--------- ---------- ------------ ------------ ----------- ------------
Balance, December 31, 1994................... 115,500 577,500 1,622,500 1,323,498 -- 3,523,498
Net income................................... -- -- -- 546,282 -- 546,282
Unrealized change in investment securities
available for sale (notes 1 and 2)......... -- -- -- -- 8,489 8,489
Cash dividends $3.80 per share............... -- -- -- (438,900) -- (438,900)
--------- ---------- ------------ ------------ ----------- ------------
Balance, December 31, 1995................... 115,500 577,500 1,622,500 1,430,880 8,489 3,639,369
Net income................................... -- -- -- 695,420 -- 695,420
Unrealized change in investment securities
available for sale (notes 1 and 2)......... -- -- -- -- (53,889) (53,889)
Cash dividends $5.70 per share............... -- -- -- (658,350) -- (658,350)
--------- ---------- ------------ ------------ ----------- ------------
Balance, December 31, 1996................... 115,500 577,500 1,622,500 1,467,950 (45,400) 3,622,550
Net income (unaudited)....................... -- -- -- 358,774 -- 358,774
Unrealized change in investment securities
available for sale (notes 1 and
2)(unaudited).............................. -- -- -- -- 13,060 13,060
Cash dividends $1.00 per share (Unaudited)... -- -- -- (115,500) -- (115,500)
--------- ---------- ------------ ------------ ----------- ------------
Balance, June 30, 1997 (unaudited)........... 115,500 $ 577,500 $ 1,622,500 $ 1,711,224 $ (32,340) $ 3,878,884
--------- ---------- ------------ ------------ ----------- ------------
--------- ---------- ------------ ------------ ----------- ------------
</TABLE>
See accompanying notes to financial statements.
F-56
<PAGE>
FIRST BANK OF DEER PARK
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------------------- --------------------------------------------
1997 1996 1996 1995 1994
------------- ------------- ------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................... $ 358,774 $ 351,543 $ 695,420 $ 546,282 $ 369,739
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization and accretion... 17,304 13,794 (55,640) (150,843) 33,036
Other real estate adjustment............... (55,240) -- 56,000 27,505 19,899
Loss on sale of loans...................... -- -- -- -- 305,500
Loan recoveries............................ -- 807 807 1,501 6,732
Gain on sale of other real estate.......... (26,391) (60,802) (82,725) -- --
Decrease (increase) in accrued interest and
other assets............................. 12,749 142,636 18,272 119 680 (179,211)
(Decrease) increase in accrued interest and
other liabilities........................ 31,276 (12,262) (15,575)
Other...................................... -- -- -- -- (4,081)
------------- ------------- ------------- -------------- -------------
Net cash provided by operating
activities............................. 307,196 447,978 663,410 531,863 536,039
------------- ------------- ------------- -------------- -------------
Cash flows from investing activities:
Proceeds from maturities of held-to-maturity
securities................................. 1,000,000 2,500,000 5,500,000 8,900,876 --
Purchase of held-to-maturity securities...... (1,039,167) -- (1,984,531) (6,346,250) (7,311,328)
Proceeds from maturities of available for
sale securities............................ -- -- 1,000,000 -- --
Purchase of securities available for sale.... -- (1,000,000) (2,000,000) (6,000,000) --
Net decrease (increase) in loans............. (733,871) (1,482,066) (1,944,090) 4,428,906 752,959
Purchase of equipment........................ -- -- (21,066) (33,362) --
Proceeds from sale of other real estate...... 132,392 492,506 549,936 -- 22,938
------------- ------------- ------------- -------------- -------------
Net cash provided by (used in) investing
activities............................. (640,646) 510,440 1,100,249 950,170 (6,535,431)
------------- ------------- ------------- -------------- -------------
Cash flows from financing activities:
Net increase (decrease) in deposits.......... 596,822 (1,106,348) 1,554,689 (1,000,312) 4,350,129
Dividends paid............................... (542,850) (323,400) (438,900) (473,550) (606,375)
Net increase (decrease) in repurchase
agreements................................. (1,000,000) 2,000,000 1,700,000 (200,000) (288,000)
------------- ------------- ------------- -------------- -------------
Net cash provided by (used in) financing
activities............................. (946,028) 570,252 2,815,789 (1,673,862) 3,455,754
------------- ------------- ------------- -------------- -------------
Net increase (decrease) in cash and cash
equivalents............................ (1,279,478) 1,528,670 4,579,448 (191,829) (2,543,638)
Cash and cash equivalents at beginning of
year......................................... 6,532,356 1,952,908 1,952,908 2,144,737 4,688,375
------------- ------------- ------------- -------------- -------------
Cash and cash equivalents at end of year....... $ 5,252,878 3,481,578 6,532,356 1,952,908 2,144,737
------------- ------------- ------------- -------------- -------------
------------- ------------- ------------- -------------- -------------
Supplemental information:
Taxes paid................................... $ 206,626 $ 32,300 $ 259,525 $ 148,291 $ 266,292
------------- ------------- ------------- -------------- -------------
------------- ------------- ------------- -------------- -------------
Interest paid................................ $ 352,664 $ 322,221 $ 657,021 $ 604,081 $ 444,942
------------- ------------- ------------- -------------- -------------
------------- ------------- ------------- -------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-57
<PAGE>
FIRST BANK OF DEER PARK
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF/AND FOR
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Bank is a state chartered institution offering full banking services in
the Deer Park area.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
The accounting and reporting policies of First Bank of Deer Park (Bank)
conform to generally accepted accounting principles. A description of the more
significant accounting policies follows:
(a) STATEMENT OF CASH FLOWS--The real estate owned was acquired in a
non-cash transaction. For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and Federal funds
sold.
(b) INVESTMENT SECURITIES--Management determines the appropriate
classification of securities at the time of purchase. If management has the
intent and the Bank has the ability at the time of purchase to hold
securities until maturity or on a long-term basis, they are classified as
held to maturity and carried at amortized historical cost. Securities to be
held for indefinite periods of time and not intended to be held to maturity
or on a long-term basis are classified as available for sale and carried at
fair value. Securities held for indefinite periods of time include
securities that management intends to use as part of its asset and
liabilities management strategy and that may be sold in response to changes
in interest rate, resultant prepayment risk and other factors, related to
interest rate and resultant prepayment risk changes.
Realized gains and losses on dispositions are based on the net proceeds
and the adjusted book value of the securities sold, using the specific
identification method. Unrealized gains and losses on investment securities
available for sale are based on the difference between book value and fair
value of each security. These gains and losses, net of any income tax
effect, are reported as a separate component of stockholders' equity.
Realized gains and losses flow through the Bank's yearly statements of
income.
(c) LOANS AND ALLOWANCE FOR LOAN LOSSES--Loans are stated at the amount
of unpaid principal, reduced by unearned discount and an allowance for loan
losses. Unearned discount on installment loans is recognized as income over
the terms of the loans by the interest method. Interest on other loans is
calculated by using the simple interest method on daily balances of the
principal amount outstanding. The allowance for loan losses is established
through a provision for loan losses charged to expenses. Loans are charged
against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb possible losses on existing
loans that may become uncollectible, based on evaluations of the
collectibility of loans and prior loan loss experience. The evaluations take
into consideration such factors as changes in the nature and volume of the
loan portfolio, overall portfolio quality, review of specific problem loans,
and current economic conditions that may affect the borrowers' ability to
pay. Accrual of interest is discontinued on a loan 90 days past due or
sooner if management believes, after considering economic and business
conditions and collection efforts, that the borrowers' financial condition
is such that collection of interest is doubtful.
F-58
<PAGE>
FIRST BANK OF DEER PARK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF/AND FOR
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(d) DEPRECIATION--Office equipment and buildings are stated at cost less
accumulated depreciation computed principally on the straight-line method
over the estimated useful lives of the assets.
(e) REAL ESTATE OWNED--Real estate owned represents real estate acquired
through foreclosure or deed in lieu of foreclosure and is stated at the
lower of the outstanding loan balance at the time of foreclosure or
appraised value. Gains on the sale of real estate owned are generally
deferred and recognized on the installment method as the sale proceeds are
received. Losses and write-downs resulting from periodic re-evaluations of
the property are charged to other expenses.
(f) INCOME TAXES--Income taxes are provided for the tax effects of
transactions reported in the financial statement, regardless of the period
in which such items are recognized for tax purposes. Deferred income tax
assets and liabilities are computed annually for differences between the
financial statement and tax bases of assets and liabilities that will result
in taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized. Income
tax expense is the tax payable or refundable for the period plus or minus
the change during the period in deferred tax assets and liabilities.
(g) DEFERRED LOAN FEES--Loan commitment and origination fees and the
direct costs of loan origination are deferred. The net deferred loan fees
are amortized into income over the life of the related loans.
(h) OFF BALANCE SHEET FINANCIAL INSTRUMENTS--In the ordinary course of
business, the Bank has entered into off balance sheet financial instruments
consisting of commitments to extend credit and commercial letters of credit.
Such financial instruments are recorded in the financial statements when
they become payable.
(i) EARNINGS PER COMMON SHARE--Earnings per common share is calculated
by dividing net income by the weighted average number of common shares
outstanding during the period.
(j) INTERIM FINANCIAL INFORMATION--Financial information as of June 30,
1997 and for the six months ended June 30, 1997 and 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 1996 are not necessarily indicative of the results for the full fiscal
year.
F-59
<PAGE>
FIRST BANK OF DEER PARK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF/AND FOR
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 IS UNAUDITED)
(2) INVESTMENT SECURITIES
The amortized cost and fair value of investment securities available for
sale at June 30, 1997 are summarized as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
U. S. government agencies.......................... $ 7,000,000 $ 8,075 $ (57,075) $ 6,951,000
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
The amortized cost and fair values of investment securities held to maturity
at June 30, 1997 are summarized as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
U. S. Treasury securities.......................... $ 3,939,453 $ 42,423 $ -- $ 3,981,876
U. S. government agencies.......................... 2,000,000 938 -- 2,000,938
------------ ----------- ----------- ------------
$ 5,939,453 $ 43,361 $ -- $ 5,982,814
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
There were no gross realized gains or losses on sales or maturities of
available for sale securities for the period ended June 30, 1997.
The amortized cost and fair values of investment securities available for
sale at December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
U. S. government agencies.......................... $ 7,000,000 $ -- $ (68,787) $ 6,931,213
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
The amortized cost and fair values of investment securities held to maturity
at December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
U. S. Treasury securities.......................... $ 4,907,013 $ 87,987 $ -- $ 4,995,000
U. S. government agencies.......................... 1,000,000 -- (7,500) 992,500
------------ ----------- ----------- ------------
$ 5,907,013 $ 87,987 $ (7,500) $ 5,987,500
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
The amortized cost and fair values of investment securities available for
sale at December 31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
U. S. government agencies.......................... $ 6,000,000 $ 12,862 $ -- $ 6,012,862
------------ ----------- ----- ------------
------------ ----------- ----- ------------
</TABLE>
F-60
<PAGE>
FIRST BANK OF DEER PARK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF/AND FOR
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 IS UNAUDITED)
(2) INVESTMENT SECURITIES (CONTINUED)
The amortized cost and fair values of investment securities held to maturity
at December 31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
U. S. Treasury securities.......................... $ 8,339,254 $ 180,606 $ (6,735) $ 8,513,125
Obligations of state and political subdivisions.... 1,000,000 -- -- 1,000,000
------------ ----------- ----------- ------------
$ 9,339,254 $ 180,606 $ (6,735) $ 9,513,125
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
Proceeds from maturities of investment securities held to maturity during
1996 and 1995 were $5,500,000 and $8,900,876, respectively. There were no sales
and maturities of investment securities available for sale during 1995. During
1996 securities available for sale in the amount of $1,000,000 matured. There
were no realized gains or realized losses during the six months ended June 30,
1997 or the years ended December 31, 1996 and 1995.
The following table shows the maturity distribution of the investment
portfolio at December 31, 1996:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
-------------------------- --------------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Due in one year or less........................ $ -- $ -- $ 996,132 $ 1,004,687
Due after one year through five years.......... 7,000,000 6,931,213 4,910,881 4,982,813
------------ ------------ ------------ ------------
$ 7,000,000 $ 6,931,213 $ 5,907,013 $ 5,987,500
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
Investment securities with a carrying amount of $11,902,000, $10,921,331 and
$13,353,659 at June 30, 1997, and December 31, 1996 and 1995, respectively, were
pledged to secure public deposits and for other purposes required or permitted
by law.
F-61
<PAGE>
FIRST BANK OF DEER PARK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF/AND FOR
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 IS UNAUDITED)
(3) LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
JUNE 30, 1997 ------------- -------------
-------------
(UNAUDITED)
<S> <C> <C> <C>
Commercial................................................ $ 3,513,111 $ 3,609,688 $ 3,855,282
Real estate............................................... 9,838,575 9,230,248 7,317,712
Installment............................................... 1,019,180 723,140 401,785
------------- ------------- -------------
14,370,866 13,563,076 11,574,779
Less unearned discount.................................... 155,134 79,231 35,023
------------- ------------- -------------
14,215,732 13,483,845 11,539,756
Less allowance for loan losses............................ 355,311 357,295 356,488
------------- ------------- -------------
$ 13,860,421 $ 13,126,550 $ 11,183,268
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
There were no non-accrual impaired loans as of June 30, 1997, and December
31, 1996 and 1995.
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, beginning of year................. $ 357,295 $ 356,488 $ 356,488 $ 362,057 $ 361,893
Provision charged to operations:........... -- -- -- -- --
Loans charged off.......................... (2,184) -- -- (7,070) (6,568)
Recoveries................................. 200 807 807 1,501 6,732
---------- ---------- ---------- ---------- ----------
Balance, end of year....................... $ 355,311 $ 357,295 $ 357,295 $ 356,488 $ 362,057
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
(4) BANK PREMISES AND EQUIPMENT
Major classifications of these assets are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
JUNE 30, 1997 ------------ ------------
-------------
(UNAUDITED)
<S> <C> <C> <C>
Land......................................................... $ 207,849 $ 207,849 $ 207,849
Building..................................................... 500,527 500,527 500,527
Equipment.................................................... 390,896 390,896 369,830
------------- ------------ ------------
1,099,272 1,099,272 1,078,206
Accumulated depreciation and amortization.................... 768,230 750,926 723,339
------------- ------------ ------------
$ 331,042 $ 348,346 $ 354,867
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
F-62
<PAGE>
FIRST BANK OF DEER PARK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF/AND FOR
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 IS UNAUDITED)
(4) BANK PREMISES AND EQUIPMENT (CONTINUED)
Depreciation and amortization expense for the period ended June 30, 1997 was
$17,304. Depreciation and amortization expense amounted to $27,588 and $20,916
in the years ended December 31, 1996 and 1995, respectively.
(5) DEPOSITS
Included in interest-bearing time deposits are certificates of deposit in
amounts of $100,000 or more. These certificates and their remaining maturities
at June 30, 1997, December 31, 1996 and 1995, respectively, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
JUNE 30, ------------ ------------
1997
------------
(UNAUDITED)
<S> <C> <C> <C>
Three months or less.......................................... $ 2,328,833 $ 3,458,334 $ 4,930,000
Four months to six months..................................... 304,015 549,636 429,000
Seven months to one year...................................... 1,285,954 300,000 462,000
Two years to four years....................................... 473,036 573,036 100,000
------------ ------------ ------------
$ 4,391,838 $ 4,881,006 $ 5,921,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Also included in time deposits are NOW accounts totalling $2,736,993,
$3,148,006 and $2,688,817 at June 30, 1997, and December 31, 1996 and 1995,
respectively.
(6) SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
The Bank entered into the sale of $2,000,000 government securities under an
agreement to repurchase substantially the identical security on July 31, 1997.
F-63
<PAGE>
FIRST BANK OF DEER PARK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF/AND FOR
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 IS UNAUDITED)
(7) INCOME TAX
The total income taxes (benefits) in the statements of income are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Current............................................................ $ 334,331 $ 135,155 $ 245,000
Deferred (benefit)................................................. (13,173) 118,095 (74,805)
---------- ---------- ----------
Federal income tax expense......................................... $ 321,158 $ 253,250 $ 170,195
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Deferred income taxes (benefit), according to the timing differences which
caused them, were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
Use of cash basis for Federal income tax purposes.................. $ (934) $ 7,209 $ 35,005
Book valuation of other real estate................................ (17,646) -- (6,766)
Book valuation of loan sale........................................ -- 103,870 (103,870)
Accelerated depreciation........................................... 5,407 7,008 (20)
Other.............................................................. -- 8 846
---------- ---------- -----------
$ (13,173) $ 118,095 $ (74,805)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
Income tax expense at the Federal statutory rate of 34% is reconciled to the
Bank's actual provision as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Tax at statutory rate.............................................. $ 345,636 $ 271,841 $ 183,578
Tax exempt interest income......................................... (24,674) (18,768) (14,256)
Non-deductible expense............................................. 196 177 873
---------- ---------- ----------
$ 321,158 $ 253,250 $ 170,195
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-64
<PAGE>
FIRST BANK OF DEER PARK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF/AND FOR
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 IS UNAUDITED)
(7) INCOME TAX (CONTINUED)
Deferred tax assets and deferred tax liabilities at December 31, 1996, 1995
and 1994 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
--------- --------- ----------
<S> <C> <C> <C>
Deferred tax assets:
Reserve for bad debts............................................... $ 62,255 $ 62,255 $ 62,310
Reserve for loss on other real estate............................... 19,618 6,766 6,765
Depreciation differences............................................ -- -- 2,840
Loss on loans paid off.............................................. -- -- 103,870
Other............................................................... -- -- 1,480
--------- --------- ----------
$ 81,873 $ 69,021 $ 177,265
--------- --------- ----------
--------- --------- ----------
Total deferred tax liabilities:
Use of cash basis for Federal income tax purpose.................... $ 36,265 $ 40,565 $ 39,160
Depreciation differences............................................ 9,473 4,168 --
Other............................................................... -- 4,278 --
--------- --------- ----------
$ 45,738 $ 49,011 $ 39,160
--------- --------- ----------
--------- --------- ----------
</TABLE>
(8) COMMITMENTS AND CONTINGENT LIABILITIES
The Bank is a defendant in legal actions arising from normal business
activities. Management believes that those actions are without merit or that the
ultimate liability, if any, resulting from them will not materially affect the
Bank"s financial position.
Since 1992, the Bank has been party to administrative and judicial
proceedings with its regulatory agency. The regulatory agency alleged that the
Bank violated certain laws relating to loan concentration and loan limit by
originating certain loan participations. From inception management has
vigorously opposed the allegations. In April 1995, an appellate court upheld the
ruling of the lower court to affirm the cease and desist orders originally
issued in 1992. Because the probability of reversal was remote, management
decided to take no further appellant action.
In an effort to fully comply and cooperate with the regulatory agency and
without admitting any wrongdoing the Bank initiated efforts in 1995 to dispose
of the certain loans. On January 27, 1995, the Bank received payoff of twelve
loans in which its participation totalled approximately $6,113,000. The
consideration received totalled approximately $5,807,000. The $306,000
difference was reserved at December 31, 1994 and charged to other expenses.
In an effort to fully comply and cooperate with the regulatory agency the
Bank is actively attempting to market the remaining nine loans in order to
reduce the loan concentration at least to the Bank's legal lending limit of
$550,000. These efforts are fully and timely communicated to the regulatory
agency to obtain approved time extensions for full compliance. The Bank
currently has an extension until December 31, 1997 to reduce the loan
concentration. The balance of the related loans at December 31, 1996 is
approximately $3,050,000. The regulatory agency has required the Bank to include
approximately $155,000 of specific reserves on these loans in the allowance for
loan losses.
F-65
<PAGE>
FIRST BANK OF DEER PARK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF/AND FOR
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 IS UNAUDITED)
(8) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
The Bank contracts for data-processing services under a contract which
expires in October 1997. The total contract expense for 1997, 1996 and 1995 was
$64,068, $140,044 and $146,398, respectively. The following is a schedule of the
estimated future contract payments:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ----------------------------------------------------
<S> <C>
1997................................................ $ 108,000
----------
----------
</TABLE>
In the normal course of business the Bank makes various commitments and
incurs certain contingent liabilities that are not presented in the accompanying
financial statements. The commitments and contingent liabilities include various
guarantees, commitments to extend credit, and standby letters of credit. Such
commitments and standby letters of credit aggregated approximately $679,000,
$136,000 and $310,000 at June 30, 1997, December 31, 1996 and 1995,
respectively. The Bank does not anticipate any material losses as a result of
the commitments and contingent liabilities.
(9) RELATED PARTY TRANSACTIONS
Certain officers and directors, and companies in which they had 10 percent
or more beneficial ownership, were indebted to the Bank in the amount of
$307,000, $404,385 and $895,456 at June 30, 1997, and December 31, 1996 and
1995, respectively.
At June 30, 1997, the Bank maintained deposits or participated in loans at
the following banks which are owned 10 percent or more by certain directors and
officers of the Bank:
<TABLE>
<CAPTION>
PARTICIPATION PARTICIPATION
DUE FROM DUE TO SOLD PURCHASED
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
First National Bank of Bellaire........................ $ 15,013 $ -- $ 414,471 $3,241,299
Texas Coastal Bank..................................... 17,244 -- 1,885 169,432
Mayde Creek Bank....................................... 13,039 -- -- 82,663
Texas National Bank of Baytown......................... -- 5,105 309,711 416,958
Alief Alamo Bank....................................... -- -- 36,715 --
--------- --------- ------------ ------------
$ 45,296 $ 5,105 $ 762,782 $3,910,352
--------- --------- ------------ ------------
--------- --------- ------------ ------------
</TABLE>
(10) REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the 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 effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
F-66
<PAGE>
FIRST BANK OF DEER PARK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF/AND FOR
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 IS UNAUDITED)
(10) REGULATORY MATTERS (CONTINUED)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 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 Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, 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.
<TABLE>
<CAPTION>
FOR CAPITAL ADEQUACY PURPOSES:
ACTUAL:
-------------------- ---------------------------
AMOUNT RATIO AMOUNT RATIO
----------- ------- ------------ ------------
<S> <C> <C> <C> <C>
As of June 30, 1997
(Unaudited):
Total Capital
greater than or equal to greater than or equal to
(To Risk Weighted Assets)... $ 4,160,000 23.23% 1,438,000 8.00%
Tier I Capital*
greater than or equal to greater than or equal to
(To Risk Weighted Assets)... $ 3,911,000 21.84% 716,000 4.00%
Tier I Capital
greater than or equal to greater than or equal to
(To Average Assets)......... $ 3,911,000 11.24% 1,391,000 4.00%
As of December 31, 1996:
Total Capital
greater than or equal to greater than or equal to
(To Risk Weighted Assets)... $ 3,881,000 22.88% 1,356,000 8.00%
Tier I Capital*
greater than or equal to greater than or equal to
(To Risk Weighted Assets)... $ 3,668,000 21.62% 678,000 4.00%
Tier I Capital
greater than or equal to greater than or equal to
(To Average Assets)......... $ 3,668,000 11.67% 1,257,000 4.00%
As of December 31, 1995:
Total Capital
greater than or equal to greater than or equal to
(To Risk Weighted Assets)... $ 3,814,000 26.25% 1,162,000 8.00%
Tier I Capital*
greater than or equal to greater than or equal to
(To Risk Weighted Assets)... $ 3,631,000 24.98% 581,000 4.00%
Tier I Capital
greater than or equal to greater than or equal to
(To Average Assets)......... $ 3,631,000 12.35% 1,213,000 4.00%
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS:
---------------------------
AMOUNT RATIO
------------ ------------
<S> <C> <C>
As of June 30, 1997
(Unaudited):
Total Capital
greater than or equal to greater than or equal to
(To Risk Weighted Assets)... 1,791,000 10.00%
Tier I Capital*
greater than or equal to greater than or equal to
(To Risk Weighted Assets)... 1,074,000 6.00%
Tier I Capital
greater than or equal to greater than or equal to
(To Average Assets)......... 1,739,000 5.00%
As of December 31, 1996:
Total Capital
greater than or equal to greater than or equal to
(To Risk Weighted Assets)... 1,696,000 10.00%
Tier I Capital*
greater than or equal to greater than or equal to
(To Risk Weighted Assets)... 1,017,000 6.00%
Tier I Capital
greater than or equal to greater than or equal to
(To Average Assets)......... 1,571,000 5.00%
As of December 31, 1995:
Total Capital
greater than or equal to greater than or equal to
(To Risk Weighted Assets)... 1,453,000 10.00%
Tier I Capital*
greater than or equal to greater than or equal to
(To Risk Weighted Assets)... 872,000 6.00%
Tier I Capital
greater than or equal to greater than or equal to
(To Average Assets)......... 1,517,000 5.00%
</TABLE>
- ------------------------
* Ratio must equal or exceed 13% to be in compliance with cease and desist
order issued by Office of the Comptroller of the Currency.
F-67
<PAGE>
FIRST BANK OF DEER PARK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF/AND FOR
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 IS UNAUDITED)
(11) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual notational amount of
those instruments (See note 7). The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount and type of collateral obtained,
if deemed necessary by the Bank upon extension of credit, varies and is based on
management's credit evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Standby letters of
credit generally have fixed expiration dates or other termination clauses and
may require payment of a fee. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers. The Bank's policy for obtaining collateral and the nature of such
collateral is essentially the same as that involved in making commitments to
extend credit.
(12) CONCENTRATIONS OF CREDIT
Most of the Bank's loans, commitments, and commercial and standby letters of
credit have been granted to customers in the Bank's market area. Most such
customers are depositors of the Bank. The concentrations of credit by type of
loan are set forth in Note 3. Commercial and standby letters of credit were
granted primarily to commercial borrowers.
(13) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 requires management to
estimate the fair value of financial instruments as of the balance sheet date.
Management is unable to estimate the fair value of financial instruments
included in the statements other than investment securities which are disclosed
in footnote 2. However, management is of the opinion that the fair value does
not differ significantly from the recorded value of those financial instruments.
F-68
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 CONTAINED 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....................................... 8
Unaudited Pro Forma Condensed Financial Statements........................ 10
Recent Unaudited Selected Consolidated Financial Data..................... 14
Risk Factors.............................................................. 16
The Company............................................................... 22
The Acquisitions.......................................................... 27
Use of Proceeds........................................................... 34
Dividend Policy........................................................... 34
Dilution.................................................................. 36
Capitalization............................................................ 37
Nature of the Trading Market and Market Prices............................ 37
Selected Consolidated Financial Data...................................... 39
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 41
Management................................................................ 72
Principal Stockholders.................................................... 80
Supervision and Regulation................................................ 81
Description of Securities of the Company.................................. 88
Underwriting.............................................................. 91
Legal Matters............................................................. 93
Experts................................................................... 93
Available Information..................................................... 93
Table of Contents to Financial Statements................................. F-1
</TABLE>
------------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS 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.
600,000 SHARES
[LOGO]
BAY BANCSHARES, INC.
COMMON STOCK
--------------
PROSPECTUS
--------------
HOEFER & ARNETT
INCORPORATED
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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>
<CAPTION>
Securities and Exchange Commission registration fee............... $ 3,136
<S> <C>
National Association of Securities Dealers, Inc. filing fee....... $ 1,535
Printing and engraving expenses................................... $ 75,000
Legal fees and expenses of counsel for the Registrant............. $ 91,000
Accounting fees and expenses...................................... $ 90,000
Blue sky filing fees and expenses (including legal fees and
expenses)........................................................ $ 5,000
Transfer Agent fees............................................... $ 1,000
Miscellaneous..................................................... $ 33,329
---------
Total........................................................... $ 300,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Articles of Incorporation and Bylaws require the Registrant
to indemnify officers and directors of the Registrant to the fullest extent
permitted by Article 2.02-1 of the Business Corporation Act of the State of
Texas (the "TBCA"). The Articles of Incorporation and Bylaws of the Registrant
are filed as Exhibits 3.1 and 3.2 to the Registration Statement. Generally,
Article 2.02-1 of the TBCA permits a corporation to indemnify a person who was,
is, or is threatened to be made a named defendant or respondent in a proceeding
because the person was or is a director or officer if it is determined that such
person (i) conducted himself in good faith, (ii) reasonably believed (a) in the
case of conduct in his official capacity as a director or officer of the
corporation, that his conduct was in the corporation's best interests, or (b) in
other cases, that his conduct was at least not opposed to the corporation's best
interests, and (iii) in the case of any criminal proceeding, had no reasonable
cause to believe that his conduct was unlawful. In addition, the TBCA requires a
corporation to indemnify a director or officer for any action that such director
or officer is wholly successfully 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 action
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>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On September 27, 1994, the Registrant sold 1,000 shares of Common Stock to a
director of the Bank at a price of $5.00 per share.
On January 23, 1995, the Registrant sold 110 shares of Common Stock to four
members of the advisory board of the Pasadena branch at a price of $5.00 per
share.
On February 27, 1995, the Registrant sold 6,000 shares of Common Stock to an
executive officer of the Bank pursuant to the Phantom Plan.
On December 31, 1995, the Registrant sold 360 shares of Common Stock to
three members of the advisory board of the Pasadena branch at a price of $6.00
per share.
On January 3, 1996, the Registrant sold 6,000 shares of Common Stock to an
executive officer of the Bank pursuant to the Phantom Plan.
On January 3, 1997, the Registrant sold 6,000 shares of Common Stock to an
executive officer of the Bank pursuant to the Phantom Plan.
On January 30, 1997, the Registrant sold 750 shares of Common Stock to seven
members of the advisory board of the Pasadena branch at a price of $7.05 per
share.
On March 31, 1997, the Registrant sold 1,026 shares of Common Stock to Jaw
Co. Trustees for the Registrant's 401K Plan at a price of $7.05 per share.
On June 30, 1997, the Registrant sold 1,117 shares of Common Stock to Jaw
Co. Trustees for the Registrant's 401K Plan at a price of $7.05 per share.
Except for the shares issued pursuant to the Phantom Plan for which no
consideration was received, 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 1933 based on the fact that each of these individuals is
well-known to the Company and that such persons are residents of the State of
Texas.
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> <C> <S>
1 -- Form of Underwriting Agreement by and between the Underwriter 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 -- Bay Bancshares, Inc. 1997 Stock Incentive Plan.
**10.2 -- Amended and Restated Bay Bancshares, Inc. 1997 Stock Option Plan.
**10.3 -- Agreement and Plan of Reorganization dated as of June 24, 1997 by and between Bay
Bancshares, Inc., Texas Bank and certain shareholders of Texas Bank.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------------------------------
<C> <C> <S>
**10.4 -- Agreement and Plan of Consolidation dated as of August 7, 1997 by and among Bay Bancshares,
Inc., Bayshore National Bank and Texas National Bank of Baytown.
**10.5 -- Agreement and Plan of Reorganization dated as of August 7, 1997 by and among Bay Bancshares,
Inc., Bayshore National Bank and First Bank of Deer Park.
**10.6 -- Bay Bancshares, Inc. 1993 Phantom Stock Plan.
**10.7 -- Voting Agreement and Irrevocable Proxy for Texas National Bank of Baytown (included as
Exhibit D in the Agreement and Plan of Reorganization filed as Exhibit 10.4 to this
Registration Statement).
**10.8 -- Non-Competition Agreement for Texas National Bank of Baytown (included as Exhibit G in the
Agreement and Plan of Reorganization filed as Exhibit 10.4 to this Registration
Statement).
**10.9 -- Voting Agreement and Irrevocable Proxy for First Bank of Deer Park (included as Exhibit D in
the Agreement and Plan of Reorganization filed as Exhibit 10.5 to this Registration
Agreement).
**10.10 -- Non-Competition Agreement for First Bank of Deer Park (included as Exhibit G in the
Agreement and Plan of Reorganization filed as Exhibit 10.5 to this Registration
Statement).
**10.11 -- Letter dated June 4, 1997 from Randall M. Ryskamp of the Office of the Comptroller of the
Currency to L.D. Wright.
**21. -- List of Subsidiaries.
23.1 -- Consent of Grant Thornton LLP.
23.2 -- Consent of McClelland, Samuel & Fehnel, L.L.P.
23.3 -- Consent of Killingsworth & Company.
23.4 -- Consent of Killingsworth & Company.
**23.5 -- Consent of Bracewell & Patterson, L.L.P. (included in the opinion to be filed as Exhibit 5
to this Registration Statement).
24 -- Power of Attorney (included on the signature pages to this Registration Statement).
**27 -- Financial Data Schedule.
</TABLE>
- ------------------------
** Previously filed.
(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
Underwriter 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, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission
II-3
<PAGE>
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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, Bay
Bancshares, Inc., has duly caused this Registration Statement or amendment
thereto to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Houston and State of Texas on November 4, 1997.
<TABLE>
<S> <C> <C>
BAY BANCSHARES, INC.
By: /s/ L. D. WRIGHT
-----------------------------------------
L. D. Wright
PRESIDENT
</TABLE>
II-5
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
each of L. D. Wright and Albert Fields, with full power to act without the
other, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities (until revoked in writing) to sign this Registration
Statement and any and all amendments (including post-effective amendments) to
this Registration Statement, to file the same, together with all exhibits
thereto and documents in connection therewith, with the Securities and Exchange
Commission, to sign any and all applications, registration statements, notices
and other documents necessary or advisable to comply with the applicable state
securities authorities, granting unto said attorneys-in-fact and agents or any
of them, or their or his substitutes or substitute, full power and authority to
perform and do each and every act necessary and advisable as fully to all
intents and purposes as he might or could perform and do in person, thereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their or his substitutes or substitute, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement or amendment thereto has been signed by the following
persons in the indicated capacities on November 4, 1997.
<TABLE>
<CAPTION>
SIGNATURE POSITIONS
- ------------------------------------------------------ ---------------------------------------------------------
<C> <S>
/s/ L.D. WRIGHT
------------------------------------------- President and Chief Executive Officer (principal
L. D. Wright executive officer)
/s/ KIM LOVE
------------------------------------------- Comptroller (principal financial officer and principal
Kim Love accounting officer)
/s/ KNOX W. ASKINS
------------------------------------------- Director
Knox W. Askins
/s/ EMERY FARKAS
------------------------------------------- Director
Emery Farkas
/s/ ALBERT D. FIELDS
------------------------------------------- Director
Albert D. Fields
/s/ EDDIE V. GRAY
------------------------------------------- Director
Eddie V. Gray
/s/ W.E. GWALTNEY, JR.
------------------------------------------- Director
W.E. Gwaltney, Jr.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE POSITIONS
- ------------------------------------------------------ ---------------------------------------------------------
<C> <S>
/s/ DOUG LATIMER
------------------------------------------- Director
Doug Latimer
/s/ JAY MARKS
------------------------------------------- Director
Jay Marks
/s/ L.H. MCKEY
------------------------------------------- Director
L.H. McKey
/s/ LINDSAY R. PFEIFFER
------------------------------------------- Director
Lindsay R. Pfeiffer
/s/ KEN STRUM
------------------------------------------- Director
Ken Strum
/s/ JAMES N. WALLACE
------------------------------------------- Director
James N. Wallace
/s/ RUEDE M. WHEELER, D.D.S.
------------------------------------------- Director
Ruede M. Wheeler, D.D.S.
/s/ ALICE W. WORTHINGTON
------------------------------------------- Director
Alice W. Worthington
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- --------------------------------------------------------------------------------------------
<C> <C> <S>
1 -- Form of Purchase Agreement by and between the Underwriter 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 -- Bay Bancshares, Inc. 1997 Stock Incentive Plan.
**10.2 -- Amended and Restated Bay Bancshares, Inc. 1997 Stock Option Plan.
**10.3 -- Agreement and Plan of Reorganization dated as of June 24, 1997 among Bay Bancshares, Inc.,
Texas Bank and certain shareholders of Texas Bank.
**10.4 -- Agreement and Plan of Consolidation dated as of August 7, 1997 among Bay Bancshares, Inc.,
Bayshore National Bank and Texas National Bank of Baytown.
**10.5 -- Agreement and Plan of Reorganization dated as of August 7, 1997 among Bay Bancshares, Inc.,
Bayshore National Bank and First Bank of Deer Park.
**10.6 -- Bay Bancshares, Inc. 1993 Phantom Stock Plan.
**10.7 -- Voting Agreement and Irrevocable Proxy for Texas National Bank of Baytown (included as
Exhibit D in the Agreement and Plan of Reorganization filed as Exhibit 10.4 to this
Registration Statement).
**10.8 -- Non-Competition Agreement for Texas National Bank of Baytown (included as Exhibit G in the
Agreement and Plan of Reorganization filed as Exhibit 10.4 to this Registration
Statement).
**10.9 -- Voting Agreement and Irrevocable Proxy for First Bank of Deer Park (included as Exhibit D in
the Agreement and Plan of Reorganization filed as Exhibit 10.5 to this Registration
Agreement).
**10.10 -- Non-Competition Agreement for First Bank of Deer Park (included as Exhibit G in the
Agreement and Plan of Reorganization filed as Exhibit 10.5 to this Registration
Statement).
**10.11 -- Letter dated June 4, 1997 from Randall M. Ryskamp of the Office of the Comptroller of the
Currency to L.D. Wright.
**21. -- List of Subsidiaries.
23.1 -- Consent of Grant Thornton LLP.
23.2 -- Consent of McClelland, Samuel & Fehnel, L.L.P.
23.3 -- Consent of Killingsworth & Company.
23.4 -- Consent of Killingsworth & Company.
**23.5 -- Consent of Bracewell & Patterson, L.L.P. (included in the opinion to be filed as Exhibit 5
to this Registration Statement).
24 -- Power of Attorney (included on the signature pages to this Registration Statement).
**27 -- Financial Data Schedule.
</TABLE>
- ------------------------
** Previously filed.
<PAGE>
Exhibit 1
600,000 Shares
BAY BANCSHARES, INC.
Common Stock
UNDERWRITING AGREEMENT
November ___, 1997
HOEFER & ARNETT INCORPORATED
353 Sacramento Street, 10th Floor
San Francisco, California 94111
Ladies and Gentlemen:
Bay Bancshares, Inc., a Texas corporation (the "Company"), proposes,
subject to the terms and conditions of this Underwriting Agreement (the
"Agreement"), to issue and sell 600,000 shares (the "Firm Shares") of common
stock, par value $1.00 per share (the "Common Stock"), of the Company to Hoefer
& Arnett Incorporated (the "Underwriter"). The Company has agreed to sell to
the Underwriter at the Underwriter's option and, upon the terms and conditions
set forth in Section 2 hereof, up to 90,000 additional shares (the "Additional
Shares") of Common Stock. The Firm Shares and the Additional Shares are
hereinafter collectively referred to as the "Shares."
The Company and the Underwriter hereby agree to the following matters with
respect to the purchase and sale of the Shares:
SECTION 1. (a) REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The
Company represents and warrants to the Underwriter that:
(i) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") in accordance with the provisions of
the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder (collectively, the "Act"), a registration statement on
Form S-1 (No. 36185), including a preliminary prospectus, and certain
amendments thereto, relating to the Shares. The Company will next file with
the Commission a final prospectus in accordance with Rules 430A and 424(b)
under the Act. As filed, the final prospectus shall include all Rule 430A
Information (as defined below). There have been or will promptly be delivered
to the Underwriter three signed copies of such registration statement and
amendments, three copies of each exhibit filed therewith, and conformed
copies of such registration statement and amendments (but without exhibits)
and of the related preliminary prospectus or prospectuses and final forms of
prospectus. The term "Registration Statement" as used in this Agreement
shall mean such registration statement at the time such registration
statement becomes effective and, in the event any amendment thereto becomes
effective prior to the Closing Date (as hereinafter defined), shall also mean
such registration statement as so amended; provided, however, that such term
shall also include all Rule 430A Information deemed to be included in such
registration statement at the time such registration statement becomes
<PAGE>
effective as provided by Rule 430A provided that if the Company files a
registration statement under the Act to register a portion of the Shares and
relies on Rule 462(b) for such registration statement to become effective
upon filing with the Commission (the "Rule 462 Registration Statement"), then
any reference to "Registration Statement" herein shall be deemed to be to
both the registration statement referred to above (No. 36185) and the Rule
462 Registration Statement, as each such registration statement may be
amended pursuant to the Act. The term "Prospectus" as used in this Agreement
shall mean: (X) the prospectus relating to the Shares in the form in which it
is first filed with the Commission pursuant to Rule 424(b) under the Act; or
(Y) if no filing pursuant to Rule 424(b) under the Act is required, the form
of final prospectus included in the Registration Statement at the time the
Registration Statement becomes effective. The term "Rule 430A Information"
as used in this Agreement shall mean information with respect to the Shares
and the offering thereof permitted to be omitted from the Registration
Statement when it becomes effective pursuant to Rule 430A under the Act. The
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder are hereinafter collectively referred to as the
"Exchange Act."
(ii) The Registration Statement has been declared effective by
the Commission under the Act. The Commission has not issued any order
preventing or suspending the effectiveness of the Registration Statement and
no proceedings for such purpose have been instituted or are pending, or to
the best knowledge of the Company, are contemplated or threatened by the
Commission. Each preliminary prospectus and the Prospectus when filed
complied in all material respects when so filed with the requirements of the
Act.
(iii) The Registration Statement and the Prospectus comply,
and on the Closing Date (as hereinafter defined) and any later date on which
Option Stock is to be purchased, the Prospectus will comply, in all material
respects, with the provisions of the Securities Act and the rules and
regulations of the Commission thereunder; on the Effective Date, the
Registration Statement did not contain any untrue statement of a material
fact and did not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading;
and, on the Effective Date the Prospectus did not and, on the Closing Date
and any later date on which Option Stock is to be purchased, will not contain
any untrue statements therein, in the light of the circumstances under which
they were made, not misleading; provided, however, that none of the
representations and warranties in this subparagraph (iii) shall apply to
statements in, or omission from, the Registration Statement or the Prospectus
made in reliance upon and in conformity with information concerning the
Underwriter set forth herein or otherwise furnished in writing to the Company
by or on behalf of the Underwriter expressly for use in the Registration
Statement or the Prospectus.
(iv) There are no contracts or other documents of a character
required to be described in the Registration Statement or to be filed as
exhibits to the Registration Statement which have not been described or filed as
required.
(v) Grant Thornton, LLP; Killingsworth & Company; and
McClelland, Samuel & Fehnel, L.L.P., who have expressed their opinion with
respect to certain of the financial
-2-
<PAGE>
statements of Texas Bank, Texas National Bank of Baytown ("Texas National"),
First Bank of Deer Park ("First Bank") (collectively, the "Acquired Banks")
and the Company included in the Registration Statement, are independent
public accountants within the meaning of the Act.
(vi) The consolidated financial statements, together with the
notes thereto, of the Company and the Acquired Banks included in the
Registration Statement comply in all material respects with the Act and
present fairly in all material respects the consolidated financial position
of the Company and the Acquired Banks, respectively, as of the dates
indicated (including, without limitation, the allowance for possible loan
losses), and the consolidated results of operations, cash flows and changes
in financial position of the Company and the Acquired Banks for the
respective periods covered thereby are in conformity with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved, except to the extent disclosed therein.
(vii) The pro forma financial statements and other pro forma
information included in the Prospectus present fairly the information shown
therein, have been prepared in accordance with generally accepted accounting
principles and the Commission's rules and guidelines with respect to pro
forma financial statements and other pro forma information, have been
properly compiled on the pro forma basis described therein, and, in the
opinion of the Company, the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate under the
circumstances.
(viii) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of
Texas, with full corporate power and authority to own, lease and operate its
properties and conduct its business as described in the Prospectus. The
Company is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction in which the ownership or leasing of its
properties or the conduct of its business requires such qualification, except
in any such case in which the failure to so qualify or be in good standing
would not have a material adverse effect upon the business of the Company,
and no proceeding of which the Company has knowledge has been instituted in
any such jurisdiction, revoking, limiting or curtailing, or seeking to
revoke, limit or curtail, such power and authority or qualification.
(ix) The Company does not own any capital stock of, or other
securities evidencing an equity interest in, any corporation, partnership or
other entity, other than Bayshore National Bank (the "Bank"). All of the
outstanding capital stock of the Bank is owned by the Company and there are
no persons or entities which have the right to acquire capital stock of the
Bank.
(x) The Bank and, to the best of the Company's knowledge,
Texas National, have been duly organized and are validly existing as national
associations in good standing under the laws of the United States, with full
corporate power and authority to own, lease and operate their respective
properties and conduct their respective businesses as described in the
Prospectus. The Bank and Texas National are duly qualified to do business
and are in good
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<PAGE>
standing in each jurisdiction in which the ownership or leasing of their
respective properties or the conduct of their respective businesses requires
such qualification, except in any such case in which the failure to so
qualify or be in good standing would not have a material adverse effect upon
their respective businesses, and no proceeding of which the Company has
knowledge has been instituted in any such jurisdiction, revoking, limiting or
curtailing, or seeking to revoke, limit or curtail, such power and authority
or qualification.
(xi) To the best of the Company's knowledge, Texas Bank and
First Bank have been duly organized and are validly existing as Texas
corporations in good standing under the laws of the State of Texas, with full
corporate power and authority to own, lease and operate their respective
properties and conduct their respective businesses as described in the
Prospectus. Texas Bank and First Bank are duly qualified to do business as
foreign corporations and are in good standing in each jurisdiction in which
the ownership or leasing of their respective properties or the conduct of
their respective businesses requires such qualification, except in any such
case in which the failure to so qualify or be in good standing would not have
a material adverse effect upon their respective businesses, and no proceeding
of which the Company has knowledge has been instituted in any such
jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit
or curtail, such power and authority or qualification.
(xii) The Company has an authorized and outstanding
capitalization as set forth in the Prospectus under the actual column under
the caption "Capitalization" and the Shares conform in all material respects
to the description thereof contained in the Prospectus. All of the issued
and outstanding shares of Common Stock have been duly authorized, validly
issued and are fully paid and non-assessable and are free of preemptive or
other similar rights and except as set forth in the Prospectus, there are no
options, agreements, contracts or other rights in existence to acquire from
the Company any shares of Common Stock.
(xiii) The Shares to be sold by the Company pursuant to this
Agreement and the Pricing Agreement have been duly authorized and, when
issued and paid for in accordance with this Agreement and the Pricing
Agreement, will be validly issued, fully paid and non-assessable; the holders
of the Shares will not be subject to personal liability by reason of being
such holders; except as set forth in the Prospectus, there are no holders of
securities of the Company having rights, contractual or otherwise, to
registration thereof or preemptive rights to purchase Common Stock; all
corporate actions required to be taken for the authorization, issuance, and
sale of the Shares have been validly and sufficiently taken.
(xiv) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as otherwise
stated or contemplated therein, there has not been (A) any material adverse
change in the condition (financial or otherwise), earnings, affairs or
business of the Company and the Bank, taken as a whole, or of any of the
Acquired Banks, whether or not arising in the ordinary course of business,
(B) any material transaction entered into, or any material liability or
obligation incurred, by the Company or its subsidiaries or any of the
Acquired Banks other than in the ordinary course of business, (C) any change
in the capital stock or material increase in the short-term debt or long-term
debt of the
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<PAGE>
Company or any of the Acquired Banks, or (D) any dividend or distribution of
any kind declared, paid or made by the Company or any of the Acquired Banks
on their respective capital stock.
(xv) The Company and the Bank and, to the best of the Company's
knowledge, the Acquired Banks, have good and marketable title to all properties
and assets reflected as owned in the financial statements hereinabove described
(or described elsewhere in the Prospectus), free and clear of all liens,
charges, encumbrances or restrictions of any kind, except such as are referred
to in such financial statements or the Prospectus or which are not material to
the Company and the Bank or the Acquired Banks as the case may be; all of the
leases and subleases material to their respective businesses or under which the
Company, the Bank or the Acquired Banks hold properties are in full force and
effect; and the Company has received no notice of any material claim of any sort
which has been asserted by anyone adverse to the rights of the Company, the Bank
or any of the Acquired Banks as owner or as lessee or sublessee under any of the
leases or subleases mentioned above, or affecting or questioning the rights of
the Company, the Bank or any of the Acquired Banks to the continued possession
of the leased or subleased premises under any such lease or sublease.
(xvi) The Company and the Bank and, to the best of the
Company's knowledge, the Acquired Banks, are not in default in the observance
of any provision of their respective articles of incorporation, articles of
association, or bylaws, in each case as amended, or in the performance or
observance of any obligation, agreement, covenant or condition contained in
any contract, indenture, mortgage, loan agreement, note, lease or other
instrument to which any of them is a party or by which any of them or any of
their properties may be bound, the effect of which could be materially
adverse to the condition (financial or otherwise), earnings, affairs or
business of the Company, the Bank or any of the Acquired Banks.
(xvii) The execution, delivery and performance of this
Agreement, the issuance and delivery of the Shares, the consummation of the
transactions contemplated herein and in the Registration Statement have been
duly authorized by all necessary corporate action and will not result in any
violation of the articles of incorporation or bylaws of the Company, and will
not conflict with or result in a breach of any of the terms or provisions of,
or constitute a default under, or result in the creation or imposition of any
lien, charge, encumbrance or restriction of any kind upon any property or
assets of the Company under any material contract, indenture, mortgage, loan
agreement, note, lease or other agreement or instrument to which the Company
is a party or by which the Company or its properties is bound, or any
existing applicable law, rule, regulation, or any judgment, order or decree
of any government, governmental instrumentality or court, domestic or
foreign, known to the Company and having jurisdiction over the Company or its
properties. No approval, authorization or consent of any court, regulatory
body, administrative agency or other governmental body having jurisdiction
over the Company is required in connection with the sale of the Shares to the
Underwriter, except such as may be required under the Act, state securities
or Blue Sky laws or from the clearance of the offering with the National
Association of Securities Dealers, Inc. (the "NASD").
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<PAGE>
(xviii) There is no action, suit or proceeding before or by any
court or governmental agency or body, domestic or foreign, or any arbitrator or
arbitration panel, now pending or, to the knowledge of the Company, threatened
against or affecting the Company, the Bank or, to the best of the Company's
knowledge, the Acquired Banks, which could reasonably be expected to result in
any material adverse change to the condition (financial or otherwise), earnings,
affairs or business of the Company or the Acquired Banks; and there is no
decree, judgment or order of any kind known to the Company in existence against
or restraining the Company or the Bank or, to the best of the Company's
knowledge, the Acquired Banks, or their officers, employees or directors, from
taking any actions of any kind in connection with their respective businesses.
(xix) The Company and the Bank and, to the best of the
Company's knowledge, the Acquired Banks, own or possess or have obtained all
material governmental licenses, permits, consents, orders, approvals and
other authorizations necessary to lease or own, as the case may be, and to
operate their properties and to carry on their businesses as presently
conducted, and the Company has received no notice of proceedings related to
revocation or modification of any such licenses, permits, consents, orders,
approvals or authorizations which individually or in the aggregate, if the
subject of an unfavorable ruling or finding, would be materially adverse to
the condition (financial or otherwise), earnings, affairs or business of the
Company, the Bank or any of the Acquired Banks, taken as a whole.
(xx) The conduct of the business of the Company and its
subsidiaries and, to the best of the Company's knowledge, the Acquired Banks is
in compliance with all applicable federal, state and local laws and regulations
that regulate or are concerned in any way with the business of the Company, the
Bank and the Acquired Banks, where the effect of the failure to comply would be
materially adverse to the condition (financial or otherwise), earnings, affairs
or business of the Company, the Bank or any of the Acquired Banks, taken as a
whole.
(xxi) The Company and the Bank and, to the best of the
Company's knowledge, the Acquired Banks, own or possess, or can acquire on
reasonable terms, all right, title and interest in or to, or have duly
licensed from third parties, all patents, trademarks, service marks,
copyrights, trade names, trade secrets and other proprietary rights ("Trade
Rights") material to the business now or proposed to be conducted by them,
and the Company has received no notice of, and has no knowledge of,
infringement of or conflict with asserted rights of others with respect to
any such Trade Rights which, individually or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would be materially adverse to
the condition (financial or otherwise), earnings, affairs or business of the
Company, the Bank or any of the Acquired Banks, taken as a whole.
(xxii) The Company and, to the best of the Company's
knowledge, the Acquired Banks, have filed all tax returns required to be
filed and have paid all taxes which were payable pursuant to said returns or
any assessments with respect thereto, other than any tax returns being
contested in good faith or which are not material to the Company or any of
the Acquired Banks and there is no tax deficiency that has been, or to the
knowledge of the Company
-6-
<PAGE>
might be, asserted against the Company or any of the Acquired Banks or any of
their respective properties or assets that would or could reasonably be
expected to have a material adverse affect upon the condition (financial or
otherwise) or results of operations of the Company or any of the Acquired
Banks, taken as a whole.
(xxiii) This Agreement has been duly executed and delivered by
the Company.
(xxiv) The Company has filed a registration statement pursuant
to Section 12(g) of the Exchange Act to register its Common Stock thereunder,
has filed an application to list the Shares for quotation on The Nasdaq
National Market and has received notification that the Shares have been
authorized for quotation on The Nasdaq National Market, subject to notice of
issuance or sale, as the case may be.
(xxv) The Company, its subsidiaries and, to the best of the
Company's knowledge, the Acquired Banks, are not and do not intend to conduct
their business in a manner in which any of them would become an "investment
company" as defined in Section 3(a) of the Investment Company Act of 1940, as
amended (the "Investment Company Act").
(xxvi) All offers and sales of the Company's capital stock
prior to the date hereof were at all relevant times either exempt from the
registration requirements of the Act and the registration requirements of all
applicable state securities or blue sky laws, were duly registered or were
duly registered in accordance with the provisions thereof.
(xxvii) The Company has not taken and will not take, directly
or indirectly, any action designed to cause or result in, or that has
constituted or might reasonably be expected to constitute, the stabilization
or manipulation of the price of any security of the Company.
(xxviii) Except as disclosed in the Registration Statement and
the Prospectus, no transaction has occurred between or among the Company or
its subsidiaries, on the one hand, and any of the Company's officers or
directors or any affiliate or affiliates of any such officer or director, on
the other hand, that is required to be so disclosed, including, but not
limited to, any outstanding loans, advances or guaranties of indebtedness by
the Company or its subsidiaries to or for the benefit of any affiliates of
the Company, or any of the officers or directors of the Company, or any
family member of any of them.
(xxix) The Company, the Bank and, to the best of the
Company's knowledge, the Acquired Banks, have not, directly or indirectly, at
any time (A) made any contributions to any candidate for foreign political
office, or if made, failed to disclose fully any such contribution made in
violation of law, or (B) made any payment to any state, federal or foreign
governmental officer or official, or other person charged with similar public
or quasi-public duties, other than payments or contributions required or
allowed by applicable law. The Company's and, to the best of the Company's
knowledge, the Acquired Banks', internal
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<PAGE>
accounting controls and procedures are sufficient to cause the Company and
the Acquired Banks to comply in all material respects with the Foreign
Corrupt Practices Act of 1977, as amended.
(xxx) The Company, the Bank and, to the best of the
Company's knowledge, the Acquired Banks, do no business with the government
of Cuba or with any person or entity located in Cuba, which would require
compliance with Florida Statute Section 517.075.
(xxxi) The Company, its subsidiaries and, to the best of the
Company's knowledge, the Acquired Banks, are in compliance with all
applicable federal and state laws and regulations that regulate the business
of banking, including, without limitation, the National Bank Act, the Federal
Deposit Insurance Act, the Bank Holding Company Act, the Federal Reserve Act
and all other applicable laws and regulations where the failure to comply
would have a material and adverse effect on the financial condition, earnings
or business of the Company or any of the Acquired Banks.
SECTION 2. AGREEMENT TO SELL AND PURCHASE.
(a) On the basis of the representations, warranties and agreements
of the Company herein contained but subject to the terms and conditions set
forth herein, (i) the Company hereby agrees to issue and sell to the
Underwriter and the Underwriter agrees to purchase the Firm Shares. The
purchase price per share to be paid by the Underwriter to the Company shall
be $_________ except for shares the purchaser of which was introduced to the
Underwriter by the Company and who is listed on Exhibit A hereto as agreed by
the Company and the Underwriter for which the price shall be $________ per
share.
(b) In addition, the Company, on the basis of the representations,
warranties and agreements of the Company set forth herein but subject to the
terms and conditions set forth herein, hereby grants to the Underwriter an
option to purchase up to an aggregate of 90,000 additional Shares, a purchase
price per share of ____________, for use solely in covering any over
allotments made by the Underwriter in the sale and distribution of the Firm
Shares. The option granted hereunder may be exercised at any time (but not
more than once), in whole or in part, within 30 days after the date of the
Prospectus upon written notice by the Underwriter to the Company setting
forth the aggregate number of Additional Shares as to which the Underwriter
is exercising the option, the names and denominations in which the
certificates for such shares are to be registered and the time and place at
which such certificates will be delivered. Such time of delivery (which may
not be earlier than the First Closing Date), being herein referred to as the
"Second Closing Date," shall be determined by the Underwriter, but if at any
time other than the First Closing Date, shall not be earlier than three nor
later than ten full business days after delivery of such notice of exercise.
SECTION 3. DELIVERY OF AND PAYMENT FOR THE SHARES.
(a) Delivery to the Underwriter of the Firm Shares shall be made
against payment therefor at 9:00 a.m., San Francisco, California, time, on the
fourth full business day
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<PAGE>
following the date of this Agreement (the "Closing Date") at the offices of
Hoefer & Arnett Incorporated, 353 Sacramento Street, 10th Floor, San
Francisco, California 94111. The place of the closing and the Closing Date
may be varied by agreement between the Underwriter and the Company.
(b) Delivery to the Underwriter of any Additional Shares to be
purchased by the Underwriter shall be made in San Francisco, California,
against payment therefor at the offices of Hoefer & Arnett Incorporated at
such time on such date (the "Option Closing Date"), which may be the same as
the Closing Date, but shall in no event be earlier than the Closing Date,
specified in the notice referred to in Section 2(b) hereof. The place of the
closing and the Option Closing Date may be varied by agreement between the
Underwriter and the Company.
(c) [CERTIFICATES FOR THE FIRM SHARES AND FOR THE ADDITIONAL SHARES
SHALL BE REGISTERED IN SUCH NAMES AND IN SUCH DENOMINATIONS AS THE UNDERWRITER
SHALL REQUEST UPON AT LEAST 48 HOURS PRIOR NOTICE TO THE COMPANY PRECEDING THE
CLOSING DATE OR THE OPTION CLOSING DATE, AS THE CASE MAY BE. SUCH CERTIFICATES
SHALL BE MADE AVAILABLE TO THE UNDERWRITER AT THE OFFICE OF THE DEPOSITORY TRUST
COMPANY, NEW YORK, NEW YORK, FOR INSPECTION AND PACKAGING NOT LATER THAN AT
LEAST 24 HOURS PRIOR TO THE CLOSING DATE OR THE OPTION CLOSING DATE, AS THE CASE
MAY BE. THE CERTIFICATES EVIDENCING THE FIRM SHARES AND THE ADDITIONAL SHARES
SHALL BE DELIVERED TO THE UNDERWRITER ON THE CLOSING DATE OR THE OPTION CLOSING
DATE, AS THE CASE MAY BE, WITH ANY TRANSFER TAXES THEREON DULY PAID BY THE
COMPANY FOR THE UNDERWRITER, AGAINST PAYMENT OF THE PURCHASE PRICE THEREFOR BY
CERTIFIED OR OFFICIAL COMPANY CHECK OR CHECKS PAYABLE IN CHICAGO CLEARING HOUSE
(NEXT DAY) FUNDS TO THE ORDER OF THE COMPANY, OR, AT THE OPTION OF THE COMPANY,
BY WIRE TRANSFER IN FEDERAL (SAME DAY) FUNDS FOR WHICH THE COMPANY WILL PAY ONE
DAY'S INTEREST AT THE BROKER CALL RATE AS REPORTED IN THE WALL STREET JOURNAL ON
THE BUSINESS DAY IMMEDIATELY PRIOR TO THE CLOSING DATE OR THE OPTION CLOSING
DATE, AS THE CASE MAY BE, SUBJECT TO CHANGE BY WRITTEN AGREEMENT OF THE COMPANY
AND THE UNDERWRITER.]
SECTION 4. AGREEMENTS OF THE COMPANY. The Company covenants and agrees
with the Underwriter that:
(a) The Company will advise the Underwriter promptly and, if
requested by the Underwriter, will confirm such advice in writing, (i) when any
post-effective amendment to the Registration Statement is filed or becomes
effective, and of the filing of any final prospectus or supplement or amendment
to the Prospectus, (ii) of any request by the Commission for amendments or
supplements to the Registration Statement or Prospectus or any Preliminary
Prospectus or for additional information, (iii) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or of the suspension of qualification of the Shares for offering or
sale in any jurisdiction, or the initiation or contemplation of any proceeding
for such purposes, and (iv) within the period of time referred to in paragraph
(f) below, of the happening of any event which makes any statement made in the
Registration Statement or Prospectus (as then amended or supplemented) untrue in
any material respect or which requires the making of any additions to or changes
in the Registration Statement or
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<PAGE>
Prospectus (as then amended or supplemented) in order to make the statements
therein not misleading or the necessity to amend or supplement the Prospectus
to comply with the Act or any other law. If at any time the Commission shall
issue any stop order suspending the effectiveness of the Registration
Statement, the Company will make every reasonable effort to obtain the
withdrawal of such order at the earliest possible moment. If the Company
elects not to rely on Rule 434, the Company will provide the Underwriter with
copies of the form of Prospectus in such numbers as the Underwriter may
reasonably request and file or transmit for filing with the Commission such
Prospectus in accordance with Rule 424(b) of the Act, by the close of
business in San Francisco on the business day immediately succeeding the date
hereof.
(b) The Company will prepare and file with the Commission, in
accordance with Rule 430A and Rule 424(b) under the Act, copies of an amended
Prospectus, or, if required by Rule 430A, a post-effective amendment to the
Registration Statement (including an amended Prospectus) containing all
information so omitted.
(c) The Company will, prior to the earlier of the Option Closing
Date or termination or expiration of the related option, not incur any
material liability or obligation, direct or contingent, or enter into any
material transaction, other than in the ordinary course of business, except
as contemplated in the Prospectus.
(d) The Company will not file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectus of which the
Underwriter shall not previously have been advised or to which the
Underwriter shall promptly after being so advised reasonably object in
writing.
(e) On the effective date of the Registration Statement and
thereafter from time to time during such period as in the opinion of counsel for
the Underwriter a prospectus relating to the Shares is required by law to be
delivered in connection with offers or sales of the Shares by the Underwriter or
a dealer, the Company will deliver to the Underwriter and each dealer, without
charge, as many copies of the Registration Statement and the Prospectus (and of
any amendment or supplement to such documents) as they may reasonably request.
During such period, if any event occurs which in the judgment of the Company, or
in the opinion of counsel for the Underwriter, should be set forth in the
Prospectus in order to ensure that no part of the Prospectus includes an untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements therein, in the light of the circumstances at the
time the Prospectus is delivered to a purchaser, not misleading, the Company
will forthwith prepare, submit to the Underwriter, file with the Commission and
deliver, without charge to the dealers (whose names and addresses will be
furnished by the Underwriter to the Company) to whom shares have been sold by
the Underwriter or to other dealers any amendments or supplements to the
Prospectus so that the statements in the Prospectus, as so amended or
supplemented, will comply with the standards set forth in this sentence. The
Company consents to the use of such Prospectus (and of any amendments or
supplements thereto) in accordance with the provisions of the Act and with the
securities or Blue Sky laws of the jurisdictions described in the preliminary
Blue Sky memorandum in which the Shares are lawfully offered by the Underwriter
and by all
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<PAGE>
dealers to whom Shares may be sold, both in connection with the offering or
sale of the Shares and for such period of time thereafter as the Prospectus
is required by law to be delivered in connection therewith. In case the
Underwriter is required to deliver a Prospectus (and any amendment or
supplement thereto) more than nine months after the first date upon which the
Shares are offered to the public, the Company will, upon request, but at the
expense of the Underwriter, promptly prepare and furnish the Underwriter with
reasonable quantities of a Prospectus complying with Section 10(a)(3) of the
Act.
(f) The Company will cooperate with the Underwriter and counsel for
the Underwriter in connection with the registration or qualification of the
Shares for offer and sale by the Underwriter and by dealers under the
securities or Blue Sky laws of such jurisdictions as the Underwriter may
designate, will continue such registrations or qualifications in effect so
long as reasonably required for the distribution of the Shares and will file
such consents to service of process or other documents as may be necessary in
order to effect such registration or qualification; provided that in no event
shall the Company be obligated to (i) qualify to do business in any
jurisdiction where it is not now so qualified, (ii) file any general consent
to service of process, or (iii) take any action that would subject it to
income taxation in any jurisdiction where it is not so qualified.
(g) For a period of five years after the date hereof:
(i) the Company will furnish to the Underwriter (A) as soon as
available a copy of each report of the Company of general
interest mailed to any class of its security holders
(B) copies of all periodic reports and current reports filed
with the Commission on Forms 10-K, 10-Q and 8-K and any
amendment thereto or such other similar forms as may be
designated by the Commission, and (C) from time to time,
such other information concerning the Company as the
Underwriter may reasonably request;
(ii) if at any time during such five-year period the Company
shall cease filing with the Commission the periodic reports
and current reports on Forms 10-K, 10-Q and 8-K or other
similar forms referred to in clause (h)(i) above, the
Company will forward to its shareholders generally and the
Underwriter (A) as soon as practicable after the end of each
fiscal year copies of a balance sheet and statements of
income and retained earnings of the Company as of the end of
and for such fiscal year, certified by independent public
accountants, and (B) as soon as practicable after the end of
each quarterly fiscal period, except for the last quarterly
fiscal period in each fiscal year, a summary statement
(which need not be certified) of income and retained
earnings of the Company for such period, which shall also be
made publicly available; and
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<PAGE>
(iii) the Company will furnish to the Underwriter and to the
NASD, and by issuance of a press release, on the date
of declaration, notice of all dividends, including the
amount and medium of payment, the record date (which
shall be not less than ten days subsequent to the
declaration date) and the payment date (which shall be
not less than ten days subsequent to the record date).
(h) The Company will make generally available to its security
holders an earnings statement of the Company, which need not be audited,
covering a 12-month period commencing after the effective date of the
Registration Statement and ending not later than 15 months thereafter, as
soon as practicable after the end of such period, which earnings statement
shall satisfy the provisions of Section 11(a) of the Act and the rules and
regulations promulgated thereunder (including Rule 158).
(i) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than by notice given by the Underwriter's
termination of this Agreement pursuant to Section 9 hereof), or if this
Agreement shall be terminated by the Underwriter because of any failure or
refusal on the part of the Company to comply with the material terms or
fulfill any of the material conditions of this Agreement, the Company agrees
to reimburse the Underwriter for all out-of-pocket expenses (including
reasonable fees and expenses of counsel for the Underwriter) reasonably
incurred by them in connection herewith but without any further obligation of
the Company for lost profits or otherwise.
(j) The Company will not sell, contract to sell or otherwise
dispose of any Common Stock or rights to purchase Common Stock for a period
of 180 days after the date of the Prospectus without the prior written
consent of the Underwriter (other than the issuance of shares of Common Stock
pursuant to the Company's stock option plan(s) and certain other employment
benefit arrangements of the Company in an aggregate amount not to exceed 5%
of the Shares). The Company will also obtain similar agreements from each of
its executive officers and directors and all persons who own at least 5% of
the Common Stock after the consummation of the Offering.
(k) The Company will apply the net proceeds from the sale of the
Shares to be sold by it under this Agreement and the Pricing Agreement for
the purposes set forth in the Prospectus under the caption "Use of Proceeds."
SECTION 5. PAYMENT OF EXPENSES. Except as provided in Sections 4(j) and
10 hereof, and in the following sentence, the Company shall have no
obligation to pay, or reimburse if paid by the Underwriter, any costs or
expenses incident to the performance by Underwriter of its obligations under
this Agreement and the Pricing Agreement. The Company shall pay, or
reimburse if paid by the Underwriter, any and all costs and expenses,
including but not limited to reasonable attorneys' fees, filing charges and
printing costs, of researching and complying with any applicable state
securities laws (blue sky laws) and printing and delivering to the
Underwriter copies of the preliminary and final blue sky memoranda.
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<PAGE>
SECTION 6. CONDITION OF THE UNDERWRITER'S OBLIGATIONS. The obligation
of the Underwriter to purchase the Firm Shares hereunder is subject to the
following conditions:
(a) The price of the Shares and any price-related or other
information previously omitted from the effective Registration Statement
pursuant to such Rule 430A shall have been transmitted to the Commission for
filing pursuant to Rule 424(b) within the prescribed time period and on or
prior to the Closing Date, the Company shall have provided evidence
satisfactory to the Underwriter of such timely filing, or a post-effective
amendment providing such information shall have been promptly filed and
declared effective in accordance with the requirements of Rule 430A. No stop
order suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for the purpose shall have been instituted or
shall be pending or, to the knowledge of' the Company, shall be contemplated
by the Commission and there shall not have come to the attention of the
Underwriter any facts that would cause them to believe that the Prospectus,
at the time it was required to be delivered to purchasers of the Shares,
contained any untrue statement of material fact or omitted to state any
material fact necessary in order to make the statements therein, in light of
the circumstances under which there were made, not misleading.
(b) Subsequent to the effective date of the Registration Statement
(i) there shall not have occurred any material adverse change, or any
development involving a material adverse change, in or affecting particularly
the business or properties of the Company or its subsidiaries, taken as a
whole, not contemplated by the Prospectus, which, in the Underwriter's
opinion, would materially adversely affect the market for the Shares or make
it impracticable or inadvisable to proceed with the offering or the delivery
of the Shares, as contemplated herein and in the Prospectus, or to attempt to
enforce contracts for the purchase of Shares, and (ii) the business and
operations of the Company shall not have been adversely affected by strike,
fire, flood, accident or other calamity (whether or not insured).
(c) The Underwriter shall have received from Bracewell & Patterson,
L.L.P., counsel for the Company, a favorable opinion dated the Closing Date
and satisfactory to the Underwriter and the Underwriter's counsel to the
effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of
the State of Texas, and the Bank has been duly organized and
is validly existing as a national association under the laws
of the United States, both with full power and authority to
own, lease and operate their respective properties and
conduct their business as described in the Prospectus. The
Company and the Bank are duly qualified to do business and
are in good standing in each jurisdiction where the
ownership or leasing of their properties or the conduct of
their business requires such qualification, except in any
such case where the failure to so qualify or be in good
standing would not reasonably be expected to have a
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material adverse effect on the condition (financial or
otherwise) or results of operations of the Company.
(ii) The issued and outstanding capital stock of the Company has
been duly authorized and validly issued and is fully paid
and non-assessable and free of preemptive rights.
(iii) The authorized capitalization of the Company consists
entirely of 10,000,000 shares of preferred stock, $1.00
par value ("Preferred Stock"), issuable in series, none
of which is issued or outstanding, and 50,000,000
shares of Common Stock, of which 1,399,583 were issued
and 1,357,657 were outstanding on the date of the
Prospectus, all of which conform to the descriptions
thereof in the Prospectus.
(iv) The form of certificate for the Shares to be delivered
hereunder is in due and proper form, and when duly
countersigned by the Company's transfer agent and delivered
to the Underwriter against payment of the agreed
consideration therefor in accordance with the provisions of
this Agreement, the Shares represented thereby will be duly
authorized and validly issued, fully paid and nonassessable
and free of preemptive rights and, to the knowledge of such
counsel, will be free of any security interest, claim, lien,
encumbrance or adverse interest of any nature, or rights of
first refusal in favor of, shareholders with respect to any
of the Shares or the issuance or sale thereof, pursuant to
the articles of incorporation or bylaws of the Company and,
to such counsel's knowledge other than as disclosed in the
Prospectus, there are no contractual preemptive rights,
rights of first refusal, rights of co-sale or other similar
rights which exist with respect to any of the Shares or the
issuance and sale thereof; and the Shares to be sold
hereunder have been qualified for inclusion on The Nasdaq
National Market, subject to notice of issuance.
(v) This Agreement has been duly and validly authorized,
executed and delivered by the Company and constitutes a
valid and binding obligations of the Company, enforceable in
accordance with its terms, except as enforceability may be
limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights
generally and by general principles of equity, and except
that such counsel need express no opinion as to those
provisions relating to indemnities for liabilities under the
Act.
(vi) No authorization, approval, order or consent of any
governmental authority or agency is required for the valid
issuance and sale of the
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Shares, except such as may be required under the Act or
state securities laws as to which such counsel need express
no opinion.
(vii) The execution, delivery and performance by the Company
of this Agreement and the issue and sale of the Shares
will not conflict with or result in a breach of any of
the provisions of, or constitute a default under (A)
the Company's articles of incorporation or bylaws or
any agreement, franchise, license, indenture, mortgage,
deed of trust or other instrument or agreement known to
such counsel to which the Company is a party or by
which the Company is bound or to which its properties
are subject or (B) so far as known to such counsel, any
statute, order, rule or regulation applicable to the
Company of any court or other governmental authority or
body having jurisdiction over the Company or its
properties.
(viii) The Registration Statement has become effective under
the Act, and, to the knowledge of such counsel, no stop
order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that
purpose have been instituted or are pending or
contemplated under the Act.
(ix) The Registration Statement (including the information deemed
to be part of the Registration Statement at the time of
effectiveness pursuant to Rule 430A(b), if applicable) as
amended or supplemented (except for the financial statements
and notes thereto, the financial statement schedules and
other statistical or financial data included therein as to
which such counsel need express no opinion) and the
Prospectus and any supplements or amendments thereto (except
for the financial statements and notes thereto, the
financial statement schedules and other statistical or
financial data included therein, as to which such counsel
need express no opinion) comply as to form in all material
respects with the requirements of the Act and the rules
promulgated thereunder and nothing has come to the attention
of such counsel that would cause such counsel to believe
that the Registration Statement (including the information
deemed to be part of the Registration Statement at the time
of effectiveness pursuant to Rule 430A(b), if applicable) as
amended or supplemented (except for the financial statements
and notes thereto, the financial statement schedules and
other statistical or financial data included therein as to
which such counsel need express no opinion) at the time it
became effective, and at the Closing Date, contained any
untrue statement of a material fact or omitted or omits to
state any material fact required to be stated therein or
necessary to make the statements therein not misleading, or
that, as of its date, the Prospectus or any amendment
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or supplement thereto (except for the financial statements
and notes thereto, the financial statement schedules and
other statistical or financial data included therein as to
which such counsel need express no opinion) included or
includes any untrue statement of a material fact or omitted
or omits to state any material fact necessary to make the
statements therein, in light of the circumstances under
which they were made, not misleading. [If used, the
Rule 434 Prospectus conforms to the requirements of Rule 434
of the Act.]
(x) The statements in the Prospectus in the sections captioned
"Description of Securities of the Company," "The
Acquisitions" and "Supervision and Regulation" in each case
insofar as such statements constitute matters of law,
summaries of law or legal conclusions have been reviewed by
counsel and accurately present and summarize, in all
material respects, the matters described herein.
(xi) To the knowledge of such counsel there are no statutes or
regulations or any pending or threatened litigation or
governmental proceedings against the Company required to be
described in the Prospectus which are not so described, nor
of any contracts or documents of a character required to be
described in or filed as a part of the Registration
Statement which are not described or filed as required.
(xii) To such counsel's knowledge, except as disclosed in the
Prospectus, no person has the right, contractual or
otherwise, to cause the Company to register pursuant to
the Act any shares of capital stock of the Company upon
the issuance and sale of the Shares to be sold by the
Company to the Underwriter pursuant to this Agreement.
(xiii) Neither the Company nor the Bank is an "investment
company" or a person "controlled by" an "investment
company" within the meaning of the Investment Company
Act.
(xiv) To such counsel's knowledge, all offers and sales of
the Company's capital stock prior to the date hereof
were at all relevant times exempt from the
registration requirements of the Act and were duly
registered or the subject of an available exemption
from the registration requirements of the applicable
state securities or Blue Sky laws.
In rendering such opinion, such counsel may state that it is relying upon
the certificate of the officers of the Company and the transfer agent for the
Common Stock, as to the number of shares of Common Stock at any time or times
outstanding, and that insofar as its opinion under clause (x) above relates to
the accuracy and completeness of the Prospectus and Registration
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<PAGE>
Statement, it is based upon a general review with the Company's
representatives and independent accountants of the information contained
therein, without independent verification by such counsel of the accuracy or
completeness of such information. Such counsel may also rely upon the
opinions of other competent counsel and, as to factual matters, on
certificates of officers of the Company and its subsidiaries and of state
officials, in which case its opinion is to state that it is so doing and
copies of such opinions or certificates are to be attached to the opinion
unless such opinions or certificates (or, in the case of certificates, the
information therein) have been furnished to the Underwriter otherwise.
(d) The Underwriter shall have received on the Closing Date a
favorable opinion dated the Closing Date from Rothgerber, Appel, Powers &
Johnson LLP, counsel for the Underwriter, as to such matters as the
Underwriter may reasonably require.
(e) On the Closing Date and Second Closing Date, the Underwriter
shall have received letters addressed to the Underwriter and dated the date
hereof and the Closing Date from Grant Thornton, LLP, independent public
accountants for the Company, McClelland, Samuel & Fehnel, L.L.P., independent
public accountants for Texas Bank, and Killingsworth & Company P.C.,
independent public accountants for Texas National and First Bank, in a form
and substance reasonably satisfactory to the Underwriter. There shall not
have been any change or decrease specified in the letters referred to in this
subparagraph which makes it impractical or inadvisable in the judgment of the
Underwriter to proceed with the public offering or purchase of the Shares as
contemplated hereby.
(f) (i) no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been taken or, to the knowledge of the Company, shall be
contemplated by the Commission at or prior to the Closing Date; (ii) there
shall not have been any change in the capital stock of the Company nor any
material increase in the short- or long-term debt of the Company or the
Acquired Banks from that set forth or contemplated in the Registration
Statement; (iii) there shall not have been, since the respective dates as to
which information is given in the Registration Statement and the Prospectus,
except as may otherwise be set forth or contemplated in the Registration
Statement and the Prospectus, any material adverse change in the financial
condition or results of operations of the Company or any of the Acquired
Banks; (iv) the Company shall not have incurred any material liabilities or
obligations, direct or contingent (whether or not in the ordinary course of
business), other than those reflected in the Registration Statement; (v) the
acquisition of the Acquired Banks shall have been consummated or, if not yet
consummated, the Company shall not have knowledge of any circumstance raising
substantial doubt that any of such acquisitions will be timely consummated;
and (vi) all of the representations and warranties of the Company contained
in this Agreement shall be true and correct in all material respects on and
as of the date hereof and the Closing Date as if made on and as of each such
date and the Underwriter shall have received a certificate, dated the Closing
Date and signed by the chief executive officer and the principal financial
officer (or such other officers as are acceptable to the Underwriter) to the
effect set forth in this Section 6(f) and in Section 6(g) hereof.
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(g) The Company shall not have failed at or prior to the Closing
Date to have performed or complied in all material respects with any of the
agreements herein contained and required to be performed or complied with by
it at or prior to the Closing Date.
(h) Within 24 hours after the Registration Statement becomes
effective, or within such longer period as to which the Underwriter shall
have consented, the Shares shall have been qualified for sale or exempted
from such qualification under the securities laws of such jurisdictions as
the Underwriter shall have designated and such qualification or exemption
shall continue in effect to and including the Closing Date.
(i) Prior to the Closing Date, the Company shall have furnished to
the Underwriter or the Underwriter's counsel such further information,
certificates and documents as the Underwriter or the Underwriter's counsel
may reasonably request.
The obligations of the Underwriter to purchase Additional Shares
hereunder are subject to the satisfaction on and as of the Option Closing
Date of the conditions set forth in paragraphs (a) through (i); except that
the opinions called for in paragraphs (c) and (d) shall be revised to reflect
the sale of Additional Shares and shall be dated the Option Closing Date, if
different from the Closing Date.
SECTION 7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless the Underwriter
and each person, if any, who controls the Underwriter within the meaning of the
Act or the Exchange Act from and against any and all losses, claims, damages or
liabilities, joint or several, whatsoever (including any investigation, legal or
other expenses incurred in connection with, and any amount paid in settlement
of, any action, suit or proceeding or any claim asserted) to which the
Underwriter, or such controlling person may become subject under the Act, the
Exchange Act or otherwise, insofar as arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus or the Registration Statement or the Prospectus or in any
amendment or supplement thereto or arising out of or based upon any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading and will reimburse
the Underwriter for any legal or other expenses reasonably incurred by the
Underwriter in connection with investigating or defending any such action or
claim as such expenses are incurred, except insofar as such losses, claims,
damages or liabilities arise out of or are based upon any such untrue statement
or omission or allegation thereof which has been made therein or omitted
therefrom in reliance upon and in conformity with information relating to the
Underwriter furnished in writing to the Company by the Underwriter expressly for
use therein; provided, however, that the indemnification contained in this
paragraph with respect to any preliminary prospectus shall not inure to the
benefit of the Underwriter (or of any person controlling the Underwriter) with
respect to any action or claim arising from the sale of the Shares by the
Underwriter brought by any person who purchased Shares from the Underwriter if
(i) a copy of the Prospectus (as amended or supplemented if any amendments or
supplements thereto shall have been furnished to the
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<PAGE>
Underwriter prior to the written confirmation of the sale involved) shall not
have been given or sent to such person by or on behalf of the Underwriter
with or prior to the written confirmation of the sale involved and (ii) the
untrue statement or omission of a material fact contained in such preliminary
prospectus was corrected in the Prospectus (as amended or supplemented if
amended or supplemented as aforesaid).
(b) If any action or claim shall be brought against the Underwriter
or any person controlling the Underwriter, in respect of which indemnity may
be sought against the Company, the Underwriter shall promptly notify the
Company in writing, and the Company shall assume the defense thereof,
including the employment of counsel and payment of all fees and expenses.
The Underwriter or any such person controlling the Underwriter shall have the
right to employ separate counsel in any such action and participate in the
defense thereof, but the fees and expenses of such counsel shall be at the
expense of the Underwriter or such controlling person unless (i) the Company
has agreed in writing to pay such fees and expenses, (ii) the Company has
failed to assume the defense and employ counsel, or (iii) the named parties
to any such action (including any impleaded party) included the Underwriter
or controlling person and the Company and the Underwriter or controlling
person shall have been advised by such counsel that there may be one or more
legal defenses available to it which are different from or additional to
those available to the Company and which may also result in a conflict of
interest (in which case if the Underwriter or controlling person notifies the
Company, the Company shall not have the right to assume the defense of such
action on behalf of the Underwriter or controlling person, it being
understood, however, that the Company shall not, in connection with any one
such action or separate but substantially similar or related actions in the
same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more than
one separate firm of attorneys for the Underwriter and any such controlling
persons, which firm shall be designated in writing by the Underwriter). The
Company shall not be liable for any settlement or any such action effected
without the written consent of the Company, but if settled with the written
consent of the Company, or if there shall be a final judgment for the
plaintiff in any such action and the time for filing all appeals has expired,
the Company agrees to indemnify and hold harmless the Underwriter and any
such controlling person from and against any loss or liability by reason of
such settlement or judgment.
(c) The Underwriter will indemnify and hold harmless the Company, its
directors, its officers who sign the Registration Statement and any person
controlling the Company within the meaning of the Act or the Exchange Act to the
same extent as the foregoing indemnity from the Company to the Underwriter, but
only with respect to information relating to the Underwriter furnished in
writing to the Company by the Underwriter expressly for use in the Registration
Statement, the Prospectus or any preliminary prospectus. If any action or claim
shall be brought or asserted against the Company, any of its directors, any such
officer, or any such controlling person based on the Registration Statement, the
Prospectus or any preliminary prospectus and in respect of which indemnity may
be sought against the Underwriter, the Underwriter shall have the rights and
duties given to the Company pursuant to Section 7(b) hereof (except that if the
Company shall have assumed the defense thereof, the Underwriter shall not be
required to do so, but may employ separate counsel therein and participate in
the defense
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<PAGE>
thereof but the fees and expenses of such counsel shall be at the expense of
the Underwriter), and the Company, its directors, any such officer, and any
such controlling person shall have the rights and duties given to the
Underwriter by Section 7(b) hereof.
(d) (i) If the indemnification provided for in this Section 7 is
unavailable as a matter of law to any indemnified party under this Section 7
in respect of any losses, claims, damages, liabilities or expenses referred
to therein, then the indemnifying party in lieu of indemnifying such
indemnified party thereunder shall contribute to the amount paid or payable
by damages, liabilities or expenses (A) in such proportion as is appropriate
to reflect the relative benefits received by the Company and the Underwriter
from the offering of the Shares or (B) if the allocation provided by clause
(A) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause
(A) above but also the relative fault of the Company and the Underwriter in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The respective relative benefits received by the
Company and the Underwriter shall be deemed to be in the same proportion, in
the case of the Company as the total price paid to the Company for the Shares
by the Underwriter (net of underwriting discount but before deducting
expenses), and in the case of the Underwriter as the underwriting discount
received by it, bears to the total of such amounts paid to the Company and
received by the Underwriter as underwriting discount, in each case as
contemplated by the Prospectus. The relative fault of the Company and the
Underwriter shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company or by the Underwriter and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The amount paid or payable by an indemnified party as
a result of the losses, claims, damages, liabilities and expenses referred to
in this section shall be deemed to include, subject to the limitations set
forth in this section, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim.
(ii) The Company and the Underwriter agree that the
determination of contribution pursuant to this section based on pro rata
allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph would not be just and equitable. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
(e) The indemnity and contribution agreements contained in this
Section 7 and the representations and warranties of the Company set forth in
this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of the Underwriter
or any person controlling the Underwriter, the Company or its directors or
officers (or any person controlling the Company), (ii) acceptance of any
Shares and payment therefor hereunder and (iii) any termination of this
Agreement. A successor or assign of the Underwriter, the Company or its
directors or officers, and their legal and personal representatives
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(or of any person controlling the Underwriter or the Company) shall be
entitled to the benefits of the indemnity, contribution and reimbursement
agreements contained in this section.
SECTION 8. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become
effective immediately as to Sections 5, 7, 8, 9 and 10 and as to all other
provisions at 10:00 a.m., San Francisco time, on the day following the date
upon which this Agreement is executed and delivered, unless such a day is a
Saturday, Sunday or holiday (and in that event this Agreement shall become
effective at such hour on the business day next succeeding such Saturday,
Sunday or holiday); but this Agreement shall nevertheless become effective at
such earlier time after the Pricing Agreement is executed and delivered as
the Underwriter may determine on and by notice to the Company or by release
of any Shares for sale to the public. For the purposes of this section, the
Shares shall be deemed to have been so released upon the release for
publication of any newspaper advertisement relating to the Shares or upon the
release by the Underwriter of telegrams (i) advising that the Shares are
released for public offering, or (ii) offering the Shares for sale to
securities dealers, whichever may occur first.
SECTION 9. TERMINATION OF AGREEMENT. The Underwriter shall have the
right to terminate this Agreement at any time prior to the Closing Date (and
with respect to the Additional Shares, the Option Closing Date) by notice to
the Company from the Underwriter, without liability (other than with respect
to Section 7) on the Underwriter's part to the Company if, on or prior to
such date, (i) the Company shall have failed, refused or been unable to
perform in any material respect any agreement on its part to be performed
hereunder, (ii) any other condition to the obligations of the Underwriter
hereunder as provided in Section 6 is not fulfilled when and as required in
any material respect, (iii) trading in securities generally on the New York
Stock Exchange, the American Stock Exchange or the NASD Automated Quotation
System shall have been suspended or materially limited, or minimum prices
shall have been established on any such exchange by the Commission, or by
such exchange or other regulatory body or governmental authority having
jurisdiction, (iv) a general Banking moratorium shall have been declared by
federal or Texas state authorities, (v) there is a material outbreak or
escalation of armed hostilities involving the United States on or after the
date hereof, or if there has been a declaration by the United States of a
national emergency or war, the effect of which shall be, in the Underwriter's
reasonable judgment, to make it inadvisable or impracticable to proceed with
the public offering or delivery of the Shares on the terms and in the manner
contemplated in the Prospectus as supplemented or amended prior to the
occurrence of such event, (vi) in the Underwriter's reasonable opinion any
material adverse change shall have occurred since the respective dates as of
which information is given in the Registration Statement or the Prospectus
(as supplemented or amended prior to the occurrence of such event) in the
condition (financial or other) of the Company or any of the Acquired Banks
whether or not arising in the ordinary course of business other than as set
forth in the Prospectus as supplemented or amended prior to the occurrence of
such event, or (vii) there shall have been such a material adverse change in
general economic, political or financial conditions or if the effect of
international conditions on the financial markets in the United States shall
be such as, in the Underwriter's reasonable opinion, makes it inadvisable or
impracticable to proceed with the delivery of the Shares as contemplated
hereby. Notice of
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such cancellation shall be given to the Company by telecopy or telephone but
shall be subsequently confirmed by letter.
SECTION 10. REIMBURSEMENT OF UNDERWRITER'S EXPENSES. If the sale to the
Underwriter of the Shares on the Closing Date is not consummated because any
condition to the Underwriter's obligations hereunder is not satisfied or
because of any refusal, inability or failure on the part of the Company to
perform any agreement herein or to comply with any provision hereof, unless
such failure to satisfy such condition or to comply with any provision hereof
is due to the default or omission of the Underwriter, the Company agrees to
reimburse the Underwriter upon demand, subject to the limits set forth in
this Agreement, for all out-of-pocket expenses (including fees and
disbursements of counsel) that shall have been incurred by the Underwriter in
connection with the proposed purchase and the sale of the Shares. Any such
termination shall be without liability of any party to any other party except
that the provisions of this section, Section 4(j), Section 5 and Section 7
shall at all times be effective and shall apply.
SECTION 11. NOTICES. Except as otherwise provided in Section 9 hereof,
notice given pursuant to any of the provisions of this Agreement shall be in
writing and shall be delivered (a) if to the Company, at the office of the
Company at 1001 Highway 146 South, La Porte, Texas 77571, Attention: L. D.
Wright, President; with a copy to Bracewell & Patterson, L.L.P., 2900 South
Tower Penzoil Place, Houston, Texas 77002, Attention: John R. Brantley, Esq.;
or (b) if to the Underwriter, at the offices of Hoefer & Arnett Incorporated,
353 Sacramento Street, 10th Floor, San Francisco, California 94111,
Attention: Steven J. Didion; with a copy to Rothgerber, Appel, Powers &
Johnson LLP, 1200 17th Street, Suite 3000, Denver, Colorado 80202-5839,
Attention: Herbert H. Davis III, Esq., or in any case to such other address
as the person to be notified may have requested in writing.
SECTION 12. SUCCESSORS. The Agreement and the Pricing Agreement are
made solely for the benefit of the Underwriter, the Company, their directors
and officers and other controlling persons referred to in Section 7 hereof,
and their respective successors and assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement or the Pricing
Agreement. The term "successors and assigns" as used in this Agreement shall
not include a purchaser from the Underwriter of any of the Shares in his
status as such purchaser.
SECTION 13. PARTIAL UNENFORCEABILITY. If any section, paragraph or
provision of this Agreement is for any reason determined to be invalid or
unenforceable, such determination shall not affect the validity or
enforceability of any other section, paragraph or provision hereof.
SECTION 14. APPLICABLE LAW. This Agreement and the Pricing Agreement
shall be governed by and construed in accordance with the laws of the State
of California.
SECTION 15. COUNTERPARTS. This Agreement may be signed in various
counterparts which together shall constitute one and the same instrument.
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Please confirm that the foregoing correctly sets forth the agreement
between the Company and the Underwriter.
Very truly yours,
BAY BANCSHARES, INC.
By:
------------------------------
Name: L. D. Wright
Title: President
Accepted and delivered as of
the date first written above
HOEFER & ARNETT INCORPORATED
By:
-------------------------
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SELECTED DEALERS AGREEMENT
__________________, 1997
HOEFER & ARNETT, INCORPORATED
353 Sacramento Street, 10th Floor
San Francisco, California 94111
Ladies and Gentlemen:
1. GENERAL. We understand that Hoefer & Arnett, Incorporated ("Hoefer
& Arnett") is entering into this Agreement with us and other firms who may be
offered the right to purchase as principal a portion of securities being
distributed to the public. The terms and conditions of this Agreement shall
be applicable to any public offering of securities ("Securities") pursuant to
a registration statement filed under the Securities Act of 1933 (the
"Securities Act") wherein Hoefer & Arnett (acting for its own account or for
the account of any underwriting or similar group or syndicate) is responsible
for managing or otherwise implementing the sale of the Securities to selected
dealers ("Selected Dealers") and has expressly informed us that such terms
and conditions shall be applicable. Any such offering of Securities to us as
a Selected Dealer is hereinafter called an "Offering." In the case of any
Offering in which you are acting for the account of any underwriting or
similar group or syndicate ("Underwriters"), the terms and conditions of this
Agreement shall be for the benefit of, and binding upon, such Underwriters,
including, in the case of any Offering in which you are acting with others as
representatives of Underwriters, such other representatives. The term
"preliminary prospectus" means any preliminary prospectus relating to an
Offering of Securities or any preliminary prospectus supplement together with
a prospectus relating to an Offering of Securities; the term "Prospectus"
means the prospectus, together with the final prospectus supplement, if any,
relating to an Offering of Securities, either filed pursuant to Rule 424(b)
or Rule 424(c) under the Securities Act or, if no such filing is required,
the form of final prospectus contained in the related registration statement
at the time that it first becomes effective.
2. CONDITIONS OF OFFERING; ACCEPTANCE AND PURCHASE. Any Offering will
be subject to delivery of the Securities and their acceptance by you and any
other Underwriters, may be subject to the approval of certain legal matters
by counsel and the satisfaction of other conditions, and may be made on the
basis of reservation of Securities or an allotment against subscription. You
will advise us by telegram, telex, or other form of written communication
("Written Communication") of the particular method and supplementary terms
and conditions (including, without limitation, the information as to prices
and offering date referred to ion Section 3(b)) of any Offering in which we
are invited to participate. To the extent such supplementary terms and
conditions are inconsistent with any provision herein, such terms and
conditions shall supersede any
<PAGE>
such provision. Unless otherwise indicated in any such Written
Communication, acceptances and other communications by us with respect to any
Offering should be sent to Hoefer & Arnett, Incorporated, 353 Sacramento
Street, 10th Floor, San Francisco, California 94111. You reserve the right
to reject any acceptance in whole or in part. Payment for Securities
purchased by us is to be made at such office as you may designate, at the
public offering price, or, if you shall so advise us, at such price less the
concession to dealers or at the price set forth or indicated in a Written
Communication, on such date as you shall determine, on one days' prior notice
to us, by certified or official bank check payable in next day funds to the
order of Hoefer & Arnett, against delivery of certificates evidencing such
Securities. If payment is made for Securities purchased by us at the public
offering price, the concession to which we shall be entitled will be paid to
us upon termination of the provisions of Section 3(b) hereof with respect to
such Securities.
Unless we promptly give you written instructions otherwise, if
transactions in the Securities may be settled through the facilities of The
Depository Trust Company, payment for and delivery of Securities purchased by
us will be made through such facilities if we are a member, or if we are not
a member, settlement may be made through or ordinary correspondent who is a
member.
3. REPRESENTATIONS, WARRANTIES AND AGREEMENT.
(a) PROSPECTUSES. You shall provide us with such number of copies of
each preliminary prospectus, the Prospectus and any supplement thereto relating
to each Offering as we may reasonably request for the purposes contemplated by
the Securities Act and the Securities Exchange Act of 1934 (the "Exchange Act")
and the applicable rules and regulations of the Securities and Exchange
Commission thereunder. We represent that we are familiar with Rule 15c2-8 under
the Exchange Act relating to the distribution of preliminary and final
prospectuses and agree that we will comply therewith. We agree to keep an
accurate record of our distribution (including dates, number of copies, and
persons to whom sent) of copies of the Prospectus or any preliminary prospectus
(or any amendment or supplement to any thereof), and promptly upon request by
you, to bring all subsequent changes to the attention of anyone to whom such
material shall have been furnished. We agree to furnish to persons who receive
a confirmation of sale a copy of the Prospectus. We agree that in purchasing
Securities in an Offering we will rely upon no statements in the Prospectus
delivered to us by you. We will not be authorized by the issuer or other seller
of Securities offered pursuant to a Prospectus or by any Underwriters to give
any information or to make any representation not contained in the Prospectus in
connection with the sale of such Securities.
(b) OFFER AND SALE TO THE PUBLIC. With respect to any Offering of
Securities, you will inform us by a Written Communication of the public
offering price,
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the selling concession, the reallowance (if any) to dealers, and the time
when we may commence selling Securities to the public. After such public
offering has commenced, you may change the public offering price, the selling
concession, and the reallowance to dealers. With respect to each Offering of
Securities, until the provisions of this Section 3(b) shall be terminated
pursuant to Section 4, we agree to offer Securities to the public only at the
pubic offering price, except that if a reallowance is in effect, a
reallowance from the public offering price not in excess of such reallowance
may be allowed as consideration for services rendered in distribution to
dealers who are actually engaged in the investment banking or securities
business, who execute the written agreement prescribed by Section 24(c) of
Article III of the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (the "NASD") and who are either members in good
standing of the NASD or foreign brokers or dealers not eligible for
membership in the NASD who represent to us that they will promptly reoffer
such Securities at the public offering price and will abide by the conditions
with respect to foreign brokers and dealers set forth in Section 3(e) hereof.
(c) STABILIZATION AND OVERALLOTMENT. You may, with respect to any
Offering, be authorized to overallot in arranging sales to Selected Dealers,
to purchase and sell Securities, any other securities of the issuer of the
Securities of the same class and series and any other securities of such
issuer that you may designate for long or short account, and to stabilize or
maintain the market price of the Securities. We agree to advise you from
time to time upon request, prior to the termination of the provisions of
Section 3(b) with respect to any Offering, of the amount of Securities
purchased by us hereunder remaining unsold and we will, upon your request,
sell to you, for the accounts of the Underwriters, such amount of Securities
as you may designate, at the public offering price thereof less an amount to
be determined by you not in excess of the concession to dealers. In the
event that prior to the later of (i) the termination of the provisions of
Section 3(b) with respect to any Offering, or (ii) the covering by you of any
short position created by you in connection with such Offering for your
account or the account of one or more Underwriters, you purchase or contract
to purchase for the account or the account of one or more Underwriters, you
purchase or contract to purchase for the account of any of the Underwriters,
in the open market or otherwise, any Securities theretofore delivered to us,
you reserve the right to withhold the above-mentioned concession to dealers
on such Securities if sold to us at the public offering price, or if such
concession has been allowed to us through our purchase at a net price, we
agree to repay such concession upon your demand, plus in each case any taxes
on redelivery, commissions, accrued interest, and dividends paid in
connection with such purchase or contract to purchase.
(d) OPEN MARKET TRANSACTIONS. We agree not to bid for, purchase,
attempt to purchase, or sell, directly or indirectly, any Securities, any
other securities of the issuer of the Securities of the same class and
series, or any other securities of such
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issuer as you may designate, except as brokers pursuant to unsolicited orders
and as otherwise provided in this Agreement. If the Securities are common
stock or securities convertible into common stock, we agree not to effect, or
attempt to induce others to effect, directly or indirectly, any transactions
in or relating to put or call options on any stock of such issuer, except to
the extent permitted by Rule 10b-6 under the Exchange Act as interpreted by
the Securities and Exchange Commission.
(e) NASD. We represent that we are actually engaged in the
investment banking or securities business and we are either a member in good
standing of the NASD, or, if not such a member, a foreign dealer not eligible
for membership. If we are such a member, we agree that in making sales of
the Securities we will comply with all applicable rules of the NASD,
including, without limitation, the NASD's Interpretation with Respect to
Free-Riding and Withholding and Section 24 of Article III of the Rule of Fair
Practice. If we are such a foreign dealer, we agree not to offer or sell any
Securities in the United States of America except through you and in making
sales of Securities outside the United States of America we agree to comply
as though we were a member with such Interpretation and Sections 8, 24, and
36 of Article III of the NASD's Rules of Fair Practice and to comply with
Section 25 of such Article III as it applies to a non-member broker or dealer
in a foreign country.
(f) RELATIONSHIP AMONG UNDERWRITERS AND SELECTED DEALERS. You may
buy Securities from or sell Securities to any Underwriter or Selected Dealer
and, with your consent, the Underwriters (if any) and the Selected Dealers
may purchase Securities from and sell Securities to each other at the public
offering price less all or any part of the concession. We are not authorized
to act as agent for you or any Underwriter or the issuer or other seller of
any Securities in offering Securities to the public or otherwise. Nothing
contained herein or in any Written Communication from you shall constitute
the Selected Dealers partners with you or any Underwriter or with one
another. Neither you nor any Underwriter shall be under any obligation to us
except for obligations assumed hereby or in any Written Communication from
you in connection with any Offering. In connection with any Offering, we
agree to pay our proportionate share of any claim, demand, or liability
asserted against us, and the other Selected Dealers or any of them, or
against you or the Underwriters, if any, based on any claim that such
Selected Dealers or any of them constitute an association, unincorporated
business, or other separate entity, including in each case our proportionate
share of any expense incurred in defending against any such claim, demand, or
liability.
(g) BLUE SKY LAWS. Upon application to you, you will inform us as
to the jurisdictions in which you believe the Securities have been qualified
for sale under the respective securities or "blue sky" laws of such
jurisdictions. We understand and agree that compliance with the securities or
"blue sky" laws in each jurisdiction in which we shall offer or sell any of
the Securities shall be our sole responsibility and that you
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assume no responsibility or obligations as to the eligibility of the
Securities for sale or our right to sell the Securities in any jurisdiction.
(h) COMPLIANCE WITH LAW. We agree that in selling Securities
pursuant to any Offering (which agreement shall also be for the benefit of
the issuer or other seller of such Securities), we will comply with the
applicable provisions of the Securities Act and the Exchange Act, the
applicable rules and regulations of the Securities and Exchange Commission
thereunder and the applicable rules and regulations of any securities
exchange having jurisdiction of the Offering. You shall have full authority
to take such action as you may deem advisable in respect of all matters
pertaining to any Offering. Neither you nor any Underwriter shall be under
any liability to us, except for lack of good faith and for obligations
expressly assumed by you in this Agreement; PROVIDED, HOWEVER, that nothing
in this sentence shall be deemed to relieve you from any liability imposed by
the Securities Act.
4. TERMINATION; SUPPLEMENTS AND AMENDMENTS. This Agreement may be
terminated by either party hereto upon five business days' written notice to
the other party; PROVIDED that with respect to any Offering for which Written
Communication was sent and accepted prior to such notice, this Agreement as
it applies to such Offering shall remain in full force and effect and shall
terminate with respect to such Offering in accordance with the last sentence
of this Section. This Agreement may be supplemented or amended by you by
written notice thereof to us, and any such supplement or amendment to this
Agreement shall be effective with respect to any Offering to which this
Agreement applies after the date of such supplement or amendment. Each
reference to "this Agreement" herein shall, as appropriate, be to this
Agreement as so amended and supplemented. The terms and conditions set forth
in Sections 3(b) and (d) hereof with regard to any Offering will terminate at
the close of business on the thirtieth day after the date of the initial
public offering of the Securities to which such Offering related, but such
terms and conditions, upon notice to us, may be terminated by you at any time.
5. SUCCESSOR AND ASSIGNS. This Agreement shall be binding on, and
inure to the benefit of, the parties hereto and other persons specified or
indicated in Section 1 hereof, and the respective successors and assigns of
each of them; PROVIDED, HOWEVER, that we may not assign our rights or
delegate any of our duties under this Agreement without your prior written
consent.
6. GOVERNING LAW. This Agreement and the terms and conditions set
forth herein with respect to any Offering together with such supplementary
terms and conditions with respect to such Offering as may be contained in any
Written Communication from you to us in connection therewith shall be
governed by, and construed in accordance with, the laws of the State of
California.
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By signing this Agreement we confirm that our subscription to, or our
acceptance of any reservation of, any Securities pursuant to an Offering
shall constitute (i) acceptance of and agreement to the terms and conditions
of this Agreement (as supplemented and amended pursuant to Section 4)
together with and subject to any supplementary terms and conditions contained
in any Written Communication from you in connection with such Offering, all
of such shall constitute a binding agreement between us and you,
individually, or as representative of any Underwriters, (ii) in confirmation
that our representations and warranties set forth in Section 3 hereof are
true and correct at that time and (iii) confirmation that our agreements set
forth in Sections 2 and 3 hereof have been and will be fully performed by us
to the extent and at the time required thereby.
Very truly yours,
------------------------------------
(Name of Firm)
By:
--------------------------------
Name:
------------------------------
Title:
------------------------------
Confirmed, as of the date
first above written.
HOEFER & ARNETT, INCORPORATED
By:
--------------------------
Name:
------------------------
Title:
------------------------
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EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 24, 1997 (except for the last
sentence of the penultimate paragraph of Note I, as to which the date is
August 26, 1997 and the third sentence of the second paragraph of Note K, as
to which the date is June 24, 1997), accompanying the financial statements of
Bay Bancshares, Inc. and Subsidiaries contained in the Registration Statement
and Prospectus. We consent to the use of the aforementioned report in the
Registration Statement and Prospectus, and to the use of our name as it
appears under the caption "Experts".
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
Houston, Texas
November 4, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated September 10, 1997, accompanying the
financial statements of Texas Bank contained in the Registration Statement
and Prospectus. We consent to the use of the aforementioned report in the
Registration Statement and Prospectus, and to the use of our name as it
appears under the caption "Experts".
/s/ McCLELLAND, SAMUEL & FEHNEL, L.L.P.
McCLELLAND, SAMUEL & FEHNEL, L.L.P.
Beaumont, Texas
November 4, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated May 28, 1997, accompanying the financial
statements of Texas National Bank of Baytown contained in the Registration
Statement and Prospectus. We consent to the use of the aforementioned report
in the Registration Statement and Prospectus, and to the use of our name as
it appears under the caption "Experts".
/s/ KILLINGSWORTH & COMPANY
KILLINGSWORTH & COMPANY
Houston, Texas
November 4, 1997
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated May 28, 1997, accompanying the financial
statements of First Bank of Deer Park contained in the Registration Statement
and Prospectus. We consent to the use of the aforementioned report in the
Registration Statement and Prospectus, and to the use of our name as it
appears under the caption "Experts".
/s/ KILLINGSWORTH & COMPANY
KILLINGSWORTH & COMPANY
Houston, Texas
November 4, 1997
