<PAGE>
As filed with the Securities and Exchange Commission on April 14, 1998
Registration No. 333-________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REGISTRATION STATEMENT
ON
FORM S-4
UNDER THE SECURITIES ACT OF 1933
CNBT BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
TEXAS 6021 APPLIED FOR
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer Identification No.)
Classification Code Number) of incorporation or organization)
</TABLE>
RANDALL W. DOBBS
5320 BELLAIRE BOULEVARD CNBT BANCSHARES, INC.
BELLAIRE, TEXAS 77401 5320 BELLAIRE
713-661-4444 BELLAIRE, TEXAS 77401
(Address, including ZIP Code 713-661-4444
and telephone number, including (Name, address, including ZIP
area code, of registrant's Code, and telephone number,
principal executive office) including area code, of agent
for service)
With A Copy To:
JOHN T. UNGER
SNELL & SMITH, P.C.
1000 LOUISIANA, SUITE 1200
HOUSTON, TEXAS 77002
713-652-3311
713-651-8010 (FAX)
Approximate date of commencement of the proposed sale of the securities to
the public: As soon as practicable after the effective date of the Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box . [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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 this form is a post-effective amendment filed pursuant to Rule 462(d)
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. [_]________
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=======================================================================================================
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(1) PRICE(1) FEE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $1.00 par value.. 5,054,181 $15.625 $78,971,578 $23,296.62
=======================================================================================================
</TABLE>
1. Estimated solely for the purpose of calculating the registration fee
and based, in accordance with Rule 457(f)(1), upon the average of the high and
low sale prices on The Nasdaq Stock Market of the outstanding shares of Citizens
National Bank of Texas, of 5,054,181 shares of common stock, par value $2.03 per
share, as of April 9, 1998, of $15.625 per share and a maximum of 5,054,181
shares of such stock to be converted in the reorganization into common stock of
the Registrant with a par value of $1.00 per share.
<PAGE>
CNBT BANCSHARES, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
FORM S-4
ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS
----------------------- ----------------------
<C> <S> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus.............. Facing Page of Registration Statement; Outside Front Cover
Page of Proxy Statement and Prospectus
2. Inside Front and Outside Back Cover Pages of Available Information; Table of Contents
Prospectus..................................
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information....................... Outside Front Cover Page of Proxy Statement and
Prospectus; Summary; Risk Factors
4. Terms of the Transaction.................... Summary -- Proposed Reorganization; Proposed
Reorganization -- Merger Agreement, --Reasons for the
Reorganization, -- Effect of Reorganization on Bank's
Business and Stockholders, -- Comparison of Stockholders
Rights, --Tax Consequences; Description of Holding
Company's Stock
5. Pro Forma Financial Information................... Not Applicable
6. Material Contracts with the Company Being
Acquired.......................................... Proposed Reorganization
7. Additional Information Required for Reoffering
by Persons and Parties Deemed to be
Underwriters...................................... Not Applicable
8. Interests of Named Experts and Counsel............ Not Applicable
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities.... Description of the Holding Company -- Indemnification for
Securities Act Liabilities
10. Information with Respect to S-3 Registrants....... Not Applicable
11. Incorporation of Certain Information by
Reference......................................... Not Applicable
12. Information with Respect to S-2 or S-3
Registrants....................................... Not Applicable
13. Incorporation of Certain Information by
Reference......................................... Not Applicable
14. Information with Respect to Registrants Other
Than S-1 or S-3 Registrants....................... Description of the Holding Company; Description of the
Bank; Summary -- Selected Financial Data; Description of
the Securities of the Bank -- Market Price of Common Stock
15. Information with Respect to S-3 Companies......... Not Applicable
16. Information with Respect to S-2 or S-3
Companies......................................... Not Applicable
17. Information with Respect to Companies Other
than S-2 or S-3 Companies......................... Not Applicable
18. Information if Proxies, Consents or Authoriza-
tions are to be Solicited......................... Outside Front Cover Page of Proxy Statement and
Prospectus; Introduction; Proposed Reorganization -- Rights
of Dissenting Stockholders; Principal Holders of Bank
Common Stock; Election of Directors
19. Information if Proxies, Consents or Authori-
zations are not to be Solicited or in an Exchange
Offer............................................. Not Applicable
</TABLE>
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS
5320 BELLAIRE BOULEVARD
BELLAIRE, TEXAS 77401
713-661-4444
April __, 1998
TO OUR STOCKHOLDERS:
The Board of Directors of Citizens National Bank of Texas (the "Bank")
cordially invites you to attend the Annual Meeting of Stockholders which will
commence at ____ __.m., Houston time, on May, 26, 1998, at the offices of the
Bank, 5320 Bellaire Boulevard, Bellaire, Texas 77401.
The Notice of Annual Meeting and the Proxy Statement on the following pages
address the formal business of the meeting. The business scheduled for the
Annual Meeting includes a proposal to approve and adopt a plan of reorganization
to form a bank holding company for the Bank. The Board of Directors recommends
that you vote in favor of the proposal and believes that the formation of a bank
holding company at this time is an important and necessary part of the Bank's
plans for the future. The Board of Directors believes that the formation of a
holding company at this time will provide the Bank with the opportunity to
engage in certain "non-bank" activities, greater flexibility in acquiring other
financial institutions, and flexibility to utilize alternative sources of
capital that are not available to the Bank and will provide investors and
potential investors with increased access to financial information with respect
to the Bank through the Securities and Exchange Commission's Internet site.
Under the proposed plan of reorganization and associated merger, each share
of common stock of the Bank presently held by you would be converted into one
share of common stock of CNBT Bancshares, Inc., a Texas corporation and bank
holding company whose only substantial asset would be all of the common stock of
the Bank (the "Holding Company"). If the plan of reorganization is approved and
adopted, the Bank's stockholders (other than dissenting stockholders) will
automatically become stockholders of the Holding Company. Since the Holding
Company will indirectly own all of the outstanding shares of the Bank, your
interest in the Bank at the time of the reorganization will remain essentially
the same, except that it will be indirect rather than direct. The conversion of
common stock of the Bank into common stock of the Holding Company will be tax
free for federal income tax purposes.
THE BOARD OF DIRECTORS BELIEVES THAT THE PLAN OF REORGANIZATION IS IN THE
BEST INTERESTS OF THE BANK AND ITS STOCKHOLDERS AND URGES YOU TO VOTE IN FAVOR
OF THE PLAN OF REORGANIZATION AND PROPOSED MERGER. THE APPROVAL AND ADOPTION OF
THE MERGER REQUIRES AN AFFIRMATIVE VOTE OF THE HOLDERS OF AT LEAST 66-2/3% OF
THE OUTSTANDING SHARES OF THE BANK'S COMMON STOCK. IT IS, THEREFORE, EXTREMELY
IMPORTANT FOR YOU TO SIGN, DATE AND RETURN YOUR ENCLOSED PROXY AS SOON AS
POSSIBLE IN THE PRE-ADDRESSED AND STAMPED ENVELOPE SUPPLIED FOR YOUR
CONVENIENCE, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING.
We urge you to carefully review the enclosed Proxy Statement and Prospectus
that describes the plan of reorganization and the merger proposal in detail. On
behalf of the Board of Directors, thank you for your cooperation and continued
support.
Very truly yours,
Frank G. Cook, Chairman of the Board
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 26,1998
-------------------------------
To the Stockholders of Citizens National Bank of Texas:
Notice is hereby given that the Annual Meeting of Stockholders of Citizens
National Bank of Texas (the "Bank") will be held at _______ __.m., Houston time,
on May 26, 1998, at the offices of the Bank at 5320 Bellaire Boulevard,
Bellaire, Texas 77401, for the following purposes:
1. To consider and act upon a proposal to approve and adopt a Merger
Agreement dated as of April ___, 1998, providing, among other things, for the
merger of the Bank and Citizens Bank, N.A., an interim national banking
association and an indirect subsidiary of CNBT Bancshares, Inc., a Texas
corporation (the "Holding Company"), and for the automatic conversion of each
share of the common stock of the Bank into one share of the common stock of the
Holding Company;
2. To elect 16 members of the Board of Directors of the Bank to serve as
directors for the ensuing year and until their successors are elected and
qualified;
3. To ratify the appointment of Mann Frankfort Stein & Lipp, Certified
Public Accountants, as independent accountants of the Bank for the ensuing year;
and
4. To transact such other business as may properly come before the Annual
Meeting and any adjournment or postponement thereof.
You are urged to mark, sign, date and promptly return your Proxy in the
enclosed envelope so that your shares may be voted in accordance with your
wishes and in order that the presence of a quorum may be assured. The prompt
return of your signed Proxy, regardless of the number of shares you hold, will
aid the Bank in reducing the expense of additional proxy solicitation. The
giving of such Proxy does not affect your right to vote in person if you attend
the meeting and give notice to the Secretary of the Bank.
Only those stockholders of record at the close of business on April __,
1998, will be entitled to notice of and to vote at the Annual Meeting and any
adjournment or postponement thereof.
A copy of the Bank's Annual Report for the year ended December 31, 1997, is
enclosed with the Proxy Statement and Prospectus. Additional copies may be
obtained at no cost by contacting Randall W. Dobbs, Executive Vice President,
Citizens National Bank of Texas, 5320 Bellaire Boulevard, Bellaire, Texas 77401;
telephone 713-661-4444.
AN AFFIRMATIVE VOTE OF THE HOLDERS OF AT LEAST 66-2/3% OF THE OUTSTANDING
SHARES IS REQUIRED FOR APPROVAL AND ADOPTION OF THE MERGER. THEREFORE, WHETHER
OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING IN PERSON, YOU ARE URGED TO SIGN,
DATE AND PROMPTLY RETURN THE ENCLOSED PROXY. A SELF-ADDRESSED STAMPED ENVELOPE
IS ENCLOSED FOR YOUR CONVENIENCE.
By Order of the Board of Directors,
Kay Cronover, Secretary to the Board of
Directors
___________________, 1998
<PAGE>
PROXY STATEMENT AND PROSPECTUS
CNBT BANCSHARES, INC.
Shares Common Stock
($1.00 par value)
CITIZENS NATIONAL BANK OF TEXAS
PROXY STATEMENT AND ANNUAL REPORT
This Proxy Statement and Prospectus is being furnished to stockholders of
Citizens National Bank of Texas, a national banking association (the "Bank"), in
connection with the solicitation of proxies by its Board of Directors to be
voted at the Annual Meeting of Stockholders of the Bank (the "Annual Meting")
scheduled to be held on May 26, 1998, at ___ __.m., local time, at the offices
of the Bank, 5320 Bellaire Boulevard, Bellaire, Texas 77401, and at any
adjournment or postponement thereof.
At the Annual Meeting, the holders of common stock, $2.03 par value ("Bank
Common Stock"), will be asked to consider and vote upon a proposal to approve
and adopt the Plan and Agreement of Merger dated as of April __, 1998 (the
"Merger Agreement"), a copy of which is attached hereto as Exhibit A, among the
Bank, CNBT Bancshares, Inc., a newly formed Texas corporation (the "Holding
Company"), and Citizens Bank, N. A., an interim national bank and subsidiary of
the Holding Company (the "New Bank"), providing for the merger of the Bank
with and into the New Bank (the "Merger"), pursuant to which all of the
outstanding shares of Bank Common Stock would be exchanged for shares of common
stock of the Holding Company on the basis of one share of the common stock,
$1.00 par value ("Holding Company Common Stock"), of the Holding Company for
each share of the Bank Common Stock
The affirmative vote of the holders of at least 66-2/3% of the outstanding
shares of the Bank is required, under the National Bank Act of 1864, as amended
(the "National Bank Act"), to approve and adopt the Merger Agreement.
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN HOLDING COMPANY COMMON STOCK.
This Proxy Statement and Prospectus also constitutes the Prospectus of the
Holding Company that is part of the registration statement of the Holding
Company filed with the Securities and Exchange Commission (the "SEC") with
respect to the 5,054,181 shares of Holding Company Common Stock to be issued in
connection with the Merger. This Proxy Statement and Prospectus is first being
mailed to stockholders of the Bank on or about April __, 1998. The Holding
Company's principal executive office is located at 5320 Bellaire Boulevard,
Bellaire, Texas 77401. The Holding Company's telephone number is (713) 661-4444.
THE SECURITIES TO BE ISSUED IN CONNECTION WITH THE MERGER HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, THE BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM, THE OFFICE OF THE COMPTROLLER
OF THE CURRENCY, OR ANY STATE SECURITIES COMMISSION OR STATE BANKING
AUTHORITY. NONE OF THE AFOREMENTIONED HAS PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROXY STATEMENT AND PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF HOLDING COMPANY COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS
ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY AND ARE SUBJECT TO INVESTMENT RISK,
INCLUDING POSSIBLE LOSS OF PRINCIPAL. THE HOLDING COMPANY COMMON STOCK IS NOT
GUARANTEED BY THE BANK OR THE HOLDING COMPANY.
The date of this Proxy Statement and Prospectus is _____________, 1998
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROXY STATEMENT AND 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 BANK OR THE HOLDING COMPANY. THIS PROXY STATEMENT AND PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY, THE HOLDING
COMPANY COMMON STOCK BY ANYONE IN ANY JURISDICTION WHERE 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 PROXY STATEMENT
AND PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CRATE
AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE BANK SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
2
<PAGE>
AVAILABLE INFORMATION
The Holding Company has filed a Registration Statement under the Securities
Act of 1933, as amended (the "Securities Act"), with the Securities and Exchange
Commission ("SEC") in Washington, D.C. for the registration of the Holding
Company Common Stock to be issued and exchanged in the proposed reorganization.
Such registration statement, of which this Proxy Statement and Prospectus is a
part, is on file with the SEC in Washington, D.C. The registration statement,
including the exhibits thereto, contains information in addition to that
contained herein and to which reference is hereby made for further information
with respect to the Holding Company, the Bank, and the Holding Company Common
Stock to be issued in the reorganization. The registration statement and
exhibits may be examined during normal business hours at the SEC public
reference room located at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
DC 20549 and also at the regional offices of the SEC located at 75 Park Place,
14th Floor, New York, New York 10007 and Northwestern Atrium Center, 500 West
Madison Street, Suite 400, Chicago, Illinois 60661. Copies of such material may
be obtained from the public reference section of the SEC at Judiciary Plaza, 450
Fifth Street, N.W., Washington, DC 20549, at prescribed rates. The SEC maintains
an Internet site that contains reports, proxy and information statements, and
other information regarding registrants that file electronically with the SEC.
The address of the SEC Internet site is http://www.sec.gov.
The Bank is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and, accordingly, file
reports, proxy statements, and other information with its primary federal
regulator, the Office of the Comptroller of the Currency (the "OCC"). Such
reports, proxy statements, and other information may be inspected and copies of
such materials obtained from the Disclosure Officer, Communications Division of
the OCC at 250 E. Street, S.W., Washington, D.C. 20219. Currently, the OCC
responds to requests for documents within approximately seven to ten days. The
OCC does not maintain an Internet site such as the service maintained by the SEC
permitting online computer access to documents filed by national banks. The
Bank's common stock is quoted on The Nasdaq Stock Market under the symbol
"CNBT." The reports, proxy statements, and other information concerning the Bank
described above also may be inspected at the offices of The Nasdaq Stock Market,
1735 K Street, N.W., Washington, D.C. 20006-1506. The Holding Company Common
Stock will be quoted on the Nasdaq Stock Market following the reorganization
under the Bank's current symbol.
3
<PAGE>
TABLE OF CONTENTS
Page
----
AVAILABLE INFORMATION....................................................... 3
SUMMARY..................................................................... 6
Annual Meeting of the Bank............................................... 6
Proposed Reorganization.................................................. 7
INTRODUCTION................................................................ 12
Date, Place and Time of Annual Meeting................................... 12
Purpose of the Annual Meeting............................................ 12
Record Date; Quorum; Voting Rights....................................... 12
Solicitation of Proxies.................................................. 14
Voting and Revocation of Proxies......................................... 14
Other Matters............................................................ 14
RISK FACTORS................................................................ 15
Holding Company's Financial Condition.................................... 15
Supervision and Regulation............................................... 15
Dividend History and Restrictions on Ability to Pay Dividends............ 16
Certain Charter and Bylaw Provisions..................................... 16
ELECTION OF DIRECTORS....................................................... 17
Nominees for Director.................................................... 17
Board of Directors Meetings and Committees............................... 20
Nomination of Directors.................................................. 21
Compensation Committee Interlocks and Insider Participation in
Compensation Decisions................................................. 22
Executive Compensation and Other Information............................. 22
Options Granted During 1997.............................................. 23
Stock Options Exercises and Fiscal Year-End Values....................... 24
Severance Agreements..................................................... 24
Employee Stock Options Plans............................................. 24
401(k) Plan.............................................................. 25
Report of the Compensation Committee on Executive Compensation........... 25
Stock Performance Graph.................................................. 26
Section 16(a) Beneficial Ownership Reporting Compliance.................. 26
Interests of Management and Others in Certain Transactions............... 27
RATIFICATION OF THE SELECTION OF INDEPENDENT AUDITORS
FOR THE BANK............................................................. 28
PROPOSED REORGANIZATION..................................................... 29
Merger Agreement......................................................... 29
Reasons for the Proposed Reorganization.................................. 30
Stockholder Approval..................................................... 31
Effective Date........................................................... 31
Effect of Reorganization on Bank's Business and Stockholders............. 31
Conversion of Stock...................................................... 32
Exchange of Stock Certificates........................................... 32
Trading and Resale of Holding Company Common Stock....................... 32
Tax Consequences......................................................... 33
4
<PAGE>
Rights of Dissenting Stockholders........................................ 33
Regulatory Approvals..................................................... 35
Capitalization........................................................... 36
Comparison of Stockholder Rights......................................... 37
DESCRIPTION OF THE HOLDING COMPANY.......................................... 39
Organization............................................................. 39
Management............................................................... 39
Compensation............................................................. 39
Indemnification for Securities Act Liabilities........................... 40
Supervision and Regulation of the Holding Company........................ 40
Permitted Activities..................................................... 41
Issuance of Additional Securities........................................ 43
DESCRIPTION OF THE HOLDING COMPANY'S STOCK.................................. 43
Common Stock............................................................. 43
Anti-Takeover Provisions................................................. 44
Dividends................................................................ 44
DESCRIPTION OF THE BANK..................................................... 46
General.................................................................. 46
Competition.............................................................. 48
Employees................................................................ 48
Supervision and Regulation............................................... 48
Legal Proceedings........................................................ 54
PRINCIPAL HOLDERS OF BANK COMMON STOCK...................................... 54
DESCRIPTION OF SECURITIES OF THE BANK....................................... 55
General.................................................................. 55
Common Stock............................................................. 55
Certain Provisions of the Articles and Bylaws............................ 55
Market Price of Common Stock............................................. 57
LEGAL MATTERS............................................................... 57
EXPERTS..................................................................... 57
STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING............................... 58
ANNUAL REPORT............................................................... 58
OTHER MATTERS............................................................... 58
EXHIBIT A Plan and Agreement of Merger among Citizens National Bank of
Texas, Citizens Bank, N.A., and CNBT Bancshares, Inc.
EXHIBIT B Restated Articles of Incorporation of CNBT Bancshares, Inc.
EXHIBIT C By-laws of CNBT Bancshares, Inc.
EXHIBIT D Excerpts from Section 215a of the National Bank Act
concerning dissenters' rights
5
<PAGE>
SUMMARY
The following summary of this Proxy Statement and Prospectus is provided
for your convenience and is not intended to be complete. This summary is
qualified in its entirety by the detailed information set forth elsewhere in
this Proxy Statement and Prospectus, including the exhibits hereto.
ANNUAL MEETING OF THE BANK
Date May 26, 1998
Time and Place :00 .m., Houston time, at the offices
of the Bank, 5320 Bellaire
Boulevard, Bellaire, Texas 77401
Record Date April 24, 1998
Securities Entitled to Vote Each share of Bank Common Stock issued and
outstanding on the record date entitles its
holder to one vote with respect to all
matters presented at the meeting for
stockholder action. Holders of Bank Common
Stock may cumulate their votes in the
election of directors.
Shares Outstanding 5,054,181
on the Record Date
Effects of Abstaining A Bank stockholder who abstains from
From Voting voting does not perfect his or her
dissenter's rights. See, "Rights of
Dissenting Stockholders." A stockholder who
abstains from voting is not included in the
affirmative vote necessary to approve and
adopt the Merger Agreement. A Bank
stockholder who abstains from voting,
automatically, without any action on his or
her part, will receive one share of Holding
Company Common Stock in exchange for one
share of Bank Common Stock held on the
Effective Date if at least 66-2/3% of the
outstanding shares of Bank Common Stock
vote in favor of the Merger Agreement. See
"Proposed Reorganization -- Conversion of
Stock."
Matters to be Considered (1) A proposal to approve and adopt the
Merger Agreement among the Bank, The New
Bank, and the Holding Company, pursuant to
which the Bank will be merged with The New
Bank and the stockholders of the Bank will
become stockholders of the Holding Company,
and the Bank will become an indirect
wholly-owned subsidiary of the Holding
Company; (2) to elect 16 members of the
Board of Directors of the Bank to serve as
directors for the ensuing year; (3) to
ratify the appointment of Mann Frankfort
Stein & Lipp, Certified Public Accountants,
as independent accountants of the Bank for
the ensuing year; and (4) to act on such
other matters
6
<PAGE>
as may properly come before the Annual
Meeting and any adjournment or postponement
thereof.
PROPOSED REORGANIZATION
The Reorganization At the direction of the Board of Directors
of the Bank, the Holding Company was
incorporated in March 1998 under the laws
of Texas to serve as the holding company
for the Bank. A new national banking
association also has been organized as a
subsidiary of the Holding Company for the
sole purpose of serving as a vehicle in the
formation of the holding company. Pursuant
to the Merger Agreement, the Bank will be
merged into the newly-organized Bank. The
bank resulting from the merger will conduct
its business in substantially the same
manner and from the same offices as the
Bank did prior to the reorganization.
Reasons for the Reorganization The Board of Directors believes the
establishment of a holding company
structure for the Bank will provide greater
operating flexibility and will permit
expansion into a broader range of financial
services and other business activities than
are currently permitted to the Bank as a
national banking association. See "Proposed
Reorganization -- Reasons for the Proposed
Reorganization."
Conversion of Stock Upon the consummation of the Merger, all
stockholders of the Bank, except those who
exercise dissenting stockholders' rights,
will become stockholders of the Holding
Company. Each outstanding whole share of
Bank Common Stock will be converted into
and become one share of Holding Company
Common Stock. No fractional shares of
Holding Company Common Stock will be issued
in connection with the Merger. "Proposed
Reorganization -- Conversion of Stock."
Exchange of Stock Certificates Stockholders will be required to exchange
their present stock certificates (bearing
the name "Citizens National Bank of Texas")
for new stock certificates (bearing the
name "CNBT Bancshares, Inc."). The Board of
Directors has reserved the right to
withhold any dividends from those
stockholders who do not exchange their
certificates within a reasonable period of
time after notification of the exchange.
See "Proposed Reorganization -- Exchange of
Stock Certificates."
Amendment The Board of Directors of the Bank, the
Holding Company, and the New Bank may amend
the Merger Agreement by mutual consent
either before or after approval by the
Bank's stockholders. However, no amendments
can be made to the provisions relating to
the conversion of shares of the Bank into
shares of the Holding
7
<PAGE>
Company without proper stockholder
approval. See "Proposed Reorganization --
Merger Agreement."
The Merger Agreement may be terminated by
the mutual consent of the Boards of
Directors of the Bank, the New Bank, and
the Holding Company, even after the
approval of such plans by the Bank's
stockholders. The Bank's Board of Directors
may terminate the Merger Agreement at any
time before it is consummated if the Board
of Directors believes the reorganization
would be inadvisable for any other proper
reason. See "Proposed Reorganization --
Merger Agreement."
Comparison in Rights of As set forth herein, there are certain
Stockholders differences between your rights as a Bank
stockholder and your rights as a Holding
Company stockholder. The differences are
described in detail under "Proposed
Reorganization -- Comparison of Stockholder
Rights." For instance, stockholders of the
Bank currently have cumulative voting
rights in the election of directors. The
stockholders of the Holding Company will
not have this right. The Holding Company's
Articles of Incorporation provide for
changes in the requirements for stockholder
approvals of certain fundamental corporate
transactions. In addition, the directors
and officers of the Holding Company will be
entitled to greater rights of
indemnification than current Bank
directors.
Anti-Takeover Provisions The Articles of Incorporation and By-laws
of the Holding Company establish or contain
certain provisions that may be deemed to be
"anti-takeover" in nature. The Articles of
Incorporation of the Holding Company were
effective as of the date the Articles of
Incorporation were filed with the Texas
Secretary of State. The By-laws were
effective on the date that they were
approved by the Holding Company's Board of
Directors. These provisions of the Articles
of Incorporation and By-laws will apply to
all stockholders of the Holding Company on
the Effective Date of the Holding Company
formation, the date on which the Merger is
consummated. The anti-takeover provisions
are as follows: (1) the authorization of
30,000,000 shares of Holding Company Common
Stock, all of which may be issued without
stockholder approval; and (2) the
requirement that a special meeting of
stockholders may only be called by a
majority of the Board of Directors, the
Chairman, the President, or stockholders
owning at least 33-1/3% of the outstanding
shares of Holding Company Common Stock. See
"Description of the Holding Company's
Stock -- Anti-takeover Provisions."
Rights of Dissenting Stockholders of the Bank who: (1) vote
Stockholders against the Merger at the Annual Meeting or
give notice in writing to the Bank prior to
or at the Annual Meeting that they dissent
from the Merger; and (2) comply with the
procedures described in "Proposed
Reorganization
8
<PAGE>
-- Rights of Dissenting Stockholders" will
be entitled to receive cash for the fair
value of their shares. Merely voting
against the Merger at the Annual Meeting
will not perfect a stockholder's
dissenters' rights. Stockholders are urged
to review carefully the section of this
Proxy Statement and Prospectus entitled
"Proposed Reorganization -- Rights of
Dissenting Stockholders" and the statutory
excerpts concerning dissenters' rights
attached to this Proxy Statement and
Prospectus as Exhibit D. FAILURE TO FOLLOW
THE PROCEDURES SET FORTH IN SECTION 215a(b)
OF THE NATIONAL BANK ACT, REGARDING
DISSENTERS' RIGHTS WILL CONSTITUTE A WAIVER
OF DISSENTERS RIGHTS.
Federal Income Tax Consequences Under the current provisions of the
Internal Revenue Code of 1986, as amended
(the "Code"), no gain or loss is expected
to be recognized for federal income tax
purposes by the stockholders of the Bank by
reason of the conversion of their Bank
Common Stock into Holding Company Common
Stock in connection with the consummation
of the Merger with the exception of any
cash issued for fractional shares owned.
See "Proposed Reorganization -- Tax
Consequences."
Conditions to the Consummation The affirmative vote of the holders of at
of the Merger least 66-2/3% of the outstanding shares of
the Bank's common stock is required to
approve and adopt the Merger Agreement. In
addition, the Merger Agreement requires the
approval of the Board of Governors of the
Federal Reserve System (the "Federal
Reserve Board") and the OCC. An application
to the OCC for approval to charter the New
Bank and to merge the Bank with and into
the New Bank is being prepared. Any
approval granted by these agencies reflects
only these agencies' view that the
transaction does not contravene the
applicable competitive standards of the law
and is consistent with regulatory concerns
relating to bank management and to the
safety of stockholders from a financial
point of view or that these agencies have
considered the adequacy of the terms of the
exchange. THESE AGENCIES' APPROVAL IS NOT
AN ENDORSEMENT OR RECOMMENDATION OF THE
MERGER. The Holding Company's proposal to
become a bank holding company requires the
approval of the Federal Reserve Board.
Notice of the Holding Company's intention
to become a holding company will be filed
by the Holding Company with the Federal
Reserve Board. See "Proposed
Reorganization -- Stockholder Approval"
and "Proposed Reorganization --
Regulatory Approvals."
Government Regulation and After the effective date of the merger, the
Supervision Holding Company will be subject to the Bank
Holding Company Act of 1956, as amended
(the "BHCA"), and will be subject to
regulation by the Federal Reserve Board
with respect to its operations as a bank
holding company. The Bank will continue to
be subject to regulation by the OCC. See
"Description
9
<PAGE>
of the Holding Company -- Supervision and
Regulation of the Holding Company" and
"Description of the Bank -- Regulation and
Supervision."
Comparative Market Price The Bank's Common Stock is quoted on The
Nasdaq Stock Market under the symbol
"CNBT." Shares began trading on October 1,
1997. The following table sets forth the
range of the high and low per share closing
sale prices for the Common Stock as
reported for the period from October 1,
1997, to April __, 1998.
LOW SALE PRICE HIGH SALE PRICE
-------------- ---------------
1997
- ----
Fourth Quarter........................... $11.50(1) $13.25
1998
- ----
First Quarter................. $12.25 $16.63
Second Quarter (through April __, 1998).. 15.75 16.00
- ----------------
(1) The Bank sold 1,150,000 shares of the Bank Common Stock in an initial public
offering on October 1, 1997.
As of March 24, 1998, the date on which the
Board of Directors made the decision to
form a bank holding company and to submit
the Merger to the stockholders of the Bank,
the closing sales price was $15.81
10
<PAGE>
Selected Financial Data
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements of the Bank and the Notes
thereto and the information contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in the Bank's Annual Report on
Form 10-K.
<TABLE>
<CAPTION>
AS OF AND FOR THE
YEARS ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income............... $ 10,866 $ 9,470 $ 7,810 $ 7,589 $ 7,456
Provision for loan losses......... 877 655 200 126 60
Noninterest income................ 2,507 2,322 2,053 1,866 1,870
Noninterest expenses.............. 7,644 6,949 6,108 5,892 5,729
Provision for income taxes........ 1,154 1,035 683 668 769
Net income ....................... $ 3,698 $ 3,153 $ 2,872 $ 2,769 $ 2,768
PER SHARE DATA:
Net income, basic (1)............. $ 0.89 $ 0.81 $ 0.74 $ 0.71 $ 0.71
Net income, fully diluted (2)(3).. 0.88 0.80 0.73 0.70 0.70
Book value........................ 6.27 4.60 4.35 3.56 3.23
Cash dividends.................... 0.40 0.36 0.30 0.29 0.19
Weighted average common shares
outstanding, basic................. 4,161 3,886 3,886 3,886 3,877
Weighted average common shares
outstanding, fully diluted...... 4,224 3,941 3,938 3,936 3,931
BALANCE SHEET DATA (4):
Total assets...................... $295,606 $258,150 $231,779 $206,379 $183,054
Securities........................ 169,831 147,505 148,294 134,029 119,327
Loans............................. 102,875 91,284 67,875 58,996 48,884
Allowance for loan losses......... 1,009 687 484 522 577
Total deposits.................... 260,907 238,059 208,749 185,579 169,474
Total stockholders' equity........ 31,647 17,871 16,921 13,815 12,562
PERFORMANCE RATIOS:
Return on average assets.......... 1.34% 1.30% 1.34% 1.40% 1.56%
Return on average common equity... 16.89 18.43 19.10 20.51 23.83
Net interest margin............... 4.22 4.18 3.89 4.11 4.51
Dividend payout ratio, basic...... 44.94 44.44 40.54 40.85 26.76
Efficiency ratio (5).............. 58.31 60.12 63.45 63.31 63.27
CAPITAL RATIOS (4):
Leverage ratio.................... 11.10% 7.27% 7.43 7.22% 7.11%
Average stockholders' equity to
average total assets............ 7.96 7.05 7.03 6.84 6.57
Tier 1 risk-based capital ratio... 21.42 13.87 15.22 15.39 18.00
Total risk-based capital ratio.... 22.13 14.41 15.68 15.96 18.83
-------- -------- -------- -------- --------
</TABLE>
- ----------------
(1) Basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period.
Shares have been restated in accordance with FASB 128.
(2) Fully diluted earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding plus the common stock
equivalents computed using the treasury stock method. Shares have been
restated in accordance with FASB 128.
(3) Outstanding shares have been adjusted for all periods presented for a 2-for-
1 stock split declared in May 1994 and 10% stock dividends declared in March
1997 and April 1996.
(4) At period end, except net charge-offs to average loans and average
stockholders' equity to average total assets.
(5) Calculated by dividing total noninterest expenses by net interest income
plus noninterest income, excluding securities gains and losses.
11
<PAGE>
CNBT BANCSHARES, INC.
AND
CITIZENS NATIONAL BANK OF TEXAS
PROXY STATEMENT, ANNUAL REPORT, AND PROSPECTUS
INTRODUCTION
This Proxy Statement, which also constitutes a Prospectus (the "Proxy
Statement and Prospectus"), is furnished for the solicitation by the Board of
Directors of the Bank of proxies to be voted at the Annual Meeting of
Stockholders of the Bank, to be held at the offices of the Bank, 5320 Bellaire
Boulevard, Bellaire, Texas 77401, on Tuesday, May 26, 1998, at ______ __.m.,
local time, and at any adjournment or postponement of the Annual Meeting. This
Proxy Statement and Prospectus also constitutes a prospectus of the Holding
Company in offering its shares of common stock to the Bank's stockholders in
accordance with the Merger Agreement. The principal executive offices of the
Bank and the Holding Company are located at 5320 Bellaire Boulevard, Bellaire,
Texas 77401. The telephone number for the Bank and the Holding Company is (713)
661-4444. All inquiries should be directed to Randall W. Dobbs, Executive Vice
President. This Proxy Statement and Prospectus and the enclosed form of proxy
(the "Proxy") are first being sent to stockholders of the Bank on or about
April __, 1998.
Date, Place, and Time of Annual Meeting
The Annual Meeting of Stockholders of the Bank will be held on Tuesday, May
26, 1998, at the offices of the Bank, 5320 Bellaire Boulevard, Bellaire, Texas
77401, at __:00 __.m., local time.
Purpose of the Annual Meeting
At the Annual Meeting stockholders of the Bank will be requested: (1) to
consider and act upon a proposal to approve and adopt the Merger Agreement,
providing, among other things, for the merger of the Bank and the New Bank, and
for the automatic conversion of each whole share of Bank Common Stock into one
share of Holding Company Common Stock; (2) to elect 16 members of the Board of
Directors of the Bank to serve as directors for the ensuing year; (3) to ratify
the appointment of Mann Frankfort Stein & Lipp, Certified Public Accountants, as
independent accountants of the Bank for the ensuing year; and (4) to transact
such other business as may properly come before the Annual Meeting and any
adjournment or postponement thereof.
Record Date; Quorum; Voting Rights
The Board of Directors of the Bank has fixed the close of business on
April 24, 1998 , as the record date for the determination of stockholders of the
Bank entitled to notice of and to vote at the Annual Meeting (the "Record
Date"). On the Record Date, the Bank had outstanding 5,054,181 shares of common
stock, par value $2.03 per share, the only authorized class of stock (the "Bank
Common Stock"), which was held by approximately 1,900 stockholders.
12
<PAGE>
Under the By-laws of the Bank, the presence of a quorum, in person or by
proxy, is required for each matter to be acted upon at the Annual Meeting. The
presence, in person or by proxy, of stockholders entitled to cast at least a
majority of the votes which all stockholders are entitled to cast, shall
constitute a quorum for the transaction of business at the Annual Meeting. Votes
withheld and abstentions will be counted in determining the presence of a quorum
for the particular matter. Broker non-votes will not be counted in determining
the presence of a quorum for the particular matter as to which the broker
withheld authority.
Assuming the presence of a quorum, the affirmative vote of at least 66-2/3%
of the outstanding shares of Common Stock is required to approve and adopt the
Merger. All executive officers and directors of the Bank who are stockholders of
the Bank and who, as of the record date, collectively had the right to vote
approximately 1,454,000 shares of the Bank Common Stock (excluding stock
options); representing approximately 28.8% of the shares outstanding as of such
date, have indicated to the Bank that they will vote the shares of the Bank's
common stock over which they have voting control in favor of the Merger.
With respect to the election of the Holding Company's directors, the 16
nominees receiving the highest number of votes will be elected to the Board of
Directors of the Holding Company. Proxies given to the persons named will be
voted FOR the election of the nominees listed under "Election of Directors"
unless authority to vote is withheld. A stockholder entitled to vote for the
election of directors can withhold authority to vote for all nominees for
director or can withhold authority to vote for certain nominees for director.
Stockholders have cumulative voting rights with respect to the election of
directors. A stockholder may vote the number of shares owned by him or her for
as many persons as there are directors to be elected or may cumulate such shares
and give one candidate as many votes as the number of directors multiplied by
the number of his or her shares shall equal or may distribute them on the same
principles among as many candidates as he or she shall think fit. For example,
assume a stockholder owns 100 shares and 16 directors are to be elected. The
stockholder may cast 100 votes for each of 16 candidates, 1,600 votes for one
candidate, or divide the 1,600 votes among as many candidates as the stockholder
chooses.
Ratification of the appointment of the independent auditors for the ensuing
year requires the vote of a majority of the shares of the shares present or
represented by proxy and entitled to vote at the Annual Meeting.
In the case of proposals requiring the affirmative vote of the holders of a
majority of the shares present or represented by proxy, abstentions will count
as part of the total number of votes cast for the proposals in determining
whether the proposals have received the requisite number of favorable votes,
whereas broker non-votes will not be counted as part of the total number of
votes cast on such proposals. Thus, abstentions will have the same effect as
votes against any such proposal, whereas broker non-votes will have no effect in
determining whether any such proposal has been approved by the stockholders. In
the case of proposals requiring the affirmative vote of the holders of a
specified percentage of outstanding shares (such as the vote on the Merger) both
abstentions and broker non-votes will be counted as part of the total number of
votes cast on such proposals in determining whether the proposals have been
approved by the stockholders. Thus, both abstentions and broker non-votes will
have the same effect as a vote against such proposals.
On all matters to come before the Annual Meeting except the election of
directors and including the proposal to approve and adopt the Merger Agreement,
each share of Common Stock is entitled to one vote.
13
<PAGE>
Solicitation of Proxies
This Proxy Statement and Prospectus and the enclosed form of Proxy are
first being sent to stockholders of the Bank on or about , 1998.
The cost of preparing, assembling, printing, mailing and soliciting
proxies, and any additional material that the Bank may furnish stockholders in
connection with the Annual Meeting, will be borne by the Bank. In addition to
solicitation by mail, directors, officers and employees of the Bank may solicit
Proxies from the stockholders of the Bank personally or by telephone, telegram
or telecopier. Arrangements will be made with brokerage houses and other
custodians, nominees and fiduciaries to forward proxy solicitation materials to
the beneficial owners of the Common Stock held of record by these persons, and,
upon request therefor, the Bank will reimburse them for their reasonable
forwarding expenses.
Voting and Revocation of Proxies
Shares represented by Proxies that are properly signed, executed, and
returned, unless subsequently revoked, will be voted at the Annual Meeting in
accordance with the instructions made thereon by the stockholders. If a Proxy is
signed, executed and returned without indicating any voting instructions, the
shares represented by the Proxy will be voted FOR the approval and adoption of
the Merger Agreement, FOR election of the named nominees as directors of the
Bank, and FOR ratification of the appointment of Mann Frankfort Stein & Lipp as
the Bank's auditors. Execution and return of the enclosed Proxy will not affect
a stockholder's right to attend the Annual Meeting and vote in person.
A stockholder of the Bank who returns a Proxy may revoke the Proxy prior to
the time it is voted: (1) by giving written notice of revocation to Kay
Cronover, Secretary to the Board of Directors of the Bank, 5320 Bellaire
Boulevard, Bellaire, Texas 77401; (2) by executing a later-dated proxy and
giving written notice thereof to the Secretary of the Bank; or (3) by voting in
person after giving written notice to the Secretary of the Bank. Attendance by a
stockholder at the Annual Meeting will not itself be deemed or constitute a
revocation of the Proxy.
Other Matters
At the date of this Proxy Statement and Prospectus, the Board of Directors
of the Bank does not know of any business to be presented at the Annual Meeting
other than as set forth in the notice of the Annual Meeting.
Financial Statements
The Annual Report to Stockholders for the year ended December 31, 1997, is
included with this Proxy Statement and Prospectus to inform stockholders of the
Bank's recent financial performance. Additional copies of the report will be
furnished without charge to stockholders upon written request directed to
Randall W. Dobbs, Executive Vice President, Citizens National Bank of Texas,
5320 Bellaire Boulevard, Bellaire, Texas 77401. The above-referenced financial
statements will be available at the Annual Meeting for inspection by
stockholders. Additional financial information will be provided upon request.
See "Additional Information."
14
<PAGE>
RISK FACTORS
In addition to the other information contained in this Proxy Statement and
Prospectus, the following factors should be considered carefully in evaluating
the purchase of the shares of Holding Company Common Stock offered hereby. In
addition to historical and factual statements, the information discussed in this
Proxy Statement and Prospectus contains forward-looking statements, which can be
identified by the use of forward-looking phrases such as "believes," "expects,"
"may," "should," "projected," "contemplates," or "anticipates" or the negative
thereof or comparable words that involve risks and uncertainties. The Holding
Company's actual results may differ materially from the results discussed in the
forward-looking statements. The following matters are cautionary statements
identifying important factors with respect to such forward-looking statements,
including certain risks and uncertainties, that could cause actual results to
vary materially from the future results discussed in such forward-looking
statements.
HOLDING COMPANY'S FINANCIAL CONDITION
Stockholders of the Bank electing to receive Holding Company Common Stock
in exchange for Bank Common Stock do so without the ability of analyzing the
historical financial performance of the Holding Company. The Holding Company is
a newly formed Texas corporation and has no history of financial performance.
The Holding Company's financial condition immediately following the effective
date of the reorganization contemplated by the Merger Agreement will depend on
the operation and profitability of the Bank at the time of and after the
effective date of the reorganization. As the Holding Company continues to
operate in the future; additional factors may affect its profitability
including, among others: (1) business started or acquired by the Holding Company
other than the Bank; (2) the nature of federal or state laws and regulations
applicable to the Holding Company; and (3) the effect of management.
SUPERVISION AND REGULATION
Bank holding companies and banks operate in a highly regulated environment
and are subject to extensive supervision and examination by federal and state
regulatory agencies. The Holding Company is subject to 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, the Federal Deposit Insurance
Corporation (the "FDIC"). These regulations are intended primarily for the
protection of depositors, rather than for the benefit of investors. The Holding
Company and the Bank are subject to changes in federal and state law, as well as
changes in regulation and governmental policies, income tax laws and accounting
principles. The effects of any potential changes cannot be predicted but could
adversely affect the business and operations of the Holding Company and the Bank
in the future.
Federal Reserve Board policy requires a bank holding company such as the
Holding Company to serve as a source of financial strength to its banking
subsidiaries and commit resources to their support. The Federal Reserve Board
has required banking holding companies to contribute cash to their troubled bank
subsidiaries based upon this "source of strength" regulation, which could have
the effect of decreasing funds available for distributions to stockholders. See
"Description of the Bank -- Supervision and Regulation."
15
<PAGE>
DIVIDEND HISTORY AND RESTRICTIONS ON ABILITY TO PAY DIVIDENDS
It is the policy of the Federal Reserve Board that bank holding companies
should pay cash dividends on common stock only out of income available over the
past year and only if prospective earnings retention is consistent with the
organization's expected future needs and financial condition. The policy
provides that bank holding companies should not maintain a level of cash
dividends that undermines the bank holding company's ability to serve as a
source of strength to its banking subsidiaries.
The Holding Company's principal source of funds to pay dividends on the
shares of Holding Company Common Stock will be cash dividends from the Bank. The
payment of dividends by the Bank to the Holding Company is subject to
restrictions imposed by federal banking laws, regulations and authorities.
Without approval of the OCC, dividends in any calendar year may not exceed the
Bank's total net profits for that year, plus its retained profits for the
preceding two years, less any required transfers to capital surplus or to a fund
for the retirement of any preferred stock. In addition, a dividend may not be
paid in excess of a bank's cumulative net profits after deducting bad debts in
excess of the allowance for loan losses. As of December 31, 1997, approximately
$3.5 million was available for payment of dividends by the Bank to the Holding
Company under these restrictions without regulatory approval.
The federal banking statutes also prohibit a national bank from making any
capital distribution (including a dividend payment), if, after making the
distribution, the institution would be "undercapitalized," as defined by
statute. In addition, the relevant federal regulatory agencies also have
authority to prohibit a national bank from engaging in an unsafe or unsound
practice in conducting its business, as determined by the agency. The payment of
dividends could be deemed to constitute such an unsafe or unsound practice,
depending upon the financial condition of the Bank. Regulatory authorities could
also impose administratively stricter limitations on the ability of the Bank to
pay dividends to the Holding Company if such limits were deemed appropriate to
preserve the Bank's capital. See "Description of the Bank --Supervision and
Regulation."
CERTAIN CHARTER AND BYLAW PROVISIONS
The Holding Company's Articles of Incorporation and Bylaws contain certain
provisions that could delay, discourage or prevent an attempted acquisition or
change of control of the Holding Company. These provisions include (i) a
provision establishing certain advance notice procedures for nomination of
candidates for election as directors and for stockholder proposals to be
considered at an annual meeting of stockholders, (ii) a provision that special
meetings of the stockholders of the Holding Company may be called only by
stockholders only upon the written request of holders of at least 33-1/3% of the
outstanding shares of capital stock entitled to vote at any such meeting, and
noncumulative voting for directors. The Company's Articles of Incorporation
authorize the Board of Directors of the Holding Company to issue shares of
common stock without stockholder approval and upon such terms as the Board of
Directors may determine. The issuance of common stock, while providing desirable
flexibility in connection with possible acquisitions, financing and other
corporate purposes, could also have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, a
controlling interest in the Holding Company. See "Description of the Holding
Company's Stock."
In addition, federal law also requires the approval of the Federal Reserve
Board prior to the acquisition of "control" of a bank holding company. See
"Description of the Holding Company --Supervision and Regulation of the Holding
Company."
16
<PAGE>
ELECTION OF DIRECTORS
Article II, Section 2.2 of the By-laws of the Bank currently provides for
a minimum of five and a maximum of twenty directors. The Bank currently has 16
directors and two advisory directors. The nominees receiving an affirmative vote
of a plurality of the shares entitled to vote and present, either in person or
by proxy, at the Annual Meeting, will be elected as members of the Board. All of
the elected directors will serve until their respective successors have been
duly elected and qualified or until they resign, die or are removed from office.
A stockholder may vote the number of shares owned by him or her for as many
persons as there are directors to be elected or may cumulate such shares and
give one candidate as many votes as the number of directors multiplied by the
number of his or her shares shall equal or may distribute them on the same
principles among as many candidates as he or she shall think fit. For example,
assume a stockholder owns 100 shares and 16 directors are to be elected. The
stockholder may cast 100 votes for each of 16 candidates, 1,600 votes for one
candidate, or divide the 1,600 votes among as many candidates as the stockholder
chooses.
NOMINEES FOR DIRECTOR
The persons named as proxies in the enclosed form of proxy were selected by
the Board, and have advised the Board that, unless authority is withheld, they
intend to vote the shares represented by them at the Annual Meeting for the
election of John B. Barnes, William H. Bruecher, Jr., James K. Chancelor, C. Joe
Chapman, Frank G. Cook, Robert C. Dawson, James B. Earthman, III, Lura M.
Griffin, Alton L. Hollis, Joseph E. Ives, Larry L. January, Albert V. Kochran,
I.W. Marks, David E. Preng, Mary A. Walker, and B. Ralph Williams as directors
and Randall W. Dobbs, Sheila J. Duffy, and Robert J. Kramer as advisory
directors. All of the nominees are current members of the Board. All of the
nominees have consented to their nomination and will serve if elected to the
Board.
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE ELECTION OF THE
NOMINEES LISTED ABOVE AS DIRECTORS. UNLESS OTHERWISE DIRECTED IN THE
ACCOMPANYING PROXY, THE PERSONS NAMED THEREIN WILL VOTE "FOR" THE ELECTION OF
THE NOMINEES LISTED ABOVE AS DIRECTORS.
The Board knows of no reason why any nominee for director would be unable
to serve as a director. If at the time of the Annual Meeting any of the named
nominees are unable or unwilling to serve as directors of the Bank, the persons
named as proxies intend to vote for such substitutes as may be nominated by the
Board.
Set forth below is a brief description of the background of the nominees
for election as directors.
John B. Barnes.
Mr. Barnes, age 55, has been a director of the Bank since 1988. Mr. Barnes
is the founder and President and Chief Executive Officer of Barney's
Enterprises, Inc., a vending company, and Bar-Gal Enterprises, Inc., a
management company.
17
<PAGE>
William H. Bruecher, Jr.
Mr. Bruecher, age 70, has been a director of the Bank since 1985. Mr.
Bruecher is retired. He was President of Damon Hardware, Inc., from 1984 to
1994.
James K. Chancelor.
Mr. Chancelor, age 57, has been a director of the Bank since December 1997.
Mr. Chancelor is President and Chief Executive Officer of TRS Financial Services
Corp. which he founded in 1974.
C. Joe Chapman.
Mr. Chapman, age 74, has been a director of the Bank since 1988. Mr.
Chapman is retired. He was Chairman of the Board of Key Engineering, Inc., a
Houston-based engineering contracting firm from 1980 to 1995. Mr. Chapman was
Chairman of the Board of Chapman Engineers, Inc. from 1961 to 1979.
Frank G. Cook.
Mr. Cook , age 72, has been a director since 1983. He was a founder of the
Bank in 1983, was President from 1983 until 1986, when he was elected Chairman
of the Board, and was Chief Executive Officer from 1983 until 1992. Prior to
joining the Bank, Mr. Cook was Executive Vice President and Cashier of First
National Bank of Bellaire where he was employed from 1979 until 1981. From 1950
until 1979, Mr. Cook was employed by First State Bank of Bellaire, having
advanced to the position of Executive Vice President and Cashier and Secretary
to the Board of Directors at the time he left the bank.
Robert C. Dawson.
Mr. Dawson, age 83, has been a director of the Bank since 1983. Mr. Dawson
is retired. He was President and General Manager of Dawson TV, Inc. from 1952 to
1996.
James B. Earthman, III.
Mr. Earthman, age 63, has been a director of the Bank since 1983. Mr.
Earthman is President of Galveston Capital Corporation. He was Chairman of the
Board of Earthman's, Inc., a funeral services company, from 1989 to 1994, when
it was acquired by The Loewen Group, Inc. He also was Chairman of the Board of
National Capitol Life Insurance Co. from 1989 to 1994. Mr. Earthman also
practiced law with the firm of Jim Earthman & Associates, P.C. from 1973 to
1997.
Lura M. Griffin.
Ms. Griffin, age 73, has been a director of the Bank since 1992. Since
1985, Ms. Griffin has been Secretary of Bud Griffin Customer Service, Inc., a
retail computer parts and service company with respect to equipment sold by Bud
Griffin & Associates, a computer systems support business.
18
<PAGE>
Alton L. Hollis.
Mr. Hollis, age 69, has been a director of the Bank since 1985. Mr. Hollis
has been President and Chairman of the Board of Hollis Oil Company, an
independent oil producer and operator, since 1985.
Joseph E. Ives.
Mr. Ives, age 53, has been a director of the Bank since 1984. He joined the
Bank as Senior Vice President and was elected Executive Vice President in 1986.
Prior to joining the Bank, Mr. Ives was a Senior Vice President with Texas
Commerce Bank - Stafford from 1981 to 1984. Prior to 1981, Mr. Ives was a loan
officer with First National Bank of Bellaire and First State Bank of Bellaire.
Larry L. January.
Mr. January, age 67, has been a director of the Bank since 1983. Mr.
January is retired. He was President of January Home Appliance Systems, an
appliance sales company, which he founded in 1954, until 1992.
Albert V. Kochran.
Mr. Kochran, age 73, has been a director of the Bank since March 1998. Mr.
Kochran has been Chairman of the Board of Southwest Houston Tire Sales, Inc.
since 1976. From 1951 to 1976, he was sales manager of the Southwest Division of
the Goodyear Tire and Rubber Company.
I.W. Marks.
Mr. Marks, age 63, has been a director of the Bank since 1983. Mr. Marks is
President, Chief Executive Officer, and owner of I.W. Marks Jewelers, Inc., an
independent jewelry business operating in the Southwest Houston area since 1978.
David E. Preng.
Mr. Preng, age 51, has been a director of the Bank since 1983. Mr. Preng is
founder and since 1980, has been President of Preng & Associates, Inc., a
retained executive search firm with offices in Houston, London, Moscow, and
Vienna. Mr. Preng is a director of Box Energy Corporation.
Mary A. Walker.
Ms. Walker, age 60, has been a director of the Bank since 1986. She joined
the Bank as Vice President in 1983 and was elected a Director of the Bank in
1986 and a Senior Vice President in 1986. Prior to joining the Bank, Ms. Walker
was employed with First National Bank of Bellaire as a Vice President and loan
officer from 1979 to 1983.
B. Ralph Williams.
Mr. Williams, age 57, has been a director of the Bank since 1983. He was a
founder of the Bank in 1983 and has been President since 1986 and Chief
Executive Officer since 1992. Prior to joining the Bank, Mr. Williams was
employed by East Texas National Bank of Palestine as a Vice President, Loan
Officer, and
19
<PAGE>
Compliance Officer from 1981 to 1983. He was associated with First National Bank
of Bellaire as Senior Vice President from 1979 to 1981, and with First State
Bank of Bellaire from 1963 until 1979, initially as a teller, and in various
capacities advancing to Senior Vice President. Mr. Williams was with Houston
National Bank from 1958 to 1963.
There is no family relationship between any director, executive officer or
person nominated or selected by the Board to become a director or executive
officer.
Advisory Directors
The Board of Directors has also elected three advisory directors: Randall
W. Dobbs, Sheila J. Duffy, and Robert J. Kramer. The Advisory Directors attend
all meetings of the Board of Directors but are not entitled to vote on matters
presented to the Board of Directors for its approval.
Randall W. Dobbs.
Mr. Dobbs, age 40, has been an advisory director of the Bank since 1995. He
joined the Bank as its first Cashier in 1983, became Chief of Operations in
1992, and Executive Vice President and Chief of Operations in 1996. Prior to
joining the Bank, Mr. Dobbs was employed by Texas Bank & Trust from 1981 until
1983 and First National Bank of Bellaire from 1974 until 1981.
Sheila J. Duffy.
Ms. Duffy, age 36, joined the Bank as President of the Sugar Land office in
1995 and was elected an Advisory Director in November 1997. From February 1988
to July 1995, she was employed by Park National Bank -Stafford as a Vice
President. From 1982 to 1988 she was employed by American National Bank, which
was acquired by Park National Bank in 1988.
Robert J. Kramer.
Mr. Kramer, age 56, joined the Bank on April 1, 1998. From July 1985 to
April 1998, he was President and Chief Executive Officer of Independence Bank,
N.A., Houston, Texas. From January 1983 to June 1985, he was President and Chief
Executive Officer of Mont Belvieu State Bank, Mont Belvieu, Texas. From April
1975 to January 1983, he was Senior Vice President and cashier of Charter
National Bank - Colonial, Houston, Texas. Mr. Kramer has been active in banking
in the Houston area since 1961.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
The Board of Directors held twelve meetings during 1997. The Bank has
Audit, Compensation, Personnel, Investment-Asset/Liability, Loan, and Strategic
Planning Committees.
The Audit Committee currently consists of Mr. Dawson, Chairman, Ms Griffin,
Mr. January, and Mr. Preng, none of whom is an employee of the Bank. The Audit
Committee reviews the general scope of the audit conducted by the Bank's
independent auditors, the fees charged therefor, and matters relating to the
Bank's internal control systems. In performing its functions, the Audit
Committee meets separately with representatives of the Bank's independent
auditors and with representatives of senior management. The Audit Committee held
four meetings in 1997.
20
<PAGE>
The Compensation Committee currently consists of Mr. Preng, Chairman, Mr.
Bruecher, Mr. Marks, Mr. Barnes, Mr. Dawson, and Mr. Hollis. The Compensation
Committee is responsible for making recommendations to the Board of Directors
with respect to the compensation of the Bank's executive officers and is
responsible for the establishment of policies dealing with various compensation
and employee benefit matters for the Bank, administers the Bank's stock option
plans, and makes recommendations to the Board of Directors as to option grants
to Bank employees under such plans. The Compensation Committee held three
meetings in 1997.
The Personnel Committee currently consists of Mr. Barnes, Chairman, Mr.
Cook, Mr. Dawson, Mr. Dobbs, Ms. Griffin, Mr. Hollis, Mr. Ives, and Mr.
Williams. The primary function of the Personnel Committee is to set compensation
for all personnel of the Bank other than officers. The Personnel Committee met
one time during 1997.
The Investment-Asset/Liability Committee currently consists of Mr. Cook,
Chairman, Mr. Hollis, Vice Chairman, Mr. Barnes, Mr. Dobbs, Mr. January, Mr.
Preng, and Mr. Willaims. The primary function of the Investment-Asset/Liability
Committee is to plan and control the process of matching the mix and maturities
of assets and liabilities of the Bank in ways that will provide a favorable and
even flow of net interest income while assuming reasonable business risk. The
Investment-Asset/Liability Committee met four times during 1997.
The Loan Committee currently consists of Mr. Williams, Chairman, Mr.
Barnes, Mr. Bruecher, Mr. Cook, Mr. Dawson, Mr. Dobbs, Mr. Hollis, Mr. Ives, and
Ms. Walker and Peggy Cook, John M. James, and Sandra Scott. The primary function
of the Loan Committee is to review and approve requests for loans in excess of
the established lending authority of the officers of the Bank. The Loan
Committee meets as needed to approve loan applications and met 53 times during
1997.
The Strategic Planning Committee currently consists of Mr. Preng, Chairman,
Mr. Barnes, Mr. Cook, Mr. Dawson, Mr. Dobbs, Ms. Duffy, Mr. Earthman, Mr.
Hollis, Mr. Ives, Mr. Marks, and Mr. Williams. The primary function of the
Strategic Planning Committee is to develop and review the Bank's strategic plan
including the expansion of facilities and services and the development of new
products. The Strategic Planning Committee met once during 1997.
During 1997, each of the current directors attended at least 75% of the
meetings of the Board of Directors and the Committees on which he or she served
(during the period that he or she served) except Mr. Marks who was not able to
attend five of the thirteen Board meetings and Mr. Preng who was not able to
attend two of the four meetings of the Investment-Asset/Liability Committee.
Directors of the Bank receive a fee of $500 for each meeting of the Board
of Directors attended and $75 for each committee meeting attended.
NOMINATION OF DIRECTORS
In the event a stockholder entitled to vote for the election of directors
at a meeting wishes to make a director nomination at a stockholders meeting,
written notice of such stockholder's intent t o
21
<PAGE>
make such nomination must be given, either by personal delivery or by U.S. mail,
postage prepaid, to the President of the Bank, 5320 Bellaire Boulevard,
Bellaire, Texas 77401 and to the OCC, not less than 60 nor more than 90 days
prior to the meeting. Each such notice must set forth: (a) the name and address
of the stockholder who intends to make the nomination, (b) the name, age,
business address, home address and principal occupation of the person or persons
to be nominated; (c) the principal occupation of the person or persons
nominated; (d) the total number of shares of capital stock of the Bank that will
be voted for each person nominated; (e) the number of shares of capital stock
owned by the notifying stockholder: (f) a representation that the stockholder is
a holder of record of stock of the Bank entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to nominate the person or
persons specified in the notice; (g) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder; (h) such other information
regarding each nominee proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the rules of the SEC, had the
nominee been nominated, or intended to be nominated, by the Board of Directors;
and (i) the written consent of each nominee to serve as a director of the Bank
if so elected. The chairman of the stockholder meeting shall determine if a
nomination complies with the foregoing requirements and may disregard the
nomination of any person not made in compliance with the foregoing procedure.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
Mr. Cook, Chairman of the Board of the Bank, and Mr. Williams, President
and Chief Executive Officer of the Bank, served on the Compensation Committee
until October 1997. As members of this committee Messrs. Cook and Williams
participated in the determination of Committee recommendations to the Board of
Directors as to compensation of executive officers of the Bank, including
themselves.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table provides certain summary information concerning
compensation paid or accrued by the Bank to or on behalf of the Bank's Chief
Executive Officer and the four most highly compensated executive officers other
than the Chief Executive Officer (the "Named Executives").
22
<PAGE>
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
------------ ------------
STOCK
NAME AND UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION(1)
------------------ ---- --------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
B. Ralph Williams................... 1997 $144,000 $25,000 10,000 $17,201
President and...................... 1996 121,000 20,000 -- 12,944
Chief Executive Officer............ 1995 118,000 15,000 -- 11,355
Frank G. Cook....................... 1997 110,000 35,000 10,000 19,073
Chairman of the Board.............. 1996 110,000 25,000 -- 13,840
1995 118,000 20,000 -- 12,367
Joseph E. Ives...................... 1997 91,800 10,000 10,000 13,560
Executive Vice President........... 1996 89,400 7,500 -- 10,856
1995 87,200 5,000 -- 9,363
Randall W. Dobbs.................... 1997 84,100 10,000 10,000 12,200
Executive Vice President, Cashier.. 1996 79,300 7,500 -- 9,798
and Chief of Operations............ 1995 74,600 5,000 -- 8,618
Mary A. Walker...................... 1997 84,600 10,000 10,000 13,393
Vice President and Director........ 1996 82,200 7,500 -- 9,866
1995 80,200 5,000 -- 9,192
</TABLE>
- --------------------
(1) Includes fees for Director's meetings attended, the Bank's contribution to
the Bank's 401(k) plan, and premiums on additional life insurance.
OPTIONS GRANTED DURING 1997
The following table contains information concerning the grant of stock
options under the Bank's stock option plans to the Named Executives during the
year ended December 31, 1997.
<TABLE>
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO POTENTIAL REALIZABLE VALUE AT ASSUMED
UNDERLYING EMPLOYEES IN EXERCISE ANNUAL RATES OF STOCK PRICE
OPTIONS FISCAL YEAR PRICE EXPIRATION APPRECIATION FOR OPTION TERM(1)
NAME GRANTED (#) 1997 ($/SH) DATE 5%($) 10%($)
---- ----------- ---- ------ ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
B. Ralph Williams.. 10,000 9.5% $9.00 6/23/07 $56,600 $143,437
Frank G. Cook...... 10,000 9.5 9.00 6/23/07 56,600 143,437
Joseph E. Ives..... 10,000 9.5 9.00 6/23/07 56,600 143,437
Randall W. Dobbs... 10,000 9.5 9.00 6/23/07 56,600 143,437
Mary A. Walker..... 10,000 9.5 9.00 6/23/07 56,600 143,437
</TABLE>
(1) The amounts shown under these columns are the result of calculations at the
5% and 10% rates required by the rules adopted by the Securities and
Exchange Commission and are not intended to forecast future appreciation of
the Bank's stock price. The potential realizable values are based on an
assumption that the stock price of the shares of Bank Common Stock
appreciates at the annual rate shown (compounded annually) from the date of
grant until the end of the option term. The values do not take into account
amounts required to be paid as income taxes or option provisions providing
for termination of an option following termination of employment,
nontransferability, or vesting over periods of up to four years.
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<PAGE>
STOCK OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth certain information concerning the value
realized on the exercise of stock options be the Named Executives during 1997
and the value of unexercised options held by each of the Named Executives at
December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1997 DECEMBER 31, 1997(1)
ACQUIRED ON VALUE --------------------------- --------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
B. Ralph Williams.. $ -- $ -- 17,424 21,616 $169,884 $148,256
Frank G. Cook...... -- -- -- 10,000 -- 35,000
Joseph E. Ives..... -- -- 8,712 15,808 84,942 91,628
Randall W. Dobbs... 4,390 29,784 5,880 13,920 57,330 73,220
Mary A. Walker..... 3,300 19,701 6,534 14,356 63,706 77,471
</TABLE>
(1) The value is based on a closing price of $12.50 per share on December 31,
1997.
SEVERANCE AGREEMENTS
The Board of Directors has entered into agreements with Messrs. Williams,
Dobbs, Ives, and James and Ms. Walker and Duffy which provide generally that in
the case of a change in control of the Bank and the discharge of any such
officer without cause within two years after such change in control, such
officer will be paid for two years and eleven months at their current salary. To
be eligible for such payment, the named officers must remain in the Bank's
employ until the change in control is completed.
EMPLOYEE STOCK OPTION PLANS
The stockholders of the Bank approved employee stock option plans in 1992,
1994, 1995, and 1997, providing for the grant of options, after adjustment for
stock splits and dividends, for 72,600, 36,300, 12,100, and 95,000 shares,
respectively. Options granted under the plans may be either "non-qualified" or
"incentive" stock options. The price at which options may be granted may not be
less than the fair market value on the dates of grant. Generally, under the
plans, options vest 20% at the end of the third year following the date of
grant, an additional 20% at the end of each of the two following years, and are
exercisable in full at the end of the sixth year following the date of grant.
Options must be exercised within ten years following the date of grant or no
more than three months after the optionee's termination of employment with the
Bank, if earlier.
At December 31, 1997, options for 180,950 shares granted to 16 employees
were outstanding, with per share exercise prices ranging from $2.75 to $9.00 per
share (as adjusted for subsequent stock dividends and stock splits), and of the
outstanding options, options to purchase an aggregate of 45,334 shares were
exercisable.
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<PAGE>
401(K) PLAN
In 1991, the Bank adopted a contributory profit sharing plan pursuant to
Internal Revenue Code Section 401(k) (the "401(k) Plan") covering substantially
all employees. Each year the Bank determines, at its discretion, the amount of
contributions to the 401(k) Plan. Total plan expense charged to the Bank's
operations for 1997, 1996, and 1995 was approximately $180,000, $128,000, and
$95,000, respectively.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee annually evaluates the performance of
management, reviews the compensation levels of members of management, and
considers management succession and related matters. The Committee reviews with
the Board of Directors in detail all of compensation for the seven officers who
constitute the Bank's senior management group including a recommendation for
annual cash bonuses and grants of stock options.
The Compensation Committee administers an executive compensation plan which
is designed to:
1. Allow the Bank to compete for and retain executives critical to the
Bank's future success by providing compensation that is commensurate
with the Bank's position as a well-capitalized institution which is
engaged in various activities to enhance its business.
2. Align the interest of its executives with the interest of the Board of
Directors and the Bank's stockholders by providing performance based
awards through annual cash bonuses and salary increases.
3. Increase ownership in the Bank Common Stock by the Bank's senior
management through the grant of stock options, thereby providing
further incentive to senior officers to improve the performance of the
Bank and the Bank Common Stock.
The Compensation Committee believes that compensation for the senior
management of the Bank should be based on achievement of an overall corporate
profit goal as well as business and individual goals and should provide an
incentive for effective management of the Bank's assets.
In 1997, the Compensation Committee based its evaluation of the performance
and compensation of the chief executive officer and the other executive officers
primarily on their leadership and performance in achieving the 1997 corporate
performance goals of the Bank as well as on peer data for comparable positions
in financial institutions of a similar size.
David E. Preng, Chairman
John B. Barnes
William H. Bruecher, Jr.
Alton L. Hollis
I.W. Marks
25
<PAGE>
STOCK PERFORMANCE GRAPH
The graph below provides an indicator of cumulative total stockholder
returns for the Bank as compared with the Nasdaq National Market Composite Index
and the Nasdaq Composite Bank Stock Index. This graph covers the period from
October 1, 1997, when the Bank Common Stock was first traded on the Nasdaq Stock
Market, through December 31, 1997, and assumes that $100 was invested on October
1, 1997, in the Bank Common Stock, the Nasdaq National market Composite Index
and the Nasdaq Composite Bank Stock Index, and that all dividends were
reinvested. The historical stock price performance for the Bank Common Stock
shown on the graph is not necessarily indicative of future stock performance.
[GRAPH APPEARS HERE]
October 1, 1997 December 31, 1997
- -----------------------------------------------------------------
Bank Common Stock $100.00 $104.49
- -----------------------------------------------------------------
Nasdaq NMS Composite 100.00 93.78
- -----------------------------------------------------------------
Nasdaq Composite Bank Index 100.00 114.53
- -----------------------------------------------------------------
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the federal securities laws, the Bank's directors, executive (and
certain other) officers, and any persons holding more than ten percent of the
Bank Common Stock are required to report their ownership of Bank Common Stock
and any changes in that ownership to the Bank and the OCC. Specific due dates
for these reports have been established by regulation and the Bank is required
to report in this proxy statement any failure to file by these dates in 1997.
All of these filings were satisfied by the Bank's directors, officers, and ten
percent holders, except that Mr. Chancelor made
26
<PAGE>
a late filing of his Form 3 following his election as a director of the Bank and
Mr. Dobbs made a late filing of a Form 4 following the exercise of stock options
in December.
As of April __, 1998, the Bank believes that all directors, officers and
ten percent holders are current in their filings. In making these statements,
the Bank has relied on the written representations of its directors, officers
and ten percent holders and copies of reports that they have filed with the OCC.
INTERESTS OF MANAGEMENT AND OTHER IN CERTAIN TRANSACTIONS
Many of the directors and executive officers of the Bank 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 Bank. During 1997,
the Bank made loans in the ordinary course of business to certain directors of
the Bank and their associates, all of which the Bank believes were on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with persons unaffiliated
with the Bank 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 Bank (i.e., those who own 10% or more of the
outstanding shares of Common Stock) are subject to limitations contained in the
Federal Reserve Act and regulations issued by the Federal Reserve Board, the
principal effect of which is to require that extensions of credit by the Bank to
executive officers, directors and principal stockholders satisfy the foregoing
standards. On December 31, 1997, all of such loans aggregated approximately
$775,000, which was 2.5% of the Bank's Tier 1 capital at such date. The Bank
expects to have such transactions or transactions on a similar basis with its
directors, executive officers, and principal stockholders and their associates
in the future.
27
<PAGE>
RATIFICATION OF THE SELECTION OF INDEPENDENT
AUDITORS FOR THE BANK
The Board of Directors of the Bank has selected the accounting firm of Mann
Frankfort Stein & Lipp, Certified Public Accountants, a Professional
Corporation, to audit the Bank's financial statements for, and otherwise act as
the Bank's independent accountants with respect to the fiscal year ending
December 31, 1998. In accordance with the Board's resolution, the selection of
Mann Frankfort Stein & Lipp for the current fiscal year is submitted to
stockholders for ratification. The Bank knows of no direct or indirect financial
interest by Mann Frankfort Stein & Lipp in the Bank.
Mann Frankfort Stein & Lipp, served as the Bank's independent auditors for
the 1997 fiscal year. In addition to performing customary audit services, Mann
Frankfort Stein & Lipp assisted the Bank with the preparation of its federal and
state tax returns and provided assistance in connection with regulatory matters,
charging the Bank for such services at its customary hourly billing rates. These
non-audit services were approved by the Bank's Board of Directors after the
Board of Directors reviewed the nature and expense associated with such services
and concluded that there was no effect on the independence of the accountants.
The Bank has been advised by Mann Frankfort Stein & Lipp that none of its
members has any financial interest in the Bank.
A representative of Mann Frankfort Stein & Lipp is expected to be present
at the Annual Meeting and will be available to make a statement if he or she so
desires, and to respond to appropriate questions of the stockholders.
The proposal to ratify the appointment of Mann Frankfort Stein & Lipp as
the Bank's independent auditors requires the affirmative vote of a majority of
the outstanding shares of Common Stock represented and entitled to vote at the
Annual Meeting.
THE BOARD UNANIMOUSLY RECOMMENDS THAT EACH STOCKHOLDER VOTE "FOR" THE
RATIFICATION OF THE APPOINTMENT OF MANN FRANKFORT STEIN & LIPP AS THE
INDEPENDENT AUDITORS OF THE BANK.
28
<PAGE>
PROPOSED REORGANIZATION
MERGER AGREEMENT
Under the terms of the Merger Agreement, the Bank will merge with, into and
under the Charter of the New Bank, a subsidiary of the Holding Company, and each
whole outstanding share of the Bank Common Stock (other than shares as to which
dissenters' rights have been perfected and other than fractional shares in lieu
of which cash will be issued) will be converted into the right to receive one
share of the Holding Company Common Stock (the "Merger").
The New Bank is an interim national banking association, organized for the
sole purpose of merging with the Bank to effect the reorganization. The New Bank
will conduct no banking business prior to the Merger.
Upon consummation of the Plan of Reorganization, the Bank will become a
wholly-owned subsidiary of the Holding Company, and the stockholders of the Bank
will become stockholders of the Holding Company. The Bank will continue its
banking business substantially unchanged and under the same management.
On March 24, 1998, the Boards of Directors of the Bank, the New Bank, and
the Holding Company approved the Merger Agreement. The Merger Agreement may be
amended by mutual consent of the Parties before or after approval and adoption
by the Bank's stockholders except for provisions relating to the conversion of
shares of Common Stock of the Bank into shares of common stock of the Holding
Company.
THE MERGER AGREEMENT MUST BE APPROVED AND ADOPTED BY THE AFFIRMATIVE VOTE
OF THE HOLDERS OF AT LEAST 66-2/3% OF THE OUTSTANDING SHARES OF THE BANK'S
COMMON STOCK.
The Merger Agreement is subject to the consent and approval of certain
governmental authorities, including approval by the Federal Reserve Board and
the OCC. The Holding Company is required to register with the Federal Reserve
Board as a bank holding company under the BHCA. The required notice will be
filed with the Federal Reserve Board. Applications for approval of the Merger
will be filed with the Federal Reserve Board and with the OCC.
The Merger Agreement may be amended by the mutual consent of the Boards
of Directors of the Bank, the New Bank and the Holding Company even after they
are approved by the Bank's stockholders. The Board of Directors, however, may
not amend any provisions relating to the conversion of shares of the Bank into
shares of the Holding Company without stockholder approval. The Board of
Directors of the Bank may also terminate the Merger Agreement at any time before
the consummation of the Merger, if the Board of Directors believes that the
reorganization would be inadvisable, for any reason.
As required by generally accepted accounting principles, the Merger will be
accounted for in a manner similar to a pooling of interests at historical cost.
For additional information, see the Merger Agreement, attached hereto as
Exhibit A and incorporated by reference herein.
29
<PAGE>
REASONS FOR THE PROPOSED REORGANIZATION
In the opinion of the Board of Directors of the Bank, the formation of a
bank holding company will provide the Bank with greater flexibility in acquiring
other financial institutions and flexibility in engaging in non-banking
activities, to utilize alternative sources of capital that are not available to
the Bank such as the issuance of trust preferred stock, and in responding to
changes in law, and will provide investors and potential investors with
increased access to financial information with respect to the Bank through the
SEC's Internet site.
Flexibility in Acquisitions. A part of the Bank's strategy is to expand
into new areas of the greater Houston metropolitan area that complement its
existing or targeted customer base by opening new branch offices or acquiring
existing financial institutions. As a national bank, the Bank is prohibited from
having a subsidiary that is a bank. Consequently, if the Bank wishes to acquire
the stock of another bank, the acquisition must be done as a merger. Under the
National Bank Act all mergers involving a national bank must be presented to the
stockholders of the Bank for approval. The calling of a stockholders meeting and
preparation of the required proxy statement is a time consuming and expensive
project. A holding company may have more than one bank subsidiary. Consequently,
the Holding Company will be able to acquire either the assets or stock of other
banks for cash or stock of the Holding Company without having to present each
acquisition to the stockholders of the Holding Company subject to certain
limitations on the number of shares of Holding Company Common Stock that may be
issued in an acquisition without stockholder approval.
Non-Banking Activities. Under the BHCA, with the prior approval of the
Federal Reserve Board, the Holding Company may organize or acquire certain other
financially related businesses without stockholder approval. The Holding Company
has no present plans for such acquisition. Subsidiaries of the Holding Company,
not engaged in banking, but in activities related to banking, are not subject to
geographic restrictions. See, "Description of the Holding Company -- Permitted
Activities".
Flexibility in Financing. The authorized capitalization of the Holding
Company, whose Articles of Incorporation authorize 30,000,000 shares of Holding
Company Common Stock, provides flexibility in financing to the Holding Company.
If the Merger is approved, approximately 5 million shares of Holding Company
Common Stock will be issued in connection with the consummation of the Merger,
leaving approximately 25 million authorized but unissued shares of Holding
Company Common Stock. The authorized but unissued shares of Holding Company
Common Stock would be available for issuance from time to time by action of the
Board of Directors to raise additional capital, for acquisitions, or for other
corporate purposes without further action by the stockholders of the Holding
Company unless otherwise required by law. Such issuance could result in a
dilution of voting rights and book value per share as to the Holding Company
Common Stock. There are no present plans, arrangements or commitments for the
issuance of any such shares. The ability to incur indebtedness at the Holding
Company level and to contribute the proceeds of such indebtedness to the Bank as
equity capital provides further flexibility.
Another advantages of formation of a Holding Company is the greater number
of alternatives in connection with the raising capital. One of alternatives is
the issuance of trust preferred stock.
Protection Against an Unfriendly Takeover. See, "Description of the Holding
Company's Stock -- Anti-Takeover Provisions."
30
<PAGE>
Availability of Financial Information. The Bank's primary federal
regulatory agency is the OCC. Since the Bank's Common Stock is registered under
the Securities Act and the 1934 Act, the Bank is subject to the reporting
requirements of the SEC and is required to file Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and proxy
statements. However, all of these filings are made with the OCC rather than the
SEC. While this information is available to the public at the offices of the
OCC, the OCC does not maintain an Internet site such as the Edgar service
maintained by the SEC permitting online computer access to documents filed by
the Bank. The Holding Company will file its periodic reports and proxy
statements with the SEC. Accordingly, such reports and statements will be
available to the public via online computer access through the SEC's Edgar
system. The Board of Directors of the Bank believes that this access will be
beneficial both for current investors and prospective investors in the Holding
Company.
STOCKHOLDER APPROVAL
An affirmative vote of 66-2/3% of the issued and outstanding shares of
Common Stock of the Bank is necessary to approve and adopt the Merger Agreement.
EFFECTIVE DATE
The reorganization and the Merger shall be effective at the time and on the
date specified on the certificate to be issued by the OCC and the Federal
Reserve Board. The Bank will request that the OCC and the Federal Reserve Board
issue a certificate no later than June 30, 1998 (the "Effective Date"). Neither
the OCC nor the Federal Reserve Board will issue a certificate before they
approve the Merger. Final approval will not be considered and given until the
Holding Company and the Bank give notice that holders of at least 66-2/3% of the
issued and outstanding shares of Common Stock of the Bank have approved and
adopted the Merger Agreement.
The approval of the OCC and of the Federal Reserve Board reflects only the
regulator's view that the transaction does not contravene the competitive
standards of law and is consistent with regulatory concerns relating to bank
management and to the safety and soundness of the subject banking organizations.
Such approval is not to be interpreted as an opinion by the regulators that the
reorganization is favorable to the stockholders from a financial point of view
or that these agencies have considered the adequacy of the terms of the
exchange. THE REGULATORS' APPROVAL IS NOT AN ENDORSEMENT OR RECOMMENDATION OF
THE REORGANIZATION OR OF THE MERGER.
EFFECT OF REORGANIZATION ON BANK'S BUSINESS AND STOCKHOLDERS
The New Bank is a national bank, organized by the Holding Company, for the
sole purpose of effecting the reorganization and holding company formation. The
New Bank is a subsidiary of the Holding Company. The New Bank will conduct no
banking business prior to the proposed merger. On the Effective Date, the Bank
will merge with, into and under the Charter of the New Bank.
On the Effective Date, stockholders of the Bank will cease to have any
rights as stockholders of the Bank and their rights will relate solely to the
shares of the Holding Company Common Stock, or, if voted against the Merger or
dissented in accordance with Section 215a(b) of the National Bank Act they will
have the right to receive cash in the amount of the appraised value of their
shares of Bank Common Stock. See "Rights
31
<PAGE>
of Dissenting Stockholders" and Exhibit D - Excerpts from Section 215a(b) of the
National Banking Act, Relating to Dissenters' Rights.
CONVERSION OF STOCK
On the Effective Date, stockholders of the Bank who do not perfect
dissenters' rights will become stockholders of the Holding Company by reason of
the Merger. They will own the same number of shares of the Holding Company
Common Stock as they previously owned of the Bank Common Stock with the
exception of fractional shares. Cash equal to the fair market value of the
fractional interest on the Effective Date will be paid in lieu of fractional
shares. Each outstanding whole share of the Bank Common Stock will automatically
be converted into and become the right to receive one share of Holding Company
Common Stock.
The Bank has issued options representing the ability to purchase 170,950
shares of Bank Common Stock at prices ranging from $2.75 per share to $9.00 per
share. The Holding Company will assume the obligation of the Bank under any
options outstanding and unexercised on the Effective Date. Option holders will
receive stock options to purchase the same number of shares at the same exercise
price had the option been exercised prior to the Merger.
EXCHANGE OF STOCK CERTIFICATES
The outstanding stock certificates that represent one share of the Bank
Common Stock will be deemed automatically to represent one share of the Holding
Company Common Stock. Stockholders will be required to exchange their present
stock certificates (bearing the name "Citizens National Bank of Texas Bank") for
new stock certificates (bearing the name "CNBT Bancshares, Inc."). The Board of
Directors has reserved the right to withhold any dividends from those
stockholders who do not exchange their present stock certificates for new stock
certificates within a reasonable period of time after being advised by the Board
of Directors of such exchange of share certificates.
Upon consummation of the reorganization, the Holding Company will mail to
holders of Bank Common Stock a letter of transmittal and instructions related to
the exchange of the Bank Common Stock certificate for certificates representing
the number of shares of Holding Company Common Stock into which their Bank
Common Stock has been converted as a result of the reorganization.
BANK STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE SUCH
NOTIFICATION.
TRADING AND RESALE OF HOLDING COMPANY COMMON STOCK
The shares of Holding Company Common Stock to be received in connection
with the Merger will not require registration under the Securities Act for their
subsequent transfer, except that shares of the Holding Company Common Stock to
be received by persons who are deemed to be "affiliates" of the Bank (directors,
certain officers, and stockholders owning five percent or more of the
outstanding shares of Common Stock), within the meaning of Rule 145 under the
Securities Act, may be resold by affiliates without further registration only in
transactions permitted under certain sections of Rule 144 under the Securities
Act or pursuant to other exemptions under the Securities Act. Rule 144, among
other things, will operate generally to limit the number of shares of Holding
Company Common Stock that may be sold in any three-month
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<PAGE>
period by any one affiliate not acting in concert with others to one percent of
the outstanding shares of the Holding Company Common Stock. This limitation will
cease at the end of one year following the Effective Date as to former
affiliates of the Bank who are not affiliates of the Holding Company. Most
affiliates of the Bank, however, will at least initially also be affiliates of
the Holding Company and thus may only sell shares of Holding Company Common
Stock in transactions permitted under Rule 144 or otherwise in compliance with
the Securities Act.
TAX CONSEQUENCES
Under the current provisions of the Code it is anticipated that: (1) no
gain or loss will be recognized by the Bank, the Holding Company, or the New
Bank by reason of the reorganization; (2) no gain or loss will be recognized by
the Bank's stockholders upon the exchange of the Bank Common Stock solely for
the Holding Company Common Stock pursuant to the reorganization, except for any
stockholder of the Bank who receives payment in cash as a dissenting stockholder
or for fractional shares; (3) the tax basis of the Holding Company Common Stock
to be owned by each of the Bank's stockholders will be the same as the tax basis
of the Bank Common Stock theretofore owned by such stockholder; (4) the holding
period of the Holding Company Common Stock into which the Bank Common Stock has
been converted will include the holding period of the Bank Common Stock,
provided that the Bank Common Stock was held as a capital asset on the date of
the conversion; (5) the New Bank will carry-over and take into account all
accounting items of the Bank such as earnings and profits, method of accounting,
inventories, etc.; and (6) any distribution by the New Bank to the Holding
Company for the repayment of the loan to charter the New Bank will be
disregarded as having any tax consequence.
In general, cash received by dissenting stockholders of the Bank or for
fractional shares will be treated as amounts distributed in redemption of their
Bank Common Stock and will be taxable under Section 302(a) of the Code as a
capital gain or loss, if the shares are held as a capital asset, or, otherwise,
as ordinary income. It is possible, however, that the provisions of Section
302(a) will not apply to a particular dissenting stockholder due to Code rules
that require that certain stockholders be treated as owning shares actually
owned by other individuals and entities (i.e., certain individuals related to
the stockholder and certain partnerships, estates, trusts and corporations in
which the stockholder has an interest); if so, the amounts paid to the
dissenting stockholder may be taxable as dividends because they would be treated
as distributions to which Code Section 301 applies and not as a redemption under
Code Section 302(a).
STOCKHOLDERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS IN ORDER TO MAKE AN
INDIVIDUAL APPRAISAL OF THE FEDERAL, STATE AND LOCAL INCOME TAX AND PERSONAL
PROPERTY AND OTHER TAX CONSEQUENCES OF THE CONSUMMATION OF THE REORGANIZATION
AND MERGER AND THE EXERCISE OF DISSENTERS' RIGHTS.
RIGHTS OF DISSENTING STOCKHOLDERS
Any stockholder who objects to the Merger may seek the remedies provided by
Section 215a(b)and (c) of the National Bank Act. The following summary of
Dissenters' Rights granted pursuant to the National Banking Act does not purport
to be complete and is qualified in its entirety by reference to Exhibit D
hereto, which contains the complete text of Dissenters' Rights. Exhibit D is
incorporated herein by reference in its entirety.
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<PAGE>
Any stockholder of the Bank who has voted against the Merger at the Annual
Meeting or has given notice in writing at or prior to such meeting to the
presiding officer that he or she dissents from the Merger is entitled to
receive the value of the shares of Bank Common Stock held by such stockholder
when the Merger has been approved by the OCC upon written request made to the
Bank at any time within 30 days after the consummation of the Merger,
accompanied by surrender of the stockholder's stock certificate.
The value of the shares of Bank Common Stock of any dissenting stockholder
shall be ascertained as of the effective date of the Merger by an appraisal made
by a committee of three persons, composed of (1) one selected by vote of the
holders of a majority of the dissenting stockholders, (2) one selected by the
directors of the Bank, and (3) one selected by the two so selected. The
valuation agreed upon by any two of the three appraisers shall govern. If the
value so fixed shall not be satisfactory to any dissenting stockholder who has
requested payment, that stockholder may, within five days after being notified
of the appraised value of his or her shares, appeal to the OCC, who shall cause
a reappraisal to be made which shall be final and binding as to the value of the
shares of such stockholder.
A VOTE AGAINST THE PLAN OF REORGANIZATION AND PLAN OF MERGER, WHETHER CAST
BY PROXY OR IN PERSON AT THE ANNUAL MEETING, SHALL NOT, IN ITSELF, CONSTITUTE
THE REQUIRED WRITTEN REQUEST FOR PAYMENT.
A stockholder may assert Dissenters' Rights as to fewer than all of the
shares of the Bank's Common Stock registered in his or her name only if he or
she dissents with respect to all the shares beneficially owned by any one person
and notifies the Bank of the name and address of the beneficial owner or owners
on whose behalf he or she dissents. A stockholder may assert Dissenters' Rights
with respect to shares owned beneficially but not registered in his or her name
if he or she submits to the Bank a written consent of the record stockholder
prior to commencement of the voting by the stockholders on the Merger at the
Annual Meeting. A stockholder may not dissent with respect to some but less than
all shares owned beneficially, whether or not the shares so owned are registered
in the stockholder's name.
If the Merger is approved and adopted by the stockholders at the Annual
Meeting, the Bank will mail a further notice to all stockholders who timely
filed a written notice of intention to demand payment and who refrained from
voting in favor of the proposed merger. The further notice will include the
following: (1) information concerning where and when a request for payment must
be sent; (2) where and when a stockholder must deposit the certificates
representing his Common Stock in order to obtain payment; (3) a form to be used
by a stockholder for requesting payment that includes a request for
certification of the date on which the stockholder, or the person on whose
behalf the stockholder dissents, acquired beneficial ownership of the shares;
and (4) a copy of Section 215a of the National Bank Act. The time set by the
Bank for receipt of the demand for payment and deposit of the certificates by
stockholders shall not be less than 30 days from the mailing of the notice. A
STOCKHOLDER WHO FAILS TO TIMELY FILE THE FORM FOR REQUESTING PAYMENT OR FAILS TO
DEPOSIT HIS OR HER COMMON STOCK CERTIFICATES, AS REQUIRED BY THE NOTICE, SHALL
NOT HAVE ANY RIGHT TO RECEIVE PAYMENT OF THE FAIR VALUE OF HIS OR HER SHARES. A
dissenting stockholder shall retain all other rights of a stockholder until
those rights are modified by consummation of the Merger.
THE FOREGOING DISCUSSION IS ONLY A SUMMARY OF THE RIGHTS AND OBLIGATIONS OF
DISSENTING STOCKHOLDERS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
PROVISIONS OF SECTION 215a OF THE NATIONAL BANK ACT, WHICH PROVISIONS ARE
34
<PAGE>
REPRODUCED AND SET FORTH IN FULL IN EXHIBIT D TO THIS PROXY STATEMENT AND
PROSPECTUS.
FAILURE TO FOLLOW THE PROCEDURES SET FORTH IN SECTION 215A OF THE NATIONAL
BANK ACT REGARDING DISSENTERS' RIGHTS WILL CONSTITUTE A WAIVER OF APPRAISAL
RIGHTS. STOCKHOLDERS MAY WISH TO CONSULT INDEPENDENT LEGAL COUNSEL BEFORE
EXERCISING DISSENTERS' RIGHTS.
Except as set forth herein, notification of the beginning or end of any
statutory period will not be given by the Bank to any dissenting stockholders.
REGULATORY APPROVALS
Consummation of the Merger is subject to the approval of the Federal
Reserve Board and the OCC, hereinafter collectively designated as the "Bank
Regulatory Authorities". Applications to charter the New Bank and for approval
of the Merger will be filed with the OCC. The Holding Company will also file a
notice with the Federal Reserve Board for permission to become a Bank Holding
Company.
In general, the Bank Regulatory Authorities may disapprove this transaction
if the Merger and the reorganization of the Bank into a one-bank holding company
would not be consistent with adequate sound banking practices and would not be
in the public interest.
In addition, the Merger may not be consummated for 15 days from the date of
the later approval by the OCC or approval by the Federal Reserve Board if there
has been no challenge issued by the United States Department of Justice on anti-
trust grounds in which case the period of time before which consummation may
occur may be extended. The Merger and the reorganization of the Bank into a one-
bank holding company cannot proceed in the absence of requisite regulatory
approvals. The approval of the Bank Regulatory Authorities reflects only the
Bank Regulatory Authorities's view that the transaction does not contravene the
competitive standards of the law and is consistent with regulatory concerns
relating to bank management and to the safety and soundness of the subject
banking organizations. Such approval is not to be interpreted as an opinion by
the Bank Regulatory Authorities that the reorganization is favorable to the
stockholders from a financial point of view or that the Bank Regulatory
Authorities have considered the adequacy of the terms of the exchange. THE BANK
REGULATORY AUTHORITIES' APPROVAL IS NOT AN ENDORSEMENT OR RECOMMENDATION OF THE
REORGANIZATION AND MERGER.
There can be no assurance that the Bank Regulatory Authorities will approve
the reorganization and the Merger, and, if approvals are granted, there can be
no assurance as to the grant date of such approvals.
35
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the Bank
as of December 31, 1997, and of the New Bank and the Holding Company prior to
the Merger, and as adjusted to reflect consummation of the Merger.
<TABLE>
<CAPTION>
NEW HOLDING
BANK BANK COMPANY
---- ---- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Prior to the Reorganization
- ---------------------------
Borrowings under line of credit................. $ 0 $ 0 $ 240,000(1)
Number of shares of capital stock:
Authorized Common Stock........................ 30,000,000 30,000,000 30,000,000
Issued and outstanding Common Stock............ 5,044,181(2) 200,000 100
Stockholders' Equity:
Common Stock $ 10,242 $ 200 $ 0.1
Surplus 16,656 40 0.9
Retained earnings 3,637 0 0
Net unrealized gains on available-for-sale
securities, net of federal income taxes
of $573,000 1,112 0 0
Total stockholders' equity..................... $ 31,647 $ 240 $ 1
After the Reorganization
- ------------------------
Borrowings under line of credit................. $ 0 $ 0 $ 0(1)
Number of shares of capital stock outstanding:
Common Stock 0 200,000 5,044,181
Stockholders' Equity
Common Stock $ 200 $ 5,044
Surplus 26,938 26,603
Retained Earnings (3) 3,397 0
Net unrealized gains on available-for-sale
securities, net of federal income taxes
of $573,000 1,112 0
Total stockholders' equity..................... $ 31,647 $ 31,647
----------- -----------
</TABLE>
- -------------------
(1) The Holding Company has arranged to draw upon a $250,000 line of credit
provided by the Bank to capitalize the New Bank. It is anticipated that the
Holding Company will not draw on the line of credit until several days
before the effective date of the Merger. The capital of the New Bank will
not be retained in the continuing bank. Such line of credit will be repaid
immediately after the
36
<PAGE>
effective date of the Merger from funds provided by a special dividend from
the continuing bank to the Holding Company. Because of the short duration
of borrowings outstanding under the line, the resulting interest expense is
expected to be minimal.
(2) Does not include 180,950 shares of Common Stock reserved for issuance upon
exercise of options granted under the Bank's stock option plans at December
31, 1997.
(3) After the Merger the continuing bank will declare a special dividend to the
Holding Company which will reduce retained earnings. The special dividend
will be used to repay the line of credit and to pay the organization
expenses of the Holding Company.
COMPARISON OF STOCKHOLDER RIGHTS
One result of the consummation of the proposed reorganization is that
stockholders of the Bank, whose rights are presently governed by the National
Bank Act, will become stockholders of the Holding Company, and their rights in
the future will be governed by the Texas Business Corporation Act. Another
result is that the Articles of Incorporation and By-laws of the Holding Company
differ in several aspects from those of the Bank.
The following table compares the rights of stockholders of the Bank with
the rights of stockholders of the Holding Company. This table is qualified by
the more detailed information appearing elsewhere in this Proxy Statement and
Prospectus and in the exhibits hereto and is not intended to be an exhaustive
comparison.
<TABLE>
<CAPTION>
The Bank The Holding Company
-------- -------------------
<S> <C> <C>
Authorized and outstanding 30,000,000 shares, $2.03 par 30,000,000 shares, $1.00 par
shares of capital stock value, Common Stock, 5,054,181 value, of Common Stock, of
outstanding. which 5,054,181 would be
outstanding after the Merger.
Voting rights One vote per share with One vote per share with no
cumulative voting for directors. cumulative voting rights.
Preemptive rights None. None.
Dividends As declared by the Board of As declared by the Board of
Directors; may not exceed in any Directors; the Bank's dividend
calendar year the Bank's net restriction apply indirectly to the
income for that year plus its Holding Company as cash
retained net income for the available for dividend
preceding two years, may not distributions will initially come
exceed the Bank's undivided from dividends paid to the Bank
profits, and may be made if after by the Holding Company. Federal
making the dividend, the Bank Reserve Board policy that bank
would be "under-capitalized." holding companies should pay
cash dividends only out of
income over the past year and
only if prospective earnings
retention is consistent with the
organization's expected future
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
needs and financial condition. In
addition, the Holding Company
may not pay a dividend if: (1)
after giving effect to the dividend,
the Holding Company would be
insolvent or (2) the dividend
exceeds the surplus of the
Holding Company
Amendments of By-laws Approval by a majority of the Approval by a majority of the
Board of Directors. Board of Directors.
Stockholder action
(a) Mergers, consolidations, Approval by vote of at least 66- Approval by a vote of at least a
etc. 2/3% of outstanding shares. majority of the outstanding
shares.
(b) Liquidation, sale of Approval by vote of at least 66- Approval by a vote of at least a
substantially all assets 2/3% of outstanding shares. majority of the outstanding
shares.
(c) Special stockholder Upon request of a majority of the Upon request of a majority of the
meetings Board of Directors, the Chairman Board of Directors, the Chairman
of the Board, or the Chief of the Board, the Chief Executive
Executive Officer. Officer, or stockholders owning
at least 33-1/3% of the outstanding
shares of Holding Company
Common Stock.
Authorization of additional Approval by a vote of at least a Approval by a vote of at least a
shares majority of outstanding shares. majority of outstanding shares.
Amendment of Articles of Approval by a vote of at least a Approval by vote of at least a
Association or Incorporation majority of outstanding shares. majority of outstanding shares.
(other than for the purposes
stated above)
Repurchase of Capital Stock Cannot repurchase or retire any Stock can be repurchased if: (1)
part of its stock without prior after giving effect to the purchase
regulatory approvals and the Holding Company would not
stockholder approval. be insolvent or (2) the purchase
would not exceed the surplus of
the Holding Company. In
addition, no more than ten
percent of the outstanding shares
of Holding Company Common
Stock may be repurchased in any
12-month period without prior
regulatory approval.
</TABLE>
38
<PAGE>
In some jurisdictions, shares of common stock of a business corporation
such as the Holding Company may be treated differently from shares of stock of a
state banking institution for legal investments for institutions and
fiduciaries, and as the subject of personal property taxation. Thus,
stockholders of the Bank may desire to determine whether the status of their
shares under local or state laws applicable to them would be changed upon the
effective date of the Merger.
DESCRIPTION OF THE HOLDING COMPANY
ORGANIZATION
The Holding Company was organized as a Texas business corporation and
incorporated under Texas law on April 7, 1998, at the direction of the Board of
Directors of the Bank for the purpose of becoming a bank holding company by
acquiring all of the Bank's outstanding Common Stock. The Holding Company has
authorized 30,000,000 shares of Common Stock, par value $1.00 per share.
Currently, there are 100 shares of the Holding Company Common Stock outstanding
and held by the Bank.
The Holding Company expects to function primarily as the indirect holder of
all of the Bank's Common Stock. It may, in the future, acquire or form
additional subsidiaries, including other banks, to the extent permitted by law.
At present, the Holding Company does not own or lease any property and has
no paid employees. It will not actively engage in business until after the
consummation of the Merger. Until then, the Holding Company will use the Bank's
space and employees without payment. Thereafter, it will reimburse the Bank on a
fair and reasonable basis for all services furnished to it.
Copies of the Articles of Incorporation and By-laws of the Holding Company
are attached to this Proxy Statement and Prospectus as Exhibits B and C,
respectively.
MANAGEMENT
On the Effective Date, the Board of Directors of the Holding Company will
consist of those persons who are members of the Board of Directors of the Bank.
(For a list of Directors of the Bank, see "Election of Directors," above.)
The officers of the Holding Company are as follows:
Name Age Position
- ---- --- --------
Frank G. Cook...... 72 Chairman of the Board
B. Ralph Williams.. 57 President and Chief Executive Officer
Randall B. Dobbs... 40 Vice President, Secretary, and Treasurer
COMPENSATION
Because the Holding Company was not in existence in 1997, it paid no
remuneration to its directors and officers for that year. Further, the Holding
Company has paid no remuneration to its officers to date during
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<PAGE>
1998. In the future, the Holding Company may pay each of its directors for
attendance at meetings of the Board of Directors.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The Bank expects to extend its present directors' and officers' liability
insurance policy to cover the Holding Company's directors and officers without
significant additional cost. This liability policy would cover the typical
errors and omissions liability associated with the activities of the Holding
Company. The provisions of the insurance policy would probably not indemnify any
of the Holding Company's officers and directors against liability arising under
the Securities Act.
Texas law and the By-laws of the Holding Company and of the Bank provide
for broad indemnification of officers and directors against liabilities and
expenses incurred in legal proceedings. In addition, the By-laws of the Holding
Company and the Bank limit the liability of directors for monetary damages under
certain conditions.
In the opinion of the SEC, indemnification of officers, directors or
persons controlling the Holding Company for liabilities arising under the
Securities Act is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
SUPERVISION AND REGULATION OF THE HOLDING COMPANY
The Holding Company will be subject to the jurisdiction of the SEC and of
state securities commissions for matters relating to the offering and sale of
its securities. Presently, the Bank is subject to the jurisdiction of the OCC.
Accordingly, additional issuances of Holding Company stock to raise capital and
for dividend reinvestment, stock option and other plans will be subject to such
registration (absent any exemption from registration). Registration will require
the incursion of some additional costs by the Holding Company that the Bank does
not presently have to incur since the OCC does not presently impose any fee for
registering securities.
On the Effective Date, the Holding Company will become subject to the
provisions of the BHCA, and to supervision by the Federal Reserve Board. The
BHCA requires the Holding Company to secure prior approval of the Federal
Reserve Board before acquiring control, directly or indirectly, of more than
five percent of the voting shares or substantially all of the assets of any
institution, including another bank.
A bank holding company is prohibited from engaging in or acquiring direct
or indirect control of more than five percent of the voting shares of any
company engaged in non-banking activities unless the Federal Reserve Board, by
order or regulation, has found such activities to be so closely related to
banking, managing, or controlling banks as to be a proper incident thereto. In
making this determination, the Federal Reserve Board considers whether these
activities offer benefits to the public that outweigh any possible adverse
effects.
As a bank holding company, the Holding Company will be required to file an
annual report with the Federal Reserve Board as well as any additional
information that the Federal Reserve Board may require pursuant to the BHCA. The
Federal Reserve Board may also make examinations of the Holding Company and any
or all of its subsidiaries. Further, under Section 106 of the 1970 amendments to
the BHCA and the Federal Reserve Board's regulations, a bank holding company and
its subsidiaries are prohibited from
40
<PAGE>
engaging in certain tie-in arrangements in connection with any extension of
credit or provision of credit or provision of any property or services. The so-
called "anti-tie-in" provisions state generally that a bank may not extend
credit, lease, sell property or furnish any service to a customer on the
condition that the customer provide additional credit or service to the bank, to
its bank holding company or to any other subsidiary of its bank holding company
or on the condition that the customer not obtain other credit or service from a
competitor of the bank, its bank holding company or any subsidiary of its bank
holding company.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of credit to
the bank holding company or any of its subsidiaries, on investments in the stock
or other securities of the bank holding company and on taking of such stock or
securities as collateral for loans to any borrower.
PERMITTED ACTIVITIES
The Federal Reserve Board permits bank holding companies to engage in
activities so closely related to banking or managing or controlling banks as to
be a proper incident thereto. While the types of permissible activities are
subject to change by the Federal Reserve Board, the following list comprises the
principal activities that presently may be conducted by a bank holding company.
1. Making, acquiring or servicing loans and other extensions of credit
for its own account or for the account of others, such as would be
made by the following types of companies: consumer finance, credit
card, mortgage, commercial finance and factoring.
2. Operating as an industrial bank, Morris Plan or industrial loan
company in the manner authorized by state law so long as the
institution does not both accept demand deposits and make commercial
loans.
3. Operating as a trust company in the manner authorized by federal or
state law so long as the institution does not make certain types of
loans or investments or accept deposits, except as may be permitted by
the Federal Reserve Board.
4. Subject to certain limitations, acting as an investment or financial
advisor to investment companies and other persons.
5. Leasing personal and real property or acting as agent, broker, or
advisor in leasing property, provided that it is reasonably
anticipated that the transaction will compensate the lessor for not
less than the lessor's full investment in the property.
6. Making equity and debt investments in corporations or projects
designed primarily to promote community welfare.
7. Providing to others financially oriented data processing or
bookkeeping services.
8. Subject to certain limitations, acting as an insurance agent or broker
in relation to insurance for itself and its subsidiaries or for
insurance directly related to extensions of credit by the bank holding
company system.
41
<PAGE>
9. Subject to certain limitations, acting as underwriter for credit life
insurance and credit accident and health insurance that is directly
related to extensions of credit by the bank holding company system.
10. Providing courier services of a limited character.
11. Subject to certain limitations, providing management consulting advice
to nonaffiliated banks and nonbank depository institutions.
12. Selling money orders having a face value of $1,000 or less, travelers'
checks and United States savings bonds.
13. Performing appraisals of real estate.
14. Subject to certain conditions, acting as intermediary for the
financing of commercial or industrial income-producing real estate by
arranging for the transfer of the title, control and risk of such a
real estate project to one or more investors.
15. Providing securities brokerage services, related securities credit
activities pursuant to Federal Reserve Board Regulation T and
incidental activities such as offering custodial services, individual
retirement accounts and cash management services, if the securities
brokerage services are restricted to buying and selling securities
solely as agent for the account of customers and do not include
securities underwriting or dealing or investment advice or research
services.
16. Underwriting and dealing in obligations of the United States, general
obligations of states and their political subdivisions and other
obligations such as bankers' acceptances and certificates of deposit.
17. Subject to certain limitations, providing by any means, general
information and statistical forecasting with respect to foreign
exchange markets; advisory services designed to assist customers in
monitoring, evaluating and managing their foreign exchange exposures;
and certain transactional services with respect to foreign exchange.
18. Subject to certain limitations, acting as a futures commission
merchant in the execution and clearance on major commodity exchanges
of futures contracts and options on futures contracts for bullion,
foreign exchange, government securities, certificates of deposit and
other money market instruments.
19. Subject to certain limitations, providing commodity trading and
futures commission merchant advice.
20. Providing consumer financial counseling that involves counseling,
educational courses and distribution of instructional materials to
individuals on consumer-oriented financial management matters,
including debt consolidation, mortgage applications, bankruptcy,
budget management, real estate tax shelters, tax planning, retirement
and estate planning, insurance and general investment management, so
long as this activity does not include the sale of specific products
or investments.
21. Providing tax planning and preparation advice such as strategies
designed to minimize tax liabilities and includes, for individuals,
analysis of the tax implications of retirement plans, estate planning
and
42
<PAGE>
family trusts. For corporations, tax planning includes the analysis of
the tax implications of mergers and acquisitions, portfolio mix,
specific investments, previous tax payments and year-end tax planning.
Tax preparation involves the preparation of tax forms and advice
concerning liability based on records and receipts supplied by the
client.
22. Providing check guaranty services to subscribing merchants.
23. Subject to certain limitations, operating a collection agency and
credit bureau.
24. Acquiring and operating thrift institutions, including savings and
loan associations, building and loan associations and FDIC-insured
savings banks.
25. Operating a credit bureau, subject to certain limitations.
ISSUANCE OF ADDITIONAL SECURITIES
Because the Holding Company has authorized Common Stock substantially in
excess of the number of shares that will be issued in connection with the
Merger, the Board of Directors of the Holding Company will have the flexibility
to raise additional capital and to make acquisitions through the issuance of
Holding Company Common Stock without further approval by the Holding Company's
stockholders. The Holding Company stockholders will not have preemptive rights
to subscribe for additional shares. Therefore, such issuance could result in a
dilution of voting rights and book value per share as to the Holding Company
Common Stock. The Board of Directors of the Holding Company has no present plans
for issuing additional shares of Holding Company Common Stock.
DESCRIPTION OF THE HOLDING COMPANY COMMON STOCK
COMMON STOCK
The Holding Company is authorized to issue 30 million shares of Common
Stock, $1.00 par value per share, of which approximately 5,054,181 shares would
be outstanding if the reorganization had been consummated as of March 31, 1998.
The remaining authorized but unissued shares of Common Stock may be issued by
the Board of Directors without further stockholder approval. Issuance of these
shares could cause a dilution of the book value of the stock and the voting
power of present stockholders. The holders are entitled to one vote per share on
all matters presented to them.
The Common Stock has no cumulative voting rights, preemptive, subscription,
or conversion rights, redemption or repurchase provisions. These shares are non-
assessable and require no sinking fund. Each stockholder is entitled to receive
dividends that may be declared by the Board of Directors and to share pro rata
in the event of dissolution or liquidation. For information concerning dividend
restrictions, see "Description of the Securities of the Bank" and "Comparison of
Stockholder Rights."
In some jurisdictions, shares of common stock of a general business
corporation, such as the Holding Company, may be treated differently from shares
of stock of a bank, and therefore, may be the subject of personal property
taxation.
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ANTI-TAKEOVER PROVISIONS
Under the Texas Business Corporation Act, as amended (the "TBCA"), the
Articles of Incorporation and By-laws of the Holding Company, there are four
provisions that may be deemed to be "anti-takeover" in nature that will be
immediately applicable. Two of these provisions are: the authorization of 30
million shares of Common Stock and the lack of preemptive rights for
stockholders to subscribe to purchase additional shares of stock on a pro rata
basis. The additional shares of Common Stock and the elimination of preemptive
rights to such stock were authorized for the purpose of providing the Board of
Directors of the Holding Company with as much flexibility as possible to issue
additional shares, without further stockholder approval for proper corporate
purposes, including financing, acquisitions, stock dividends, stock splits,
employee incentive plans and other similar purposes. However, these additional
shares may also be used by the Board of Directors (if consistent with its
fiduciary responsibilities) to deter future attempts to gain control over the
Holding Company.
Provisions in the Holding Company's Articles of Incorporation and By-laws
require action by a majority of the Board of Directors and that only the
Chairman of the Board, the President, the Board of Directors, and stockholders
owning at least 33-1/3% of the issued and outstanding shares of Holding Company
Common Stock may call a special meeting of stockholders. The Holding Company's
By-laws may be amended by a majority vote of the members of the Board of
Directors. These provisions were included in the By-laws of the Holding Company
in order to ensure that any extraordinary corporate transaction could be
effected only if it received a clear mandate from the stockholders and/or the
directors.
THE OVERALL EFFECT OF THESE PROVISIONS MAY BE TO DETER A FUTURE OFFER OR
OTHER MERGER OR ACQUISITION PROPOSAL THAT A MAJORITY OF THE STOCKHOLDERS MIGHT
VIEW TO BE IN THEIR BEST INTERESTS AS THE OFFER MIGHT INCLUDE A SUBSTANTIAL
PREMIUM OVER THE MARKET PRICE OF THE HOLDING COMPANY'S COMMON STOCK AT THAT
TIME. IN ADDITION, THESE PROVISIONS MAY HAVE THE EFFECT OF ASSISTING THE HOLDING
COMPANY'S CURRENT MANAGEMENT IN RETAINING ITS POSITION AND PLACING IT IN A
BETTER POSITION TO RESIST CHANGES THAT THE STOCKHOLDERS MAY WANT TO MAKE IF
DISSATISFIED WITH THE CONDUCT OF THE HOLDING COMPANY'S BUSINESS.
A vote in favor of the Merger is a vote in favor of the anti-takeover
provisions contained in the Holding Company's Articles and By-laws and under the
TBCA.
DIVIDENDS
The Bank has paid cash dividends to its stockholders since 1986. Prior to
March 1998, the Bank's policy was to declare dividends on December 31 of each
year payable on January 15 of the next year. In March 1998, the Bank changed to
a policy of paying dividends on a quarterly basis. The amount of the dividend
paid is subject to the Bank's earnings and capital requirements. Year-end
dividends declared in 1996 and 1997 were $0.27 and $0.30 per share,
respectively. The Bank also declared and paid (i) in 1996 and 1997 special cash
dividends of $0.09 and $0.10 per share, respectively, and (ii) in 1996 and 1997,
10% stock dividends.
Any decision to pay a cash dividend in the future must necessarily depend
upon the earnings and financial condition of the Holding Company and the Bank,
the Holding Company's ability to service any equity or debt obligations senior
to the Holding Company Common Stock, appropriate legal restrictions,
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and other factors deemed relevant at the time the Board of Directors of the
Holding Company considers dividend policy. Cash available for dividend
distribution to stockholders of the Holding Company must initially come from
dividends paid by the Bank to the Holding Company. Therefore, the restrictions
on the Bank's dividend payments are directly applicable to the Holding Company.
As of December 31, 1997, approximately $3.5 million was available, under
applicable restrictions without regulatory approval, for payment of dividends by
the Bank. Regulatory authorities could impose stricter limitations on the
ability of the Bank to pay dividends to the Holding Company if such limits were
deemed appropriate to preserve certain capital adequacy requirements. See "Risk
Factors -- Dividend History and Restrictions on Ability to Pay Dividends" and
"Description of the Bank --Supervision and Regulation" and "Proposed
Reorganization -- Comparison of Stockholder Rights."
Under the TBCA, the Holding Company may not pay a dividend if, after giving
effect thereto: (1) the Holding Company would be unable to pay its debts as they
become due or (2) the Holding Company's total assets would be less than its
total liabilities plus an amount needed to satisfy any preferential rights of
stockholders. Total assets and liabilities shall be determined by the Board of
Directors, which may base its determination on such factors as it considers
relevant, including without limitation: (i) the book value of the assets and
liabilities of the Holding Company, as reflected on its books and records; and
(ii) unrealized appreciation and depreciation of the assets of the Holding
Company.
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DESCRIPTION OF THE BANK
GENERAL
The Bank is a national banking association that provides a full range of
traditional retail and commercial banking services primarily to individual
consumers and small businesses in the Houston metropolitan area. The Bank was
founded in 1983 in the City of Bellaire, an incorporated city within the city
limits of Houston, by a group of experienced bankers who had been senior
officers with other commercial banks in the Bank's primary market area. Over its
fourteen-year history, the Bank has demonstrated a consistent record of growth
and profitability. The Bank has increased its assets and net income in each year
of operation, even during the period of adverse economic conditions in Texas in
the mid-to-late 1980s. At December 31, 1997, the Bank had $295.6 million in
total assets, $260.9 million in total deposits and total stockholders' equity of
$31.6 million.
The Bank opened in October 1983. The Bank's main office is located at 5320
Bellaire Boulevard, Bellaire, Texas 77401 and its telephone number is (713) 661-
4444.
Management of the Bank adheres to a community banking philosophy that
emphasizes accessible, service-oriented, relationship banking. Management
believes that this commitment, together with the Bank's conservative lending and
prudent investment policies, are important factors in its success and growth.
The Bank's high quality personal service and responsiveness to customer needs
has attracted numerous customers from larger regional banks. Management believes
that the continued acquisitions of local banks by out of state organizations
present additional opportunities to attract customers who prefer to work with a
local community bank or who have experienced a decline in personal service from
the out of state banks. The quality of service provided by the Bank and the
development of long-term customer relationships has been facilitated by the
continuity of service of officers and staff. The Bank's seven senior lending
officers average more than 25 years of experience in the Bank's primary market
areas. In addition, of the Bank's 19 current executive officers and directors,
11 were in the founding group.
As a full service commercial bank, the Bank offers an array of lending and
deposit services to its retail and commercial customers. The primary lending
focus of the Bank is on small business, commercial and residential real estate,
and consumer loans. The Bank generally seeks a mix of 50% consumer loans, 25%
small business loans, and 25% real estate loans. Loan demand and maturities may
cause the actual percentage of the Bank's loans in any category to vary from the
proposed mix. As a service to its customers, the Bank also offers home computer
banking, provides on-site access to conventional mortgage loans through its
subsidiary CNB Mortgage Company, and has recently brought its check printing in
house, which permits almost immediate turnaround on check orders.
The Bank maintains a strong community orientation by, among other things,
supporting the active participation of its officers and employees in local
charitable, civic, school, and religious activities. Three of the Bank's senior
officers are past Presidents of the Bellaire Chamber of Commerce. In 1989, the
Bank founded the Leisure Club for customers 50 years of age and over. Leisure
Club members are eligible for a package of special services from the Bank and
participate in community activities and various local, national, and
international trips and tours. At December 31, 1997, the Leisure Club had more
than 5,000 members and accounted for more than $102 million in deposits in the
Bank. The Bank has renovated an office building adjacent to its main office
which serves as the office and activity center for the Leisure Club
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and is also available to other community organizations free of charge. The Bank
currently has three full-time employees and one part-time employee dedicated to
the Leisure Club's activities.
Management believes that the Houston metropolitan area offers significant
growth opportunities for the Bank. Houston is the fourth largest city in the
United States with an estimated metropolitan area population in 1996 of
approximately 3.7 million. The Bank's primary markets are centered in the City
of Bellaire, approximately seven miles southwest of the Houston central business
district, and in rapidly growing suburban northeast Fort Bend County, which is
approximately 15 miles southwest of the Houston central business district. The
Bank's main office is located in the City of Bellaire, an established community
in the center of southwest Houston. This area is attractive to residents because
of its convenience to the Houston central business district, the Texas Medical
Center, the Galleria area, local museums, and Rice University. According to U.S.
Census Bureau estimates, Fort Bend County ranked as the second fastest growing
county in Texas and the fourth fastest growing urban county in the United States
between 1990 and 1995, based on per capita population. According to private
research estimates, Fort Bend County also ranked sixth in the nation in economic
strength and employment growth for counties with populations of 150,000 or more
and is predicted to have the sixth fastest rate of employment growth of any
county in the U.S. from 1995 to 2005.
The Bank has grown through a combination of internal growth and the opening
of new community banking offices. The Bank opened its first two branch offices
in 1992 in supermarkets in Fort Bend County, Texas, and a third in 1997, which
afforded the Bank with a relatively inexpensive means of entering this new
market. In addition to providing the Bank with an opportunity to diversify its
deposit base, this area was attractive because of its growth characteristics. In
December 1995, the Bank opened a free-standing office in Sugar Land, an affluent
section of Fort Bend County. This office is managed by a senior banking officer
with 13 years of experience in the Fort Bend market area. At December 31, 1997,
the Fort Bend County branches accounted for approximately $35.5 million of the
Bank's deposits, of which $20.9 million were at the free-standing Sugar Land
office.
The Bank's strategy is to increase its presence in existing markets by
targeting individuals and small owner-operated businesses and to expand into new
areas of the greater Houston metropolitan area that complement its existing or
targeted customer base by opening new branch offices or acquiring existing
financial institutions. In pursuing its expansion strategy, the Bank intends to
seek both an attractive location and one or more senior banking officers with
experience in the local community to staff the office. Currently, the Bank is
actively pursuing expansion into the west and northwest suburban areas of the
greater Houston metropolitan area either by establishing a new branch office or
acquiring one or more existing branches. There are banks or banking facilities
in these areas that are possible acquisition candidates. There can be no
assurance that the Bank can successfully establish new branch offices or acquire
existing institutions and failure to do so may limit the Bank's growth
potential.
The Bank currently has five offices. The Bank owns its main office, an
adjacent drive-in banking facility, and an adjacent office building, which has
been converted to a community activity center and offices for the Leisure Club.
The Bank currently leases the real estate where its main office is located
pursuant to a ten-year lease expiring in 2001 with an option to renew or
purchase the property. The Bank also owns the building and land for its free-
standing Sugar Land branch. The Bank leases space in three grocery stores from
The Kroger Co. under leases that expire in 2000, 2000, and 2002, respectively.
The following table sets forth specific information on each branch, each of
which offers full service banking.
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BRANCH DEPOSITS AT
BRANCH LOCATION DECEMBER 31, 1997
------ -------- ------------------
(IN THOUSANDS)
Bellaire/Main Office 5320 Bellaire Blvd. $225,413
Sugar Land..................... Highway 59
at Williams Trace 20,857
Sugar Land - First Colony (1).. 3665 Highway 6 8,322
Stafford (1) 220 FM 1092 5,070
Sugar Land - Sweetwater (1) Sweetwater Blvd at
Lexington 1,245(2)
- -------------------
(1) Located in Kroger store.
(2) Opened in June, 1997.
COMPETITION
The banking business is highly competitive and the profitability of the
Bank depends principally upon the Bank's ability to compete in the Houston
metropolitan area. In addition to competing with other commercial and savings
banks and savings and loan associations, the Bank competes with credit unions,
finance companies, mutual funds, insurance companies, brokerage and investment
banking firms, asset-based non-bank lenders, and certain other non-financial
entities, including retail stores that may maintain their own credit programs,
and governmental organizations that may offer subsidized financing at lower
rates than those offered by the Bank. Many of the Bank's competitors have
significantly greater financial and other resources and larger lending limits
than the Bank. The Bank has been able to compete effectively with other
financial institutions by emphasizing customer service, including local office
decision-making on loans, establishing long-term customer relationships, and
building customer loyalty.
The success of the Bank is also highly dependent upon general economic
conditions in the Houston metropolitan area. Significant deterioration in the
local economy or economic problems in the greater Houston area could
substantially impact the Bank's performance. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors That May
Affect Future Results and Market Price of Stock."
EMPLOYEES
As of December 31, 1997, the Bank had 99 full-time equivalent employees, 25
of whom were officers. The Bank provides medical and hospitalization insurance
and a 401(k) profit sharing plan to its full-time employees. The Bank considers
its relations with its employees to be excellent.
SUPERVISION AND REGULATION
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of the Bank. The following description of
references herein to applicable statutes and regulations, which are not intended
to be complete descriptions of these provisions or their effects on the Bank,
are brief summaries and are qualified in their entirety by reference to such
statutes and regulations.
General. The Bank is a national bank under the National Bank Act. As a
national banking association, the Bank is supervised, examined, and regulated
principally by the OCC. The OCC regularly examines such areas as capital
adequacy, reserves, loan portfolio, investments, and management practices.
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The Bank must also furnish quarterly and annual reports to the OCC, and the OCC
may exercise cease and desist and other enforcement powers over the Bank if its
actions represent unsafe or unsound practices or violations of law. Since the
deposits of the Bank are insured by the Bank Insurance Fund ("BIF") of the
Federal Deposit Insurance Corporation (the "FDIC"), the Bank is also subject to
regulation and supervision by the FDIC. Because the Bank is a member of the
Federal Reserve System, the Federal Reserve Board also has supervisory authority
over certain operations and activities of the Bank.
Permissible Activities of National Banks. The National Bank Act sets forth
the rights, privileges, and powers of national banks and defines the activities
in which national banks may engage. National banks may engage in the following
activities: to make, arrange, purchase, or sell loans or extensions of credit
secured by liens or interests in real estate; to purchase, hold, and convey real
estate under certain conditions; to offer certain trust services to the public;
to deal in investment securities in certain circumstances; and, more broadly, to
engage in the "business of banking" and activities that are "incidental" to
banking. The following are a few of the activities deemed incidental to the
business of banking: the borrowing and lending of money; receiving deposits,
including deposits of public funds; holding or selling stock or other property
acquired in connection with security on a loan; discounting and negotiating
evidences of debt; acting as guarantor, if the bank has a "substantial interest
in the performance of the transaction;" issuing letters of credit to or on
behalf of its customers; operating a safe deposit business; providing check
guarantee plans; issuing credit cards; operating a loan production office;
selling loans under repurchase agreements; selling money orders at offices other
than bank branches; providing consulting services to banks; and verifying and
collecting checks.
In general, statutory restrictions on the activities of banks are aimed at
protecting the safety and soundness of banking practices. Many of the statutory
restrictions limit the participation of national banks in the securities and
insurance markets. These restrictions do not affect the Bank because it is not
currently involved in the types of activities covered by the restrictions.
Branching. National banks may establish a branch anywhere in Texas provided
that the branch is approved in advance by the OCC, which considers a number of
factors, including financial history, capital adequacy, earnings prospects,
character of management, needs of the community, and consistency with corporate
powers. The Interstate Banking Act, which expanded the authority of bank holding
companies and banks to engage in interstate bank acquisitions and interstate
banking, allows each state the option of "opting out" of the interstate
branching (but not banking) provisions. The Texas Legislature opted out of the
interstate branching provisions in 1995. Interstate banking was effective on
September 25, 1995, and interstate branching would have become effective in
Texas in June, 1997, if Texas had not elected to opt out. The Texas "opt-out"
legislation prohibiting interstate branching is effective until September, 1999.
Restrictions on Transactions with Affiliates and Insiders. The Bank is
subject to certain provisions of the Federal Deposit Insurance Corporation
Improvements Act of 1991 ("FDICIA") limiting transactions with the Bank and its
nonbanking affiliates. One set of restrictions is found in Section 23A of the
Federal Reserve Act, which affects loans or other credit extensions to, asset
purchases with, and investments in affiliates of the Bank. Such transactions
with the Bank or any of its nonbanking subsidiaries are limited in amount to ten
percent of the Bank's capital and surplus and, with respect to the Bank and all
of its nonbanking subsidiaries together, to an aggregate of 20% of the Bank's
capital and surplus. Furthermore, such loans and extensions of credit, as well
as certain other transactions, are required to be secured in specified amounts.
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Another set of restrictions is found in Section 23B of the Federal Reserve
Act. Among other things, Section 23B requires that certain transactions between
the Bank, including its subsidiaries, and its affiliates must be on terms
substantially the same, or at least as favorable to the Bank or its
subsidiaries, as those prevailing at the time for comparable transactions with
or involving other nonaffiliated persons. In the absence of such comparable
transactions, any transaction between the Bank and its affiliates must be on
terms and under circumstances, including credit standards, that in good faith
would be offered to or would apply to nonaffiliated persons. The Bank is also
subject to certain prohibitions against any advertising that indicates the Bank
is responsible for the obligations of its affiliates. The Bank does not have any
nonbanking affiliates as of the date of this Prospectus.
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 now apply to
all insured institutions and their subsidiaries and holding companies. These
restrictions include limits on loans to one borrower and conditions that must be
met before such loans can be made. There is also an aggregate limitation on all
loans to insiders and their related interests. These loans cannot exceed the
institution's total unimpaired capital and surplus, and the OCC may determine
that a lesser amount is appropriate. Insiders are subject to enforcement actions
for knowingly accepting loans in violation of applicable restrictions.
Interest Rate Limits. Interest rate limitations for the Bank are primarily
governed by the National Bank Act which generally defers to the laws of the
state where the bank is located. Under the laws of the State of Texas, the
maximum annual interest rate that may be charged on most loans made by the Bank
is based on doubling the average auction rate, to the nearest 0.25%, for United
States Treasury Bills, as computed by the Office of the Consumer Credit
Commissioner of the State of Texas. However, the maximum rate does not decline
below 18% or rise above 24% (except for loans in excess of $250,000 that are
made for business, commercial, investment or other similar purposes (excluding
agricultural loans), in which case the maximum annual rate may not rise above
28%, rather than 24%). On fixed rate closed-end loans, the maximum non-usurious
rate is to be determined at the time the rate is contracted, while on floating
rate and open-end loans (such as credit cards), the rate varies over the term of
the indebtedness. State usury laws (but not late charge limitations) have been
preempted by federal law for loans secured by a first lien on residential real
property.
Examinations. The OCC periodically examines and evaluates national banks.
Based upon such an evaluation, the OCC may revalue the assets of a national bank
and require that it establish specific reserves to compensate for the difference
between the OCC-determined value and the book value of such assets. Onsite
examinations are to be conducted every 12 months, except that certain well
capitalized banks may be examined every 18 months. FDICIA authorizes the OCC to
assess the institution for its costs of conducting the examinations.
Prompt Corrective Action. In addition to the capital adequacy guidelines ,
FDICIA requires the OCC to take "prompt corrective action" with respect to any
national bank that does not meet specified minimum capital requirements. The
applicable regulations establish five capital levels, ranging from "well
capitalized" to "critically undercapitalized," which authorize, and in certain
cases require, the OCC to take certain specified supervisory action. Under
regulations implemented under FDICIA, a national bank is considered well
capitalized if it has a total risk-based capital ratio of 10.0% or greater, a
Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0%
or greater, and it is not subject to an order, written agreement, capital
directive, or prompt corrective action directive to meet and maintain a specific
capital
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level for any capital measure. A national bank is considered adequately
capitalized if it has a total risk-based capital ratio of 8.0% or greater, a
Tier 1 risk-based capital ratio of at least 4%, and leverage capital ratio of
4.0% or greater (or a leverage ratio of 3.0% or greater if the institution is
rated composite 1 in its most recent report of examination, subject to
appropriate federal banking agency guidelines), and the institution does not
meet the definition of an undercapitalized institution. A national bank is
considered undercapitalized if it has a total risk-based capital ratio that is
less than 8.0%, a Tier 1 risk-based capital ratio that is less than 4.0%, or a
leverage ratio that is less than 4.0% (or a leverage ratio that is less than
3.0% if the institution is rated composite 1 in its most recent report of
examination, subject to appropriate federal banking agency guidelines). A
significantly undercapitalized institution is one which has a total risk-based
capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is
less than 3.0%, or a leverage ratio that is less than 3.0%. A critically
undercapitalized institution is one which has a ratio of tangible equity to
total assets that is equal to or less than 2.0%. Under certain circumstances, a
well capitalized, adequately capitalized, or undercapitalized institution may be
treated as if the institution were in the next lower capital category if it
receives an unsatisfactory examination rating.
With certain exceptions, national banks are prohibited from making capital
distributions to their stockholders if the payment of such distributions will
cause them to become undercapitalized. Furthermore, undercapitalized national
banks are required to file capital restoration plans with the OCC. Such a plan
will not be accepted unless, among other things, the banking institutions's
stockholders guarantee the plan up to a certain specified amount. Any such
guarantee from a depository institution's stockholders is entitled to a priority
of payment in bankruptcy. Undercapitalized national banks also are subject to
restrictions on growth, acquisitions, branching and engaging in new lines of
business unless they have an approved capital plan that permits otherwise. The
OCC also may, among other things, require an undercapitalized national bank to
issue shares or obligations, which could be voting stock, to recapitalize the
institution or, under certain circumstances, to divest itself of any subsidiary.
The OCC is authorized by the legislation to take various enforcement
actions against any significantly undercapitalized national bank and any
national bank that fails to submit an acceptable capital restoration plan or
fails to implement a plan accepted by the OCC. These powers include, among other
things, requiring the institution to be recapitalized, prohibiting asset growth,
restricting interest rates paid, requiring divestiture by the institution of its
subsidiaries, requiring new election of directors, and requiring the dismissal
of directors and officers.
Significantly and critically undercapitalized national banks may be subject
to more extensive control and supervision. The OCC may prohibit any such
institution from, among other things, entering into any material transaction not
in the ordinary course of business, amending its charter or bylaws, or engaging
in certain transactions with affiliates. In addition, critically
undercapitalized institutions generally will be prohibited from making payments
of principal or interest on outstanding subordinated debt. Within 90 days of a
national bank becoming critically undercapitalized, the OCC must appoint a
receiver or conservator unless certain findings are made with respect to the
prospect for the institution's continued viability.
Banks with capital ratios below the required minimum are subject to certain
administrative actions by the FDIC, including the termination of deposit
insurance upon notice and hearing or a temporary suspension of insurance without
a hearing in the event the bank has no tangible capital.
As of December 31, 1997, the Bank met the capital requirements of a "well-
capitalized" institution.
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Dividends. There are certain statutory limitations on the payment of
dividends by national banks. Without approval of the OCC, dividends may not be
paid by the Bank in an amount in any calendar year which exceeds the Bank's net
income for that year, plus its retained net income for the preceding two years,
less any required transfers to capital surplus. In addition, a national bank may
not pay dividends in excess of its undivided profits. In some cases, the OCC may
find a dividend payment that meets these statutory requirements to be an unsafe
or unsound practice. Under FDICIA, the Bank cannot pay a dividend if it will
cause the Bank to be "undercapitalized."
The National Bank Act also provides that until the surplus fund of a bank
equals its common capital, no dividend may be declared unless there has been
carried to the surplus fund not less than 10% of the Bank's net income of the
preceding half-year in the case of quarterly or semi-annual dividends, or not
less than 10% of the bank's net income for the preceding year in the case of
annual dividends.
Deposit Insurance. The deposits of the Bank are insured by the FDIC through
the BIF to the extent provided by law. Under the FDIC's risk-based insurance
system, BIF-insured institutions are currently assessed premiums of between zero
and twenty seven cents per $100 of eligible deposits, depending upon the
institution's capital position and other supervisory factors. Congress recently
enacted legislation that, among other things, provides for assessments against
BIF-insured institutions that will be used to pay certain Financing Corporation
("FICO") obligations. In addition to any BIF insurance assessments, BIF-insured
banks are expected to make payments for the FICO obligations equal to an
estimated $0.0129 per $100 of eligible deposits each year during 1997 through
1999, and an estimated $0.024 per $100 of eligible deposits thereafter.
Conservator and Receivership Powers. FDICIA significantly expanded the
authority of the federal banking regulators to place depository institutions
into conservatorship or receivership to include, among other things, appointment
of the FDIC as conservator or receiver of an undercapitalized institution under
certain circumstances. In the event the Bank is placed into conservatorship or
receivership, the FDIC is required, subject to certain exceptions, to choose the
method for resolving the institution that is least costly to the BIF, such as
liquidation. In any event, if the Bank was placed into conservatorship or
receivership, because of the cross-guarantee provisions of the Federal Deposit
Insurance Act, as amended, the stockholders of the Bank would likely lose their
investment in the Bank.
Brokered Deposit Restrictions. The Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") and FDICIA generally limit institutions
that are not well capitalized from accepting brokered deposits. In general,
undercapitalized institutions may not solicit, accept, or renew brokered
deposits. Adequately capitalized institutions may not solicit, accept, or renew
brokered deposits unless they obtain a waiver from the FDIC. Even in that event,
they may not pay an effective yield of more than 75 basis points over the
effective yield paid on deposits of comparable size and maturity in the
institution's normal market area for deposits accepted from within that area, or
the national rate paid on deposits of comparable size and maturity for deposits
accepted from outside the institution's normal market area.
Consumer Laws and Regulations. In addition to the laws and regulations
discussed herein, the Bank is also subject to certain consumer laws and
regulations that are designed to protect consumers in transactions with banks.
While the list set forth herein is not exhaustive, these laws and regulations
include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds
Transfer Act, the Expedited Funds Availability Act, the Community Reinvestment
Act, the Equal Credit Opportunity Act, and the Fair Housing Act, among others.
These laws and regulations mandate certain disclosure requirements and regulate
the
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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.
Economic Growth and Regulatory Paperwork Reduction Act of 1996. On
September 30, 1996, President Clinton signed into law the Economic Growth and
Regulatory Paperwork Reduction Act of 1996 (the "Regulatory Reduction Act"). The
Regulatory Reduction Act's principal provisions relate to capitalization of the
Savings Association Insurance Fund of the FDIC, but it also contains numerous
regulatory relief measures, including provisions to reduce regulatory burdens
associated with compliance with various consumer and other laws applicable to
the Bank, including, for example, provisions designed to coordinate the
disclosure and other requirements under the Truth-in-Lending Act and the Real
Estate Settlement Procedures Act and modify certain insider lending restrictions
and anti-tying prohibitions.
Changing 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 depositary
institution may make with insured funds, is from time-to-time introduced in
Congress. Other legislative and regulatory proposals regarding changes in
banking and regulations of banks, thrifts, and other financial institutions, are
being considered by the executive branch of the federal government, Congress,
and various state governments, including Texas. Certain of these proposals, if
adopted, could significantly change the regulation of banks and the financial
services industry and the operating environment of the Bank in substantial and
unpredictable ways. The Bank cannot predict accurately whether any of these
proposals will be adopted or, if adopted, how these proposals, or implementing
regulations with respect thereto, will affect the financial condition or results
of operation of the Bank.
Expanding Enforcement Authority. One of the major effects of FDICIA was the
increased ability of banking regulators to monitor the activities of banks and
their holding companies. In addition, the Federal Reserve Board, the OCC, and
the FDIC have extensive authority to police unsafe or unsound practices and
violations of applicable laws and regulations by depository institutions and
their holding companies. For example, the FDIC may terminate the deposit
insurance of any institution which it determines has engaged in an unsafe or
unsound practice. The agencies can also assess civil money penalties, issue
cease and desist or removal orders, seek injunctions, and publicly disclose such
actions.
Effect on Economic Environment. The policies of regulatory authorities,
including the monetary policy of the Federal Reserve Board, have a significant
effect on the operating results of bank holding companies and their
subsidiaries. Among the means available to the Federal Reserve Board to affect
the money supply are open market operations in U.S. Government securities,
changes in the discount rate on member bank borrowings, and changes in reserve
requirements against member bank deposits. These means are used in varying
combinations to influence overall growth and distribution of bank loans,
investments and deposits, and their use may affect interest rates charged on
loans or paid for deposits.
Federal Reserve Board monetary policies have materially affected the
operating results of commercial banks in the past and are expected to continue
to do so in the future. The nature of future monetary policies and the effect of
such policies on the business and earnings of the Bank and its subsidiaries
cannot be predicted.
53
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LEGAL PROCEEDINGS.
The Bank is a party to a legal proceeding, which arose in the ordinary
course of business. While the outcome of this claim cannot be predicted with
certainty, management believes that the ultimate resolution of the matter will
not have a material adverse impact on the Bank's financial condition or results
of operation.
PRINCIPAL HOLDERS OF BANK COMMON STOCK
The following table sets forth certain information regarding the beneficial
ownership of the Bank's Common Stock as of March 31, 1998, by (i) each director,
(ii) each of the Named Executives, (iii) each person who is known by the Bank to
own beneficially 5% or more of the Common Stock, and (iv) all directors and
executive officers as a group. Unless otherwise indicated, each person has sole
voting and dispositive power over the shares indicated as owned by such person.
Number of Percentage
Shares Beneficially Owned
------------- -------------------
John B. Barnes(1)................. 289,492(2) 5.7%
William H. Bruecher, Jr........... 24,442 *
C. Joe Chapman.................... 61,752 1.2
James K. Chancelor................ 19,700 *
Frank G. Cook..................... 155,716 3.1
Robert C. Dawson.................. 64,290 1.3
Randall W. Dobbs.................. 24,107(3) *
James B. Earthman III............. 63,654 1.3
Lura M. Griffin................... 20,328 *
Alton L. Hollis................... 90,200 1.8
Joseph E. Ives.................... 26,994(4) *
Larry L. January.................. 63,761 1.3
Albert V. Kochran................. 18,133(5) *
I.W. Marks........................ 238,580(6) 4.7
David E. Preng.................... 193,050(7) 3.8
Mary A. Walker.................... 40,295(8) *
B. Ralph Williams................. 88,941(9) 1.8
Directors and Executive Officers
as a Group (19 persons).......... 1,490,695(10) 29.5
--------- ----
- -------------------
* Does not exceed 1.0%.
(1) Mr. Barnes address is 9000 Southwest Freeway, Suite 303, Houston, Texas
77074.
(2) Includes 3,410 shares owned by Mr. Barnes wife, Patricia A. Barnes.
(3) Includes 5,880 shares which may be acquired within 60 days pursuant to
outstanding stock options.
(4) Includes 8,712 shares which may be acquired within 60 days pursuant to
outstanding stock options.
(5) Includes 17,649 shares owned by Kochran Family Living Trust.
(6) Mr. Marks address is 3841 Bellaire Boulevard, Houston, Texas 77025.
(7) Includes 11,000 shares owned by Mr. Preng's wife, Joanne Preng and
17,050 shares owned by two of Mr. Preng's sons. Mr. Preng's address is
2925 Briarpark, Suite 1111, Houston, Texas 77042.
(8) Includes 6,534 shares which may be acquired within 60 days pursuant to
outstanding stock options.
(9) Includes 7,424 shares which may be acquired within 60 days pursuant to
outstanding stock options.
(10) Includes 35,810 shares which may be acquired within 60 days pursuant
to outstanding stock options.
54
<PAGE>
DESCRIPTION OF SECURITIES OF THE BANK
GENERAL
The Bank has authorized 30,000,000 shares of Common Stock, $2.03 par value
per share, 5,054,181 shares of which are issued and outstanding as of March 31,
1998.
COMMON STOCK
The holders of the Bank Common Stock are entitled to one vote for each
share of Bank Common Stock owned. Holders of Bank Common Stock may cumulate
their votes for the election of directors, i.e, a stockholder has as many votes
as the number of directors to be elected at a meeting multiplied by the number
of the stockholder's shares and the stockholder may cast all of such votes for
one candidate or distribute the votes among as many candidates as the
stockholder chooses. Holders of Bank Common Stock do not have preemptive rights
to acquire any additional, unissued, or treasury shares of the Bank, or
securities of the Bank convertible into or carrying a right to subscribe to or
acquire shares of the Bank.
Holders of Bank Common Stock will be entitled to receive dividends out of
funds legally available therefor, if and when properly declared by the Board of
Directors. See "Risk Factors -- Dividend History and Dividend Restrictions" and
"Description of the Bank -- Supervision and Regulation."
On the liquidation of the Bank, the holders of Bank Common Stock are
entitled to share pro rata in any distribution of the assets of the Bank, after
all indebtedness of the Bank has been retired.
Under Section 55 of the National Bank Act, if the capital of a national
bank becomes impaired and the bank receives notice from the OCC to make up the
deficiency, the bank must either liquidate or pay such deficiency by pro rata
assessment of its stockholders. If an assessment of the Bank should occur, a
stockholder cannot be held personally liable, but his or her shares of the
Common Stock may be sold at public auction and the proceeds of such sale may be
applied to satisfy the amount of the assessment with respect to such
stockholder's Common Stock. Any amounts in excess of the assessment would be
returned to the stockholder. The OCC has not used this provision in recent
times.
CERTAIN PROVISIONS OF THE ARTICLES OF ASSOCIATION AND BYLAWS
Certain provisions of the Bank's Articles of Association and the Bank's
Bylaws could make more difficult the acquisition of the Bank by means of a
tender offer or 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 Bank to negotiate first with
the Bank.
The following discussion is a summary of certain material provisions of the
Bank's Articles of Association and Bylaws, copies of which are filed as exhibits
to the Registration Statement of which this Prospectus is a part.
55
<PAGE>
Advance Notice of Stockholder Proposals and Nominations. The Bank's Bylaws
establish advance notice procedures for stockholders to make nominations of
candidates for election as directors or bring other business before an annual
meeting of stockholders of the Bank. The stockholder notice procedures provide
that only persons who are nominated 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 Bank and the OCC prior to the meeting at which directors are to
be elected, will be eligible for election as directors of the Bank 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 Bank of
such stockholder's intention to bring such business before such meeting.
Under the stockholder notice procedures, for notice of a stockholder
proposal to be made at an annual meeting to be timely, such notice must be
received by the Bank not less than 60 days nor more than 90 days prior to the
meeting and for notice of a stockholder nomination to be made at an annual
meeting to be timely, such notice must be received by the Bank and the OCC not
less than 60 nor more than 90 days prior to the meeting. For purposes these
notice provisions, the requirement to deliver notice or information to the Bank
a set number of days in advance of an annual meeting means that such notice must
be delivered that number of days in advance of the first anniversary of the
preceding year's annual meeting; provided, however, in the event that the date
of the annual meeting is advanced by more than 30 days or delayed by more than
60 days from the first anniversary of the preceding year's annual meeting,
notice by the stockholder to be timely must be delivered not later than the
close of business on the later of the 60th day prior to such annual meeting or
the 10th day following the day on which notice of such meeting is first given to
stockholders. Notice is deemed to first be given to stockholders when disclosure
of such date is first made in a press release reported by Dow Jones News
Services, Associated Press, or comparable national news service or in a document
filed by the Bank with the OCC.
Under the stockholder notice procedures, a stockholder's notice to the Bank
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 Bank 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 Bank and its stockholders.
Annual Meetings of Stockholders. The Bylaws provide that Annual Meetings of
stockholders may be called only by the Board of Directors or the Chairman of the
Board.
No Action by Written Consent. None of the National Bank Act, the Articles
of Association of the Bank, or the Bylaws of the Bank permit action required or
permitted to be taken at an annual or special Meeting of stockholders to be
taken by written consent in lieu of a meeting of stockholders.
56
<PAGE>
Amendment of Bylaws. The Bank's Articles of Association and Bylaws provide
that the Bylaws may be amended only by the Board of Directors. Stockholders do
not have the power to amend the Bank's Bylaws.
MARKET PRICE OF COMMON STOCK
The Bank's Common Stock is approved for quotation on The Nasdaq Stock
Market (the "NSM") under the symbol "CNBT." Shares began trading on October 1,
1997. The following table sets forth the range of the high and low per share
closing sale prices for the Common Stock as reported by the NSM for the period
from October 1, 1997, to April __, 1998.
LOW SALE PRICE HIGH SALE PRICE
----------------- ---------------
1997
----
Fourth Quarter $11.50(1) $13.25
1998
----
First Quarter $12.25 $16.63
Second Quarter (through April __, 1998) 15.75 16.00
------ ------
- -------------------
(1) The Bank sold 1,150,000 shares of Bank Common Stock in an initial public
offering on October 1, 1997, at a price to the public of $10.50 per share.
As of March 24, 1998, the date on which the Board of Directors made the
decision to form a bank holding company and to submit the Merger to the
stockholders of the Bank, the closing sales price was $15.81.
The Bank has paid cash dividends to its stockholders since 1986. The Bank
paid a special cash dividend of $0.10 on May 30, 1997, and declared a year-end
dividend of $0.30 on December 31, 1997, payable on January 15, 1998. The Bank
also declared a 10% stock dividend in April, 1997. In 1996, the Bank paid a
special cash dividend of $0.09 on June 15, 1996, declared a year-end dividend of
$0.27 on December 31, 1996, which was paid on January 15, 1997, and declared a
10% stock dividend in April, 1996.
LEGAL MATTERS
The validity of the Holding Company Common Stock to be issued in connection
with the Merger and certain tax consequences of the Merger will be passed upon
by Snell & Smith, A Professional Corporation, Houston, Texas.
EXPERTS
The consolidated balance sheet of Citizens National Bank of Texas and
subsidiary as of December 31, 1997 and 1996, and the consolidated statements of
income, changes in stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997, included in this Prospectus, have
been included herein in reliance on the report, which includes an explanatory
paragraph for changes in accounting principles, of Mann Frankfort Stein & Lipp
Certified Public Accountants, A Professional Corporation, given on the authority
of that firm as experts in accounting and auditing.
57
<PAGE>
STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
In the event of consummation of the Merger, any record or beneficial owner
of Holding Company Common Stock , in accordance with and subject to the
provisions of the proxy rules of the SEC, may submit proposals on proper
subjects for action at the 1999 Annual Meeting of Stockholders of the Holding
Company. All such proposals must be mailed to Citizens National Bank of Texas,
5320 Bellaire Boulevard, Bellaire, Texas 77401, attention: Randall W. Dobbs, and
must be received at that address no later that January 31, 1999, in order to be
considered for inclusion in the Bank's proxy statement and form of proxy
relating to the 1999 Annual Meeting. Submission of a stockholder proposal does
not guarantee inclusion in the Bank's proxy statement or form of proxy because
certain SEC rules must be met.
If the Merger is not consummated, then any record or beneficial owner of
Bank Common Stock who wishes to submit a proposal on proper subjects for
inclusion in the Bank's proxy statement for its 1999 Annual Meeting of
Stockholders, must submit the proposal in writing to Citizens National Bank of
Texas, 5320 Bellaire Boulevard, Bellaire, Texas 77401, attention: Randall W.
Dobbs, and must be received at that address no later that January 31, 1999, in
order to be considered for inclusion in the Bank's proxy statement and form of
proxy relating to the 1999 Annual Meeting. Submission of a stockholder proposal
does not guarantee inclusion in the Bank's proxy statement or form of proxy
because certain SEC rules must be met.
ANNUAL REPORT
The financial statements of the Bank are contained in the 1998 Annual
Report to Stockholders, which has been provided to the stockholders concurrently
herewith. Such report and the financial statements contained therein are not to
be considered as a part of this soliciting material. Copies of the Bank's Annual
Report to Stockholders and Annual Report on Form 10-K for the year ended
December 31, 1997, are available without charge upon request. Please direct your
request to Citizens National Bank of Texas, Attention: Investor Relations, 5320
Bellaire Boulevard, Bellaire, Texas 77401, (713) 661-4444.
OTHER MATTERS
The Board knows of no matters other than those listed in the attached
Notice of Annual Meeting which are likely to come before the Annual Meeting.
However, if any other matter properly comes before the Annual Meeting, the
persons named on the enclosed proxy card will vote the proxy in accordance with
their best judgment on such matters.
In the event that sufficient votes in favor of the proposals set forth in
the Notice of the Annual Meeting of Stockholders and Proxy Statement are not
received by the time scheduled for the Annual Meeting, the individuals named as
proxies may move for one or more adjournments of the Annual Meeting to permit
further solicitation of proxies with respect to any such proposals.
58
<PAGE>
Exhibit A
PLAN AND AGREEMENT OF MERGER
THIS AGREEMENT made as of this ___ day of April, 1998, among CNBT
BANCSHARES, INC., a Texas corporation (the "Holding Company"), CITIZENS NATIONAL
BANK OF TEXAS, Bellaire, Texas, a national banking association (the "Bank"). In
addition, as soon as reasonably and legally possible the Holding Company will
form as a wholly-owned subsidiary, a new national banking association organized
and existing under the laws of the United States (the "New Bank") under the name
and CITIZENS BANK, N.A., which will upon such formation become a party to this
Agreement and to the Agreement of Merger attached hereto as Exhibit A. All
obligations of the New Bank will, until properly assumed by the New Bank by its
execution of this Agreement, be made and assumed on its behalf by the Holding
Company.
W I T N E S S E T H:
WHEREAS, the Holding Company, the Bank, and the New Bank desire to effect
the formation of a bank holding company whereby the Bank and the New Bank will
be merged, the surviving bank will become a wholly-owned subsidiary of the
Holding Company, and the present stockholders of the Bank (except for those who
perfect dissenters' rights) will become shareholders of the Holding Company, on
the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and intending to be legally bound hereby, the parties agree as
follows:
SECTION 1. MERGER.
1.1. Agreement to Merge. Subject to the terms and conditions
hereinafter set forth, the parties hereto agree to effect a merger of the Bank
and the New Bank (the "Merger") pursuant to the provisions of Section 215a of
the National Bank Act, as amended (the "Act") in accordance with the Agreement
to Merge, attached hereto as Exhibit A and made a part hereof (the "Merger
Agreement").
1.2. Holding Company Common Stock. The Holding Company shall make
available to the Bank and the New Bank a sufficient number of shares of the
Common Stock, $1.00 par value (the "Holding Company Common Stock"), of the
Holding Company to effect the Merger pursuant to the Merger Agreement.
SECTION 2. SHARES OF THE HOLDING COMPANY AND OF THE SURVIVING BANK.
2.1. Conversion of Shares. The manner of converting the shares of Common
Stock, $2.03 par value, of the Bank into shares of Holding Company Common Stock
and the shares of Common Stock of the New Bank into shares of Common Stock of
the surviving bank in the
<PAGE>
Merger and the assumption of the outstanding options of the Bank by the Holding
Company, shall be as set forth in Section 7 of the Merger Agreement.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE HOLDING COMPANY.
The Holding Company represents, warrants and agrees as follows:
3.1. Organization and Standing. The Holding Company is a corporation duly
organized and validly existing under the Texas Business Corporation Act.
3.2. Capitalization. The Holding Company is authorized to issue 30,000,000
shares of Common Stock, par value $1.00 per share, of which 100 shares are
issued and outstanding. There are no outstanding options, warrants, calls,
convertible securities, subscriptions, or other commitments or rights of any
nature with respect to the Common Stock of the Holding Company.
3.3. Authority Relative to this Agreement. The execution, delivery, and
performance of this Agreement have been duly authorized by the Board of
Directors of the Holding Company. Subject to appropriate stockholder and
regulatory approvals, neither the execution and delivery of this Agreement nor
the consummation of the transactions provided for herein will violate any
agreement to which the Holding Company is a party or by which it is bound or any
law, order, or decree or any provision of its Articles of Incorporation or By-
laws.
3.4. Absence of Liabilities. Prior to the effective time of the Merger, the
Holding Company will have engaged only in the transactions contemplated by this
Agreement and the Merger Agreement, will have no material liabilities and will
have incurred no material obligations except in connection with its performance
of the transactions provided for in this Agreement and in the Merger Agreement.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE BANK.
The Bank represents, warrants and agrees as follows:
4.1. Organization and Standing. The Bank is a national banking association
duly organized and validly existing under Act.
4.2. Capitalization. The Bank is authorized to issue 30,000,000 shares of
Common Stock, par value $2.03 per share, of which 5,054,181 shares are issued
and outstanding. As of the date of the Agreement, the Bank has issued 170,950
options at exercise prices ranging from $2.75 to $9.00 per share. Each such
option is exercisable for one share of common stock of the Bank. There are no
other outstanding options, warrants, calls, convertible securities,
subscriptions, or other commitments or rights of any nature with respect to the
Common Stock of the Bank.
A-2
<PAGE>
4.3. Authority Relative to this Agreement. The execution, delivery, and
performance of this Agreement and of the Merger Agreement have been duly
authorized by the Board of Directors of the Bank. Subject to appropriate
stockholder and regulatory approvals, neither the execution and delivery of this
Agreement or the Merger Agreement nor the consummation of the transactions
provided for herein or therein will violate any agreement to which the Bank is a
party or by which it is bound, or any law, order, decree, or any provision of
its Articles of Incorporation or By-laws.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE NEW BANK.
The New Bank represents, warrants and agrees as follows:
5.1. Organization and Standing. The New Bank is an interim national
banking institution in the process of formation under the Act.
5.2. Capitalization. The New Bank is authorized to issue 30,000,000
shares of Common Stock, par value $1.00 per share, of which 200,000 shares will
be issued and outstanding and owned by the Holding Company and five organizers
immediately prior to the Merger.
5.3. Authority Relative to this Agreement. The execution, delivery, and
performance of this Agreement and the Merger Agreement have been duly authorized
by the Board of Directors of the New Bank. Subject to appropriate stockholder
and regulatory approvals, neither the execution and delivery of this Agreement
or the Merger Agreement nor the consummation of the transactions provided for
herein or therein will violate any agreement to which the New Bank is a party or
by which it is bound or any law, order, decree, or any provision of its Articles
of Incorporation or By-laws.
5.4. Absence of Liabilities. Prior to the effective time of the
Merger, the New Bank will have engaged only in the transactions contemplated by
this Agreement and the Merger Agreement, will have no material liabilities and
will have incurred no material obligations except in connection with its
performance of the transactions provided for in this Agreement and in the Merger
Agreement.
SECTION 6. COVENANTS OF THE HOLDING COMPANY.
The Holding Company agrees that between the date hereof and the effective
time of the Merger:
6.1. Capitalization of the New Bank. The Holding Company shall
purchase a total of 195,000 shares of Common Stock, par value $1.00 per share,
of the New Bank for $1.20 per share, and shall cause the New Bank to do all
things necessary to obtain a charter as an interim national banking association,
pursuant to the Act, so as to permit the consummation of the Merger
A-3
<PAGE>
provided for in the Merger Agreement. The Holding Company may also purchase the
subscription rights of the organizers of the New Bank for the 5,000 shares of
Common Stock issued to them in the aggregate. Such shares of the organizers
shall be purchased at $1.20 per share.
6.2. Approval of Merger. The Holding Company, as a stockholder of the New
Bank, shall approve this Agreement and the Merger Agreement in accordance with
applicable law.
6.3. Best Efforts. The Holding Company will use its best efforts to take,
or cause to be taken, all actions or do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement
and the Merger Agreement, subject, however, to the requisite vote of the
stockholders of the Bank in accordance with the requirements of the Act and
applicable law.
SECTION 7. COVENANTS OF THE BANK.
The Bank agrees that between the date hereof and the effective time of the
Merger:
7.1. Stockholders Meeting. The Bank shall submit this Agreement and the
Merger Agreement to the vote of its stockholders, as provided by the Act and
other applicable laws, at the Annual Meeting of Stockholders to be held on or
about May ___, 1998, and any adjournment or postponement thereof.
7.2. Best Efforts. The Bank will use its best efforts to take, or
cause to be taken, all actions or do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement and the Merger
Agreement, subject, however, to the requisite vote of the stockholders of the
Bank in accordance with the requirements of the Act and applicable law.
SECTION 8. CONDITIONS TO OBLIGATIONS OF THE PARTIES.
The obligations of the parties to consummate this Agreement and the Merger
Agreement shall be subject to the following conditions:
8.1. Representations and Warranties; Performance of Covenants. The
representations and warranties and covenants contained in Sections 3, 4, 5, 6,
and 7 hereof shall be true as of and at the effective time of the Merger, and
each party shall have performed all obligations required hereby to be performed
by it prior to the effective time of the Merger.
8.2. Bank Stockholder Approval. The stockholders of the Bank shall
have duly approved this Agreement and the Merger Agreement in accordance with
applicable laws.
8.3. Regulatory Approvals. Any federal or state regulatory agency having
jurisdiction (banking or otherwise), to the extent that any consent or approval
is required by applicable laws
A-4
<PAGE>
or regulations for the consummation of this Agreement and the Merger Agreement,
shall have granted any necessary consent or approval.
8.4. Registration Statement. The Registration Statement on Form S-4
(the "Registration Statement") filed by the Holding Company under the Securities
Act of 1933, as amended, covering the shares of the Holding Company's Common
Stock to be issued pursuant to the Merger Agreement shall have been declared
effective by the Securities and Exchange Commission; and no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and no proceeding for that purpose shall have been initiated or, to the
knowledge of the Holding Company, shall be contemplated or threatened by the
Securities and Exchange Commission.
8.5. Litigation. There shall be no litigation or proceeding pending or
threatened for the purpose of enjoining, restraining or preventing the
consummation of the Merger, this Agreement or the Merger Agreement or otherwise
claiming that such consummation is improper.
8.6. Tax Opinion. A tax opinion shall have been obtained from Snell &
Smith, P.C., counsel to the Bank that the conversion of the Bank's Common Stock
into the Holding Company's Common Stock will be tax free for federal income tax
purposes; provided, however, that the requirements of this Section 8.6 may be
waived by the affirmative vote of a majority of the Board of Directors of each
of the parties hereto.
SECTION 9. TERMINATION, WAIVER, AND AMENDMENT.
9.1. Circumstances of Termination. Anything herein or elsewhere to the
contrary notwithstanding, this Agreement and the Merger Agreement may be
terminated at any time before the effective time of the Merger (whether before
or after action with respect thereto by the Bank's stockholders) only:
(a) by the mutual consent of the Board of Directors of the Bank,
the New Bank and the Holding Company evidenced by an instrument in writing
signed on behalf of each by any two of their respective officers; or
(b) by the Board of Directors of the Bank if, in its sole
judgment, the Merger would be inadvisable because of the number of
stockholders of the Bank who perfect their dissenter's rights in accordance
with applicable law and the Merger Agreement, or if, in the sole judgment
of such Board, the Merger would not be in the best interests of the Bank or
its employees, depositors or stockholders for any reason whatsoever.
9.2. Effect of Termination. In the event of the termination and
abandonment hereof, this Agreement and the Merger Agreement shall become void
and have no effect, without any liability on the part of any of the parties,
their directors, officers or stockholders, except as set forth in Section 10
hereof.
A-5
<PAGE>
9.3. Waiver. Any of the terms or conditions of this Agreement and the
Merger Agreement may be waived in writing at any time by the Bank by action
taken by its Board of Directors, whether before or after action by the Bank's
stockholders; provided, however, that such action shall be taken only if, in the
judgment of the Board of Directors, such waiver will not have a materially
adverse effect on the benefits intended to be granted hereunder to the
stockholders of the Bank.
9.4. Amendment. Anything herein or elsewhere to the contrary
notwithstanding, to the extent permitted by law, this Agreement and the Merger
Agreement may be amended at any time by the affirmative vote of a majority of
the Board of Directors of each of the Bank, the Holding Company and the New
Bank, whether before or after action with respect thereto by the Bank's
stockholders and without further approval of such amendment by the stockholders
of the parties hereto; provided, however, that Section 2.1 of this Agreement and
Section 7 of the Merger Agreement may not be amended after the meeting of the
Bank's stockholders referred to in Section 7.1 hereof except by the vote of The
Bank stockholders required for the approval of the Merger by such stockholders.
SECTION 10. EXPENSES.
10.1. General. Each party hereto will pay its own expenses incurred in
connection with this Agreement and the Merger Agreement, whether or not the
transactions contemplated herein are effected.
10.2. Special Dividend. Upon the effective time of the Merger, the
surviving bank shall pay a special dividend to the Holding Company in an amount
equal to the sum of:
(a) the expenses of the Holding Company in connection with the
transactions contemplated herein, if any;
(b) the principal amount of any loan that the Holding Company shall
have obtained to purchase shares of Common Stock of the New Bank as
provided in 6.1 hereof; and
(c) the amount of any interest incurred by the Holding Company on
account of any loans obtained by it in order to purchase shares of Common
Stock of the New Bank as provided in Section 6.1 hereof.
SECTION 11. MISCELLANEOUS.
11.1. Restrictions on Affiliates. The Holding Company may cause stock
certificates representing any shares issued to any shareholder who may be deemed
to be an affiliate of the Bank, within the meaning of Rule 145 under the
Securities Act of 1933, as amended, to bear a
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legend setting forth any applicable restrictions on transfer thereof under Rule
145 and may cause stop-transfer orders to be entered with its transfer agent
with respect to any such certificates.
11.2. No Brokers. Each of the parties represents to the other that it
has not incurred and will not incur any liability for brokerage fees or agents'
commissions in connection with this Agreement, the Merger Agreement and the
transactions contemplated hereby.
11.3. Right to Withhold Dividends. The Board of Directors of the
Holding Company reserves the right to withhold dividends from any former
stockholder of the Bank who fails to exchange certificates representing the
shares of the Bank for certificates representing the shares of the Holding
Company in accordance with Section 7 of the Merger Agreement.
11.5. Entire Agreement. This Agreement (including the Merger Agreement
attached as an exhibit hereto) contains the entire agreement among the parties
with respect to the subject matter hereof and supersedes all prior agreements,
written or oral, with respect thereto.
11.6. Captions. Descriptive headings are for convenience only and
shall not control or affect the meaning or construction of any provisions of
this Agreement or the Merger Agreement.
11.7. Applicable Law. This Agreement and the Merger Agreement shall be
governed by the laws of the State of Texas applicable to contracts executed in
and to be performed exclusively within the State of Texas, regardless of where
they are executed.
11.8. Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
IN WITNESS WHEREOF, this Agreement has been executed as of the day, month
and year first above mentioned.
CNBT BANCSHARES, INC.
By____________________________
CITIZENS NATIONAL BANK OF TEXAS
By__________________________________
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Citizens Bank, National Association hereby agrees to and assumes all of the
obligations and agreements contained herein which were agreed to and assumed on
its behalf by CNBT Bancshares, Inc.
Date:____________________
CITIZENS BANK, N.A.
By__________________________________
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Exhibit A
AGREEMENT TO MERGE
Citizens National Bank of Texas
with and into,
and
under the charter of,
Citizens Bank, National Association
under the title of
"Citizens National Bank of Texas"
THIS AGREEMENT is made between Citizens National Bank of Texas (hereinafter
referred to as the "Bank"), a national banking association located at 5320
Bellaire Boulevard, City of Bellaire, County of Harris, in the State of Texas,
and Citizens Bank, N. A. (hereinafter referred to as the "New Bank"), a
national banking association located at the same address, and is JOINED IN AND
assented to by CNBT Bancshares, Inc., a Texas corporation (hereinafter referred
to as the "Holding Company").
The Bank and the New Bank are banks duly organized under the banking laws
of the United States of America. As of December 31, 1997, the Bank had capital
stock issued and outstanding in the amount of $10,242,000 (divided into
5,044,181 shares of common stock of the par value of $2.03 per share), surplus
of $16,656,000 and undivided profits (including unrealized gains on securities
available for sale) of $4,749,000.
The New Bank was organized on ______ __, 1998, and has authorized capital
stock in the amount of $30,000,000 (divided into 10,000,000 shares of common
stock of the par value of $1.00 per share). Immediately prior to the merger
becoming effective, 200,000 shares of the New Bank shall be issued and
outstanding and the New Bank shall have a surplus in the amount of $40,000. The
merger hereby provided for shall hereinafter be called the "Merger."
The Holding Company is a corporation duly organized under the laws of the
State of Texas and has its principal office in the City of Bellaire, County of
Harris, State of Texas. The Holding Company's authorized capital stock consists
of 30,000,000 shares of common stock, of the par value of $1.00 per share.
A majority of the Board of Directors of the Bank and a majority of the
Board of Directors of the New Bank have, respectively, approved this Agreement
and authorized its execution. A majority of the Board of Directors of the
Holding Company has approved this Agreement, agreed that the Holding Company
shall join in and be bound by it, and authorized the undertakings hereinafter
made by the Holding Company.
This Agreement is and shall be deemed to be a plan of reorganization within
the meaning of Section 368 of the Internal Revenue Code of 1986, as amended.
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NOW, THEREFORE, in consideration of the premises, the Bank and the New
Bank, joined in by the Holding Company, hereby make this Agreement prescribing
the terms and conditions of merger of the Bank and the New Bank as follows:
Section 1
The Bank shall be merged into the New Bank under the Charter and Articles
of Association of the New Bank pursuant to the provisions of, and with the
effect provided in, Section 2 of Chapter 209 of the Act of Congress of November
7, 1918, as amended (12 U.S.C. Section 215a).
Section 2
The name of the surviving association (hereinafter referred to as the
"Association") shall be "Citizens National Bank of Texas" and its charter number
shall be 17954.
Section 3
The business of the Association shall be that of a national banking
association. This business shall be conducted by the Association at its main
office which shall be located at 5320 Bellaire Boulevard, Bellaire, Texas, and
its legally established branches.
Section 4
The amount of capital stock of the Association shall be $200,000 divided
into 100,000 shares of common stock, each of $1.00 par value, and at the time
the merger shall become effective, the Association shall have a surplus of
$26,898,000, and undivided profits, including capital reserves, which when
combined with the capital and surplus will be equal to the combined capital
structures of the merging banks as stated in the preamble of this Agreement,
adjusted, however, for normal earnings and expenses between December 31, 1997,
and the effective time of the merger.
Section 5
(a) Upon the merger becoming effective, the corporate existence of the Bank
and the New Bank shall, as provided by the aforementioned Act of Congress, be
merged into and continued in the Association, and the Association shall be
deemed to be the same corporation as the Bank and the New Bank. All rights,
franchises, and interests of the Bank and the New Bank, respectively, in and to
every type of property (real, personal, and mixed) and choses in action shall be
transferred to and vested in the Association by virtue of such merger without
any deed or other transfer, and the Association, without any order or action on
the part of any court or otherwise, shall hold and enjoy all rights of property,
franchises, and interests, including appointments, designations, and
nominations, and all other rights and interests as trustee, executor,
administrator, registrar of stocks and bonds, guardian of estates and persons,
assignee, receiver, and in every other fiduciary capacity, in the same manner
and to the same
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extent as such rights, franchises, and interests were held or enjoyed by the
Bank and the New Bank, respectively, at the time the merger becomes effective.
Thereafter, the Association shall engage in the business of a national banking
association at the main office and the legally established and approved branches
of the Bank.
(b) Upon the merger becoming effective, the Association shall be liable for
all liabilities of the Bank; and all liabilities, obligations, and contracts of
the Bank and of the New Bank, respectively, matured or unmatured, whether
accrued, absolute, contingent, or otherwise, and whether or not reflected or
reserved against on balance sheets, books of account, or records of the Bank or
the New Bank, as the case may be, shall be those of the Association, and shall
not be released or impaired by the merger, and all rights of creditors and other
obligees and all liens on property of either the Bank or the New Bank shall be
preserved unimpaired.
Section 6
This Agreement shall be submitted to the stockholders of the Bank and the
New Bank for ratification and confirmation at meetings to be called and held in
accordance with the applicable provisions of law and their respective Articles
of Association and By-laws. The Bank and the New Bank shall proceed
expeditiously and cooperate fully in the procurement of any other consents and
approvals and in the taking of any other action, and the satisfaction of all
other requirements prescribed by law or otherwise, necessary for consummation of
the merger on the terms herein provided including, without being limited to, the
preparation and submission of an application to the Comptroller of the Currency
of the United States for approval of the merger under the provisions of Section
18(c) of the Federal Deposit Insurance Act, as amended (12 USC Section 1828(c))
and Section 215a of Title 12 United States Code.
Section 7
Upon the merger becoming effective:
(a) Each share of the common stock of the Bank shall, by virtue of this
Agreement and without any action on the part of the holder thereof, be converted
into and become one share of the common stock of the Holding Company, and
outstanding certificates representing shares of common stock, par value $2.03
per share, of the Bank shall thereafter represent shares of common stock, par
value $1.00 per share, of the Holding Company. Each holder of any such shares
of the Bank which shall have been so converted into common stock of the Holding
Company, shall, upon surrender in proper form to the Association for
cancellation of one or more stock certificates (hereinafter called "Old
Certificates") which, prior to the merger becoming effective, represented common
stock of the Bank, be entitled to receive as evidence of the shares so converted
one or more stock certificates (hereinafter called "New Certificates") bearing
the name of the Holding Company as issuer, for the number of shares of Holding
Company represented by such Old Certificates when surrendered. Until so
surrendered, each Old Certificate shall be deemed, for all corporate purposes,
to evidence the
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ownership of the number of shares of common stock of the Holding Company which
the holder thereof would be entitled to receive upon its surrender, except that
Holding Company may withhold, from the holder of shares represented by such Old
Certificates, distribution of any or all dividends declared by the Holding
Company on such shares until such time as such Old Certificate shall be
surrendered in exchange for one or more New Certificates, at which time
dividends so withheld by the Holding Company with respect to such shares shall
be delivered, without interest thereon, to the stockholder to whom such New
Certificates are issued.
(b) The amount, and the number of shares, of common stock of the New Bank
outstanding immediately before the merger becomes effective (specifically
$200,000 divided into 200,000 shares of the par value of $1.00 each) shall be
the amount and the number of shares of the common stock of the Association
outstanding upon the completion of the merger.
(c) No cash shall be allocated to stockholders of the Bank (except as to
those stockholders who elect to dissent from the plan of merger as provided in
Section 11 hereof) or to any other person, firm, or corporation, and stock shall
be allocated as follows:
(i) To stockholders of the Bank of record at the time the merger
becomes effective there shall be allocated one share of common stock
of the Holding Company for each one share of common stock of the Bank
held of record at the time of the merger; and
(ii) To the Holding Company there shall be allocated the amount,
and the number of shares, of common stock of the Association of the
par value of $2.03 per share, which shall be equal to the amount, and
the number of shares, of common stock of the Bank outstanding
immediately before the merger.
(d) The Holding Company shall assume all of the obligations of the
Bank under the stock options outstanding to the extent that such options
remain unexercised on the effective date of the merger of the Bank and the
New Bank. Option holders shall receive options to purchase the same number
of shares at the same option exercise price that the option held had such
option been exercised prior to the merger.
(e) The shares of the capital stock of the New Bank issued and
outstanding at the time of the merger shall continue to be issued and
outstanding shares of the Association.
Section 8
Neither of the banks shall declare or pay any dividend to its stockholders
between the date of this Agreement and the time at which the merger shall become
effective, except in the ordinary
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course of business, nor dispose of any of its assets in any other manner except
in the normal course of business and for adequate value.
Section 9
The present Board of Directors of Bank shall continue to serve as the Board
of Directors of the Association until the next annual meeting or until such time
as their successors have been elected and have qualified.
Section 10
Effective as of the time this merger shall become effective as specified in
the "Certificate Approving Merger" to be issued by the Comptroller of the
Currency, the Articles of Association of the Association shall read in their
entirety as provided in Exhibit A hereto. The By-Laws of the Association shall
be the By-Laws of the New Bank.
Section 11
Any stockholder of the Bank who shall have voted against the merger at the
meeting of the stockholders of the Bank held for the purpose set forth in
Section 6 of this Agreement or who shall have given notice in writing at or
prior to such meeting to the presiding officer that he dissents from the plan of
merger, shall be entitled to receive the value of the shares so held by him when
the merger shall be approved by the Comptroller of the Currency upon written
request made to the Association at any time before 30 days after the date of
consummation of the merger, accompanied by the surrender of his stock
certificates. The value of the shares of any dissenting stockholder shall be
ascertained, as of the effective date of the merger, by an appraisal made by a
committee of three persons, composed of (1) one selected by the vote of the
holders of the majority of the stock, the owners of which are entitled to
payment in cash (by reason of such dissent and request for appraisal); (2) one
selected by the directors of the Association; and (3) one selected by the two so
selected. The valuation agreed upon by any two of the three appraisers shall
govern. If the value so fixed shall not be satisfactory to any dissenting
stockholder who has requested payment, that stockholder may, within five days
after being notified of the appraised value of such shares, appeal to the
Comptroller of the Currency, who shall cause a reappraisal to be made which
shall be final and binding as to the value of the shares of the appellant. If
within 90 days from the date of consummation of the merger, for any reason one
or more of the appraisers is not selected as herein provided, or the appraisers
fail to determine the value of such shares, the Comptroller of the Currency
shall upon written request of any interested party cause an appraisal to be made
which shall be final and binding on all parties. The expenses of the Comptroller
of the Currency in making the reappraisal or the appraisal, as the case may be,
shall be paid by the Association. The value of the shares ascertained shall be
promptly paid to the dissenting stockholders by the Association.
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Section 12
Effectuation of the merger herein provided for is conditional upon:
(a) Ratification and confirmation of this Agreement by vote of the
stockholders of the Bank and the New Bank as required by law;
(b) The approval of the Office of the Comptroller of the Currency of
the merger herein provided for; and
(c) Procurement of all other consents and approvals, and satisfaction
of all other requirements prescribed by law, which are necessary for
consummation of the merger.
Section 13
In the event that:
(a) The number of shares of capital stock of the Bank voted against
the merger, or in respect of which written notice is given purporting to
dissent from the merger, shall make consummation of the merger unwise in
the opinion of either the Board of Directors of the Bank or the Board of
Directors of the New Bank; or
(b) Any action, suit, proceeding, or claim has been instituted, made
or threatened relating to the proposed merger which shall make consummation
of the merger inadvisable in the opinion of either the Board of Directors
of the Bank or the Board of Directors of the New Bank; or
(c) Any action, consent or approval, governmental, or otherwise,
which is, or in the opinion of counsel for the Bank may be, necessary to
permit or enable the Association, upon and after the merger, to conduct all
or any part of the business and activities of the Bank up to the time of
the merger, in the manner in which such activities and business are then
conducted, shall not have been obtained; or
(d) For any other reason consummation of the merger is inadvisable in
the opinion of the respective Boards of Directors of both the Bank and the
New Bank;
then this Agreement may be terminated at any time before the merger becomes
effective by written notice by either the Bank or the New Bank to the other of
them, authorized or approved by resolution adopted by the Board of Directors of
the one of them giving such notice. Upon termination by written notice as
provided in this Section 13, this Agreement shall be void and of no further
effect, and there shall be no liability by reason of this Agreement or the
termination thereof on the part of
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the Bank, the New Bank, Holding Company or the directors, officers, employees,
agents or stockholders, or any of them.
Section 14
Subject to the terms of and upon satisfaction of all requirements of law
and the conditions specified in this Agreement, including, among other
conditions, receipt of the approval of the Comptroller of the Currency specified
in the Act of Congress referred to in Section l of this Agreement, the merger
shall become effective at the time specified in the certificate to be issued by
the Comptroller of the Currency under the seal of his office approving the
merger.
WITNESS, the signature and seals of said merging banks this ____ day of
_________, 1998, each hereunto set by its Chairman and attested by its
President, pursuant to a resolution of its Board of Directors, acting by a
majority thereof, and witness the signatures hereto of a majority of each of
said Boards of Directors:
ATTEST: CITIZENS NATIONAL BANK OF TEXAS
_________________________
B. Ralph Williams, President
(SEAL) By_________________________________
Frank G. Cook, Chairman of the Board
ATTEST: CITIZENS BANK, N.A.
________________________
B. Ralph Williams, President
(SEAL) By_________________________________
Frank G. Cook, Chairman of the Board
CNBT Bancshares, Inc. hereby joins in and assents to the foregoing
Agreement, undertakes that it will be bound thereby and that it will do and
perform all acts and things therein referred to or provided to be done by it.
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IN WITNESS WHEREOF, CNBT Bancshares, Inc. has caused this undertaking to be
executed by its duly authorized officer and its corporate seal to be hereunto
affixed this ___ day of __________, 1998.
CNBT BANCSHARES, INC.
By_________________________________
B. Ralph Williams, President
[Acknowledgments]
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<PAGE>
Exhibit B
ARTICLES OF INCORPORATION
OF
CNBT BANCSHARES, INC.
The undersigned natural person of the age of eighteen (18) years or more,
acting as Incorporator of a corporation (hereinafter referred to as the
"Corporation") under the Texas Business Corporation Act (hereinafter referred to
as the "Act"), adopts the following Articles of Incorporation for the
Corporation:
ARTICLE I
Name
The name of the Corporation is: CNBT BANCSHARES, INC.
ARTICLE II
Duration
The period of the duration of the Corporation is perpetual.
ARTICLE III
Purpose and Powers
Section 1. Purpose. The purpose for which the Corporation is organized
is:
To transact any or all lawful business for which corporations may be
incorporated under the Act.
Section 2. Statutory Powers. Subject to any limitations or restrictions
imposed by the Act or other law, or by these Articles of Incorporation, and
solely in furtherance of, but not in addition to, the purpose set forth in
Section 1 of this Article, the Corporation shall have and may exercise all of
the powers specified in the Act or in any other applicable law of Texas.
<PAGE>
Section 3. Additional Powers. Subject to any limitations or restrictions
imposed by the Act, by other law, or by these Articles of Incorporation, and
solely in furtherance of, but not in addition to, the purpose set forth in
Section 1 of this Article, the purpose enumerated in Section 1 of this Article
shall be construed as creating powers (as well as declaring purposes) as fully
as if the text of the clause in Section 1 of this Articles was repeated in this
Section.
Section 4. Direction of Purpose and Exercise of Powers by Directors.
Subject to any limitations or restrictions imposed by the Act, by other law, or
by these Articles of Incorporation, the Board of Directors is hereby authorized
to direct, by resolution duly adopted, the purpose set forth in Section 1 of
this Article and to exercise all the powers of the Corporation, without previous
authorization or subsequent approval by the shareholders; and all parties
dealing with the Corporation shall have the right to rely on any action taken by
the Corporation pursuant to such action by the Board of Directors.
Section 5. Limiting Clause. Nothing in this Article is to be construed as
authorizing the Corporation to transact any business in the State of Texas
expressly prohibited by any law of Texas, or to engage in any activity in Texas
which cannot lawfully be engaged in without first obtaining a license under the
laws of Texas and such a license cannot be granted to a corporation.
ARTICLE IV
Capital Stock
The aggregate number of shares which the Corporation shall have the
authority to issue is 30,000,000 shares of Common Stock of the par value of
$1.00 each (hereinafter sometimes called "Common Stock") which may be divided
into and issued in series or classes as set forth below. The preferences,
limitations and relative rights in respect of each series of shares of the
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Corporation and the authority vested in the Board of Directors to divide the
shares of the Corporation into series and the variations in the relative rights
and preferences between the shares of such series so established are as follows:
Section 1. Issuance of Shares in Classes or Series. The shares of the
Corporation may be divided into and issued in classes and series, and each class
or series shall be so designated as to distinguish the shares from the shares of
all other classes or series. All shares of the same class shall be of equal
rank and identical except to the extent that variations in the relative rights
and preferences enumerated in subparagraphs (a) through (h), inclusive of this
paragraph 1 may be fixed and determined, from time to time, by the Board of
Directors between classes and series hereinafter established; and each share of
a class or series shall be identical in all respects with the other shares of
such class or series, except that shares of any one class or series issued at
different times may differ as to the dates from which dividends thereon shall be
cumulative. Shares of any class or series which have been retired or canceled
in any manner, including shares redeemed or treasury shares returned and shares
which have been converted into Common Stock or other shares of the Corporation
or exchanged for shares of any other class or series, shall have the status of
authorized but unissued shares of such class or series.
Authority is expressly granted to the Board of Directors, within the
limitations and restrictions stated herein, to divide the shares of the
Corporation into one or more classes or series and, with respect to each class
or series, to fix and determine in the resolution or resolutions providing for
the issue of such shares the following relative rights and preferences as to
which there may be variations between the class or series so established:
(a) the distinctive designation of such class or series and the number
of shares which shall constitute such class or series, which number may be
increased (except where otherwise provided by the Board of Directors in
creating such series) or decreased (but not below the number of shares
thereof then outstanding) from time to time by like action of the Board of
Directors;
(b) the rate of dividends payable on shares of such class or series,
the conditions upon which and the dates when such dividends shall be
payable and whether such dividends are cumulative, non-cumulative, or
partially cumulative;
(c) whether such class or series will be preferred over any other
class, classes, or series as to the payment of dividends;
(d) the price or prices at, and the terms and conditions on, which
shares of such class or series may be redeemed and whether such shares may
be redeemed at the option of the Corporation, the shareholder or another
person or upon the occurrence of a designated event;
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(e) the amount payable on shares of such class or series in the event
of any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Corporation;
(f) whether such class or series will have preference in the assets of
the Corporation over any other class, classes, or series upon the voluntary
or involuntary liquidation of the Corporation;
(g) the terms and conditions and the date or dates on which the shares
of such class or series may be converted into shares of Common Stock or
shares of another class of series of shares of the Corporation;
(h) subject to the limitations contained in Article 2.12B(5) of the
Act, the rights, if any, of the holders of shares of such series to
exchange shares for shares of any other class or shares of any series of
the same or any other class, obligations, indebtedness, evidences of
ownership, rights to purchase securities, or other securities of the
Corporation or one or more other domestic or foreign corporations or other
entities or for other property or for any combination of the foregoing, and
the terms and conditions of such exchange;
(g) whether or not the shares of such class or series shall be subject
to the operation of a retirement or sinking fund, and, if so, the manner in
which any such retirement or sinking fund shall be applied to the purchase
or redemption of the shares of such class or series for retirement and the
terms and provisions relative to the operation thereof; and
(h) the rights, if any, of the holders of shares of such class or
series to vote.
Section 2. Voting Rights. Except as otherwise provided by law, or by the
resolution or resolutions of the Board of Directors providing for the issue of
any class or series of shares of the Corporation, the holders of Common Stock
shall have the exclusive right to vote for the election of directors and for all
other purposes, each holder of Common Stock being entitled to one vote for each
share held.
Section 3. Denial of Cumulative Voting. No shareholder of the Corporation
shall have the right to cumulate his votes for the election of directors.
Section 4. Denial of Preemptive Rights. No holder of Common Stock or other
shares of the Corporation shall be entitled as a matter of right to subscribe
for, purchase or receive any shares of stock (except by conversion or exchange
of shares of the Corporation into shares of Common Stock or into shares of any
other class or series, as provided herein) or any rights or options of the
Corporation which it may issue or sell, whether out of the number of shares of
the Corporation authorized by these Articles of Incorporation or by amendment
thereof or out of the
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shares of the Corporation acquired by it after the issuance thereof, nor shall
any holders of shares of the Corporation be entitled as a matter of right to
subscribe for, purchase or receive any bonds, debentures or other securities
which the Corporation may issue or sell that shall be convertible into or
exchangeable for shares of the Corporation or to which shall be attached or
appertain any warrant or warrants or other instrument or instruments that shall
confer upon the holder or owner of such obligation the right to subscribe for,
purchase or receive from the Corporation any shares of the Corporation; but all
such additional issues of shares, rights and options, or of bonds, debentures of
other securities convertible into or exchangeable for shares of the Corporation,
or to which warrants shall be attached or appertain or which shall confer upon
the holder the rights to subscribe for, purchase or receive any shares of the
Corporation, may be issued and disposed of by the Board of Directors to such
persons, firms or corporations as in its absolute discretion such board may deem
advisable, without offering any such shares, securities or obligations to the
holders of shares of the Corporation or to the holders of warrants entitling
such holders to subscribe to shares of the Corporation or to the holders of
obligations which may be converted into shares of the Corporation. The
acceptance of any shares in the Corporation shall be a waiver of any preemptive
or preferential right which in the absence of this provision might otherwise be
asserted by the holders of shares of the Corporation or any of them.
Section 5. Issuance of Rights or Options to Purchase Securities of the
Corporation. The Board of Directors shall have power at any time or from time
to time, without any action by the shareholders of the Corporation, to create
and issue, for such consideration, as may be fixed from time to time by the
Board of Directors, whether or not in connection with the issue and sale of any
shares of stock or other securities of the Corporation, rights or options
entitling the holders thereof to purchase from the Corporation any of its
shares, such rights or options to be evidenced by or in such instrument or
instruments as shall be approved by the Board of Directors; the terms upon
which, the time or times, which may be limited or unlimited in duration, at or
within which, and the price or prices at which any such shares may be purchased
from the Corporation upon the exercise of any such right or option shall,
subject to provisions of the Texas Business Corporation Act and any other law,
be such as shall be fixed and stated in the resolution or resolutions adopted by
the Board of Directors providing for the creation and issue of such rights or
options, and, in every case, set forth or incorporated by reference in the
instrument or instruments evidencing such rights or options.
Section 6. Voting. A majority is sufficient for any action which requires
the vote or concurrence of shareholders.
Section 7. Special Meetings of Shareholders. The shareholders of the
Corporation shall have the power to call a special meeting of the shareholders
of the Corporation only upon a written request delivered to the Corporation
signed by holders of at least 33-1/3% of the outstanding shares entitled to vote
at the proposed special meeting.
Section 8. Purchase of Shares. Except as specified in Section 1(d) of
this Article IV, nothing herein shall limit the right of the Corporation to
purchase any of its outstanding shares
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in accordance with law, by public or private transaction. Without necessity for
action by the shareholders, the Corporation any purchase, directly or
indirectly, its own shares to the extent of the aggregate of unrestricted
capital surplus available therefor and unrestricted reduction surplus available
therefor.
ARTICLE V
Initial Consideration for Issuance of Shares
The Corporation will not commence business until it has received for the
issuance of its shares consideration of One Thousand and No/100 and No/100
($1,000.00) Dollars, consisting of money paid, labor done or property actually
received.
ARTICLE VI
Initial Registered Office and Agent
Section 1. Registered Office. The post office address of the initial
registered office of the Corporation is 5320 Bellaire Boulevard, Bellaire, Texas
77401.
Section 2. Registered Agent. The name of the initial registered agent of
the Corporation, at such address, Randall W. Dobbs.
ARTICLE VII
Data Respecting Directors
Section 1. Board of Directors. The number of directors shall from time to
time be fixed by, or in the manner provided in, the By-laws of the Corporation.
The number of directors constituting the initial Board of Directors is three who
need not be residents of the State of Texas or shareholders of the Corporation.
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Section 2. Names and Addresses. The names and addresses of the person or
persons who are elected to serve as directors until the first annual meeting of
the shareholders, or until their successors shall have been elected and qualify,
are:
Name Address
Frank G. Cook 5320 Bellaire Boulevard
Bellaire, Texas 77401
B. Ralph Williams 5320 Bellaire Boulevard
Bellaire, Texas 77401
Randall W. Dobbs 5320 Bellaire Boulevard
Bellaire, Texas 77401
Section 3. Increase or Decrease of Directors. The number of directors may
be increased or decreased from time to time by amendment to, or in the manner
provided in, the By-laws; but no decrease shall have the effect of shortening
the term of any incumbent director. In the absence of a By-law fixing the
number of directors, the number shall be two.
Section 4. Limitation of Liability of Directors. No director of the
Corporation shall be liable to the Corporation or its shareholders for monetary
damages for an act or omission in such director's capacity as a director except
for (i) a breach of the director's duty of loyalty to the Corporation or its
shareholders, (ii) an act or omission not in good faith that constitutes a
breach of duty to the Corporation or an act or omission involving intentional
misconduct or a knowing violation of the law, (iii) a transaction from which the
director received an improper benefit (whether or not the benefit resulted from
an action taken within the scope of the director's office), or (iv) an act or
omission for which the liability of the director is expressly provided by
applicable statute.
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Section 5. Indemnification. As permitted by Section G of Article 2.02-
1 of the Act as in effect on the date of the filing of these Articles of
Incorporation with the Secretary of State of the State of Texas, the Corporation
hereby:
(A) makes mandatory the indemnification permitted under Section B of
Article 2.01-1 of the Act;
(B) makes mandatory the payment or reimbursement of the reasonable expenses
incurred by a director who was, is, or is threatened to be made a named
defendant or respondent in a proceeding upon such director's compliance with the
requirements of Section K of Article 2.01-1 the Act; and
(C) extends the mandatory indemnification referred to in paragraph (A)
above and the mandatory payment or reimbursement of expenses referred to in
paragraph (B) above (i) to all officers of the Corporation and (ii) to all
persons who are or were serving at the request of the Corporation as a director,
officer, partner or trustee of another foreign or domestic corporation,
partnership, joint venture, trust or employee benefit plan, to the same extent
that the Corporation is obligated to indemnify and pay or reimburse expenses to
directors.
Section 6. Insurance. The Corporation may purchase and maintain insurance
or another arrangement on behalf of any person who is or was a director,
officer, employee, or agent of the Corporation, or who is or was serving at the
request of the Corporation as a director, officer, partner, venturer,
proprietor, trustee, employee, agent, or similar functionary of another foreign
or domestic corporation, partnership, joint venture, sole proprietorship, trust,
employee benefit plan, or other enterprise, against any liability asserted
against him and incurred by him in such capacity or arising out of his status as
such a person, whether or not the Corporation would have the power to indemnify
him against that liability under the Article 2.02-1 of the Act.
Section 7. Non-Exclusivity. The provisions of Sections 5 and 6 of this
Article VII shall not be deemed exclusive of any other rights to which any such
director, officer or other person may be entitled under any other agreement,
pursuant to a vote of directors or any committee thereof or a vote of
shareholders, as a matter of law or otherwise, either as to action in his
official capacity or
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as to action in another capacity while holding such office, and shall continue
as to a person who has ceased to be director or officer and shall inure to the
benefit of the heirs, executors and administrators of such a person. No person
shall be entitled to indemnification pursuant to this Article 8 in relation to
any matter as to which indemnification shall not be permitted by law. No repeal
or modification of Sections 4, 5, or 6 of this Article VII shall adversely
affect any right or protection to an officer or director of the Corporation
existing at the time of such repeal or modification.
ARTICLE VIII
Data Respecting Incorporators
The name and address of the Incorporator of the Corporation is:
Name Address
John T. Unger 1000 Louisiana, Suite 1200
Houston, Texas 77002
ARTICLE IX
Bylaws
The initial bylaws of the Corporation shall be adopted by the Board of
Directors. The power to alter, amend or repeal the bylaws of the Corporation or
adopt new bylaws is vested in the Board of Directors, subject to repeal or
change by action of the shareholders of the Corporation.
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IN WITNESS WHEREOF, the undersigned has hereunto set his hand this __th day
of April, 1998.
INCORPORATOR:
____________________________
John T. Unger
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Exhibit C
CNBT BANCSHARES, INC.
B Y L A W S
ARTICLE I
OFFICES
Section 1. Registered Office. Until the Board of Directors
otherwise determines, the registered office of the Corporation required by the
Texas Business Corporation Act (the "Act") to be maintained in the State of
Texas shall be the registered office named in the original Articles of
Incorporation of the Corporation, but such registered office may be changed from
time to time by the Board of Directors in the manner provided by law. Should
the Corporation maintain a place of business in Texas, such registered office
need not be the same as the principal place of business of the Corporation.
Section 2. Other Offices. The Corporation may also have offices
at such other places or locations, within or without the State of Texas, as the
Board of Directors may determine or the business of the Corporation may require.
ARTICLE II
SHAREHOLDERS
Section 1. Meetings of Shareholders. Any meeting of the shareholders,
annual or special, shall be held at the principal place of business of the
Corporation, or at such other place within or without the State of Texas as may
be determined by the Board of Directors. However, any meeting may be held at any
place within or without the State of Texas designated in a waiver or waivers of
notice signed by, or in the aggregate signed by, all of the shareholders.
Section 2. Annual Meeting. An annual meeting of the shareholders shall
be held at such place, within or without the State of Texas, on such date, and
at such time as the Board of Directors shall fix each year and set forth in, the
notice of meeting, which date shall be within thirteen (13) months subsequent to
the later of the date of incorporation or the last annual meeting of
shareholders, for the purpose of electing directors and for the transaction of
any and all such other business as may be properly brought before or submitted
to the meeting. Any and all business of any nature or character whatsoever may
be transacted, and action may be taken thereon, at any annual meeting, except as
otherwise provided by law or by these By-laws.
Section 3. Special Meetings. Special meetings of the shareholders for
any purpose or purposes, unless otherwise prescribed by statute, or by law or by
the Articles of Incorporation of the Corporation, may be called by the
President, the Chairman of the Board (if any), or the Board of Directors, and
shall be called by the Chairman of the Board (if any), the
<PAGE>
President or the Secretary upon written request therefor, stating the purpose or
purposes of the meeting, delivered to such officer, signed by the then holder(s)
of at least 33-1/3% of all of the then issued and outstanding shares of the
capital stock of the Corporation entitled to be voted at such meeting.
Section 4. Notices of Shareholders' Meetings. Written or printed
notice stating the place, day and hour of each meeting of the shareholders, and,
in case of a special meeting, the purpose or purposes for which the meeting is
called, shall be delivered not less than ten (10) days nor more than sixty (60)
days before the date of the meeting, either personally or by mail, by or at the
direction of the President, the Secretary, or the officer or person calling the
meeting, to each shareholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the United
States mail addressed to the shareholder at his address as it appears on the
stock transfer books of the Corporation, with postage thereon prepaid. Any
notice required to be given to any shareholder, under any provision of the Act
or the Articles of Incorporation or bylaws of the Corporation, need not to be
given to a shareholder if (1) notice of two consecutive annual meetings and all
notices of meetings held during the period between those annual meetings, if
any, or (2) all (but in no event less than two) payments (if sent by first class
mail) of distributions or interest on securities during a 12-month period have
been mailed to that person, addressed at his address as shown on the share
transfer records of the Corporation, and have been returned undeliverable. Any
action or meeting taken or held without notice to such a person shall have the
same force and effect as if the notice had been duly given and, if the action
taken by the Corporation is reflected in any articles or documents filed with
the Secretary of State of Texas, those articles or that document may state that
notice was duly given to all persons to whom notice was required to be given. If
such a person delivers to the Corporation a written notice setting forth his
then current address, the requirement that notice be given to that person shall
be reinstated.
Section 5. Quorum of Shareholders. Unless otherwise required by law or
provided in the Articles of Incorporation, the holders of a majority of the
shares entitled to vote, represented in person or by proxy, shall constitute a
quorum at a meeting of shareholders, but in no event shall a quorum consist of
the holders of less than one-third (1/3) of the shares entitled to vote and thus
represented at such meeting in person or by proxy. With respect to any matter,
other than the election of Directors or a matter for which the affirmative vote
of the holders of a specified portion of the shares entitled to vote is required
by the Act, the affirmative vote of the holders of a majority of the shares
entitled to vote and represented in person or by proxy at a meeting at which a
quorum is present shall be the act of the shareholders' meeting, unless the vote
of a greater number is required by law, the Articles of Incorporation or these
By-laws. The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the subsequent withdrawal
from the meeting of enough shareholders represented it person or by proxy to
leave less than a quorum.
Section 6. Adjournments of Annual and Special Meetings of the
Shareholders. If the holders of the amount of shares necessary to constitute a
quorum shall fail to attend any
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meeting of the shareholders in person or by proxy then the holders of a majority
of the shares entitled to vote, represented in person or by proxy, may adjourn
any such meeting from time to time without notice, other than by announcement at
the meeting of the time and place at which the meeting will reconvene, until
holders of the amount of shares requisite to constitute a quorum shall be
present at the particular meeting or at any adjournment thereof, in person or by
proxy. The holders of a majority of the shares entitled to vote, represented in
person or by proxy, may also adjourn any annual or special meeting of the
shareholders from time to time and without notice, other than by announcement at
the meeting of the time and place at which the meeting will reconvene, until the
transaction of any and all business submitted or proposed to be submitted to
such meeting or any ad journment thereof shall have been completed. If the
adjournment is for more than 60 days, or if after adjournment a new record date
is fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each shareholder of record entitled to vote at such meeting. At any
such adjourned meeting at which a quorum is present, in person or by proxy, any
business may be transacted which might have been transacted at the meeting as
originally notified or called.
Section 7. Procedure at Meetings of Shareholders. The President of the
Corporation, or in the event of his absence, omission or refusal to so act, a
Vice President of the Corporation, shall call each meeting of the shareholders
to order and shall act as Chairman of such meeting. If for any reason whatever
neither the President nor a Vice President of the Corporation acts or will act
as the Chairman of the meeting of shareholders, then the shareholders present,
in person or by proxy, and entitled to vote thereat may by affirmative vote of a
majority appoint a Chairman who shall act as Chairman of the meeting.
The Secretary of the Corporation, or in the event of his absence,
omission or refusal to act, an Assistant Secretary, shall act as Secretary of
each meeting of the shareholders. If for any reason whatever neither the
Secretary nor an Assistant Secretary acts or will act as Secretary of the
meeting of shareholders, then the Chairman of the meeting or, if he fails to do
so, the shareholders present, either in person or by proxy, and entitled to vote
thereat may by affirmative vote of a majority appoint any person to act as
Secretary of the meeting and such person shall act as Secretary of the meeting.
The Chairman of any meeting shall determine the order of business and
the procedure at the meeting, including such regulation of the manner of voting
and the conduct of discussion as seem to him in order. Unless the Chairman of
the meeting shall otherwise determine, the order of business shall be as
follows:
(a) Calling of meeting to order.
(b) Election of a Chairman and the appointment of a Secretary if
necessary.
(c) Presentation of proof of the due calling of the meeting.
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(d) Presentation and examination of proxies and determination of a
quorum.
(e) Reading and settlement of the minutes of the previous meeting.
(f) Reports of officers and committees.
(g) The election of directors if an annual meeting, or a meeting
called for that purpose.
(h) Unfinished business.
(i) New business.
(j) Adjournment.
Section 8. Attendance and Proxies. Each shareholder entitled to vote
at the particular shareholders' meeting may attend such meeting and vote in
person or may attend such meeting by proxy, and vote by such proxy, appointed by
instrument in writing executed by the shareholder or by such shareholder's duly
authorized attorney-in-fact and filed with the Secretary of the Corporation
before or at the time of the particular meeting, and the attendance or the vote
at any such meeting of a proxy of any such shareholder so appointed shall for
all purposes be considered as the attendance or vote in person of such
shareholder. All proxies shall be received and taken charge of and all ballots
shall be received and canvassed by the Secretary of the meeting who shall decide
all questions touching upon the qualification of voters, the validity of the
proxies, and the acceptance or rejection of votes, unless an inspector or
inspectors shall have been appointed by the Chairman of the meeting, in which
event such inspector or inspectors shall decide all such questions. A telegram,
telex, cablegram, or similar transmission by a shareholder, or a photographic,
photostatic, facsimile, or similar reproduction of a writing executed by a
shareholder, shall be treated as an execution in writing for purposes of this
Section. No proxy shall be valid after eleven (11) months from the date of its
execution unless otherwise expressly provided in the proxy. Each proxy shall be
revocable unless expressly provided therein to be irrevocable and the proxy is
coupled with an interest and unless otherwise made irrevocable by law.
Should a proxy designate two or more persons to act as proxies, unless
such instrument shall provide the contrary, a majority of such persons present
at any meeting at which their powers thereunder are to be exercised shall have
and may exercise all the powers of voting or giving consents thereby conferred,
or if only one be present, then such powers may be exercised by that one; or, if
any even number attend and a majority do not agree on any particular issue, each
proxy so attending shall be entitled to exercise such powers in respect of the
same portion of the shares as he is of the proxies representing such shares.
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Section 9. Voting of Shares. At each meeting of the shareholders, each
outstanding share, regardless of class, standing in the shareholder's name on
the stock and transfer books and records of the Corporation shall be entitled to
one (1) vote on each matter submitted to vote at such meeting, subject, however,
to the provisions of Section 6 of ARTICLE VIII of these By-laws, and except to
the extent that the Articles of Incorporation provide for more or less than one
vote per share or, if and to the extent permitted by law, limit or deny voting
rights to the holders of the shares of any class or series, or as otherwise
provided by law. Treasury shares, shares of the Corporation's stock owned by
another corporation the majority of the voting stock of which is owned or
controlled by the Corporation, and shares of the Corporation's stock held by the
Corporation in a fiduciary capacity shall not be voted, directly or indirectly,
at any meeting, and shall not be counted in determining the total number of
outstanding shares at any given time.
At each election for directors by the shareholders, every shareholder
entitled to vote at such election shall have the right to vote, in person or by
proxy, the number of shares owned by him for as many persons as there are
directors to be elected and for whose election he has a right to vote, or,
unless expressly prohibited by the Articles of Incorporation of the Corporation,
to cumulate his votes by giving one candidate as many votes as the number of
such directors multiplied by his shares shall equal or by distributing such
votes on the same principle among any number of such candidates. If cumulative
voting of shares of capital stock of the Corporation has not been denied in the
Articles of Incorporation, any shareholder thereby having cumulative voting
rights and who intends to cumulate his votes shall give written notice of such
intention to the Secretary of the Corporation on or before the day preceding the
election at which such shareholder intends to cumulate his votes, and all
shareholders may cumulate their votes if any shareholder gives such written
notice of intention to cumulate his votes as provided for herein.
Section 10. Voting of Shares Owned by Another Corporation. Shares
standing in the name of another corporation, domestic or foreign, on the books
and records of the Corporation and having voting rights may be voted by such
officer, agent or proxy as the bylaws of such other corporation may authorize
or, in the absence of such authorization, as the board of directors of such
other corporation may determine; provided, however, that when any foreign
corporation without a permit to do business in this State lawfully owns or may
lawfully own or acquire stock in a Texas corporation, it shall not be unlawful
for such foreign corporation to vote such stock and to participate in the
management and control of the business and affairs of such Texas corporation, as
other stockholders, subject to all laws, rules and regulations governing Texas
corporations and especially subject to the provisions of the antitrust laws of
the State of Texas.
Section 11. Shares Held by Fiduciaries, Receivers, Pledgees. Shares
held by an administrator, executor, guardian or conservator, may be voted by him
so long as such shares forming a part of an estate are in the possession and
forming a part of the estate being served by him, either in person or by proxy,
without a transfer of such shares into his name. Shares standing in the name of
a trustee may be voted by him, either in person or by proxy, but no
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trustee shall be entitled to vote shares held by him unless such shares shall
have been transferred into his name as trustee. Shares standing in the name of a
receiver may be voted by such receiver, and shares held by or under the control
of a receiver may be voted by such receiver without such shares being
transferred into his name if authority so to do be contained in an appropriate
order of the court by which such receiver was appointed. A shareholder whose
shares are pledged shall be entitled to vote such shares until such shares have
been transferred on the books and records of the Corporation into the name of
the pledgee, and thereafter the pledgee shall be entitled to vote the shares so
transferred.
Section 12. Decisions at Meetings of Shareholders. At all meetings of
the shareholders all elections of directors shall be determined by a plurality
of the votes cast by the shareholders entitled to vote represented in person or
by proxy, a quorum being present, and all other questions, business and matters,
except those the manner of deciding which is otherwise expressly governed by the
Act or by the Articles of Incorporation or by these By-laws, shall be decided by
the affirmative vote of the holders of a majority of the votes of the
shareholders entitled to vote, represented in person or by proxy, a quorum being
present. All voting shall be viva voce, except that upon the determination of
the Chairman of the meeting or upon the demand of any qualified voter or his
proxy, voting on any question, matter or business at such meeting shall be by
ballot. In the event any business, question or matter is so voted upon by
ballot, then each ballot shall be signed by the shareholder voting or by his
proxy and shall state the number of shares so voted.
At any meeting at which a vote is taken by ballots, the Chairman of
the meeting shall appoint one or more inspectors who shall subscribe an oath or
affirmation to execute faithfully the duties of inspector at such meeting with
strict impartiality and according to the best of his ability. Such inspector
shall receive the ballots, count the votes and make and sign a certificate of
the result thereof. The Chairman of the meeting may appoint any person to serve
as an inspector, except no candidate for the office of director shall be
appointed as an inspector.
Section 13. List of Shareholders. A complete list of shareholders
entitled to vote at each shareholders' meeting or any adjournment thereof,
arranged in alphabetical order, with the address of and the number of shares
held by each, shall be prepared by the Secretary and kept on file at the
registered office or principal place of business of the Corporation and be
subject to inspection by any shareholder at any time during usual business hours
for a period of at least ten (10) days prior to such meeting and shall be
produced and kept open at such meeting and at all times during such meeting
shall be subject to inspection by any shareholder. The original stock transfer
book shall be prima facie evidence as to who are the shareholders entitled to
examine such list or transfer books or to vote at any meeting of shareholders.
Section 14. Record Date. The Board of Directors shall have the power
to close the stock transfer books of the Corporation or, in lieu thereof, to fix
a record date for the determina tion of the shareholders entitled to notice of
or to vote at any meeting of the shareholders
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and at any adjournment thereof and to fix a record date for any other purpose as
provided in Section 6 of ARTICLE VIII of these By-laws.
Section 15. Action by Unanimous Consent. Any action required or which
may be taken at a meeting of the shareholders may be taken without a meeting if
a consent in writing, setting forth the action so taken, shall be signed by all
the shareholders entitled to vote with respect to the subject matter thereof,
or, if provided in the Articles of Incorporation, by the holder or holders of
shares having not less than the minimum number of votes that would be necessary
to take such action at a meeting at which the holders of all shares entitled to
vote on the action were present and voted. Every written consent shall bear the
date of signature of each shareholder who signs the consent. No written consent
shall be effective to take the action that is the subject of the consent unless,
within 60 days after the date of the earliest date consent delivered to the
Corporation in the manner required by the Act, a consent or consents signed by
the holder or holders of shares having not less than the minimum number of votes
that would be necessary to take the action that is the subject of the consent
are delivered to the Corporation by delivery to its registered office, its
principal place of business, or an officer or agent of the Corporation having
custody of the books in which proceedings of meetings of shareholders are
recorded. Delivery shall be by hand or certified or registered mail, return
receipt requested. Delivery to the Corporation's principal place of business
shall be addressed to the President or principal executive officer of the
Corporation. A telegram, telex, cablegram, or similar transmission by a
shareholder, or a photographic, photostatic, facsimile, or similar reproduction
of a writing signed by a shareholder, shall be regarded as signed by the
shareholder for purposes of this Section. Prompt notice of the taking of any
action by shareholders without a meeting by less than unanimous written consent
shall be given to those shareholders who did not consent in writing to the
action. If any action by shareholders is taken by written consent, any articles
or documents filed with the Secretary of State as a result of the taking of the
action shall state, in lieu of any statement required by the Act concerning any
vote of shareholders, that written consent has been given in accordance with the
provisions of the Act and that any written notice required by the Act has been
given.
Section 16. Meeting by Telephone or Similar Communications Equipment.
Subject to the provisions required or permitted by the Texas Business
Corporation Act for notice of meetings, unless otherwise restricted by these
Bylaws or the Articles of Incorporation, shareholders may participate in and
hold a meeting by means of conference telephone or other similar communications
equipment by means of which all persons participating in the meeting can hear
each other. Participation in a meeting pursuant to this Section shall constitute
presence in person at such meet ing, except where a person participates in the
meeting for the express purpose of objecting to the transaction of any business
on the ground that the meeting is not lawfully called or convened.
Section 17. Shareholder Proposals. At any special meeting of
shareholders only such business shall be conducted as shall have been set forth
in the notice of special meeting. At an annual meeting of the shareholders, only
such business shall be conducted as shall have been
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properly brought before the meeting. To be properly brought before an annual
meeting business must be (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Chairman of the Board,
the Chief Executive Officer, or the Board of Directors, (b) otherwise properly
brought before the meeting by or at the direction of the Chairman of the Board,
the Chief Executive Officer, or the Board of Directors, or (c) otherwise
properly brought before the meeting by a shareholder.
No proposal by a shareholder shall be presented at an annual meeting of
shareholders unless such shareholder shall provide the Board of Directors or the
Secretary of the Corporation with timely written notice of intention to present
a proposal for action at the forthcoming meeting of shareholders, which notice
shall include (a) the name and address of such shareholder, (b) the number of
voting securities he or she holds of record and which he or she holds
beneficially, (c) the text of the proposal to be presented at the meeting, (d) a
statement in support of the proposal, and (e) any material interest of the
shareholder in such proposal. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation, not less than 60 days nor more than 90 days prior to the meeting.
Any shareholder may make any other proposal at an annual meeting of shareholders
and the same may be discussed and considered, but unless stated in writing and
filed with the Board of Directors or the Secretary prior to the date set forth
above, no action with respect to such proposal shall be taken at such meeting
and such proposal shall be laid over for action at an adjourned, special, or
annual meeting of the shareholders taking place no earlier than 60 days after
such meeting.
This provision shall not prevent the consideration and approval or
disapproval at an annual meeting of reports of officers, directors, and
committees; but in connection with such reports, no new business shall be acted
upon at such annual meeting unless stated and filed as provided in this Section
17. Notwithstanding anything in the By-laws to the contrary, no business shall
be conducted at any annual or special meeting except in accordance with the
procedures set forth in this Section 17. The Chairman of the annual or special
meeting shall, if the facts warrant, determine and declare to the meeting that
business was not properly brought before the meeting and in accordance with the
provisions of this Section 17, and if he should so determine, he shall so
declare to the meeting and any such business not properly brought before the
meeting shall not be transacted.
Notwithstanding any other provision of these By-laws, the Corporation shall
be under no obligation to include any shareholder proposal in its proxy
statement materials or otherwise present any such proposal to shareholders at a
special or annual meeting of shareholders if the Board of Directors reasonably
believes the proponents thereof have not complied with Sections 13 and 14 of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder, and the Corporation shall not be required to include in
its proxy statement material to shareholders any shareholder proposal not
required to be included in its proxy material to shareholders in accordance with
such Act, rules, or regulations.
For purposes of this Section 17 and Section 4 of Artcile III of these By-
laws, reference to a requirement to deliver notice or information to the
Corporation a set number of days in advance of
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an annual meeting shall mean that such notice must be delivered that number of
days in advance of the first anniversary of the preceding year's annual meeting;
provided, however, in the event that the date of the annual meeting is advanced
by more than 30 days or delayed by more than 60 days from the first anniversary
of the preceding year's annual meeting, notice by the shareholder to be timely
must be so delivered not later than the close of business on the later of the
60th day prior to such annual meeting or the 10th day following the day on which
notice of such meeting is first given to shareholders. For purposes of this
Section 17 and Section 4 of Article III, notice shall be deemed to first be
given to shareholders when disclosure of such date is first made in a press
release reported by Dow Jones News Services, Associated Press, or comparable
national news service or in a document filed by the Corporation with the Office
of the Comptroller of the Currency pursuant to Sections 13, 14, or 15(d) of the
Securities Exchange Act of 1934, as amended.
ARTICLE III
BOARD OF DIRECTORS
Section 1. Board of Directors. The powers of the Corporation shall be
exercised by or under the authority of, and the business and affairs of the
Corporation shall be managed by the Board of Directors and, subject to such
restrictions, if any, as may be imposed by law, the Articles of Incorporation or
by these Bylaws, the Board of Directors may, and are fully authorized to, do all
such lawful acts and things as may be done by the Corporation and to exercise
all the powers of the Corporation. Directors need not be residents of the State
of Texas or shareholders of the Corporation.
Section 2. Number of Directors. The number of directors which shall
constitute the entire Board of Directors shall be determined from time to time
by resolution of the Board of Directors, provided that no decrease shall have
the effect of shortening the term of any incumbent director, and further
provided that the number of directors shall never be less than one (1). If the
Board of Directors makes no such determination, the number of directors shall be
the same as the number constituting the initial Board of Directors as fixed by
the Articles of Incorporation.
Section 3. Election and Term. Except as otherwise provided in Section
5 of this ARTICLE III, the directors shall be elected each year at the annual
meeting of the shareholders, or at a special meeting of the shareholders held in
lieu of the annual meeting. Each such director shall hold office, unless he is
removed in accordance with the provisions of these Bylaws or he resigns, for the
term for which he is elected and until his successor shall have been elected and
qualified. Each director shall qualify by accepting his election to office
either expressly or by acting as a director.
Section 4. Nominations for Director. Only persons who are nominated in
accordance with the procedures of this Section 4 shall be eligible for election
as directors. Subject to the rights of holders of any class or series of stock
having a preference over the common stock as to dividends or upon liquidation,
nominations for the election of directors may be made at a meeting
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of shareholders (a) by or at the direction of the Board of Directors or (b) by
any shareholder of any outstanding class of capital stock of the Corporation who
is a shareholder of record at the time of the giving of notice required in this
Section 4, who shall be entitled to vote in the election of directors generally,
and who complies with the notice procedures set forth in this Section 4. Any
shareholder entitled to vote in the election of directors generally may nominate
one or more persons for election as a director at a meeting only if timely
written notice of such shareholder's intent to make such nomination or
nominations has been given, either by personal delivery or by U.S. mail, first
class postage prepaid, return receipt requested, to the President of the
Corporation.
With respect to an annual meeting, to be timely, a shareholder's notice
shall be delivered to or mailed and received at the principal executive offices
of the Corporation not less than 60 days nor more than 90 days prior to the date
of the meeting. Each such notice shall set forth: (a) the name and residence
address of the shareholder who intends to make the nomination, (b) the name,
age, business address, and home address of the person or persons to be
nominated; (c) the principal occupation of the person or persons nominated; (d)
the total number of shares of capital stock of the Corporation that will voted
for each person nominated; (e) the number of shares of capital stock owned by
the notifying shareholder, (f) a representation that the shareholder is a holder
of record of stock of the Corporation entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting and intends to appear at
the meeting to nominate the person or persons specified in the notice; (g) a
description of all arrangements or understandings between the shareholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
shareholder; (h) such other information regarding each nominee proposed by such
shareholder as would be required to be included in a proxy statement filed
pursuant to the rules of the Securities and Exchange Commission, had the nominee
been nominated, or intended to be nominated, by the Board of Directors; and (i)
the written consent of each nominee to serve as a director of the Corporation if
so elected. At the request of the Board of Directors, any person nominated by
the Board of Directors for election as a Director shall furnish to the Secretary
of the Corporation that information required to be set forth in a shareholder's
notice of nomination which pertains to the nominee.
Other than directors chosen pursuant to the provisions of this Section 4,
no person shall be eligible for election as a Director of the Corporation unless
nominated in accordance with the procedures set forth in this Section 4. The
Chairman of the meeting shall, if the facts warrant, determine and declare to
the meeting that a nomination was not made in accordance with the procedures
prescribed by the By-laws, and if he or she should so determine, he or she shall
so declare to the meeting and the defective nomination shall be disregarded.
For a nomination by a stockholder to be proper, a stockholder shall also
comply with all applicable requirements of the Securities Exchange Act of 1934,
as amended, and the rules and regulations thereunder with respect to the matters
set forth in this Section 4.
Section 5. Resignation. Any director or officer of the Corporation may
resign at any time as provided in Section 4 of ARTICLE IX of these Bylaws.
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Section 6. Vacancy and Increase. Any vacancy occurring in the Board of
Directors may be filled by the affirmative vote of a majority of the remaining
directors though less than a quorum of the Board of Directors. A director
elected to fill a vacancy shall be elected for the unexpired term of his
predecessor in office and until his successor shall have been elected and
qualified. A directorship to be filled by reason of an increase in the number of
directors may be filled by the Board of Directors for a term of office
continuing only until the next election of one or more directors by the
shareholders; provided that the Board of Directors may not fill more than two
such directorships during the period between any two successive annual meetings
of shareholders. Any vacancy occurring in the Board of Directors or any
directorship to be filled by reason of an increase in the number of directors
may also be filled by election at an annual or special meeting of shareholders
called for that purpose. Notwithstanding the foregoing provisions of this
Section, whenever the holder of any class or series of shares are entitled to
elect one or more directors by the provisions of the Articles of Incorporation,
any vacancies in such directorships and any newly created directorships of such
class or series to be filled by reason of an increase in the number of such
directors may be filled by the affirmative vote of the majority of directors
elected by such class or series in an office or by a sole remaining director so
elected, or by the vote of the holders of the outstanding shares of such class
or series, and such directorship shall not in any case be filled by the vote of
the remaining directors or the holders of the outstanding shares as a whole
unless otherwise provided in the Articles of Incorporation.
Section 7. Removal. At any meeting of shareholders called expressly
for that purpose, any director or the entire Board of Directors may be removed
from office, with or without cause, by a vote of the holders of a majority of
the shares then entitled to vote at an election of directors; provided that,
whenever the holders of any class or series of shares are entitled to elect one
or more directors by the provisions of the Articles of Incorporation, only the
holders of shares of the class or series shall be entitled to vote for or
against the removal of a director elected by the holders of shares of that class
or series and in case the shareholders have the right to cumulate votes for the
election of directors, if less than the entire Board is to be removed, no
director may be removed if the votes cast against his removal would be
sufficient to elect him if then cumulatively voted at any election of the entire
Board of Directors, or if there be classes of directors, at an election of the
class of directors of which such director is a part; and any vacancy or
vacancies in the Board resulting therefrom may be filled by the remaining
directors, though less than a quorum, or by the share holders, whichever shall
first act thereon.
Section 8. Offices and Records. The directors may hold their meetings
and may have or establish one or more offices of the Corporation and keep the
books and records of the Corporation, except as otherwise provided by statute,
in such place in the State of Texas or outside the State of Texas, as the Board
of Directors may determine.
Section 9. Meeting of Directors. Meetings of the Board of Directors,
regular or special, may be held either within or without the State of Texas.
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Section 10. First Meeting. Each newly elected Board of Directors may
hold its first meeting for the purpose of organization and the transaction of
business, if a quorum is present, immediately after and at the same place as the
annual meeting of the shareholders, and no notice of such meeting shall be
necessary.
Section 11. Election of Officers. At the first meeting of the Board of
Directors in each year at which a quorum shall be present, the Board of
Directors shall proceed to the election of the officers of the Corporation.
Section 12. Regular Meetings. Regular meetings of the Board of
Directors may be held at such times and places as shall be designated or
determined by the Board of Directors. Notice of such regular meetings shall not
be required.
Section 13. Special Meetings. Special meetings of the Board of
Directors shall be held whenever and wherever called or provided to be held by
the Chairman of the Board (if any), the President or by a majority of the
directors then in office, and at the place, day and hour determined by the
officer or such majority of the directors calling or providing for the holding
of the particular meeting, in each instance, and such determination may be
conclusively evidenced in a call, waiver of notice or other communication signed
by such officer or such majority of the directors.
Section 14. Notice. The Secretary or an Assistant Secretary shall, but
in the event of the absence of the Secretary or an Assistant Secretary or the
failure, inability, refusal or omission on the part of the Secretary or an
Assistant Secretary so to do, any other officer of the Corporation may, give
notice of each special meeting, and of the place, day and hour of the particular
meeting, in person or by mail, or by telephone, telegraph or other means of
communication, at least twenty-four (24) hours before the meeting to each
director. The attendance of a director at any meeting shall constitute a waiver
of notice of such meeting, except where a director attends a meeting for the
express purpose of objecting to the transaction of any business on the ground
that the meeting is not lawfully called or convened.
Section 15. Business to be Transacted. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the Board
of Directors need be specified in the notice or any waiver of notice of such
meeting. Any and all business of any nature or character whatsoever may be
transacted and action may be taken thereon at any meeting, regular or special,
of the Board of Directors. At any meeting at which every director shall be
present, even though without any notice, any business may be transacted.
Section 16. Quorum - Adjournment if Quorum is not Present. A majority
of the number of directors fixed by, or in the manner provided in, the Articles
of Incorporation or these Bylaws shall constitute a quorum for the transaction
of any and all business, unless a greater number is required by law or by the
Articles of Incorporation or these Bylaws. At any meeting, regular or special or
any first meeting, of the Board of Directors, if there be less than a quorum
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present, a majority of those present, or if only one director be present, then
such director, may adjourn the meeting from time to time without notice, other
than by announcement at the meeting of the time and place at which the meeting
will reconvene, until a quorum shall be present at the meeting. A majority of
the directors present at any meeting of the Board of Directors, or if only one
director be present, then such director may adjourn any meeting of the Board
from time to time without notice, other than by announcement at such meeting of
the time and place at which the meeting will reconvene, until the transaction
of any and all business submitted or proposed to be submitted to such meeting or
any adjournment thereof shall have been completed. The act of the majority of
the directors present at any meeting of the Board of Directors at which a quorum
is present shall constitute the act of the Board of Directors, unless the act of
a greater number is required by law or the Articles of Incorporation or these
Bylaws.
Section 17. Order of Business. At all meetings of the Board of
Directors business shall be transacted in such order as the Board of Directors
may determine. At all meetings of the Board of Directors, if a Chairman of the
Board has theretofore been elected by the Board of Directors pursuant to the
provisions of Section 7 of ARTICLE VI of these Bylaws, the Chairman of the Board
shall preside, but if a Chairman of the Board has not theretofore been elected
or if elected he should be absent, the President shall preside and in the
absence of the President, a Vice President shall preside, but if none of such
officers shall be present or preside at any meeting of the Board, then a
Chairman shall be chosen by the Board from among the directors present and such
Chairman so chosen shall preside at the meeting.
The Secretary of the Corporation, or in his absence, an Assistant
Secretary, shall act as Secretary of the meetings of the Board of Directors, but
in the absence of the Secretary and an Assistant Secretary, or if for any reason
neither acts as Secretary thereof, the presiding officer shall appoint any
person of his choice to act, and such person shall act as Secretary of the
meeting.
Section 18. Presumption of Assent. A director of the Corporation who
is present at a meeting of the Board of Directors at which action on any
corporate matter is taken shall be presumed to have assented to the action
taken unless his dissent shall be entered in the minutes of the meeting or
unless he shall file his written dissent to such action with the person acting
as Secretary of the meeting before the adjournment thereof or shall forward such
dissent by registered mail to the Secretary of the Corporation immediately after
the adjournment of the meeting. Such right to dissent shall not apply to a
director who voted in favor of such action.
Section 19. Compensation. Unless otherwise restricted by the Articles
of Incorporation, the Board of Directors shall have authority to fix the
compensation of directors. Nothing herein contained shall be construed so as to
preclude any director from serving the Corporation in any other capacity or
receiving compensation therefor. Members of special or standing committees may
be allowed a fixed sum and expenses of attendance, if any, at committee
meetings.
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Section 20. Action by Unanimous Consent. Unless otherwise restricted
by the Articles of Incorporation, any action required or permitted to be taken
at a meeting of the Board of Directors or any committee may be taken without a
meeting if a consent in writing, setting forth the action so taken, is signed by
all the members of the Board of Directors or committee, as the case may be. Such
consent shall have the same force and effect as a unanimous vote at a meeting,
and may be stated as such in any document or instrument filed with the Secretary
of State of the State of Texas.
Section 21. Meeting by Telephone or Similar Communications Equipment.
Subject to the provisions required or permitted by the Act for notice of
meetings, unless otherwise restricted by these Bylaws or the Articles of
Incorporation, the Board of Directors or any committee thereof designated by the
Board of Directors, may participate in and hold a meeting of the Board of
Directors or any such committee by means of conference telephone or other
similar communications equipment by means of which all persons participating in
the meeting can hear each other. Participation in a meeting pursuant to this
Section shall constitute presence in person at such meeting, except where a
person participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
Section 22. Approval or Ratification of Acts or Contracts by
Shareholders. The Board of Directors in its discretion may submit any act or
contract for approval or ratification at any annual meeting of the shareholders,
or at any special meeting of the shareholders called for the purpose of
considering any such act or contract, and any act or contract that shall be
approved or be ratified by the vote of the shareholders holding a majority of
the issued and outstanding shares of stock of the Corporation entitled to vote
and present in person or by proxy at such meeting, provided that a quorum is
present, shall be as valid and as binding upon the Corporation and upon all the
shareholders as if it has been approved or ratified by every shareholder of the
Corporation.
ARTICLE IV
OFFICERS' AND DIRECTORS' SERVICES, CONFLICTING
INTERESTS, INDEMNIFICATION AND INSURANCE
Section 1. Services. No director and, unless otherwise determined by
the Board of Directors, no officer of the Corporation, shall be required to
devote his time or any particular portion of his time or render services or any
particular services exclusively to the Corporation. Every director and, unless
otherwise determined by the Board of Directors, every officer, of the
Corporation shall be entirely free to engage, participate and invest in any and
all businesses, enterprises and activities, either similar or dissimilar to the
business, enterprise and activities of the Corporation, without breach of duty
to the Corporation or to its shareholders and without accountability or
liability to the Corporation or to its shareholders.
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Every director and, unless otherwise determined by the Board of
Directors, every officer, of the Corporation shall, respectively, be entirely
free to act for, serve and represent any other corporation, any entity or any
person, in any capacity, and be or become a director or officer, or both, of any
other corporation or any entity, irrespective of whether or not the business,
purposes, enterprises and activities, or any of them, thereof be similar or
dissimilar to the business, purposes, enterprises and activities, or any of
them, of the Corporation, without breach of duty to the Corporation or to its
shareholders and without accountability or liability of any character or
description to the Corporation or to its shareholders.
Section 2. Directors' and Officers' Interests in Contracts. No
contract or transaction between the Corporation and one or more of its directors
or officers, or between the Corporation and any firm or partnership of which
one or more of its directors or officers are members or employees or in which
they are otherwise interested, or between the Corporation and any corporation,
association or other organization in which one or more of the Corporation's
directors or officers are shareholders, members, directors, officers or
employees or have a financial interest or in which they are otherwise
interested, shall be void or voidable by reason of or as a result of such
connection with or holding an office as a director or officer of the Corporation
or such interest in or in connection with such other firm, partnership,
corporation, association or other organization, notwithstanding the presence of
such director or officer at the meeting of the Board of Directors or committee
of the Corporation which authorizes any such contract or other transaction, and
notwith standing his participation in such action or his votes are counted for
such purpose, if such contract or other transaction is fair, just and beneficial
to the Corporation, and if (i) the material facts as to such interest or
relationship shall be disclosed or known to the Board of Directors or the
committee and the Board of Directors or the committee shall, in good faith,
authorize, approve or ratify such contract or other transaction by a vote of a
majority of the disinterested directors present, such interested director to be
counted neither in determining whether a quorum is present, nor in calculating
the majority necessary to carry such vote, or if (ii) the material facts of such
interest or relationship shall be disclosed or known to the shareholders and the
shareholders either by written consent or by vote of holders of record of a
majority of all the outstanding shares of stock entitled to vote, shall in good
faith authorize, approve or ratify such contract or other transaction; nor shall
any director or officer be responsible to, or liable to account to, the
Corporation for any profits realized by or from or through any such contract or
other transaction of the Corporation so authorized, ratified or approved, by
reason of such interest or his being or having been a director or officer, or
both, of the Corporation. Nothing herein contained shall create responsibility
or liability in or in connection with any such event or prevent the
authorization, ratification or approval of such contracts or other transactions
in any other manner permitted by law or by statute. This Section shall not be
construed to invalidate any contract or other transaction which would otherwise
be valid under the common or statutory law applicable thereto.
Section 3. Reliance Upon Books, Reports and Records. Neither a
director nor a member of any committee shall be liable if, in the exercise of
ordinary care, he relied and acted in good faith upon written financial
statements of the Corporation represented to him to be correct
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in all material respects by the President or by the officer of the Corporation
having charge of its books of account, or certified by an independent public or
certified public accountant or firm of such accountants fairly to reflect the
financial condition of the Corporation, nor shall he be so liable if, in the
exercise of ordinary care and in good faith, in determining the amount available
for payment of a distribution, he considered the assets of the Corporation to be
at least of their book value.
Section 4. Non-Liability of Directors and Officers in Certain Cases.
No director, officer or member of a committee shall be liable for his acts as
such if he is excused from liability under any present or future provision of
the Texas Business Corporation Act.
Section 5. Indemnification of Directors, Officers, Employees and
Agents.
(a) As used in this section:
(1) "Corporation" includes any domestic or foreign predecessor
entity of the Corporation in a merger, consolidation or other
transaction in which the liabilities of the predecessor are
transferred to the Corporation by operation of law and in any other
transaction in which the Corporation assumes the liabilities of the
predecessor but does not specifically exclude liabilities that are the
subject matter of this Section 5.
(2) "Director" means any person who is or was a director of the
Corporation and any person who, while a director of the Corporation,
is or was serving at the request of the Corporation as a director,
officer, partner, venturer, proprietor, trustee, employee or agent of
similar functionary of another foreign or domestic corporation,
partnership, joint venture, sole proprietorship, trust, employee
benefit plan or other enterprise.
(3) "Expenses" include court costs and attorneys' fees.
(4) "Official Capacity" means
(A) when used with respect to a Director, the office of
director in the Corporation, and
(B) when used with respect to a person other than a
Director, the elective or appointive office in the Corporation
held by the officer or the employment or agency relationship
undertaken by the employee or agent in behalf of the Corporation,
but in each case does not include service for any other foreign
or domestic corporation or any partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise.
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(5) "Proceeding" means any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative,
arbitrative, or investigative, any appeal in such an action, suit or
proceeding, and any inquiry or investigation that could lead to such
an action, suit or proceeding.
(b) The Corporation may indemnify any person who was, is or is
threatened to be made a named defendant or respondent in any Proceeding
because he is or was a Director only if it is determined in accordance with
paragraph (f) of this Section 5 that the person:
(1) conducted himself in good faith;
(2) reasonably believed:
(A) in the case of conduct in his Official Capacity as a
Director of the Corporation, that his conduct was in the
Corporation's best interests, and
(B) in all other cases, that his conduct was at least not
opposed to the Corporation's best interests; and
(3) in the case of any criminal Proceeding, had no reasonable
cause to believe his conduct was unlawful.
(c) Except to the extent permitted under subsection 5(e), a Director
shall not be indemnified under subsection 5(b) for obligations resulting
from a Proceeding:
(1) in which the person is found liable on the basis that
personal benefit was improperly received by him, whether or not the
benefit resulted from an action taken in the person's Official
Capacity; or
(2) in which the person is found liable to the Corporation.
(d) The termination of any Proceeding by judgment, order, settlement
or conviction, or upon a plea of nolo contendere or its equivalent shall
not, of itself, be determinative that the person did not meet the
requisite standard of conduct set forth in subsection 5(b). A person shall
be deemed to have been found liable in respect of any claim, issue or
matter only after the person shall have been adjudged by a court of
competent jurisdiction after exhaustion of all appeals therefrom.
(e) A person may be indemnified under section 5(b) against judgments,
penalties (including excise and similar taxes), fines, settlements and
reasonable Expenses actually incurred by the person in connection with the
Proceeding; but if the person is
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found liable to the Corporation or is found liable on the basis that
personal benefit was improperly received by the person, the indemnification
(i) is limited to reasonable Expenses actually incurred by the person in
connection with the Proceeding and (ii) shall not be made in respect of any
Proceedings in which the person shall have been found liable or willful or
intentional misconduct in the performance of his duty to the Corporation.
(f) No indemnification under subsection 5(b) shall be made by the
Corporation unless authorized in the specific case after a determination
has been made that the Director has met the standard of conduct set forth
in subsection 5(b). Such determination shall be made:
(1) by the Board of Directors by a majority vote of a quorum
consisting of directors who at the time of the vote are not named
defendants or respondents in the Proceeding;
(2) if such a quorum cannot be obtained, then by a majority vote
of a committee of the Board of Directors, designated to act in the
matter by a majority vote of the full Board of Directors (in which
vote directors who are named defendants or respondents may
participate), which committee shall consist solely of two or more
directors who at the time of the vote are not named defendants or
respondents to the Proceeding; or
(3) by special legal counsel, selected by the Board of Directors
or a committee thereof by vote as set forth in clauses (1) or (2) of
this subsection 5(f), or, if the requisite quorum of the full Board of
Directors cannot be obtained therefor and such a committee cannot be
established, by a majority vote of the full Board of Directors (in
which vote directors who are named defendants or respondents may
participate); or
(4) by the shareholders in a vote that excludes the shares held
by directors who are named defendants or respondents in the
Proceeding.
(g) Authorization of indemnification and determination as to
reasonableness of Expenses shall be made in the same manner as the
determination that indemnification is permissible, except that if the
determination that indemnification is permissible is made by special legal
counsel, authorization of indemnification and determination as to
reasonableness of Expenses shall be made in a manner specified in clause
(3) in subsection 5(f) for the selection of such counsel.
(h) A Director who has been wholly successful, on the merits or
otherwise, in the defense of any Proceeding in which he is a party because
he is a Director shall be indemnified by the Corporation against
reasonable Expenses incurred by him in connection with the Proceeding.
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(i) If upon application of a Director, a court of competent
jurisdiction determines that a Director is fairly and reasonably entitled
to indemnification in view of all the relevant circumstances, whether or
not he has met the requirements set forth in subsection 5(b) or has been
found liable in the circumstances described in subsection 5(c), the court
may order such indemnification as the court determines is proper and
equitable; but if the person is found liable to the Corporation or is found
liable on the basis that personal benefit was improperly received by the
person, the indemnification shall be limited to reasonable Expenses
actually incurred by the person in connection with the proceeding.
(j) Reasonable Expenses incurred by a Director who was, is, or is
threatened to be made a named defendant or respondent to a Proceeding may
be paid or reimbursed by the Corporation in advance of the final
disposition of such Proceeding after, and without the determination
specified in subsection 5(f) or the authorization or determination
specified in subsection 5(g), receipt by the Corporation of a written
affirmation by the Director of his good faith belief that he has met the
standard of conduct necessary for indemnification by the Corporation as
authorized in this Section 5, and a written undertaking by or on behalf of
the Director to repay the amount paid or reimbursed if it shall ultimately
be determined that he has not met such standard of conduct or if it is
ultimately determined that indemnification of the director against Expenses
incurred by him in connection with that Proceeding is prohibited by
subsection 5(e).
(k) The written undertaking required by subsection (j) must be an
unlimited general obligation of the Director but need not be secured. It
may be accepted without reference to financial ability to make repayment.
(l) The indemnification provided by this Section 5 shall not be deemed
exclusive of any other rights to which those indemnified may be entitled
under any statute, Bylaw, agreement, insurance policy, vote of shareholders
or disinterested directors or otherwise, both as to action in their
Official Capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a Director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person; provided, however, no
provision for the Corporation to indemnify or to advance Expenses to a
Director who was, is or is threatened to be made a named defendant or
respondent to a Proceeding, whether contained in the Articles of
Incorporation, these Bylaws, a resolution of shareholders or directors, an
agreement or otherwise (except as contemplated by subsection (q)), shall be
valid unless consistent with this section or, to the extent that indemnity
hereunder is limited by the Articles of Incorporation, consistent
therewith.
(m) Nothing contained in this Section shall limit the Corporation's
power to pay or reimburse Expenses incurred by a Director in connection
with his appearance as a witness in a Proceeding at a time when he is not a
named defendant or respondent in the Proceeding.
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(n) Unless limited by the Articles of Incorporation of the
Corporation,
(1) an officer of the Corporation shall be indemnified as and to
the same extent provided in subsections (h) and (i) for a Director and
shall be entitled to the same extent as a Director to seek
indemnification pursuant to the provisions of those subsections; and
(2) the Corporation may indemnify and advance Expenses to an
officer, employee or agent of the Corporation to the same extent that
it may indemnify and advance Expenses to Directors pursuant to this
Section 5.
(o) The Corporation may indemnify and advance Expenses to persons who
are not or were not officers, employees, or agents of the Corporation who
are or were serving at the request of the Corporation as a director,
officer, partner, venturer, proprietor, trustee, employee, agent or similar
functionary of another foreign or domestic corporation, partner ship,
joint venture, sole proprietorship, trust, other enterprise, or employee
benefit plan to the same extent that it may indemnify and advance expenses
to Directors under this Section 5.
(p) The Corporation, in addition, may indemnify and advance Expenses
to an officer, employee or agent or person who is identified by subsection
5(p) as a nominee or designee and who is not a Director to such further
extent, consistent with law, as may be provided by the Articles of
Incorporation of the Corporation, these Bylaws, general or specific action
of the Board of Directors, or contract or as permitted or required by
common law.
(q) The Corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
Corporation, or who is or was serving at the request of the Corporation as
a director, officer, partner, venturer, proprietor, trustee, employee,
agent or similar functionary of another foreign or domestic corporation,
partnership, joint venture, sole proprietorship, trust, other enterprise or
employee benefit plan, or other enterprise against any liability asserted
against him and incurred by him in any such capacity or arising out of his
status as such a person, whether or not the Corporation would have the
power to indemnify him against such liability under the provisions of the
Act or this Section 5. If the insurance of other arrangement is with a
person or entity that is not regularly engaged in the business of providing
insurance coverage, the insurance or arrangement may provide for payment of
a liability with respect to which the Corporation would not have the power
to indemnify the person only if including coverage for the additional
liability has been approved by the shareholders of the Corporation. The
Corporation may, for the benefit of persons indemnified by the Corporation,
(i) create a trust fund; (ii) establish any form of self-insurance; (iii)
secure its indemnity obligation by grant of a security interest or other
lien on the assets of the Corporation; or (iv) establish a letter of
credit, guarantee or surety arrangement. The
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insurance or other arrangement may be procured, maintained or established
within the Corporation or with any insurer or other person deemed
appropriate by the Board of Directors regardless of whether all or part of
the stock or other securities of the insurer or other person are owned in
whole or part by the Corporation.
(r) Any indemnification of, or advance of Expenses to a Director in
accordance with this Section shall be reported in writing to the
shareholders with or before the notice or waiver of notice of the next
shareholders' meeting or with or before the next submission to shareholders
of a consent to action without a meeting pursuant to Section A, Article
9.10 of the Act, and in any case, within the 12-month period immediately
following the date of the indemnification or advance.
(s) For purposes of this Section 5, the Corporation shall be deemed to
have requested a Director to serve an employee benefit plan whenever the
performance by him of his duties to the Corporation also imposes duties on,
or otherwise involves services by, him to the plan or participants or
beneficiaries of the plan. Excise taxes assessed on a Director with
respect to an employee benefit plan pursuant to applicable law shall be
deemed "fines". Action taken or omitted by him with respect to an employee
benefit plan in the performance of his duties for a purpose reasonably
believed by him to be in the interest of the participants and beneficiaries
of the plan shall be deemed to be for a purpose which is not opposed to the
best interests of the Corporation.
ARTICLE V
BOARD COMMITTEES
The Board of Directors, by resolution adopted by a majority of the
full Board of Directors, may designate from among its members an Executive
Committee and one or more other committees, each of which, to the extent
provided in such resolution or in the Articles of Incorporation or in these
Bylaws, shall have and may exercise all of the authority of the Board of
Directors, except that no such committee shall have the authority of the Board
of Directors in reference to (1) amending the Articles of Incorporation, (2)
proposing a reduction of the stated capital of the Corporation, (3) approving a
plan of merger, share exchange or consolidation, (4) recommending to the
shareholders the sale, lease or exchange of all or substantially all of the
property and assets of the Corporation otherwise than in the usual and regular
course of its business, (5) recommending to the shareholders a voluntary
dissolution of the Corporation or a revocation thereof, (6) amending, altering
or repealing these Bylaws or adopting new Bylaws for the Corporation, (7)
filling vacancies in the Board of Directors or any such committee, (8) filling
any directorship to be filled by reason of an increase in the number of
directors, (9) electing or removing officers or members of any such committee,
(10) fixing the compensation of any member of such committee, or (11) altering
or repealing any resolution of the Board of Directors which by its terms
provides that it shall not be so amendable or repealable; and, unless such
resolution
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or the Articles of Incorporation expressly so provide, no such committee shall
have the power and authority to authorize a distribution or share dividend or to
authorize the issuance of shares of the Corporation. A majority of all the
members of any such committee may determine its action and fix the time and
place of its meetings, unless the Board of Directors shall otherwise provide. At
every meeting of any such committee, the presence of a majority of all the
members thereof shall constitute a quorum and the affirmative vote of a majority
of the members present shall be necessary for the adoption by it of any
resolution. The Board of Directors shall have power at any time to change the
number and members of any such committee, to fill vacancies and to discharge any
such committee. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of such committee. In the absence or disqualification of
a member of a committee, the member or members present at any meeting and not
disqualified from voting, whether or not constituting a quorum, may unanimously
appoint another member of the Board of Directors to act at the meeting in the
place of the absent or disqualified member. The designation of such committee
and the delegation thereto of authority shall not operate to relieve the Board
of Directors, or any member thereof, of any responsibility imposed by law.
ARTICLE VI
OFFICERS
Section 1. Principal Officers. The officers of the Corporation shall
be chosen by the Board of Directors. The officers shall be a President, one or
more Vice Presidents, a Secretary, a Treasurer and such number of Assistant
Secretaries and Assistant Treasurers as the Board may from time to time
determine or elect and if elected and so designated by the Board of Directors, a
Chairman of the Board. Any person may hold two or more offices at the same time.
Section 2. Additional Officers. The Board may appoint such other
officers and agents as it shall deem necessary.
Section 3. Terms of Officers. Each officer shall hold his office until
his successor shall have been duly elected and qualified or until his death or
until he shall resign or shall have been removed in the manner hereinafter
provided.
Section 4. Salaries. The salaries or other compensation of the
officers and agents of the Corporation shall be fixed from time to time by the
Board of Directors.
Section 5. Removal. Any officer or agent or member of any committee
elected or appointed by the Board of Directors may be removed by the Board of
Directors whenever in its judgment the best interests of the Corporation will be
served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or
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appointment of an officer or agent or member of any committee shall not of
itself create contract rights.
Section 6. Vacancies. A vacancy in the office of any officer may be
filled by the vote of a majority of the directors then in office.
Section 7. Powers and Duties of Officers. The officers so chosen shall
perform the duties and exercise the powers expressly conferred or provided for
in these Bylaws, as well as the usual duties and powers incident to such office,
respectively, and such other duties and powers as may be assigned to them by the
Board of Directors or by the President.
Section 8. Chairman of the Board. The Board of Directors may select
from among its members a Chairman of the Board who may, if so elected, preside
at all meetings of the Board of Directors and approve the minutes of all
proceedings thereat, and he shall be available to consult with and advise the
officers of the Corporation with respect to the conduct of the business and
affairs of the Corporation and shall have such other powers and duties as
designated in accordance with these Bylaws and as from time to time may be
assigned to him by the Board of Directors.
Section 9. The President. The President, subject to the control of the
Board of Directors, shall be the chief executive officer of the Corporation
unless the Board of Directors designates the Chairman of the Board as chief
executive officer. Subject to the control of the Board of Directors, the chief
executive officer shall have general executive charge, management and control of
the affairs, properties and operations of the Corporation in the ordinary course
of its business, with all such duties, powers and authority with respect to such
affairs, properties and operations as may be reasonably incident to such
responsibilities; he may appoint or employ and discharge employees and agents of
the Corporation and fix their compensation; he may make, execute, acknowledge
and deliver any and all contracts, leases, deeds, conveyances, assignments,
bills of sale, transfers, releases and receipts, any and all mortgages, deeds of
trust, indentures, pledges, chattel mortgages, liens and hypothecations, and any
and all bonds, debentures, notes, other evidences of indebtedness and any and
all other obligations and encumbrances and any and all other instruments,
documents and papers of any kind or character for and on behalf of and in the
name of the Corporation, and, with the Secretary or an Assistant Secretary, he
may sign all certificates for shares of the capital stock of the Corporation;
he shall do and perform such other duties and have such additional authority and
powers as from time to time may be assigned to or conferred upon him by the
Board of Directors.
Section 10. Vice Presidents. In the absence of the President or in the
event of his disability or refusal to act, the Vice President (or in the event
there be more than one Vice President, the Vice Presidents in the order
designated, or in the absence of any designation, then in the order of their
election) shall perform the duties of the President, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
President. Any Vice President shall perform such other duties as may be assigned
to him by the President or by the
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Board of Directors of the Corporation. Any action taken by a Vice President in
the performance of the duties of the President shall be conclusive evidence of
the absence or inability to act of the President at the time such action was
taken.
Section 11. Treasurer. The Treasurer shall have custody of all funds
and securities of the Corporation which come into his hands. When necessary or
proper, he may endorse on behalf of the Corporation, for collection, checks,
notes and other obligations and shall deposit the same to the credit of the
Corporation in such banks or depositories as shall be selected or designated by
or in the manner prescribed by the Board of Directors. He may sign all receipts
and vouchers for payments made to the Corporation, either alone or jointly with
such officer as may be designated by the Board of Directors. Whenever required
by the Board of Directors he shall render a statement of his cash account. He
shall enter or cause to be entered, punctually and regularly, on the books of
the Corporation to be kept by him or under his supervision or direction for that
purpose, full and accurate accounts of all moneys received and paid out by, for
or on account of the Corporation. He shall at all reasonable times exhibit his
books and accounts and other financial records to any director of the
Corporation during business hours. He shall have such other powers and duties as
may be conferred upon or assigned to him by the Board of Directors. The
Treasurer shall perform all acts incident to the position of Treasurer subject
always to the control of the chief executive officer and the Board of Directors.
He shall, if required by the Board of Directors, give such bond for the faithful
discharge of his duties in such form and amount as the Board of Directors may
require.
Section 12. Assistant Treasurers. Each Assistant Treasurer shall have
the usual powers and duties pertaining to his office, together with such other
powers and duties as may be conferred upon or assigned to him by the Board of
Directors. The Assistant Treasurers shall have and exercise the powers of the
Treasurer during that officer's absence or inability or refusal to act.
Section 13. Secretary. The Secretary (1) shall keep the minutes of all
meetings of the Board of Directors and the minutes of all meetings of the
shareholders, in books provided for that purpose, (2) shall attend to the giving
and serving of all notices, (3) may sign with the President or a Vice President
in the name of the Corporation and/or attest the signature of either to, all
contracts, conveyances, transfers, assignments, encumbrances, authorizations and
all other instruments, documents and papers, of any and every description
whatsoever, of or executed for or on behalf of the Corporation and affix the
seal of the Corporation thereto, (4) may sign with the President or a Vice
President all certificates for shares of the capital stock of the Corporation
and affix the corporate seal of the Corporation thereto, (5) shall have charge
of and maintain and keep or supervise and control the maintenance and keeping of
the stock certificate books, transfer books and stock ledgers and such other
books and papers as the Board of Directors may authorize, direct or provide for,
all of which shall at all reasonable times be open to the inspection of any
director, upon request, at the office of the Corporation during business hours,
(6) shall in general perform all the duties incident to the office of Secretary,
subject to the control of the chief executive officer and the Board of
Directors, and (7) shall have such other powers and duties as may be conferred
upon or assigned to him by the Board of Directors.
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Section 14. Assistant Secretaries. Each Assistant Secretary shall have
the usual powers and duties pertaining to his office, together with such other
powers and duties as may be conferred upon or assigned to him by the Board of
Directors or the Secretary. The Assistant Secretaries shall have and exercise
the powers of the Secretary during that officer's absence or inability or
refusal to act.
Section 15. Securities of Other Corporations. The President or any
Vice President or the Secretary or the Treasurer of the Corporation shall have
power and authority to transfer, endorse for transfer, vote, consent or take any
other action with respect to any securities of another issuer which may be held
or owned by the Corporation and to make, execute and deliver any waiver, proxy
or consent with respect to any such securities and otherwise to exercise any and
all rights and powers which the Corporation may possess by reason of its
ownership of securities in such other corporation.
ARTICLE VII
BOOKS, DOCUMENTS AND ACCOUNTS
The Corporation shall keep correct and complete books and records of
account and shall keep minutes of the proceedings of its shareholders, its Board
of Directors and each committee of its Board of Directors. The Board of
Directors shall have power to keep the books, documents and accounts of the
Corporation outside of the State of Texas. A record of the shareholders of the
Corporation, giving the names and addresses of all past and current shareholders
and the number and class of shares held by each shall be kept at its registered
office or principal place of business, or at the office of the transfer agent or
registrar.
ARTICLE VIII
CAPITAL STOCK
Section 1. Stock Certificates. The certificates for shares of the
capital stock of the Corporation shall be in such form, not inconsistent with
that required by law and the Articles of Incorporation, as shall be approved by
the Board of Directors. They shall be consecutively numbered and shall be
entered in the books of the Corporation as they are issued and shall exhibit the
holder's name and the number of shares. Every holder of stock in the Corporation
shall be entitled to have a certificate signed by, or in the name of, the
Corporation by the President or a Vice President and either the Secretary or an
Assistant Secretary of the Corporation, certifying the number of shares (and, if
the stock of the Corporation shall be divided into classes or series, the class
and series of such shares) owned by him in the Corporation, with the seal of the
Corporation or a facsimile thereof impressed or printed thereon. Where any such
certificate is countersigned by a transfer agent or registered by a registrar,
either of which is other
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than the Corporation itself or an employee of the Corporation, the signatures of
the President or Vice President and the Secretary or Assistant Secretary upon a
certificate may be facsimiles, engraved or printed. In case any officer who
shall have signed or whose facsimile signature shall have been placed on any
such certificate shall have ceased to be such officer of the Corporation,
whether because of death, resignation or otherwise, before such certificate is
issued, such certificate may nevertheless be issued and delivered by the
Corporation with the same effect as if the person were such officer at the date
of its issuance.
Section 2. Transfers. Stock of the Corporation shall be transferable
in the manner prescribed by the laws of the State of Texas and in these Bylaws.
Transfers of stock shall be made on the books of the Corporation only by the
person named in the certificate, or by his attorney-in-fact or legal
representative, duly and lawfully authorized in writing, and upon the surrender
of the certificate therefor, which shall be cancelled before the new certificate
for a like number of shares shall be issued. Upon surrender to the Corporation
or a transfer agent of the Corporation of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
The Board of Directors may appoint a transfer agent or a registrar for
each class of stock, and may require all stock certificates to bear the
signature of such transfer agent and of such registrar or either of them. The
stock record books and the blank stock certificate books shall be kept by the
Secretary, or at the office of such transfer agent or transfer agents as the
Board of Directors may from time to time by resolution determine.
Section 3. Registered Holders. Unless otherwise provided by the Act
and subject to applicable law, the Corporation shall be entitled to regard the
person in whose name any shares or warrants, rights or options are registered in
the share transfer records of the Corporation at any particular time as the
owner thereof at that time for all purposes and shall not be bound to recognize
any equitable or other claim to, or interest in, such share, warrant, right or
option on the part of any other person, whether or not the Corporation shall
have notice thereof, save as may be expressly provided otherwise by the laws of
the State of Texas.
Section 4. New Certificates. The Corporation may, in its sole
discretion, issue a new certificate for shares of its stock in the place of any
certificate theretofore issued by it, alleged to have been lost or destroyed,
and the Board of Directors may, in its discretion, require the owner of the lost
or destroyed certificate, or his legal representative, to give the Corporation
such statement under oath or other evidence of such loss or destruction as the
Board may desire, and a bond in form, amount and with such surety as the Board
of Directors may prescribe or determine, and sufficient, in the sole judgment of
the Board, to indemnify and protect the Corporation against any and all claims,
liabilities, costs and expenses that may be made or asserted against it or which
it may suffer or incur or pay, on account of the alleged loss of any
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such certificate or the issuance of such new certificate. A new certificate may
be issued without requiring any bond when, in the sole discretion of the Board,
it is proper so to do.
Section 5. Distributions. The Board of Directors may authorize such
distributions or share dividends as the Board deems expedient and as permitted
by law under the provisions of the Act. Before declaring any distribution there
may be reserved out of the Corporation's surplus such sums as the Board of
Directors deems proper for working capital or as a reserve fund to meet
contingencies or for equalizing distributions, or for such other purposes as the
Board may deem conducive to the interests of the Corporation, and the Board may
abolish any such reserve in the manner in which it was created.
Section 6. Record Dates and Closing of Transfer Books. For the purpose
of determining shareholders entitled to notice of or to vote at any meeting of
shareholders or any adjournment thereof, or entitled to receive a distribution
by the Corporation (other than a distribution involving a purchase or redemption
by the Corporation of any of its own shares) or a share dividend, or in order to
make a determination of shareholders for any other proper purpose (other than
shareholders entitled to consent to action by shareholders proposed to be taken
without a meeting of shareholders), the Board of Directors of the Corporation
may provide that the share transfer books shall be closed for a stated period
but not to exceed, in any case, sixty (60) days. If the share transfer records
shall be closed for the purpose of determining shareholders entitled to notice
of or to vote at a meeting of shareholders, such records shall be closed for at
least ten (10) days immediately preceding such meeting. In lieu of closing the
share transfer records, the Board of Directors may fix in advance a date as the
record date for any such determination of shareholders, such date in any case to
be not more than sixty (60) days and, in case of a meeting of shareholders, not
less than ten (10) days prior to the date on which the particular action
requiring such determination of shareholders is to be taken. If the share
transfer records are not closed and no record date is fixed for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders, or shareholders entitled to receive a distribution by the
Corporation (other than a distribution involving a purchase or redemption by the
Corporation of any of its own shares) or a share dividend, the date on which the
notice of the meeting is mailed or the date on which the resolution of the Board
of Directors declaring such distribution or share dividend is adopted, as the
case may be, shall be the record date for such determination of shareholders.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided herein, such determination shall apply to
any adjournment thereof except where the determination has been made through the
closing of share transfer records and the stated period of closing has expired.
Unless a record date shall have previously been fixed or determined
pursuant to this Section, whenever action by shareholders is proposed to be
taken by consent in writing without a meeting of shareholders, the Board of
Directors may fix a record date for the purpose of determining shareholders
entitled to consent to that action, which record date shall not precede, and
shall not be more than ten (10) days after, the date upon which the resolution
fixing the record date is adopted by the Board of Directors. If no record date
has been fixed by the Board of
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Directors and the prior action of the Board of Directors is not required by the
Act, the record date for determining shareholders entitled to consent to action
in writing without meeting shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to
the Corporation by delivery to its registered office, its principal place of
business, or an officer or agent of the Corporation having custody of the books
in which proceedings of meetings of shareholders are recorded. Delivery shall be
by hand or by certified or registered mail, return receipt requested. Delivery
to the Corporation's principal place of business shall be addressed to the
President or the principal executive officer of the Corporation. If no record
date shall have been fixed by the Board of Directors and prior action of the
Board of Directors is required by the Act, the record date for determining
shareholders entitled to consent to action in writing without a meeting shall be
at the close of business on the date on which the Board of Directors adopts a
resolution taking such prior action.
Section 7. Regulations. The Board of Directors shall have power and
authority to make all such rules and regulations as they may deem expedient
concerning the issue, transfer and registration or the replacement of
certificates for shares of the capital stock of the Corporation.
ARTICLE IX
MISCELLANEOUS PROVISIONS
Section 1. Fiscal Year. The fiscal year of the Corporation shall be
such as the Board of Directors shall, by resolution, provide or establish or
such as the President shall determine subject to approval of the Board.
Section 2. Seal. The seal of the Corporation shall be in such form as
the Board of Directors shall prescribe, and may be used by causing it or a
facsimile thereof to be impressed, or printed, or reproduced or in any other
manner affixed. The Secretary shall have charge of the seal. If and when so
directed by the Board of Directors, duplicates of the seal may be kept and used
by the Treasurer or by the Assistant Secretary or Assistant Treasurer.
Section 3. Notice and Waiver of Notice. Whenever any notice is
required to be given to any shareholder or director under the provisions of the
Act or under the provisions of these Bylaws or the Articles of Incorporation of
the Corporation, said notice shall be deemed to be sufficient if given by
depositing the same in a post office box in a sealed post-paid wrapper addressed
to the person entitled thereto at his post office address as same appears on the
books or other records of the Corporation, and such notice shall be deemed to
have been given on the day of such mailing, but said notice shall also be deemed
to be sufficient and to have been given and received if given in any other
manner or by any other means authorized or provided for elsewhere in these
Bylaws. A written waiver of notice, signed by the person or persons entitled to
such notice, whether before or after the time stated therein, shall be
equivalent to the giving of such notice.
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Section 4. Resignations. Any director or officer may resign at any
time. Each such resignation shall be made in writing and shall take effect at
the time specified therein, or, if no time be specified, at the time of its
receipt by either the Board of Directors or the President or the Secretary. The
acceptance of a resignation shall not be necessary to make it effective, unless
expressly so provided in the resignation.
Section 5. Depositories. Funds of the Corporation not otherwise
employed shall be deposited in such banks or other depositories as either the
Board of Directors or the President or the Treasurer may select or approve.
Section 6. Signing of Checks, Notes, Etc. In addition to and
cumulative of, but in nowise limiting or restricting, any other provision of
these Bylaws which confer any authority relative thereto, all checks, drafts
and other orders for the payment of money out of funds of the Corporation and
all notes and other evidences of indebtedness of the Corporation shall be signed
on behalf of the Corporation, in such manner, and by such officer or person as
shall be determined or designated by the Board of Directors; provided, however,
that if, when, after and as authorized or provided for by the Board of
Directors, the signature of any such officer or person may be facsimile or
engraved or printed, and shall have the same force and effect and bind the
Corporation as though such officer or person had signed the same personally,
and, in the event of the death, disability, removal or resignation of any such
officer or person, if the Board of Directors shall so determine or provide, as
though and with the same effect as if such death, disability, removal or
resignation had not occurred.
Section 7. Gender and Number. Wherever used or appearing in these
Bylaws, pronouns of the masculine gender shall include the persons of the female
sex as well as the neuter gender and the singular shall include the plural
wherever appropriate.
Section 8. Laws and Statutes. Wherever used or appearing in these
Bylaws, the words "law" or "laws" or "statute" or "statutes," respectively,
shall mean and refer to laws and statutes, or a law or a statute, of the State
of Texas, to the extent only that such is or are expressly applicable, except
where otherwise expressly stated or the context requires that such words not be
so limited.
Section 9. Headings. The headings of the Articles and Sections of
these Bylaws are inserted for convenience of reference only and shall not be
deemed to be a part thereof or used in the construction or interpretation
thereof.
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ARTICLE X
AMENDMENTS
These Bylaws may, from time to time, be added to, changed, altered,
amended or repealed or new Bylaws may be made or adopted by the Board of
Directors at any meeting of the Board of Directors, subject to repeal or change
by action of the shareholders at any meeting of the shareholders, unless the
power to alter, amend or repeal the Bylaws is reserved to the shareholders in
the Articles of Incorporation of the Corporation.
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EXHIBIT D
EXCERPTS FROM SECTION 215A OF THE NATIONAL BANK ACT CONCERNING DISSENTERS'
RIGHTS.
UNITED STATES CODE
TITLE 12. BANKS AND BANKING
CHAPTER 2 -- NATIONAL BANKS
SUBCHAPTER XVI -- CONSOLIDATION AND MERGER
SECTION 215A. MERGER OF NATIONAL BANKS OR STATE BANKS INTO NATIONAL BANKS
(a) Approval of Comptroller, board and shareholders; merger agreement;
notice; capital stock; liability of receiving association
[Omitted]
(b) Dissenting shareholders
If a merger shall be voted for at the called meetings by the necessary
majorities of the shareholders of each association or State bank participating
in the plan of merger, and thereafter the merger shall be approved by the
Comptroller, any shareholder of any association or State bank to be merged into
the receiving association who has voted against such merger at the meeting of
the association or bank of which he is a stockholder, or has given notice in
writing at or prior to such meeting to the presiding officer that he dissents
from the plan of merger, shall be entitled to receive the value of the shares so
held by him when such merger shall be approved by the Comptroller upon written
request made to the receiving association at any time before thirty days after
the date of consummation of the merger, accompanied by the surrender of his
stock certificates.
(c) Valuation of shares
The value of the shares of any dissenting shareholder shall be ascertained,
as of the effective date of the merger, by an appraisal made by a committee of
three persons, composed of (1) one selected by the vote of the holders of the
majority of the stock, the owners of which are entitled to payment in cash; (2)
one selected by the directors of the receiving association; and (3) one selected
by the two so selected. The valuation agreed upon by any two of the three
appraisers shall govern. If the value so fixed shall not be satisfactory to any
dissenting shareholder who has requested payment, that shareholder may, within
five days after being notified of the appraised value of his shares, appeal to
the Comptroller, who shall cause a reappraisal to be made which shall be final
and binding as to the value of the shares of the appellant.
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(d) Application to shareholders of merging associations; appraisal by
Comptroller; expenses of receiving association; sale and resale of shares;
State appraisal and merger law
If, within ninety days from the date of consummation of the merger, for any
reason one or more of the appraisers is not selected as herein provided, or the
appraisers fail to determine the value of such shares, the Comptroller shall
upon written request of any interested party cause an appraisal to be made which
shall be final and binding on all parties. The expenses of the Comptroller in
making the reappraisal or the appraisal, as the case may be, shall be paid by
the receiving association. The value of the shares ascertained shall be promptly
paid to the dissenting shareholders by the receiving association. The shares of
stock of the receiving association which would have been delivered to such
dissenting shareholders had they not requested payment shall be sold by the
receiving association at an advertised public auction, and the receiving
association shall have the right to purchase any of such shares at such public
auction, if it is the highest bidder therefor, for the purpose of reselling such
shares within thirty days thereafter to such person or persons and at such price
not less than par as its board of directors by resolution may determine. If the
shares are sold at public auction at a price greater than the amount paid to the
dissenting shareholders, the excess in such sale price shall be paid to such
dissenting shareholders. The appraisal of such shares of stock in any State
bank shall be determined in the manner prescribed by the law of the State in
such cases, rather than as provided in this section, if such provision is made
in the State law; and no such merger shall be in contravention of the law of the
State under which such bank is incorporated. The provisions of this subsection
shall apply only to the shareholders of (and stock owned by them in) a bank or
association being merged into the receiving association.
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PART II
All capitalized terms used and not defined in Part II of this Registration
Statement shall have the meanings assigned to them in the Prospectus which forms
a part of this registration statement.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses of the offering are estimated to be as follows:
SEC registration fee......................................... $23,296.62
Nasdaq listing fee........................................... *
Legal fees and expenses...................................... *
Accounting fees and expenses................................. *
Blue Sky fees and expenses (including legal fees)............ *
Printing and engraving expenses.............................. *
Transfer Agent fees.......................................... *
Miscellaneous................................................ *
----------
TOTAL................................................. $ *
==========
_________
* To be supplied by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Articles of Incorporation of the Registrant provide that its directors
and officers may be indemnified against any costs and expenses, including
counsel fees, actually and necessarily incurred (or reasonably expected to be
incurred) in connection with the defense of any civil, criminal, administrative
or other claim, action, suite or proceedings (whether by or in the right of the
Registrant or otherwise) in which he may become involved or with which he may be
threatened, by reason of his being or having been such a director or officer,
and against any payments in settlement of any such claim, action, suit or
proceeding or in satisfaction of any related judgment, fine or penalty, provided
that the Board of Directors of the Registrant shall, in the exercise of its
business judgment, determine that such indemnification is in the best interest
of the Registrant.
The Registrant's Bylaws provide for indemnification of directors and
officers to the full extent permitted by law. In the case of a derivative or
other action by or in the right of the Registrant where a director is found
liable, indemnity is predicated on the determination that indemnification is
nevertheless appropriate, by majority vote of a committee of disinterested
directors or by independent legal counsel.
Under the Texas Business Corporation Act ("the TBCA"), directors, officers,
employees or agents are entitled to indemnification against expenses (including
attorneys' fees) whenever they successfully defend legal proceedings brought
against them by reason of the fact that they hold such a position with the
corporation. In addition, with respect to actions not brought by or in the
right of the corporation, indemnification is permitted under the TBCA for
expenses (including attorneys' fees), judgments, fines, penalties and reasonable
settlement if it is determined that the persons seeking indemnification acted in
good faith and in a manner he or she reasonably believed to be in or not opposed
to the best interests of the corporation or its shareholders and, with respect
to criminal proceedings he or she had no reasonable cause to believe that his or
her conduct was unlawful. With respect to actions brought by or in the right
<PAGE>
of the corporation, indemnification is permitted under the TBCA for expenses
(including attorneys' fees) and reasonable settlements, if it is determined that
the person seeking indemnification acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
corporation or its shareholders; provided, indemnification is not permitted if
the person is found liable to the corporation, unless the court in which the
action or suit was brought has determined that indemnification is fair and
reasonable in view of all the circumstances of the case.
The Registrant may provide liability insurance for each director and
officer for certain losses arising from claims or charges made against them
while acting in their capacities as directors or officers of the Registrant,
whether or not the Registrant would have the power to indemnify such person
against such liability, as permitted by law.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
2.1 -- Plan and Agreement of Merger dated as of April ___, 1998 among CNBT
Bancshares, Inc., Citizens National Bank of Texas, and Citizens
Bank, National Association [incorporated by reference herein and
filed as Exhibit A to the Proxy Statement and Prospectus included in
this Registration Statement].
3.1 -- Articles of Incorporation of CNBT Bancshares, Inc. [incorporated by
reference herein and filed as Exhibit B to the Proxy Statement and
Prospectus included in this Registration Statement].
3.2 -- Bylaws of CNBT Bancshares, Inc.[incorporated by reference herein and
filed as Exhibit C to the Proxy Statement and Prospectus included in
this Registration Statement].
5.1 -- Opinion of Snell & Smith, A Professional Corporation, as to the
legality of the securities being registered.
8.1 -- Opinion of Snell & Smith, A Professional Corporation, as to certain
tax matters.
23.1 -- Consent of Mann Frankfort Stein & Lipp, P.C.
23.2 -- Consent of Snell & Smith, A Professional Corporation (included in
Exhibit 5.1)
24.1 -- Powers of Attorney (included on the signature page to this
Registration Statement).
99.1 -- Annual Report on Form 10-K for the year ended December 31, 1997, of
Citizens National Bank of Texas.
99.2 -- Form of proxy card.
99.3 -- Section 215a of the National Bank Act [incorporated by reference
herein and filed as Exhibit D to the Proxy Statement and Prospectus
included in this Registration Statement].
_____________
* To be supplied by amendment
II-2
<PAGE>
(b) Financial Statement Schedules:
None.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement.
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
Provided, however, that paragraph (a)(1)(i) and (a)(1)(ii) shall not apply
if the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
(c)(1) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is part of this registration statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
Items of the applicable form.
(2) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (c)(1) immediately preceding, or (ii) that purports to
meet the requirements of section 10(a)(3) of the Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed 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.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim or
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.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registrations statement through
the date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 16 of the Regulations of the Office
of the Comptroller of the Currency, the Registrant has duly cause this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Houston, Texas, on April 14, 1998.
Citizens National Bank of Texas
By /s/ Ralph Williams
-------------------------------------
Ralph Williams, President and Chief
Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints B. Ralph Williams and Randall W. Dobbs, or any of
them, his true and lawful attorney-in-fact and agent, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same with all exhibits thereto,
and other documents in connection therewith, with the Office of the Comptroller
of the Currency, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and ratifying
and confirming all that said attorney-in-fact and agent or his substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
II-5
<PAGE>
Pursuant to Section 16 of the Regulations of the Office of the Comptroller
of the Currency, this Registration Statement has been signed below by the
following persons in the capacities stated and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Frank G. Cook
- --------------------- Chairman of the Board April 14, 1997
Frank G. Cook (Chief Financial Officer)
/s/ B. Ralph Williams
- --------------------- President, Chief Executive April 14, 1997
B. Ralph Williams Officer, and Director
/s/ Randall W. Dobbs
- -------------------- Executive Vice President, April 14, 1998
Randall W. Dobbs Chief Operations Officer
and Director (Chief
Accounting Officer)
II-6
<PAGE>
Exhibits 5.1 and 23.2
[Snell & Smith, P.C. Letterhead]
April 14, 1998
CNBT Bancshares, Inc.
5320 Bellaire Boulevard
Bellaire, Texas 77401
Ladies and Gentlemen:
You propose to file today with the Securities and Exchange Commission a
registration statement on Form S-4 (the "Registration Statement") relating to
5,054,181 shares of the Common Stock, $1.00 par value (the "Common Stock"), of
CNBT Bancshares, Inc., a Texas corporation (the "Company") to be issued pursuant
to the Agreement and Plan of Merger dated as of April __, 1998, between the
Company, Citizens National Bank of Texas (the "Bank") and Citizens Bank, N.A.,
(the "Agreement"), by which the Bank will be reorganized under a one-bank
holding company structure (the "Reorganization"). Under the Agreement, the
Company will issue shares of its stock on a one-for-one exchange basis on the
Effective Date of the Reorganization.
We have been requested to furnish an opinion regarding certain legal
matters to be included as an exhibit to the Registration Statement. The opinion
set out below is rendered as of the date hereof and its applicability on any
future date is conditioned upon the nonoccurrence of any event which would
affect the validity of the issuance of Common Stock covered by the Registration
Statement.
In connection with this opinion, we have examined such records and
documents as we have deemed relevant and necessary in order to render this
opinion.
We are of the opinion that the shares of Common Stock of the Company that
may be issued under the Reorganization and that are the subject of the
Registration Statement, when issued for the consideration provided for and in
the manner and under the conditions set forth in the Agreement and the
instruments under which they are granted, will be validly issued, fully paid,
and nonassessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to all references to our Firm included in the Registration
Statement and in the Proxy Statement and Prospectus..
Very truly yours,
/s/ SNELL & SMITH, A Professional
Corporation
<PAGE>
Exhibit 8.1
April ___, 1998
Citizens National Bank of Texas
5320 Bellaire Blvd.
Bellaire, Texas 77401
Reorganization of Citizens National Bank of Texas
into a One-Bank Holding Company Structure
Ladies and Gentlemen:
You have requested our opinion as to certain federal income tax
consequences with respect to the consummation of the proposed merger of Citizens
National Bank of Texas, a national banking corporation (the "Bank"), into
Citizens Bank, N.A., an interim nationally chartered bank recently organized
(the "Interim Bank"), pursuant to the terms and conditions of the Agreement and
Plan of Merger dated as of April __, 1998 (the "Agreement"), by and among the
Bank, the Interim Bank, and CNBT Bancshares, Inc., a proposed bank-holding
company organized under the laws of Texas (the "Holding Company").
Pursuant to the Agreement and subject to various regulatory approvals, the
Bank will be merged with and into the Interim Bank under the charter of the
latter and in accordance with the provisions of, and the National Bank Act and
regulations promulgated thereunder with the effect provided therein (the
"Reorganization"). The bank resulting from the Reorganization will be a wholly-
owned subsidiary of the Holding Company and will conduct its business in
substantially the same manner as the Bank had done before the Reorganization.
At the effective date of the Reorganization, each outstanding share of
common stock, @.03 par value, of the Bank ("Bank Common Stock") will be
exchanged for and converted into one share of common stock, $1.00 par value, of
the Holding Company ("Holding Company Common Stock").
In connection with the preparation of this opinion, we have examined such
documents concerning the Reorganization as we have deemed necessary. We have
based our conclusions on the Internal Revenue Code of 1986, as amended (the
"Code"), and the regulations promulgated pursuant thereto, each as amended from
time to time and existing on the date hereof, as well as existing judicial and
administrative interpretations thereof.
As to various questions of fact material to our opinion, we have relied
upon the representations made in the Agreement and in the Proxy Statement and
Prospectus of the Bank,
<PAGE>
Citizens National Bank of Texas
April __, 1998
Page 2
dated as of __________, 1998, furnished to the stockholders of the Bank in
connection with the solicitation of proxies to be used at the stockholders'
meeting called to approve the Agreement, as well as the representations set
forth below.
In connection with the proposed Reorganization, the following additional
representations have been made:
A. The fair market value of Holding Company Stock to be received by the
Bank's stockholders will be approximately equal to the fair market value of Bank
Common Stock surrendered in exchange therefor.
B. To the best knowledge of the management of the Bank, there is no plan
or intention on the part of the Bank's stockholders to sell or otherwise dispose
of Holding Company Common Stock to be received by them in the Reorganization
that will reduce their holdings thereof to a number of shares having in the
aggregate a fair market value of less than 50% of the fair market value of all
the Bank Common Stock held by Bank stockholders on the effective date of the
Reorganization.
C. In the proposed Reorganization, the Bank will transfer to the Interim
Bank assets representing at least 90% of the fair market value of the net assets
and at least 70% of the fair market value of the gross assets held by the Bank
immediately prior to the Reorganization. For purposes of this representation,
payment of reorganization expenses and payment of interest on the loan for the
Interim Bank's initial capitalization that are made out of the assets of the
Bank will be treated as assets held by the Bank immediately prior to the
Reorganization that are not transferred to the Interim Bank.
D. There is no plan or intention to sell or otherwise dispose of any of
the assets of the Bank to be transferred to the Interim Bank in the proposed
Reorganization, except for dispositions made in the ordinary course of business.
E. Each party to the Reorganization will pay its own expenses, if any,
incurred in connection with the transaction.
F. After consummation of the Reorganization, the bank resulting from the
Reorganization will conduct its business operations in substantially the same
manner as the Bank had done before the Reorganization, but as a wholly-owned
subsidiary of the Holding Company.
G. There is no plan or intention for the Holding Company to liquidate the
Interim Bank, to merge the Interim Bank into another corporation, or to sell or
otherwise dispose of the stock in the Interim Bank, nor is there any plan or
intention for the Holding Company to redeem or otherwise acquire any of its
stock to be issued in the proposed transaction.
<PAGE>
Citizens National Bank of Texas
April __, 1998
Page 3
H. There is no plan or intention for the Interim Bank to issue additional
shares of its stock that would result in Holding Company losing control of
Interim Bank within the meaning of Section 368(c)(1) of the Code.
I. The liabilities of the Bank to be assumed by the Interim Bank in the
proposed transaction were incurred in the ordinary course of business and are
associated with the assets to be transferred.
J. There is no intercorporate indebtedness existing between or among the
Holding Company, the Bank and the Interim Bank that was issued, acquired, or
will be settled at a discount.
K. The fair market value and adjusted basis of the assets of the Bank to
be transferred to the Interim Bank will each equal or exceed the sum of the
liabilities to be assumed by the Interim Bank plus the amount of liabilities to
which the assets are subject.
L. No dividends or other distributions will be made with respect to any
Bank Common Stock before the proposed Reorganization, except for regular, normal
distributions.
M. None of the shares of Holding Company Common Stock and no other
property received by a shareholder-employee in exchange for Bank Common Stock
pursuant to the Reorganization is compensation for services rendered. In
addition, any compensation paid to any shareholder-employee will be for services
actually rendered and bargained for at arm's length, or commensurate with a
thirty party arm's length negotiation.
N. No two parties to the Reorganization are investment companies as
defined in Section 368(a)(2)(F)(iii) or (iv) of the Code.
Based upon the foregoing, and assuming no change in the laws or facts
underlying this transaction between the date of this opinion and the date of the
Reorganization is completed, we are of the opinion that for federal income tax
purposes:
(i) The Reorganization will constitute and qualify as a reorganization
within the meaning of the Sections 368(a)(1)(A) and 368(a)(2)(D) of
the Code;
(ii) No gain, loss or other income will be recognized by the Holding
Company or the Bank as a result of the Reorganization;
(iii) No gain, loss, or other income will be recognized by (or be
includable in the gross income of) the stockholders of the Bank upon
the receipt by them of Holding Company Common Stock in exchange for
their shares of Bank Common Stock;
<PAGE>
Citizens National Bank of Texas
April __, 1998
Page 4
(iv) The tax basis of Holding Company Common Stock received by the
stockholders of the Bank will be the same as the tax basis of the Bank
Common Stock surrendered and exchanged therefor; and
(v) The holding period of the Holding Company Common Stock to be received
by the stockholders of the Bank will include the period during which
the Bank Common Stock surrendered in exchange therefor was held as a
capital asset, provided such Bank Stock was held as a capital asset on
the date of the exchange.
This opinion is made in connection with the Reorganization and is solely
for the benefit of the Holding Company, the Interim Bank, the Bank and the
Bank's stockholders. It may be not relied upon in any other manner or by any
other person.
Very truly yours,
/s/ SNELL & SMITH, A Professional
Corporation
SNELL & SMITH, A Professional
Corporation
<PAGE>
Exhibit 23.1
Accountant's Consent
As independent public accountants, we hereby consent to the incorporation
by reference in this registration statement of our report dated February 13,
1998, included in Citizens National Bank of Texas's Form 10-K for the year ended
December 31, 1997, and all references to our Firm included in this registration
statement and in the Proxy Statement and Prospectus.
/s/ Mann Frankfort Stein & Lipp, P.C.
Mann Frankfort Stein & Lipp, P.C.
Houston, Texas
April 14, 1998
<PAGE>
EXHIBIT 99.1
================================================================================
UNITED STATES
OFFICE OF THE COMPTROLLER OF THE CURRENCY
Washington, D.C. 20006
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
CHARTER NUMBER 17954
CITIZENS NATIONAL BANK OF TEXAS
(Exact name of registrant as specified in its charter)
UNITED STATES 76-0062396
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
5320 BELLAIRE BOULEVARD
BELLAIRE, TEXAS 77401
(Address of principal executive offices, including zip code)
(713) 661-4444
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $2.03 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.____
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 17, 1998, was approximately $59,500,000. The aggregate
market value was computed by using the closing price of the stock as of that
date on the Nasdaq National Market. (For purposes of calculating this amount
only, all directors and executive officers of the registrant have been treated
as affiliates.)
Number of shares of Common Stock, $2.03 par value, outstanding at March 18,
1998: 5,054,181.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III -- Portions of the registrant's definitive proxy statement to be issued
in connection with registrant's annual stockholders' meeting to be held on
May 26, 1998.
================================================================================
<PAGE>
TABLE OF CONTENTS
PART I Page
----
Item 1. Business................................................... 3
Item 2. Properties................................................. 11
Item 3. Legal Proceedings.......................................... 11
Item 4. Submission of Matters to a Vote of Security Holders........ 11
Item 4A. Executive Officers of the Registrant....................... 11
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters................................ 13
Item 6. Selected Consolidated Financial Data....................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 15
Item 7A Quantitative and Qualitative Disclosure About Market Risk.. 37
Item 8. Financial Statements and Supplementary Data................ 37
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 38
PART III
Item 10. Directors and Executive Officers of the Registrant......... 39
Item 11. Executive Compensation..................................... 39
Item 12. Security Ownership of Certain Beneficial
Owners and Management...................................... 39
Item 13. Certain Relationships and Related Transactions............. 39
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K........................................ 40
Signatures................................................. 41
2
<PAGE>
FORWARD-LOOKING STATEMENTS
In the normal course of its business, the Bank, in an effort to keep its
stockholders and the public informed about the Bank's operations, may from time
to time issue certain statements, either in writing or orally, that contain or
may contain forward-looking information. In addition to historical information,
this Annual Report contains forward-looking statements. Generally, these
statements relate to business plans or strategies, acquisitions made or to be
made by the Bank, and other aspects of the Bank's operating results. Forward
looking statements are not guarantees of future performance and are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
in the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Factors That May Affect Future Results
and Market Price of Stock." The Bank undertakes no obligation to publicly
revise these forward-looking statements to reflect events or circumstances that
arise after the date hereof. Readers should carefully review the risk factors
described in other documents the Bank files from time to time with the Office of
the Comptroller of the Currency including the Quarterly Reports on Form 10-Q to
be filed by the Bank in 1998 and any Current Reports on Form 8-K filed by the
Bank.
PART I
ITEM 1. BUSINESS.
GENERAL
Citizens National Bank of Texas (together with its wholly-owned subsidiary,
the "Bank") is a national banking association that provides a full range of
traditional retail and commercial banking services primarily to individual
consumers and small businesses in the Houston metropolitan area. The Bank was
founded in October 1983 in the City of Bellaire, an incorporated city within the
city limits of Houston, by a group of experienced bankers who had been senior
officers with other commercial banks in the Bank's primary market area. Over
its fourteen-year history, the Bank has demonstrated a consistent record of
growth and profitability. The Bank has increased its assets and net income in
each year of operation, even during the period of adverse economic conditions in
Texas in the mid-to-late 1980s. At December 31, 1997, the Bank had $295.6
million in total assets, $260.9 million in total deposits and total
stockholders' equity of $31.6 million.
The Bank's main office is located at 5320 Bellaire Boulevard, Bellaire,
Texas 77401 and its telephone number is (713) 661-4444.
Management of the Bank adheres to a community banking philosophy that
emphasizes accessible, service-oriented, relationship banking. Management
believes that this commitment, together with the Bank's conservative lending and
prudent investment policies, are important factors in its success and growth.
The Bank's high quality personal service and responsiveness to customer needs
has attracted numerous customers from larger regional banks. Management believes
that the continued acquisitions of local banks by out of state organizations
present additional opportunities to attract customers who prefer to work with a
local community bank or who have experienced a decline in personal service from
the out of state banks. The quality of service provided by the Bank and the
development of long-term customer relationships has been facilitated by the
continuity of service of officers and staff. The Bank's seven senior
3
<PAGE>
lending officers average more than 25 years of experience in the Bank's primary
market areas. In addition, of the Bank's 19 current executive officers and
directors, 11 were in the founding group.
As a full service commercial bank, the Bank offers an array of lending and
deposit services to its retail and commercial customers. The primary lending
focus of the Bank is on small business, commercial and residential real estate,
and consumer loans. The Bank generally seeks a mix of 50% consumer loans, 25%
small business loans, and 25% real estate loans. Loan demand and maturities may
cause the actual percentage of the Bank's loans in any category to vary from the
proposed mix. As a service to its customers, the Bank also offers home computer
banking, provides on-site access to conventional mortgage loans through its
subsidiary CNB Mortgage Company, and has recently brought its check printing in
house, which permits almost immediate turnaround on check orders.
The Bank maintains a strong community orientation by, among other things,
supporting the active participation of its officers and employees in local
charitable, civic, school, and religious activities. Three of the Bank's senior
officers are past Presidents of the Bellaire Chamber of Commerce. In 1989, the
Bank founded the Leisure Club for customers 50 years of age and over. Leisure
Club members are eligible for a package of special services from the Bank and
participate in community activities and various local, national, and
international trips and tours. At December 31, 1997, the Leisure Club had more
than 5,000 members and accounted for more than $102 million in deposits in the
Bank. The Bank has renovated an office building adjacent to its main office
which serves as the office and activity center for the Leisure Club and is also
available to other community organizations free of charge. The Bank currently
has three full-time employees and one part-time employee dedicated to the
Leisure Club's activities.
Management believes that the Houston metropolitan area offers significant
growth opportunities for the Bank. Houston is the fourth largest city in the
United States with an estimated metropolitan area population in 1996 of
approximately 3.7 million. The Bank's primary markets are centered in the City
of Bellaire, approximately seven miles southwest of the Houston central business
district, and in rapidly growing suburban northeast Fort Bend County, which is
approximately 15 miles southwest of the Houston central business district. The
Bank's main office is located in the City of Bellaire, an established community
in the center of southwest Houston. This area is attractive to residents
because of its convenience to the Houston central business district, the Texas
Medical Center, the Galleria area, local museums, and Rice University.
According to U.S. Census Bureau estimates, Fort Bend County ranked as the second
fastest growing county in Texas and the fourth fastest growing urban county in
the United States between 1990 and 1995, based on per capita population.
According to private research estimates, Fort Bend County also ranked sixth in
the nation in economic strength and employment growth for counties with
populations of 150,000 or more and is predicted to have the sixth fastest rate
of employment growth of any county in the U.S. from 1995 to 2005.
The Bank has grown through a combination of internal growth and the opening
of new community banking offices. The Bank opened its first two branch offices
in 1992 in supermarkets in Fort Bend County, Texas, and a third in 1997, which
afforded the Bank with a relatively inexpensive means of entering this new
market. In addition to providing the Bank with an opportunity to diversify its
deposit base, this area was attractive because of its growth characteristics. In
December 1995, the Bank opened a free-standing office in Sugar Land, an affluent
section of Fort Bend County. This office is managed by a senior banking officer
with 13 years of experience in the Fort Bend market area. At December 31, 1997,
the Fort Bend County branches accounted for approximately $35.5 million of the
Bank's deposits, of which $20.9 million were at the free-standing Sugar Land
office.
4
<PAGE>
The Bank's strategy is to increase its presence in existing markets by
targeting individuals and small owner-operated businesses and to expand into new
areas of the greater Houston metropolitan area that complement its existing or
targeted customer base by opening new branch offices or acquiring existing
financial institutions. In pursuing its expansion strategy, the Bank intends to
seek both an attractive location and one or more senior banking officers with
experience in the local community to staff the office. Currently, the Bank is
actively pursuing expansion into the west and northwest suburban areas of the
greater Houston metropolitan area either by establishing a new branch office or
acquiring one or more existing branches. There are banks or banking facilities
in these areas that are possible acquisition candidates. There can be no
assurance that the Bank can successfully establish new branch offices or acquire
existing institutions and failure to do so may limit the Bank's growth
potential.
COMPETITION
The banking business is highly competitive and the profitability of the
Bank depends principally upon the Bank's ability to compete in the Houston
metropolitan area. In addition to competing with other commercial and savings
banks and savings and loan associations, the Bank competes with credit unions,
finance companies, mutual funds, insurance companies, brokerage and investment
banking firms, asset-based non-bank lenders, and certain other non-financial
entities, including retail stores that may maintain their own credit programs,
and governmental organizations that may offer subsidized financing at lower
rates than those offered by the Bank. Many of the Bank's competitors have
significantly greater financial and other resources and larger lending limits
than the Bank. The Bank has been able to compete effectively with other
financial institutions by emphasizing customer service, including local office
decision-making on loans, establishing long-term customer relationships, and
building customer loyalty.
The success of the Bank is also highly dependent upon general economic
conditions in the Houston metropolitan area. Significant deterioration in the
local economy or economic problems in the greater Houston area could
substantially impact the Bank's performance. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors That May
Affect Future Results and Market Price of Stock."
EMPLOYEES
As of December 31, 1997, the Bank had 99 full-time equivalent employees, 25
of whom were officers. The Bank provides medical and hospitalization insurance
and a 401(k) profit sharing plan to its full-time employees. The Bank considers
its relations with its employees to be excellent.
SUPERVISION AND REGULATION
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of the Bank. The following description of
references herein to applicable statutes and regulations, which are not intended
to be complete descriptions of these provisions or their effects on the Bank,
are brief summaries and are qualified in their entirety by reference to such
statutes and regulations.
General. The Bank is a national bank under the National Bank Act of 1864,
as amended (the "National Bank Act"). As a national banking association, the
Bank is supervised, examined, and regulated principally by the Office of the
Comptroller of the Currency (the "OCC"). The OCC regularly examines such areas
as capital adequacy, reserves, loan portfolio, investments, and management
practices. The Bank must
5
<PAGE>
also furnish quarterly and annual reports to the OCC, and the OCC may exercise
cease and desist and other enforcement powers over the Bank if its actions
represent unsafe or unsound practices or violations of law. Since the deposits
of the Bank are insured by the Bank Insurance Fund ("BIF") of the Federal
Deposit Insurance Corporation (the "FDIC"), the Bank is also subject to
regulation and supervision by the FDIC. Because the Bank is a member of the
Federal Reserve System, the Board of Governors of the Federal Reserve Board (the
"Federal Reserve Board") also has supervisory authority over certain operations
and activities of the Bank.
Permissible Activities of National Banks. The National Bank Act sets forth
the rights, privileges, and powers of national banks and defines the activities
in which national banks may engage. National banks may engage in the following
activities: to make, arrange, purchase, or sell loans or extensions of credit
secured by liens or interests in real estate; to purchase, hold, and convey real
estate under certain conditions; to offer certain trust services to the public;
to deal in investment securities in certain circumstances; and, more broadly, to
engage in the "business of banking" and activities that are "incidental" to
banking. The following are a few of the activities deemed incidental to the
business of banking: the borrowing and lending of money; receiving deposits,
including deposits of public funds; holding or selling stock or other property
acquired in connection with security on a loan; discounting and negotiating
evidences of debt; acting as guarantor, if the bank has a "substantial interest
in the performance of the transaction;" issuing letters of credit to or on
behalf of its customers; operating a safe deposit business; providing check
guarantee plans; issuing credit cards; operating a loan production office;
selling loans under repurchase agreements; selling money orders at offices other
than bank branches; providing consulting services to banks; and verifying and
collecting checks.
In general, statutory restrictions on the activities of banks are aimed at
protecting the safety and soundness of banking practices. Many of the statutory
restrictions limit the participation of national banks in the securities and
insurance markets. These restrictions do not affect the Bank because it is not
currently involved in the types of activities covered by the restrictions.
Branching. National banks may establish a branch anywhere in Texas
provided that the branch is approved in advance by the OCC, which considers a
number of factors, including financial history, capital adequacy, earnings
prospects, character of management, needs of the community, and consistency with
corporate powers. The Interstate Banking Act, which expanded the authority of
bank holding companies and banks to engage in interstate bank acquisitions and
interstate banking, allows each state the option of "opting out" of the
interstate branching (but not banking) provisions. The Texas Legislature opted
out of the interstate branching provisions in 1995. Interstate banking was
effective on September 25, 1995, and interstate branching would have become
effective in Texas in June, 1997, if Texas had not elected to opt out. The Texas
"opt-out" legislation prohibiting interstate branching is effective until
September, 1999.
Restrictions on Transactions with Affiliates and Insiders. The Bank is
subject to certain provisions of the Federal Deposit Insurance Corporation
Improvements Act of 1991 ("FDICIA") limiting transactions with the Bank and its
nonbanking affiliates. One set of restrictions is found in Section 23A of the
Federal Reserve Act, which affects loans or other credit extensions to, asset
purchases with, and investments in affiliates of, the Bank. Such transactions
with the Bank or any of its nonbanking subsidiaries are limited in amount to ten
percent of the Bank's capital and surplus and, with respect to the Bank and all
of its nonbanking subsidiaries together, to an aggregate of 20% of the Bank's
capital and surplus. Furthermore, such loans and extensions of credit, as well
as certain other transactions, are required to be secured in specified amounts.
6
<PAGE>
Another set of restrictions is found in Section 23B of the Federal Reserve
Act. Among other things, Section 23B requires that certain transactions between
the Bank, including its subsidiaries, and its affiliates must be on terms
substantially the same, or at least as favorable to the Bank or its
subsidiaries, as those prevailing at the time for comparable transactions with
or involving other nonaffiliated persons. In the absence of such comparable
transactions, any transaction between the Bank and its affiliates must be on
terms and under circumstances, including credit standards, that in good faith
would be offered to or would apply to nonaffiliated persons. The Bank is also
subject to certain prohibitions against any advertising that indicates the Bank
is responsible for the obligations of its affiliates. The Bank did not have any
nonbanking affiliates as of December 31, 1997.
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 now apply to
all insured institutions and their subsidiaries and holding companies. These
restrictions include limits on loans to one borrower and conditions that must be
met before such loans can be made. There is also an aggregate limitation on all
loans to insiders and their related interests. These loans cannot exceed the
institution's total unimpaired capital and surplus, and the OCC may determine
that a lesser amount is appropriate. Insiders are subject to enforcement actions
for knowingly accepting loans in violation of applicable restrictions.
Interest Rate Limits. Interest rate limitations for the Bank are primarily
governed by the National Bank Act which generally defers to the laws of the
state where the bank is located. Under the laws of the State of Texas, the
maximum annual interest rate that may be charged on most loans made by the Bank
is based on doubling the average auction rate, to the nearest 0.25%, for United
States Treasury Bills, as computed by the Office of the Consumer Credit
Commissioner of the State of Texas. However, the maximum rate does not decline
below 18% or rise above 24% (except for loans in excess of $250,000 that are
made for business, commercial, investment or other similar purposes (excluding
agricultural loans), in which case the maximum annual rate may not rise above
28%, rather than 24%). On fixed rate closed-end loans, the maximum non-usurious
rate is to be determined at the time the rate is contracted, while on floating
rate and open-end loans (such as credit cards), the rate varies over the term of
the indebtedness. State usury laws (but not late charge limitations) have been
preempted by federal law for loans secured by a first lien on residential real
property.
Examinations. The OCC periodically examines and evaluates national banks.
Based upon such an evaluation, the OCC may revalue the assets of a national bank
and require that it establish specific reserves to compensate for the difference
between the OCC-determined value and the book value of such assets. Onsite
examinations are to be conducted every 12 months, except that certain well
capitalized banks may be examined every 18 months. FDICIA authorizes the OCC to
assess the institution for its costs of conducting the examinations.
Prompt Corrective Action. In addition to the capital adequacy guidelines
(see "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition--Capital Resources"), FDICIA requires the OCC to
take "prompt corrective action" with respect to any national bank that does not
meet specified minimum capital requirements. The applicable regulations
establish five capital levels, ranging from "well capitalized" to "critically
undercapitalized," which authorize, and in certain cases require, the OCC to
take certain specified supervisory action. Under regulations implemented under
FDICIA, a national bank is considered well capitalized if it has a total risk-
based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of
6.0% or greater, and a leverage ratio of 5.0% or greater, and it is not subject
7
<PAGE>
to an order, written agreement, capital directive, or prompt corrective action
directive to meet and maintain a specific capital level for any capital measure.
A national bank is considered adequately capitalized if it has a total risk-
based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of at
least 4%, and leverage capital ratio of 4.0% or greater (or a leverage ratio of
3.0% or greater if the institution is rated composite 1 in its most recent
report of examination, subject to appropriate federal banking agency
guidelines), and the institution does not meet the definition of an
undercapitalized institution. A national bank is considered undercapitalized if
it has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-
based capital ratio that is less than 4.0%, or a leverage ratio that is less
than 4.0% (or a leverage ratio that is less than 3.0% if the institution is
rated composite 1 in its most recent report of examination, subject to
appropriate federal banking agency guidelines). A significantly undercapitalized
institution is one which has a total risk-based capital ratio that is less than
6.0%, a Tier 1 risk-based capital ratio that is less than 3.0%, or a leverage
ratio that is less than 3.0%. A critically undercapitalized institution is one
which has a ratio of tangible equity to total assets that is equal to or less
than 2.0%. Under certain circumstances, a well capitalized, adequately
capitalized, or undercapitalized institution may be treated as if the
institution were in the next lower capital category if it receives an
unsatisfactory examination rating.
With certain exceptions, national banks are prohibited from making capital
distributions to their stockholders if the payment of such distributions will
cause them to become undercapitalized. Furthermore, undercapitalized national
banks are required to file capital restoration plans with the OCC. Such a plan
will not be accepted unless, among other things, the banking institution's
stockholders guarantee the plan up to a certain specified amount. Any such
guarantee from a depository institution's stockholders is entitled to a priority
of payment in bankruptcy. Undercapitalized national banks also are subject to
restrictions on growth, acquisitions, branching and engaging in new lines of
business unless they have an approved capital plan that permits otherwise. The
OCC also may, among other things, require an undercapitalized national bank to
issue shares or obligations, which could be voting stock, to recapitalize the
institution or, under certain circumstances, to divest itself of any subsidiary.
The OCC is authorized by the legislation to take various enforcement
actions against any significantly undercapitalized national bank and any
national bank that fails to submit an acceptable capital restoration plan or
fails to implement a plan accepted by the OCC. These powers include, among other
things, requiring the institution to be recapitalized, prohibiting asset growth,
restricting interest rates paid, requiring divestiture by the institution of its
subsidiaries, requiring new election of directors, and requiring the dismissal
of directors and officers.
Significantly and critically undercapitalized national banks may be subject
to more extensive control and supervision. The OCC may prohibit any such
institution from, among other things, entering into any material transaction not
in the ordinary course of business, amending its charter or bylaws, or engaging
in certain transactions with affiliates. In addition, critically
undercapitalized institutions generally will be prohibited from making payments
of principal or interest on outstanding subordinated debt. Within 90 days of a
national bank becoming critically undercapitalized, the OCC must appoint a
receiver or conservator unless certain findings are made with respect to the
prospect for the institution's continued viability.
Banks with capital ratios below the required minimum are subject to certain
administrative actions by the FDIC, including the termination of deposit
insurance upon notice and hearing or a temporary suspension of insurance without
a hearing in the event the bank has no tangible capital.
As of December 31, 1997, the Bank met the capital requirements of a "well-
capitalized" institution.
8
<PAGE>
Dividends. There are certain statutory limitations on the payment of
dividends by national banks. Without approval of the OCC, dividends may not be
paid by the Bank in an amount in any calendar year which exceeds the Bank's net
income for that year, plus its retained net income for the preceding two years,
less any required transfers to capital surplus. In addition, a national bank may
not pay dividends in excess of its undivided profits. In some cases, the OCC may
find a dividend payment that meets these statutory requirements to be an unsafe
or unsound practice. Under FDICIA, the Bank cannot pay a dividend if it will
cause the Bank to be "undercapitalized." See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Dividend History
and Restrictions on Ability to Pay Dividends."
The National Banking Act also provides that until the surplus fund of a
bank equals its common capital, no dividend may be declared unless there has
been carried to the surplus fund not less than 10% of the Bank's net income of
the preceding half-year in the case of quarterly or semi-annual dividends, or
not less than 10% of the bank's net income for the preceding year in the case of
annual dividends.
Deposit Insurance. The deposits of the Bank are insured by the FDIC
through the BIF to the extent provided by law. Under the FDIC's risk-based
insurance system, BIF-insured institutions are currently assessed premiums of
between zero and twenty seven cents per $100 of eligible deposits, depending
upon the institution's capital position and other supervisory factors. Congress
recently enacted legislation that, among other things, provides for assessments
against BIF-insured institutions that will be used to pay certain Financing
Corporation ("FICO") obligations. In addition to any BIF insurance assessments,
BIF-insured banks are expected to make payments for the FICO obligations equal
to an estimated $0.0129 per $100 of eligible deposits each year during 1997
through 1999, and an estimated $0.024 per $100 of eligible deposits thereafter.
Conservator and Receivership Powers. FDICIA significantly expanded the
authority of the federal banking regulators to place depository institutions
into conservatorship or receivership to include, among other things, appointment
of the FDIC as conservator or receiver of an undercapitalized institution under
certain circumstances. In the event the Bank is placed into conservatorship or
receivership, the FDIC is required, subject to certain exceptions, to choose the
method for resolving the institution that is least costly to the BIF, such as
liquidation. In any event, if the Bank was placed into conservatorship or
receivership, because of the cross-guarantee provisions of the Federal Deposit
Insurance Act, as amended, the stockholders of the Bank would likely lose their
investment in the Bank.
Brokered Deposit Restrictions. The Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") and FDICIA generally limit institutions
that are not well capitalized from accepting brokered deposits. In general,
undercapitalized institutions may not solicit, accept, or renew brokered
deposits. Adequately capitalized institutions may not solicit, accept, or renew
brokered deposits unless they obtain a waiver from the FDIC. Even in that event,
they may not pay an effective yield of more than 75 basis points over the
effective yield paid on deposits of comparable size and maturity in the
institution's normal market area for deposits accepted from within that area, or
the national rate paid on deposits of comparable size and maturity for deposits
accepted from outside the institution's normal market area.
Consumer Laws and Regulations. In addition to the laws and regulations
discussed herein, the Bank is also subject to certain consumer laws and
regulations that are designed to protect consumers in transactions with banks.
While the list set forth herein is not exhaustive, these laws and regulations
include the Truth-in-Lending Act, the Truth-in-Savings Act, the Electronic Funds
Transfer Act, the Expedited Funds Availability Act, the Community Reinvestment
Act, the Equal Credit Opportunity Act, and the Fair Housing
9
<PAGE>
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.
Economic Growth and Regulatory Paperwork Reduction Act of 1996. On
September 30, 1996, President Clinton signed into law the Economic Growth and
Regulatory Paperwork Reduction Act of 1996 (the "Regulatory Reduction Act"). The
Regulatory Reduction Act's principal provisions relate to capitalization of the
Savings Association Insurance Fund of the FDIC, but it also contains numerous
regulatory relief measures, including provisions to reduce regulatory burdens
associated with compliance with various consumer and other laws applicable to
the Bank, including, for example, provisions designed to coordinate the
disclosure and other requirements under the Truth-in-Lending Act and the Real
Estate Settlement Procedures Act and modify certain insider lending restrictions
and anti-tying prohibitions.
Changing 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 depositary
institution may make with insured funds, is from time-to-time introduced in
Congress. Other legislative and regulatory proposals regarding changes in
banking and regulations of banks, thrifts, and other financial institutions, are
being considered by the executive branch of the federal government, Congress,
and various state governments, including Texas. Certain of these proposals, if
adopted, could significantly change the regulation of banks and the financial
services industry and the operating environment of the Bank in substantial and
unpredictable ways. The Bank cannot predict accurately whether any of these
proposals will be adopted or, if adopted, how these proposals, or implementing
regulations with respect thereto, will affect the financial condition or
results of operation of the Bank.
Expanding Enforcement Authority. One of the major effects of FDICIA was the
increased ability of banking regulators to monitor the activities of banks and
their holding companies. In addition, the Federal Reserve Board, the OCC, and
the FDIC have extensive authority to police unsafe or unsound practices and
violations of applicable laws and regulations by depository institutions and
their holding companies. For example, the FDIC may terminate the deposit
insurance of any institution which it determines has engaged in an unsafe or
unsound practice. The agencies can also assess civil money penalties, issue
cease and desist or removal orders, seek injunctions, and publicly disclose such
actions.
Effect on Economic Environment. The policies of regulatory authorities,
including the monetary policy of the Federal Reserve Board, have a significant
effect on the operating results of bank holding companies and their
subsidiaries. Among the means available to the Federal Reserve Board to affect
the money supply are open market operations in U.S. Government securities,
changes in the discount rate on member bank borrowings, and changes in reserve
requirements against member bank deposits. These means are used in varying
combinations to influence overall growth and distribution of bank loans,
investments and deposits, and their use may affect interest rates charged on
loans or paid for deposits.
Federal Reserve Board monetary policies have materially affected the
operating results of commercial banks in the past and are expected to continue
to do so in the future. The nature of future monetary policies and the effect of
such policies on the business and earnings of the Bank and its subsidiaries
cannot be predicted.
10
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ITEM 2. PROPERTIES.
The Bank currently has five offices. The Bank owns its main office, an
adjacent drive-in banking facility, and an adjacent office building, which has
been converted to a community activity center and offices for the Leisure Club.
The Bank currently leases the real estate where its main office is located
pursuant to a ten-year lease expiring in 2001 with an option to renew or
purchase the property. The Bank also owns the building and land for its free-
standing Sugar Land branch. The Bank leases space in three grocery stores from
The Kroger Co. under leases that expire in 2000, 2000, and 2002, respectively.
The following table sets forth specific information on each branch, each of
which offers full service banking.
BRANCH DEPOSITS AT
BRANCH LOCATION DECEMBER 31, 1997
------ -------- ------------------
(In thousands)
Bellaire/Main Office 5320 Bellaire Blvd. $225,413
Sugar Land..................... Highway 59
at Williams Trace 20,857
Sugar Land - First Colony (1).. 3665 Highway 6 8,322
Stafford (1) 220 FM 1092 5,070
Sugar Land - Sweetwater (1).... Sweetwater Blvd at
___________________............ Lexington 1,245(2)
(1) Located in Kroger store.
(2) Opened in June, 1997.
ITEM 3. LEGAL PROCEEDINGS.
The Bank is a party to a legal proceeding, which arose in the ordinary
course of business. While the outcome of this claim cannot be predicted with
certainty, management believes that the ultimate resolution of the matter will
not have a material adverse impact on the Bank's financial condition or results
of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE BANK
The executive officers of the Bank are as follows:
Name Office(s)
---- ---------
Frank G. Cook........... Chairman of the Board
B. Ralph Williams....... President, Chief Executive Officer, and Director
Randall W. Dobbs........ Executive Vice President, Cashier, Chief Operations
Officer, and Advisory Director
Joseph E. Ives.......... Executive Vice President and Director
Mary A. Walker.......... Senior Vice President and Director
John M. James........... Senior Vice President
Sheila J. Duffy......... President of Sugar Land Office and Advisory Director
11
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Frank G. Cook. Mr. Cook was a founder of the Bank in 1983, was President
from 1983 until 1986, when he was elected Chairman of the Board, and was Chief
Executive Officer from 1983 until 1992. Prior to joining the Bank, Mr. Cook was
Executive Vice President and Cashier of First National Bank of Bellaire where
he was employed from 1979 until 1981. From 1950 until 1979, Mr. Cook was
employed by First State Bank of Bellaire, having advanced to the position of
Executive Vice President and Cashier and Secretary to the Board of Directors at
the time he left the bank.
B. Ralph Williams. Mr. Williams was a founder of the Bank in 1983 and has
been President since 1986 and Chief Executive Officer since 1992. Prior to
joining the Bank, Mr. Williams was employed by East Texas National Bank of
Palestine as a Vice President, Loan Officer, and Compliance Officer from 1981 to
1983. He was associated with First National Bank of Bellaire as Senior Vice
President from 1979 to 1981, and with First State Bank of Bellaire from 1963
until 1979, initially as a teller, and in various capacities advancing to Senior
Vice President. Mr. Williams was with Houston National Bank from 1958 to 1963.
Randall W. Dobbs. Mr. Dobbs joined the Bank as its first Cashier in 1983,
became Chief of Operations in 1992, and Executive Vice President and Chief of
Operations in 1996, and was elected an advisory director in 1995. Prior to
joining the Bank, Mr. Dobbs was employed by Texas Bank & Trust from 1981 until
1983 and First National Bank of Bellaire from 1974 until 1981.
Joseph E. Ives. Mr. Ives joined the Bank as Senior Vice President and was
elected a Director in 1984 and Executive Vice President in 1986. Prior to
joining the Bank, Mr. Ives was a Senior Vice President with Texas Commerce Bank
- - Stafford from 1981 to 1984. Prior to 1981, Mr. Ives was a loan officer with
First National Bank of Bellaire and First State Bank of Bellaire.
Mary A. Walker. Ms. Walker joined the Bank as Vice President in 1983 and
was elected a Director of the Bank in 1986 and a Senior Vice President in 1986.
Prior to joining the Bank Ms. Walker was employed with First National Bank of
Bellaire as a Vice President and loan officer from 1979 to 1983.
John M. James. Mr. James joined the Bank as a Senior Vice President in
1993. From 1985 to 1992, he served as President of First City National Bank of
Bellaire. From 1978 to 1985, Mr. James was employed by First City National Bank
in its corporate office in Houston. From 1973 to 1978, he was employed by the
Federal Reserve Bank of Dallas in its bank holding company examination division.
Sheila J. Duffy. Ms. Duffy joined the Bank as President of the Sugar
Land office in 1995 and was elected an Advisory Director in November 1997. From
February 1988 to July 1995, she was employed by Park National Bank - Stafford as
a Vice President. From 1982 to 1988 she was employed by American National Bank,
which was acquired by Park National Bank in 1988.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Bank's Common Stock is approved for quotation on the The Nasdaq Stock
Market (the "NSM") under the symbol "CNBT." Shares began trading on October 1,
1997. The following table sets forth the range of the high and low per share
closing sale prices for the Common Stock as reported by the NSM for the period
from October 1, 1997, to March 17, 1998.
LOW SALE PRICE HIGH SALE PRICE
-------------- ---------------
1997
----
Fourth Quarter........................... $11.50 $13.25
1998
----
First Quarter (through March 17, 1998)... $12.25 $16.63
On March 17, 1998, the closing sale price as reported on the NSM was $16.50
per share. The number of holders of record of Common Stock based on the transfer
records of the Bank at March 17, 1998, was 500. Based on security position
listings, the Bank believes it has in excess of 1,900 beneficial owners.
The Bank has paid cash dividends to its stockholders since 1986. The Bank
paid a special cash dividend of $0.10 on May 30, 1997, and declared a year-end
dividend of $0.30 on December 31, 1997, payable on January 15, 1998. The Bank
also declared a 10% stock dividend in April, 1997. In 1996, the Bank paid a
special cash dividend of $0.09 on June 15, 1996, declared a year-end dividend of
$0.27 on December 31, 1996, which was paid on January 15, 1997, and declared a
10% stock dividend in April, 1996.
The Bank's policy to date has been to declare dividends on December 31 of
each year payable on January 15 of the next year. Commencing in March 1998, the
Bank intends to begin paying dividends on a quarterly basis. In the future, the
declaration and payment of dividends on the Common Stock will depend upon the
earnings and financial condition of the Bank, liquidity and capital
requirements, the general economic and regulatory climate, the Bank's ability to
service any equity or debt obligations senior to the Common Stock, and other
factors deemed relevant by the Bank's Board of Directors. As of December 31,
1997, approximately $3.5 million was available, under applicable restrictions
without regulatory approval, for payment of dividends by the Bank. Regulatory
authorities could impose stricter limitations on the ability of the Bank to pay
dividends 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 -- Factors That May Affect Future Results
and Market Price of Stock."
On October 1, 1997, the Bank commenced, and on October 6, 1997, completed,
the sale of 1,150,000 shares of Common Stock at a price of $10.50 per share (an
aggregate price of $12,075,000). The net proceeds of the offering,
approximately $11,085,000, will be used for general corporate purposes,
including the development or acquisition of additional branches or the
acquisition of other financial institutions. Such proceeds have been invested in
accordance with the Bank's established investment policies. The offering was
underwritten by Legg Mason Wood Walker, Inc. The Bank incurred total estimated
expenses in connection with the offering of approximately $990,000, comprised of
an underwriting discount of $845,000 and other expenses in the amount of
$145,000. No expense payments were made directly or indirectly to any directors,
officers, or stockholders of the Bank in connection with the offering.
13
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements of the Bank and the Notes
thereto, appearing elsewhere in the Annual Report, and the information contained
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations." The selected historical consolidated financial data as of the end
of and for each of the five years in the period ended December 31, 1997, are
derived from the Bank's Consolidated Financial Statements which have been
audited by independent public accountants.
<TABLE>
<CAPTION>
As of and for the
Years Ended December 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
--------- -------- --------- ------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income........................... $ 19,941 $ 17,372 $ 14,705 $ 12,582 $ 11,802
Interest expense.......................... 9,075 7,902 6,895 4,993 4,346
-------- -------- -------- -------- --------
Net interest income...................... 10,866 9,470 7,810 7,589 7,456
Provision for loan losses................. 877 655 200 126 60
-------- -------- -------- -------- --------
Net interest income after provision for
loan losses............................ 9,989 8,815 7,610 7,463 7,396
Noninterest income........................ 2,507 2,322 2,053 1,866 1,870
NONINTEREST expenses...................... 7,644 6,949 6,108 5,892 5,729
-------- -------- -------- -------- --------
Income before taxes...................... 4,852 4,188 3,555 3,437 3,537
Provision for income taxes................ 1,154 1,035 683 668 769
-------- -------- -------- -------- --------
Net income ............................... $ 3.698 $ 3,153 $ 2,872 $ 2,769 $ 2,768
======== ======== ======== ======== ========
PER SHARE DATA:
Net income, basic (1)..................... $ 0.89 $ 0.81 $ 0.74 $ 0.71 $ 0.71
Net income, fully diluted (2)(3).......... 0.88 0.80 0.73 0.70 0.70
Book value................................ 6.27 4.60 4.35 3.56 3.23
Cash dividends............................ 0.40 0.36 0.30 0.29 0.19
Weighted average common shares
outstanding, basic...................... 4,161 3,886 3,886 3,886 3,877
Weighted average common shares
outstanding, fully diluted............... 4,224 3,941 3,938 3,936 3,931
BALANCE SHEET DATA (4):
Total assets.............................. $295,606 $258,150 $231,779 $206,379 $183,054
Securities................................ 169,831 147,505 148,294 134,029 119,327
Loans..................................... 102,875 91,284 67,875 58,996 48,884
Allowance for loan losses................. 1,009 687 484 522 577
Total deposits............................ 260,907 238,059 208,749 185,579 169,474
Total stockholders' equity................ 31,647 17,871 16,921 13,815 12,562
PERFORMANCE RATIOS:
Return on average assets.................. 1.34% 1.30% 1.34% 1.40% 1.56%
Return on average common equity........... 16.89 18.43 19.10 20.51 23.83
Net interest margin....................... 4.22 4.18 3.89 4.11 4.51
Dividend payout ratio, basic.............. 44.94 44.44 40.54 40.85 26.76
Efficiency ratio (5)...................... 58.31 60.12 63.45 63.31 63.27
ASSET QUALITY RATIOS (4):
Nonperforming assets to loans
and other real estate................... 1.31% 0.57% 0.67% 0.92% 1.14%
Nonperforming assets to total assets...... 0.46 0.20 0.20 0.26 0.30
Net charge-offs to average loans.......... 0.57 0.55 0.39 0.34 0.27
Allowance for loan losses to total loans.. 0.98 0.75 0.71 0.88 1.18
Allowance for loan losses to
nonperforming loans (6)................. 74.80 131.61 105.68 95.78 103.78
CAPITAL RATIOS (4):
Leverage ratio............................ 11.10% 7.27% 7.43% 7.22% 7.11%
Average stockholders' equity to
average total assets..................... 7.96 7.05 7.03 6.84 6.57
Tier 1 risk-based capital ratio........... 21.42 13.87 15.22 15.39 18.00
Total risk-based capital ratio............ 22.13 14.41 15.68 15.96 18.83
- --------------
</TABLE>
(1) Basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period.
Shares have been restated in accordance with FASB 128.
(footnotes continued on following page)
14
<PAGE>
(2) Fully diluted earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding plus the common stock
equivalents computed using the treasury stock method. Shares have been
restated in accordance with FASB 128.
(3) Outstanding shares have been adjusted for all periods presented for a 2-for-
1 stock split declared in May 1994 and 10% stock dividends declared in March
1997 and April 1996.
(4) At period end, except net charge-offs to average loans and average
stockholders' equity to average total assets.
(5) Calculated by dividing total noninterest expenses by net interest income
plus noninterest income, excluding securities gains and losses.
(6) Nonperforming loans consist of nonaccrual loans and loans contractually
past due 90 days or more.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results of
Operations analyzes the major elements of the Bank's balance sheets and
statements of income and reviews the Bank's operations for the three years ended
December 31, 1997, and should be read in conjunction with the Bank's
Consolidated Financial Statements and related notes thereto and Selected
Consolidated Financial Data.
OVERVIEW
Total assets at December 31, 1997, 1996, and 1995, were $295.6 million,
$258.2 million, and $231.8 million, respectively. This growth was a result of a
strong local economy, expansion of the Bank's services in Fort Bend County by
the addition of a new full-service branch location, and the Bank's style of
accessible, service-oriented, relationship banking. Loans were $102.9 million at
December 31, 1997, an increase of $11.6 million or 12.7% from $91.3 million at
the end of 1996. Loans were $67.9 million at year end 1995. Deposits also
experienced significant growth, increasing to $260.9 million at year end 1997
from $238.1 million at year end 1996, and $208.7 million at year end 1995.
Stockholders' equity was $31.6 million, $17.9 million, and $16.9 million at
December 31, 1997, 1996, and 1995, respectively. The growth in stockholders'
equity in 1997 is primarily attributable to the sale of 1,150,000 shares of
common stock in October 1997, which provided approximately $11.1 million.
Net income was $3.7 million, $3.2 million, and $2.9 million. Basic net
income per share was $0.89, $0.81, and $0.74 and fully diluted earnings per
share was $0.88, $0.80, and $0.73 for the years ended 1997, 1996, and 1995,
respectively. This increase in net income was primarily the result of strong
loan growth, maintenance of strong asset quality, and expense control, which
resulted in returns on average assets of 1.34%, 1.30%, and 1.34% and returns on
average common equity of 16.89%, 18.43%, and 19.10% for the years ended 1997,
1996, and 1995, respectively.
The Bank declared dividends of $0.40, $0.36, and $0.30 per share for the
years ended 1997, 1996, and 1995, respectively, which resulted in a dividend
payout ratio (basic) of 44.9%, 44.4%, and 40.5% for the years ended 1997, 1996,
and 1995, respectively.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income represents the amount by which interest income on
interest-earning assets, including securities and loans, exceeds interest
expense incurred on interest-bearing liabilities, including
15
<PAGE>
deposits and other borrowed funds. Net interest income is the principal source
of the Bank's earnings. Interest rate fluctuations, as well as changes in the
amount and type of earning assets and liabilities, combine to affect net
interest income.
1997 versus 1996. Net interest income for 1997 was $10.9 million, an
increase of $1.4 million or 14.7% from $9.5 million for 1996. The Bank's net
interest spread was 3.23% and 3.28% and the net interest margin was 4.22% and
4.18% for the years ended December 31, 1997, and 1996, respectively. The
increase in net interest margin resulted from an increase in net interest income
relative to the increase in total average interest earnings assets. Although
there was an increase in the yield on total interest earnings assets of 1.0%,
there was a greater increase, 2.7%, in the rate paid on interest earnings
liabilities which resulted in a small decrease in net interest spread.
The increase in net interest income resulted from increases in the Bank's
loan and securities portfolios. Interest income from loans increased to $9.6
million in 1997 from $8.1 million in 1996, an increase of $1.5 million or 18.4%.
The yield on the loan portfolio increased marginally to 9.90% for 1997 from
9.89% for 1996. Interest income from the securities portfolio increased to $10.4
million for 1997 from $9.3 million for 1996, a $1.1 million or 11.6% increase.
This was due primarily to a 11.1% increase in average securities held by the
Bank and an increase in yield from 6.43% in 1996 to 6.46% for 1997. Partially
offsetting the interest income growth was an increase in interest expense, which
grew to $9.1 million for 1997, compared to $7.9 million for 1996. This increase
was the result of strong growth in average deposits, in particular, money market
and savings deposits and certificates of deposit.
1996 versus 1995. Net interest income totaled $9.5 million in 1996
compared to $7.8 million in 1995, an increase of $1.7 million or 21.3%. This
resulted in net interest margins of 4.18% and 3.89% and net interest spreads of
3.28% and 3.03% for 1996 and 1995, respectively.
The primary reason for higher net interest income was strong growth in
outstanding loans. Yields on the loan portfolio increased to 9.89% from 9.88%.
Interest and fees on loans increased by $2.0 million or 32.7% while interest on
investment securities increased $676,000 or 7.8%. Offsetting these increases
was a large increase in interest expense due to the growth in savings and money
market account balances and certificates of deposit and an increase in the rate
paid to 4.39% from 4.30% for the year ended 1996 versus 1995.
16
<PAGE>
The following table presents, for the periods indicated, the total dollar
amount of average balances, interest income from average interest-earning assets
and the resultant yields, as well as the interest expense on average interest-
bearing liabilities, expressed both in dollars and rates. No tax equivalent
adjustments were made and all average balances are daily average balances.
Nonaccruing loans have been included in the table as loans carrying a zero
yield.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- -------------------------------- -------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
------------- ---------- -------- ------------- ---------- -------- ------------ --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans....................... $ 96,655 $ 9,572 9.90% $ 81,746 $ 8,084 9.89% $ 61,689 $ 6,093 9.88%
Securities.................. 159,798 10,320 6.46 143,832 9,243 6.43 137,711 8,550 6.21
Federal funds sold and other
earning assets........... 1,030 49 4.76 878 45 5.13 1,245 62 4.98
-------- ------- -------- ------- -------- ------
Total interest-earning
assets............. 257,483 19,941 7.74 226,456 17,372 7.67 200,645 14,705 7.33
Less allowance for loan losses. 746 548 498
-------- -------- --------
Total earning assets, net of 256,737
allowance................... 225,908 200,147
Nonearning assets.............. 18,634 16,794 14,012
-------- -------- --------
Total assets......... $275,371 $242,702 $214,159
======== ======== ========
Liabilities and
stockholders' equity
Interest-bearing liabilities:
Interest-bearing demand
deposits................ $ 19,348 $ 341 1.76% $ 17,862 $ 317 1.77% $ 17,528 $ 350 2.00%
Savings and money market
accounts................. 71,742 2,645 3.69 65,721 2,296 3.49 66,312 2,272 3.43
Certificates of deposit..... 105,347 5,835 5.54 92,610 5,098 5.50 74,750 4,167 5.57
Repurchase agreements and
borrowed funds.......... 4,582 254 5.54 3,676 191 5.20 1,774 106 5.98
-------- ------- ------- -------- ------- -------- ------
Total interest-bearing
liabilities....... 201,019 9,075 4.51 179,869 7,902 4.39 160,364 6,895 4.30
Noninterest-bearing
liabilities:
Noninterest-bearing demand
deposits................ 50,759 44,274 37,669
Other liabilities 1,693 1,455 1,091
-------- -------- --------
Total liabilities.... 253,471 225,598 199,124
Stockholders' equity 21,900 17,104 15,035
-------- -------- --------
Total liabilities and
stockholders' equity $275,371 $242,702 $214,159
======== ======== ========
Net interest income............ $10,866 $ 9,470 $ 7,810
======= ======= =======
Net interest spread (1)........ 3.23% 3.28% 3.03%
Net interest margin (2)........ 4.22% 4.18% 3.89%
</TABLE>
___________
(1) The interest rate spread is the difference between the average yield on
interest-earning assets and the average rate paid on interest-bearing
liabilities.
(2) The net interest margin is equal to net interest income divided by average
interest-earning assets.
17
<PAGE>
The following table presents, for the periods indicated, the dollar amount of
changes in interest income and interest expense for the major components of
interest-earning assets and interest-bearing liabilities and distinguishes
between the increase (decrease) related to higher outstanding balances and the
volatility of interest rates. For purposes of this table, changes attributable
to both rate and volume which can not be segregated have been allocated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
---------------------------- --------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------- --------------
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest-earning assets:
Loans.......................................... $1,474 14 $1,488 $1,981 $ 10 $1,991
Securities..................................... 1,025 52 1,077 380 313 693
Other earning assets........................... 8 (4) 4 (18) 1 (17)
------- ------ ------ ------ ----- ------
Total increase (decrease) in interest income.. 2,507 62 2,569 2,343 324 2,667
------- ------ ------ ------ ----- ------
Interest-bearing liabilities:
Interest-bearing demand deposits............... 26 (2) 24 7 (40) (33)
Savings and money market accounts.............. 210 139 349 (20) 44 24
Certificates of deposit........................ 702 35 737 996 (65) 931
Borrowed funds................................. 47 16 63 113 (28) 85
------- ------ ------ ------ ----- ------
Total increase (decrease) in interest
expense...................................... 985 188 1,173 1,096 (89) 1,007
------- ------ ------ ------ ----- ------
Increase (decrease) in net interest income..... $1,522 ($126) $1,396 $1,247 $413 $1,660
======= ====== ====== ====== ===== ======
</TABLE>
Provisions for Loan Losses
The 1997 provision for loan losses increased to $877,000 from $655,000 in
1996, an increase of $222,000 or 33.9%. The provision for year ended 1996
increased to $655,000 from $200,000 in 1995, an increase of $455,000 or 227.5%.
The increased provisions in 1997 and 1996 relate to the Bank's methodology for
determining the appropriate provision amount which includes an analysis of loan
portfolio and economic trends and other portfolio risks. In addition, a
significant portion of the increase was attributable to a provision for losses
in the Bank's credit card portfolio, which the Bank has under contract to sell
to another bank and is expected to close in August 1998. The Bank does not
anticipate the sale of the credit card portfolio to generate a signifcant gain
or loss or have a mertail impact on the Bank's operations.
Noninterest Income
Noninterest income for the year ended December 31, 1997, was $2.5 million,
an increase of $185,000 or 8.0% over the same period in 1996. Noninterest income
of $2.3 million earned in the year
ended December 31, 1996, represented an increase of $269,000 or 13.1% over the
same period in 1995. The following table presents for the periods indicated the
major changes of noninterest income:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Service fees $1,950 $1,816 $1,520
Net realized gains on sale of available-for-sale securities.. 263 233 237
Other operating income 294 273 296
------ ------ ------
Total noninterest income $2,507 $2,322 $2,053
====== ====== ======
</TABLE>
18
<PAGE>
Service fees were $2.0 million for the year ended December 31, 1997,
compared to $1.8 million for the year ended December 31, 1996, an increase of
$134,000 or 7.4%, and increased $296,000 or 19.5% from 1995 to 1996. This
increase is primarily attributable to an increase in the number of deposit
accounts from 20,784 at December 31, 1995, to 21,871 at December 31, 1996, to
23,144 at December 31, 1997.
Noninterest Expenses
For the year ended December 31, 1997, noninterest expenses totaled $7.6
million, an increase of $695,000 or 10.0% from $6.9 million in 1996, which had
increased $841,000 or 13.8% from $6.1 million in 1995. The increase in
noninterest expenses during these periods was due primarily to increases in
salaries, general and administrative expenses, employee benefits, and data
processing expenses. The efficiency ratio was 58.31% in 1997, 60.12% in 1996,
and 63.45% in 1995. The percentage decrease from 1995 to 1997 was due primarily
to a large increase in earning assets and the Bank's continued efforts to
control overhead expenses.
Salary, general and administrative, and benefit expenses for the year
ended December 31, 1997, were $5.0 million, an increase of $485,000 or 10.7%
from $4.5 million for the year ended December 31, 1996. Salary, general and
administrative, and benefit expenses for the year ended December 31, 1996, were
up $702,000 or 18.3% from the same period in 1995. The increase in both years
was due primarily to the hiring of additional personnel required to accommodate
the Bank's growth. Total full-time equivalent employees at December 31, 1997,
1996, and 1995 were 99, 83, and 77, respectively.
Net occupancy and equipment maintenance expenses increased $45,000 and
$109,000 or 4.5% and 12.3% in 1997 and 1996, respectively. Major categories
included within occupancy expense are building lease expense, depreciation
expense, and maintenance expense. Depreciation expense increased $6,000 and
$39,000 or 1.4% and 10.6% in 1997 and 1996, respectively. These increases were
due primarily to depreciation on equipment provided to new employees and
expenses related to technology upgrades throughout the Bank. Maintenance expense
for the year ended December 31, 1997, was $232,000, an increase of $28,000 or
13.6% compared to $204,000 in 1996 and $182,000 in 1995.
Data processing expenses during 1997 were $795,000, an increase of $92,000
or 13.1% from $703,000 during 1996, which had increased $100,000 or 16.6% from
$603,000 during 1995. This increase was primarily due to a renegotiation of the
Bank's contract for data processing services which are handled by a third party
vendor and the increase in the number of the Bank's deposit accounts.
Postage and printing expense during 1997 decreased to $414,000 from
$436,000 in 1996, a decrease of 5.0%. From 1995 to 1996, postage and printing
increased $100,000, or 29.8%.
Professional fees during 1997 increased to $353,000 from $285,000 in 1996,
a difference of $68,000 or 23.9%. This increase is attributed to accounting and
legal fees related to quarterly reporting and audit expenses. Professional fees
during 1996 increased to $285,000 from $245,000 during 1995, an increase of
$40,000 or 16.3%.
Deposit insurance premiums paid by the Bank totaled $29,000 for 1997,
compared to $2,000 for 1996. In August 1995, the FDIC Board of Directors reduced
the deposit insurance premium paid by the Bank from $0.23 per $100 of deposits
to $0.04 per $100 of deposits and, subsequently, reduced the rate
19
<PAGE>
paid by the Bank to $500 per quarter during 1996. Deposit insurance premiums
were increased effective as of January 1, 1997, to $0.013 per $100 of deposits.
See "Business -- Supervision and Regulation."
Income taxes
Income tax expense includes the regular federal income tax at the statutory
rate. The amount of federal income tax expense is influenced by the amount of
taxable income, the amount of tax-exempt income, the amount of nondeductible
interest expense, and the amount of other nondeductible expenses. In 1997,
income tax expense was $1.2 million, an increase of $119,000 or 11.5% from $1.0
million in 1996. In 1996, income tax expense was $1.0 million, an increase of
$352,000 or 51.5% from the $683,000 of income tax expense in 1995. The higher
tax expense in 1996 and 1997 is principally due to an increase in taxable income
each year. The effective tax rates for 1997, 1996, and 1995, respectively, were
23.8%, 24.7%, and 19.2%.
Impact of Inflation
The effects of inflation on the local economy and on the Bank's operating
results have been relatively modest for the past several years. Since
substantially all of the Bank's assets and liabilities are monetary in nature,
such as cash, securities, loans and deposits, their values are less sensitive to
the effects of inflation than to changing interest rates, which do not
necessarily change in accordance with inflation rates. The Bank tries to control
the impact of interest rate fluctuations by managing the relationship between
its interest rate sensitive assets and liabilities. See "Financial Condition --
Interest Rate Sensitivity and Liquidity" below.
FINANCIAL CONDITION
Loan Portfolio
Total loans increased by $11.6 million or 12.7% to $102.9 million at
December 31, 1997. During 1996, total loans increased $23.4 million or 34.5% to
$91.3 million from $67.9 million at December 31, 1995. The increase in 1997 was
in line with the Bank's increase in deposits and projected loan growth. The
extraordinary increase in 1996 was attributable to loans generated from the
Sugar Land branch office which opened in December, 1995.
At December 31, 1997, total loans represented 39.4% of deposits and 34.8%
of total assets. Total loans as a percentage of deposits were 38.3% at December
31, 1996, as compared to 32.5% at December 31, 1995. Total loans as a percentage
of total assets were 35.4% at December 31, 1996, as compared with 29.3% at
December 31, 1995.
20
<PAGE>
The following table summarizes the loan portfolio of the Bank by major
category as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ------------------ ----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------- ------- ------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
industrial $25,23 24.5% $22,717 24.9% $18,180 26.8% $15,564 26.4% $11,919 24.3%
Real estate:
Construction and land
development.......... 10,673 10.4 6,285 6.9 3,240 4.8 3,301 5.6 2,042 4.2
1-4 family residential.. 10,808 10.5 11,245 12.3 8,329 12.3 7,913 13.4 6,136 12.6
Commercial owner
occupied............. 17,846 17.3 15,998 17.5 9,912 14.6 7,280 12.3 6,495 13.3
Other................... 378 0.4 340 0.4 100 0.1 123 0.2 139 0.3
Consumer................... 37,940 36.9 34,699 38.0 28,114 41.4 24,815 42.1 22,153 45.3
--------- ----- ------- ------ ------- ----- ------- ----- ------- -----
Total loans..........$102,875 100.0% $91,284 100.0% $67,875 100.0% $58,996 100.0% $48,884 100.0%
======== ===== ====== ====== ======= ===== ======= ===== ======= =====
</TABLE>
The primary lending focus of the Bank is on small commercial businesses,
commercial and residential real estate, and consumer loans. The Bank offers a
variety of commercial lending products including term loans, lines of credit,
and equipment financing. A broad range of short and medium-term commercial
loans, both collateralized and uncollateralized, are made available to
businesses for working capital (including inventory and receivables), business
expansion (including acquisitions of real estate and improvements), and the
purchase of equipment and machinery. The purpose of a particular loan generally
determines its structure. While the Bank's lending limit is approximately $4.7
million, its largest currently outstanding loan is approximately $2.5 million,
and the average size of its 20 largest loans is approximately $792,000. The Bank
generally seeks a mix of 50% consumer loans, 25% small business loans, and 25%
real estate loans although the mix will vary from time-to-time due to market
conditions and the Bank's policy allows for a variance of up to 10% in any
category.
The Bank seeks credit risks of good quality within its target markets that
display stable operating histories and cash flows and secondary sources of
repayment from tangible collateral and personal guarantees. Generally, the
Bank's commercial loans are underwritten in the Bank's primary market area on
the basis of the borrower's ability to service such debt from income. The Bank
maintains rigorous credit approval and credit quality assurance policies. Under
these policies, all loans in excess of $50,000 that are not collateralized by a
certificate of deposit, a deposit account, or vehicles must be approved by the
Bank's loan committee, which includes four outside directors. The loan committee
meets on an as needed basis in order to provide prompt response to customer's
loan requests. As a general practice, the Bank takes as collateral a lien on
any available real estate, equipment, or other assets and personal guarantees.
Working capital loans are primarily collateralized by short-term assets whereas
term loans are primarily collateralized by long-term assets. Business loans
secured by assets other than real estate generally range from $20,000 to
$100,000 with the largest such loan being $255,000.
A substantial portion of the Bank's real estate loans consists of loans
collateralized by real estate and other assets of commercial customers. Real
estate loans range from $6,000 to $1.6 million. The Bank originates single-
family residential mortgage loans collateralized by owner-occupied properties
through the
21
<PAGE>
Bank's subsidiary CNB Mortgage Company. At its main office, the Bank accepts
mortgage applications, gathers necessary information and documentation,
processes applications, and approves applicants in accordance with the
underwriting guidelines of the purchasers of the mortgages. The Bank currently
sells all residential mortgages it originates at closing and does not service
any residential mortgages.
Loans collateralized by single-family residential real estate generally
have been originated in amounts of no more than 80% of appraised value. The Bank
requires mortgage title insurance and hazard insurance in the amount of the
loan. Although the contractual loan payment periods for single-family
residential real estate loans are generally for a three to seven-year period,
such loans often remain outstanding for significantly shorter periods than their
contractual terms.
Consumer loans made by the Bank 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. Consumer loans typically range
from $5,000 to $25,000 with the largest consumer loan being $138,000.
The contractual maturity ranges of the commercial and industrial, real
estate mortgage, and real estate construction loan portfolio and the amount of
such loans with fixed interest rates and floating rates in each maturity range
as of December 31, 1997, are summarized in the following table:
DECEMBER 31, 1997
---------------------------------------
AFTER ONE AFTER
ONE YEAR THROUGH FIVE
OR LESS FIVE YEARS YEARS TOTAL
--------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
Commercial and industrial.............. $13,587 $11,533 $ 110 $25,230
Real estate mortgage................... 5,387 12,343 11,302 29,032
Real estate construction............... 5,123 2,870 2,680 10,673
------- ------- ------- -------
Total........................ $24,097 $26,746 $14,092 $64,935
======= ======= ======= =======
Loans with a fixed interest rate....... $10,522 $22,224 $10,106 $42,852
Loans with a floating interest rate.... 13,575 4,522 3,986 22,083
------- ------- ------- -------
Total........................ $24,097 $26,746 $14,092 $64,935
======= ======= ======= =======
Nonperforming Assets
The Bank has well developed procedures in place to maintain a high quality
loan portfolio. These procedures include credit quality policies that begin with
approval of lending policies and underwriting guidelines by the Board of
Directors, an independent loan review conducted by outside auditors, low
individual lending limits for officers, Loan Committee approval for large credit
relationships, and quality loan documentation procedures. The Bank's lending
officers and loan personnel identify and analyze weaknesses in the portfolio and
report credit risk changes on a monthly basis to the Bank's Board of Directors.
The Bank also maintains a well developed monitoring process for credit
extensions in excess of $50,000. The Bank performs monthly and quarterly
concentration analyses based on collateral types, business lines, large credit
sizes, and officer portfolio loads. The Bank has established underwriting
guidelines to be followed by its officers. The Bank also monitors its
delinquency levels for any negative
22
<PAGE>
or adverse trends. There can be no assurance, however, that the Bank's loan
portfolio will not become subject to increasing pressures from deteriorating
borrower credit due to general economic conditions.
The Bank generally places a loan on nonaccrual status and ceases accruing
interest when loan payment performance is deemed unsatisfactory. All loans past
due 90 days, however, are placed on nonaccrual status, unless the loan is both
well collateralized and in the process of collection. Cash payments received
while a loan is classified as nonaccrual are recorded as a reduction of
principal as long as doubt exists as to collection. The Bank is sometimes
required to revise a loan's interest rate or repayment terms in a troubled debt
restructuring.
The Bank's conservative lending approach has resulted in strong asset
quality. Nonperforming assets at December 31, 1997, were $1.3 million, compared
with $522,000 at December 31, 1996, and $458,000 at December 31, 1995. This
resulted in a ratio of nonperforming assets to loans plus other real estate of
1.31%, 0.57% and 0.67% at December 31, 1997, 1996, and 1995, respectively. The
increase at December 31, 1997 was due to a number of 1-4 family construction
loans that were in the process of being converted from construction loans to
permanent loans and sold but had not been converted at year-end. $624,000 of
these loans were converted and sold in January 1998, which reduced total
nonperforming assets to approximately $725,000, resulting in a ratio of
nonperforming loans to loans plus other real estate of 0.70% and a ratio of
nonperforming assets to total assets of 0.25%.
Loans listed as nonaccrual and restructured loans are not considered to be
material. If interest had been accrued on nonaccrual loans, such income would
have been approximately $30,000, $21,000 and $26,000 for the years ended
December 31, 1997, 1996, and 1995, respectively.
The following table presents information regarding nonperforming assets as
of December 31, 1993 through 1997:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 279 $ 301 $ 323 $ 398 $ 407
Accruing loans 90 or more days past due........ 1,016 191 97 84 78
Restructured loans 54 30 38 63 71
Other real estate and foreclosed property...... -- -- -- -- --
------ ----- ----- ----- -----
Total nonperforming assets............... $1,349 $ 522 $ 458 $ 545 $ 556
====== ===== ===== ===== =====
Nonperforming assets to total loans and other
real estate................................ 1.31% 0.57% 0.67% 0.92% 1.14%
Nonperforming assets to total assets........... 0.46 0.20 0.20 0.26 0.30
</TABLE>
23
<PAGE>
Allowance for Loan Losses
The allowance for loan losses is a reserve established through charges to
earnings in the form of a provision for loan losses. Based on an evaluation of
the loan portfolio, management presents a monthly review of the allowance for
loan losses to the Board of Directors, indicating any changes in the allowance
since the last review and any recommendations as to adjustments in the
allowance. In making its evaluation, management considers the diversification by
industry of the Bank'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 Bank's financial statements by its independent auditors.
Charge-offs occur when loans are deemed to be uncollectible.
In order to determine the adequacy of the allowance for loan losses,
management considers the risk classification or delinquency status of loans and
other factors, such as collateral value, portfolio composition, trends in
economic conditions, and the financial strength of borrowers. Management
establishes specific allowances for loans which management believes require
reserves greater than those allocated according to their classification or
delinquent status. An unallocated allowance is also established based on the
Bank's historical charge-off experience. The Bank then charges to operations a
provision for loan losses determined on an annualized basis to maintain the
allowance for loan losses at an adequate level determined according to the
foregoing methodology.
Management believes that the allowance for loan losses at December 31, 1997,
is adequate to cover losses inherent in the portfolio as of such date. There can
be no assurance, however, that the Bank will not sustain losses in future
periods, which could be greater than the size of the allowance at December 31,
1997.
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data for the years ended December
31, 1993 through 1997:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1997 1996 1995 1994 1993
----- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at
January 1.................................. $ 687 $ 484 $ 522 $ 577 $ 645
Provision for loan losses...................... 877 655 200 126 60
Charge-offs.................................... (636) (478) (271) (225) (226)
Recoveries..................................... 81 26 33 44 98
------ ------- ------- ------ -------
Allowance for loan losses at
December 31................................ $1,009 $ 687 $ 484 $ 522 $ 577
====== ======= ======= ====== =======
Allowance to period-end loans.................. 0.98% 0.75% 0.71% 0.88% 1.18%
Net charge-offs (recoveries) to
average loans............................... 0.57 0.55 0.39 0.34 0.27
Allowance to period-end
nonperforming loans........................ 74.80 131.61 105.68 95.78 103.78
</TABLE>
The following tables describe the allocation of the allowance for loan
losses among various categories of loans and certain other information as of the
dates indicated. The allocation is made for
24
<PAGE>
analytical purposes and is not necessarily indicative of the categories in which
future loan losses may occur. The total allowance is available to absorb losses
from any segment of loans.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1997 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............ $ 287 24.5% $ 194 24.9%
Real estate.......................... 41 38.6 48 37.1
Consumer............................. 547 36.9 354 38.0
Unallocated.......................... 134 91
Total allowance for loan losses....... $1,009 $ 687
====== =====
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------
1995 1994 1993
----------------------- ----------------------- -------------------------
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............ $ 121 26.8% $ 176 26.4% $ 190 24.3%
Real estate.......................... 51 31.8 94 31.5 107 30.4
Consumer 312 41.4 218 42.1 280 45.3
Unallocated.......................... -- 34 --
------ ----- -----
Total allowance for loan losses....... $ 484 $ 522 $ 577
====== ===== =====
</TABLE>
Effective January 1, 1995, the Bank adopted Statement of Financial
Accounting Standards ("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 Disclosure." Under SFAS No. 114, as amended,
a loan is considered impaired, based on current information and events, if it is
probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is based on the present value of
expected future cash flows discounted at the loan's effective interest rate or
the loan's observable market price or based on the fair value of the collateral
if the loan is collateral-dependent. The adoption of SFAS No. 114 did not result
in any additional provision for loan losses.
Securities
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," at the date of purchase, the Bank is required to
classify debt and equity securities into one of three categories: held-to-
maturity, trading or available-for-sale. Investments in debt securities are
classified as held-to-maturity and measured at amortized cost in the financial
statements only if management has the intent and ability to hold those
securities to maturity. Securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading and measured
at fair value in the financial statements with unrealized gains and losses
included in earnings. Securities not classified as either held-to-maturity or
trading are classified as available-for-sale and measured at fair value in the
financial statements
25
<PAGE>
with unrealized gains and losses reported, net of tax, in a separate component
of stockholders' equity until realized. Gains and losses on sales of securities
are determined using the specific-identification method.
In November 1995, the Financial Accounting Standards Board issued "A Guide
to Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities" which provided a one-time reassessment of the
appropriateness of the classifications of all securities. Based on such
reassessment, the Bank transferred a portion of its securities in the held-to-
maturity portfolio to the available-for-sale portfolio in November 1995. The
transferred securities had an amortized cost of approximately $27.1 million and
net unrealized gains of approximately $930,000. The transfer resulted in an
increase of approximately $614,000 to stockholders' equity net of deferred
income tax of $316,000. Such reassessment does not change management's intent to
hold other debt securities to maturity in the future. At this time,
classification of all securities as available-for-sale allows the Bank to manage
its investment portfolio more effectively and to enhance the average yield on
the portfolio.
The following table summarizes the amortized cost of securities held by the
Bank as of the dates shown:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
------- ------- -------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Government and agency
securities................................................................... $ 66,140 $ 66,632 $ 72,809 $ 67,880 $ 36,713
Mortgage-backed securities.................................................... 50,497 52,600 48,748 45,294 51,039
Obligations of state and political subdivisions............................... 48,884 25,962 23,992 28,199 30,744
Other securities.............................................................. 2,508 1,794 958 918 831
-------- -------- -------- -------- --------
Total securities............................................................. $168,029 $146,988 $146,507 $142,291 $119,327
======== ======== ======== ======== ========
</TABLE>
The following table summarizes the carrying value and classification of
securities as of the dates shown.
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Available-for-sale............................................ $ 93,036 $ 79,109 $ 77,513
Held-to-maturity.............................................. 76,795 68,396 70,781
-------- -------- --------
Total securities.............................................. $169,831 $147,505 $148,294
======== ======== ========
</TABLE>
The following tables present the amortized cost of securities classified as
available-for-sale and their approximate values at December 31, 1997, December
31, 1996, and December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------------------ ------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE COST GAIN LOSS VALUE
--------- ----------- ---------- ------ --------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and agency
securities............... $17,085 $ 262 $ (1) $17,346 $30,058 $ 174 $ (86) $30,146
Mortgage-backed securities.. 22,757 259 -- 23,016 20,778 109 (230) 20,657
Obligations of state and
political subdivisions.... 48,884 1,363 (81) 50,166 25,962 555 (5) 26,512
Other securities............ 2,508 -- -- 2,508 1,794 -- -- 1,794
------- ------ ------- ------- ------- ------ ----- -------
Total securities.......... $91,234 $1,884 $(82) $93,036 $78,592 $ 838 $(321) $79,109
======= ====== ======= ======= ======= ====== ===== =======
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government and agency
securities................................................. $ 34,191 $ 512 $ (46) $34,657
Mortgage-backed securities................................... 16,585 434 -- 17,019
Obligations of state and political subdivisions.............. 23,992 887 -- 24,879
Other securities............................................. 958 -- -- 958
-------- ----- ----- ------
Total securities............................................ $ 75,726 $1,833 $ (46) $77,513
======= ===== ===== ======
</TABLE>
The following tables present the amortized cost of securities classified as
held-to-maturity and their approximate fair values at December 31, 1997,
December 31, 1996, and December 31, 1995:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------------------------------------- ----------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gain Loss Value Cost Gain Loss Value
--------- ---------- ---------- ------ --------- ----------- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and agency
securities............... $49,055 $ 982 $ (24) $50,013 $36,574 $ 446 $(251) $36,769
Mortgage-backed securities. 27,740 195 (379) 27,556 31,822 217 (470) 31,569
------- ------ ----- ------- --------- ---------- ---------- -------
Total securities.......... $76,795 $1,177 $(403) $77,569 $68,396 $ 663 $(721) $68,338
======= ====== ===== ======= ========= ========== ========== =======
December 31, 1995
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
---------- ---------- ---------- -------
(Dollars in thousands)
U.S. Government and agency
securities........................................................................... $ 38,618 $ 467 $(256) $38,829
Mortgage-backed securities............................................................ $ 32,163 541 (85) 32,619
------- ----- ---- ------
Total securities..................................................................... $ 70,781 $1,008 $(341) $71,448
======= ===== ==== ======
</TABLE>
U.S. Government and agency securities are primarily securities issued by
the Federal National Mortgage Association ("FNMA"), Federal Home Loan Bank
("FHLB"), and Federal Home Loan Mortgage Corporation ("FHLMC"). Mortgage-backed
securities are securities that have been developed by pooling a number of real
estate mortgages and are principally issued by federal agencies such as the
FNMA, FHLMC and the Governmental National Mortgage Association. These
securities have high credit ratings, and minimum regular monthly cash flows of
principal and interest are guaranteed by the agencies. The Bank has no mortgage-
backed securities that have been issued by non-agency entities.
At December 31, 1997, securities totaled $169.8 million, an increase of
$22.3 million from $147.5 million at December 31, 1996. The increase occurred
primarily in obligations of state and political subdivisions. During 1996,
securities decreased $789,000 from $148.3 million at December 31, 1995. The
yield on the securities portfolio for 1997 was 6.46% while the yield was 6.43%
in 1996 and 6.21% in 1995.
At December 31, 1997, 80.5% of the mortgage-backed securities held by the
Bank had final maturities of more than 10 years. At December 31, 1997,
approximately $24.6 million of the Bank's mortgage-backed securities earned
interest at floating rates and repriced within one year, and, accordingly, were
less susceptible to declines in value should interest rates increase.
27
<PAGE>
The following table summarizes the contractual maturity of investments on
an amortized cost basis (including securities and interest-bearing deposits) and
their weighted average yields at December 31, 1997 (the yields on tax exempt
obligations have not been adjusted to their tax equivalent basis):
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------------------------------------
After One After Five
Year but Years but
Within Within Within
One Year Five Years Ten Years After Ten Years
-------- ---------- --------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield Total Yield
------ ----- ------ ----- ------ ------ ------ ------ ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and agency
securities.............. $ 9,038 5.42% $ 5,009 7.23% $48,536 7.27% $ 3,557 4.95% $ 66,140 6.89%
Mortgage-backed securities.. 3,399 6.17 6,428 6.67 -- -- 40,670 6.58 50,497 6.56
Obligations of states and
political subdivisions... 1,590 4.55 8,504 4.82 4,130 5.07 34,660 5.41 48,884 5.25
Other securities............ -- -- -- -- -- -- 2,508 6.42 2,508 6.42
Interest-bearing deposits... 3,177 4.76 -- -- -- -- -- -- 3,177 4.76
------- ---- ------- ---- ------- ----- ------ ---- -------- ----
Total securities........... $17,204 5.37% $19,941 6.02% $52,666 7.10% $81,395 6.01% $171,206 6.28%
======= ==== ======= ==== ======= ===== ======= ==== ======== ====
</TABLE>
Deposits
The Bank offers a variety of deposit accounts having a wide range of
interest rates and terms. The Bank's deposits consist of demand, savings, NOW
accounts, money market, and time accounts. The Bank relies primarily on
advertising, competitive pricing policies, and customer service to attract and
retain these deposits. As of December 31, 1997, the Bank has no deposits
classified as brokered funds. Deposits provide generally all the funding for the
Bank's lending and investment activities and the interest paid for deposits must
be managed carefully to control the level of interest expense.
The Bank's ratio of average demand deposits to average total deposits for
the years ended December 31, 1997, 1996, and 1995 were 20.4%, 20.0%, and 19.2%,
respectively.
Average total deposits during 1997 increased to $246.9 million from $220.4
million in 1996, an increase of $26.5 million or 12.0%. In addition, average
noninterest-bearing deposits increased to $50.5 million in 1997 from $44.2
million in 1996 due to the increase in the number of deposit accounts. Average
deposits in 1996 rose to $220.4 million from $196.2 million in 1995, an increase
of $24.2 million or 12.3%.
The daily average balances and weighted average rates paid on deposits for
each of the years ended December 31, 1997, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1997 1996 1995
---------------- --------------- ----------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ---- ------ ---- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
NOW accounts...................... $ 19,348 1.76% $ 17,862 1.77% $ 17,528 1.96%
Regular savings................... 6,731 2.24 6,437 2.35 6,029 2.70
Money market...................... 65,010 3.84 59,284 3.62 60,283 3.50
CDS less than $100,000............ 61,097 5.53 54,550 5.50 45,345 5.59
CDS $100,000 and over............. 27,544 5.52 24,040 5.54 17,571 5.63
IRAs & QRPs....................... 16,706 5.62 14,020 5.49 11,834 4.58
-------- ----- -------- ------ ------- ----
Total interest-bearing deposits.. 196,436 4.49% 176,193 4.38% 158,590 4.28%
-------- ----- -------- ------ ------- ----
Noninterest-bearing deposits...... 50,494 -- 44,274 -- 37,669 --
-------- ----- -------- ------ ------- ----
Total deposits................... $246,930 3.57% $220,467 3.50% $196,259 3.46%
======== ===== ======== ====== ======= ====
</TABLE>
28
<PAGE>
The following table sets forth the maturity and repricing of the Bank's
certificates of deposit that are $100,000 or greater as of the dates indicated:
DECEMBER 31,
--------------------------
1997 1996 1995
------- ------ -------
(DOLLARS IN THOUSANDS)
3 months or less.............. $ 9,000 $11,368 $ 6,615
Between 3 months and 1 year.. 15,110 14,443 8,852
Over 1 year................... 7,063 3,372 5,275
------- ------- -------
Total CDS $100,000 and over.. $31,173 $29,183 $20,742
======= ======= =======
Borrowings
Other short-term borrowings generally represent borrowings from FHLB with
maturities ranging from one to thirty days. Information relating to these
borrowings is summarized as follows:
DECEMBER 31,
-------------------------------
1997 1996 1995
------- ------ -------
(DOLLARS IN THOUSANDS)
Other short-term borrowings:
Average............................ $ 4,582 $3,676 $1,774
Year-end........................... --(1) --(1) 3,900
Maximum month-end balance during year... 15,100 7,500 7,600
Interest rate:
Average............................ 5.46% 5.20% 5.96%
Year-end........................... --%(1) --%(1) 5.75%
- --------------------
(1) There were no borrowings at year-end.
Interest Rate Sensitivity and Liquidity
Asset and liability management is concerned with the timing and magnitude
of repricing assets compared to liabilities. It is the objective of the Bank to
generate stable growth in net interest income and to attempt to control risks
associated with interest rate movements. In general, management's strategy is to
reduce the impact of changes in interest rates on its net interest income by
maintaining a favorable match between the maturities or repricing dates of its
interest-earning assets and interest-bearing liabilities. The Bank's asset and
liability management strategy is formulated and monitored by the Investment-
Asset/ Liability Committee, which is composed of senior officers and directors
of the Bank, in accordance with policies approved by the Bank's Board of
Directors. This Committee meets regularly to review, among other things, the
sensitivity of the Bank's assets and liabilities to interest rate changes, the
book and market values of assets and liabilities, unrealized gains and losses,
purchase and sale activity, and maturities of investments and borrowings. The
Investment-Asset/Liability Committee also approves and establishes pricing and
funding decisions with respect to the Bank's overall asset and liability
composition. The Committee reviews the Bank's liquidity, cash flow flexibility,
maturities of investments, deposits and borrowings, deposit activity, current
market conditions, and interest rates on both a local and national level.
One traditional test of interest rate sensitivity is the interest rate
sensitivity gap ("GAP"), which is defined as the difference between interest-
earning assets and interest-bearing liabilities maturing or
29
<PAGE>
repricing within a given time period. A GAP is considered positive when the
amount of interest rate sensitive assets exceeds the amount of interest rate
sensitive liabilities. A GAP is considered negative when the amount of interest
rate sensitive liabilities exceeds interest rate sensitive assets. During a
period of rising interest rates, a negative GAP would tend to adversely affect
net interest income, while a positive GAP would tend to result in an increase in
net interest income. During a period of falling interest rates, a negative GAP
would tend to result in an increase in net interest income, while a positive GAP
would tend to affect net interest income adversely. While the interest rate
sensitivity GAP is a useful measurement and contributes toward effective asset
and liability management, it is difficult to predict the effect of changing
interest rates solely on that measure. Because different types of assets and
liabilities with the same or similar maturities may react differently to changes
in overall market rates or conditions, changes in interest rates may affect net
interest income positively or negatively even if an institution were perfectly
matched in each maturity category.
The following table sets forth an interest rate sensitivity analysis for
the Bank as of December 31, 1997:
<TABLE>
<CAPTION>
Volumes Subject to Repricing Within
------------------------------------------------------------
After
0-30 days 31-180 days 181-360 Days One year Total
--------- ----------- ------------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities and interest-earning funds.. $ 3,177 $ 3,066 $ 35,710 $131,055 $173,008
Loans.................................. 5,310 12,717 14,810 69,772 102,609
Overdrafts 266 -- -- -- 266
------- -------- -------- ------- --------
Total interest-earning assets......... 8,753 15,783 50,520 200,827 275,883
------- -------- -------- ------- --------
Interest-bearing liabilities:
Demand, money market and savings
deposits.............................. $ 95,927 $ -- $ -- $ $ 95,927
Certificates of deposit and
other time deposits................... 9,517 34,840 38,275 27,750 110,382
------- -------- -------- ------- --------
Total interest-bearing liabilities.... 105,444 34,840 38,275 27,750 206,309
------- -------- -------- ------- --------
Period GAP $(96,691) $ (19,057) $ 12,245 $173,077 $ 69,574
Cumulative GAP $(96,691) $(115,748) $(103,503) $ 69,574
Period GAP to total assets.............. (32.71)% (6.45)% 4.14% 58.55%
Cumulative GAP to total assets.......... (32.71)% (39.16)% (35.02)% 23.53%
</TABLE>
The Bank seeks to maintain rate sensitive assets minus rate sensitive
liabilities divided by total assets within 35% on a cumulative basis for one
year. At December 31, 1997, this ratio was a negative 35.02%.
Shortcomings are inherent in any GAP analysis since certain assets and
liabilities may not move proportionally as interest rates change. Consequently,
in addition to GAP analysis, the Bank uses a simulation model and shock analysis
to test the interest rate sensitivity of net interest income and the balance
sheet, respectively. Based on the Bank's December 31, 1997, simulation analysis,
the Bank estimates that a 200 basis point rise in interest rates over the next
twelve-month period would result in a 0.7% decline in net interest income. This
is a result of the Bank maintaining a significant portion of its interest
earning assets in fixed rate securities rather than adjustable rate securities
or loans tied to a prime lending rate that adjusts as interest rates change.
The Investment-Asset/Liability Committee regularly reviews interest rate
risk exposure by forecasting the impact of alternative interest rate
environments on net interest income. The Bank adjusts
30
<PAGE>
interest sensitivity accordingly during the year through changes in the mix of
assets and liabilities. The Bank's Investment-Asset/Liability Committee has
recently adopted specific investment policies directed at reducing the length of
maturity of securities that it purchases and shifting a portion of the
securities portfolio to adjustable rate securities.
Liquidity involves the Bank'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 Bank
on an ongoing basis. During 1997 the Bank's liquidity needs have primarily been
met by growth in deposits, as previously discussed. Access to borrowed funds
from the FHLB is available and has been utilized to take advantage of investment
opportunities. The cash position, supplemented by amortizing securities and loan
portfolios, have generally created an adequate liquidity position.
FHLB advances may be utilized from time to time as either a short-term
funding source or a long- term funding source. FHLB advances can be particularly
attractive as a long-term funding source to balance interest rate sensitivity
and reduce interest rate risk. The Bank is eligible for two borrowing programs
through the FHLB. The first, called "Short Term Fixed" (STF), requires delivery
of eligible securities for collateral. At December 31, 1997, the Bank had a loan
value of approximately $111.5 million in securities maintained in safekeeping at
the FHLB which qualify as eligible collateral. Maturities under this program
range from 1-35 days.
The second borrowing program, the "Blanket Borrowing Program" (BBP), is
under an overnight borrowing agreement which does not require the delivery of
specific collateral. Borrowings are limited to a maximum of 75% of the Bank's 1-
4 family mortgage loans. At December 31, 1997, the Bank had approximately $6.5
million in potential borrowings available under this program. Under this
program, the Bank must hold approximately $1 in FHLB stock for each $10 in
borrowings. In addition, under the Blanket Borrowing Program, the Bank may
deliver specific collateral which will dramatically increase total potential
borrowings. Upon delivery, the FHLB will review the collateral and assign a
loan-to-value ratio of approximately 90%. In addition to real estate loans, the
FHLB will accept delivery of credit card and installment loans. The advances are
limited to 50% of assets or total eligible collateral, whichever is less. The
advances are subject to the stock purchase requirements as mentioned above. At
December 31, 1997, the Bank had total potential borrowings under the various
programs discussed above of $21.4 million.
Capital Resources
Stockholders' equity increased to $31.6 million at December 31, 1997, from
$17.9 million at December 31, 1996, an increase of $13.8 million, or 77.1%. This
increase was primarily the result of net income of $3.7 million and the proceeds
of the sale of 1,150,000 shares of Common Stock in October 1997, in the amount
of $11.1 million. During 1996, stockholders' equity increased by $1.0 million,
or 5.9%, from $16.9 million at December 31, 1995.
Capital management consists of providing equity to support both current and
future operations. The Bank is subject to capital adequacy requirements imposed
by the OCC. The OCC has adopted risk-based capital requirements for assessing
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
31
<PAGE>
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 guidelines issued by the OCC
apply to the Bank. These guidelines relate a financial institution's capital to
the risk profile of its assets. The risk-based capital standards require all
financial organizations to have "Tier 1 capital" of at least 4.0% of risk-
adjusted assets and "total risk-based" capital (Tier 1 and Tier 2) of at least
8.0% of risk-adjusted assets. "Tier 1 capital" includes, generally, common
stockholders' equity and qualifying perpetual preferred stock, together with
related surpluses and retained earnings, qualifying perpetual preferred stock,
and minority interest in equity accounts of consolidated subsidiaries less
deductions for goodwill and various other intangibles. "Tier 2 capital" may
consist of a limited amount of intermediate-term preferred stock, a limited
amount of 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 ("Tier 2
capital"). The sum of Tier 1 capital and Tier 2 capital is "total risk-based
capital."
The OCC has also adopted guidelines which supplement the risk-based capital
guidelines with a minimum leverage ratio of Tier 1 capital to average total
consolidated assets ("leverage ratio") of 3.0% for institutions with well
diversified risk, including no undue interest rate exposure; excellent asset
quality; high liquidity; good earnings; and that are generally considered to be
strong banking organizations, rated composite 1 under applicable federal
guidelines, and that are not experiencing or anticipating significant growth.
Other banking organizations are required to maintain a leverage ratio of at
least 4.0% to 5.0%. These rules further provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
capital positions substantially above the minimum supervisory levels and
comparable to peer group averages, without significant reliance on intangible
assets.
The following table provides a comparison of the Bank's leverage and risk-
weighted capital ratios as of December 31, 1997, to the minimum regulatory
standards:
WELL-CAPITALIZED
MINIMUM MINIMUM BANK
REQUIRED REQUIRED RATIO
-------- ---------- --------
Leverage ratio 3.00%(1) 5.00% 11.10%
Tier 1 risk-based capital ratio 4.00% 6.00% 21.42%
Risk-based capital ratio 8.00% 10.00% 22.13%
- -----------
(1) The OCC has the authority to require the Bank to maintain a leverage ratio
of up to 200 basis points above the required minimum.
Pursuant to Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), each federal banking agency revised its risk-based capital standards
to ensure that those standards take adequate account of interest rate risk,
concentration of credit risk and the risks of nontraditional activities, as well
as reflect the actual performance and expected risk of loss on multifamily
mortgages. Also pursuant to FDICIA, each federal banking agency has promulgated
regulations setting the levels at which an insured institution would be
considered "well-capitalized," "adequately-capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized." Under the
Federal Reserve Board's regulations, the Bank is classified "well-capitalized"
for purposes of prompt corrective action. See "Supervision and Regulation."
32
<PAGE>
YEAR 2000
The Year 2000 issue is the result of many existing computer programs using
two digits rather than four to identify a year in a date field. These programs
were designed and developed without considering the impact of the upcoming
change in the century. Computer hardware, date-driven automated equipment, and
computer software may recognize a date using "00" as the year 1900 rather than
the year 2000. If not corrected, many computer systems could fail or create
erroneous results causing disruptions of operations, including a temporary
inability to process transactions or engage in normal business activities. The
Year 2000 issue affects virtually all companies and organizations.
In May 1997, the OCC issued an advisory letter to all national banks
concerning the Year 2000 issue. The OCC has directed that all national banks
must largely complete all software code enhancements and revisions, hardware
upgrades, and other associated changes by December 31, 1998. Between January 1,
1999 and the end of the year, banks must test and implement their Year 2000
conversion projects. In addition, the OCC is conducting an examination of each
bank's Year 2000 preparedness.
The Bank has completed an internal review of all computer hardware, date-
sensitive automated equipment, and software. Some of the Bank's software will
require modification or replacement so that applications and computer systems
will properly use dates beyond December 31, 1999. The Bank is using both
internal and external resources to correct or replace and test in-house code to
ensure uninterrupted customer service. The Bank believes that through
modifications to existing software and conversion to new software, the Year 2000
issue will be adequately addressed. The Bank is also working with its third
party data processing vendor to coordinate their Year 2000 activities with the
Bank's to ensure Year 2000 readiness.
The Bank plans to complete its Year 2000 readiness project within one year
and should begin significant testing of programs during the third quarter of
1998. The Bank currently expects to incur approximately $100,000 in programming
and equipment costs in connection with the Year 2000 project which is being
funded through operating cash flows, will be expensed or capitalized as incurred
over the next two years, and is not expected to have any material adverse effect
on the Bank's results of operations.
The Bank's Year 2000 readiness project costs include the estimated costs
and time associated with the impact of the Bank's primary third party data
processing vendor's Year 2000 issues and are based on presently available
information. The costs associated with the Year 2000 readiness project and the
date on which the Bank plans to complete the project are based on management's
best estimates, which were derived using assumptions of future events including
the availability of certain resources, third party vendors Year 2000 plans, and
other factors. There is no assurance that the Bank's estimates will be realized
and actual results could differ materially. Specific factors that might cause
such a material difference include the availability and cost of trained
programming personnel and the ability to locate and correct all relevant
computer code. In addition, there can be no assurance that the systems and
applications of other companies on which the Bank's systems and applications
rely will be timely converted, that a fail to convert by another company, or
that a conversion that is incompatible with the Bank's systems and applications
would not have a material adverse impact on the Bank.
33
<PAGE>
OTHER ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1997, the Bank adopted SFAS No. 125, Accounting for
Transfers and Servicing of Assets and Extinguishments of Liabilities. This
statement requires that accounting and reporting standards for the transfer and
servicing of financial assets and extinguishments of liabilities be based on
consistent application of financial components approach that focuses on control.
Under this approach, after a transfer of financial assets, the Bank recognizes
the financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control had been surrendered, and
derecognizes liabilities when extinguished. This statement provides consistent
standards for distinguishing transfers of financial assets that ser sales from
transfers that are secured borrowings. Provisions of SFAS No. 125 that deal with
securities lending, repurchase and dollar repurchase agreements, and the
recognition of collateral will not be adopted until January 1, 1998, as provided
by SFAS No. 127 which allows the deferral of these items. The adoption of SFAS
No. 125 is not expected to have a material impact on the Bank's financial
condition or results of operation.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement establishes standards for reporting and disclosure of
comprehensive income and its components. Comprehensive income is defined as the
change in equity during a period. Comprehensive income includes net income and
other comprehensive income which refers to unrealized gains and losses that
under generally accepted accounting principles are excluded from net income.
Under this statement for 1998, the Bank will include a comprehensive income
statement that is presented as a financial statement.
In June 1997, the FASB also issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. This statement establishes
standards and requirements for public enterprises regarding information about
operating segments in annual financial statements. This statement also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Operating segments are components of an
enterprise that are evaluated regularly by the chief executive officer in
deciding how to allocate resources and in assessing performance.
The adoption of these statements will impact the disclosures in the Bank's
financial statements, however, management does not believe that adoption of
these statements will have a material impact on the Bank's financial condition
or results of operation.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
In addition to historical and factual statements, the information
discussed in this Annual Report contains forward-looking statements, which can
be identified by the use of forward-looking phrases such as "believes,"
"expects," "may," "should," "projected," "contemplates," or "anticipates" or the
negative thereof or comparable words that involve risks and uncertainties. The
Bank operates in an environment that involves numerous risks, uncertainties, and
other influences, many of which are beyond the Bank's control, and any one of
which, or a combination of which, could materially affect the Bank's results of
operation and the market price of its Common Stock. The Bank's actual results
may differ materially from the results discussed in the forward-looking
statements.
The following discussion highlights some of the risks the Bank faces and
includes cautionary statements identifying important factors with respect to
forward-looking statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results discussed
in such forward-looking statements.
34
<PAGE>
Interest Rate Risk. The Bank's earnings depend to a substantial extent on
"rate differentials", i.e., the differences between the income the Bank earns on
loans, securities, and other earning assets, and the interest expense it pays to
obtain deposits and other liabilities. These rates are highly sensitive to many
factors that are beyond the Bank's control, including general economic
conditions and the policies of various governmental and regulatory authorities.
Increases in the discount rate by the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") usually lead to rising interest rates,
which affect the Bank's interest income, interest expense, and securities
portfolio. Also, governmental policies, such as the creation of a tax deduction
for individual retirement accounts, can increase savings and affect the Bank's
cost of funds. From time to time, maturities of assets and liabilities are not
balanced and a rapid increase in interest rates could have an adverse effect on
the net interest margin and results of operations of the Bank. To the extent
that the Bank maintains a significant percentage of its assets in investment
securities, a rapid increase or decrease in interest rates could have a greater
adverse effect on the Bank's net interest margin and results of operation. The
nature, timing, and effect of any future changes in federal monetary and fiscal
policies on the Bank and its results of operations are not predictable. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition--Interest Rate Sensitivity and Liquidity."
Exposure to Local Economic Conditions. The Bank's success is dependent to
a significant extent upon general economic conditions in the Houston
metropolitan area. The banking industry in Texas and Houston is affected by
general economic conditions such as inflation, recession, unemployment, and
other factors beyond the Bank's control. During the mid-1980's, severely
depressed oil and gas and real estate prices materially and adversely affected
the Texas and Houston economies, causing recession and unemployment in the
region and resulting in excess vacancies in the Houston real estate market and
elsewhere in the State. Since 1987, the local economy has improved in part due
to its expansion into non-energy related industries. As the Houston economy has
diversified away from the energy industry, however, it has become more
susceptible to adverse effects resulting from recession in the national economy.
Economic recession over a prolonged period of time in the Houston area could
cause significant increases in nonperforming assets, thereby causing operating
losses, impairing liquidity, and eroding capital. There can be no assurance that
future adverse changes in the local economy would not have a material adverse
effect on the Bank's financial condition, results of operations or cash flows.
Competition. The banking business is highly competitive and the
profitability of the Bank depends principally upon the Bank's ability to compete
in the Houston metropolitan area. In addition to competing with other commercial
and savings banks and savings and loan associations, the Bank competes with
credit unions, finance companies, mutual funds, insurance companies, brokerage
and investment banking firms, asset-based non-bank lenders, and certain other
non-financial entities, including retail stores that may maintain their own
credit programs, and governmental organizations that may offer subsidized
financing at lower rates than those offered by the Bank. Many of such
competitors have significantly greater financial and other resources and higher
lending limits than the Bank. Although the Bank has been able to compete
effectively in the past, no assurance can be given that the Bank 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 Congress or the Texas legislature will not enact
legislation that may further increase competitive pressures on the Bank.
Competition from both financial and non-financial institutions is expected to
continue. See "Business--The Bank -- Competition."
Supervision and Regulation. Banks operate in a highly regulated
environment and are subject to extensive supervision and examination by federal
and state regulatory agencies. The Bank, as a national banking association, is
subject to regulation and supervision by the OCC and, as a result of the
insurance of
35
<PAGE>
its deposits, the FDIC. These regulations are intended primarily for the
protection of depositors and customers, rather than for the benefit of
investors. The Bank is subject to changes in federal and state law, as well as
changes in regulation and governmental policies, income tax laws and accounting
principles. The effects of any potential changes cannot be predicted but could
adversely affect the business and operations of the Bank in the future. See
"Business--The Bank--Supervision and Regulation."
Dividend History and Restrictions on Ability to Pay Dividends. While the
Bank has paid dividends on the Common Stock each year since 1986 and in the
future plans to pay dividends based on its earnings and capital requirements,
there is no assurance that the Bank will pay dividends in the future. The
payment of dividends by the Bank is subject to restrictions imposed by federal
banking laws, regulations, and authorities. Without approval of the OCC,
dividends in any calendar year may not exceed the Bank's net income for that
year, plus its retained net income for the preceding two years, less any
required transfers to capital surplus or to a fund for the retirement of any
preferred stock. In addition, a dividend may not be paid in excess of a bank's
undivided profits. Under these restrictions, as of December 31, 1997,
approximately $3.5 million was available for payment of dividends (without prior
regulatory approval) by the Bank.
The federal banking statutes also prohibit a national bank from making any
capital distribution (including a dividend payment) if, after making the
distribution, the institution would be "undercapitalized," as defined by
statute. In addition, the relevant federal regulatory agencies also have
authority to prohibit a national bank from engaging in an unsafe or unsound
practice as determined by the agency in conducting its business. The payment of
dividends could be deemed to constitute such an unsafe or unsound practice,
depending upon the financial condition of the Bank. Regulatory authorities could
also impose administratively stricter limitations on the ability of the Bank to
pay dividends if such limits were deemed appropriate by such regulatory
authorities to preserve the Bank's capital. See "Market for Registrant's Common
Stock and Related Stockholder Matters" and "Business--The Bank--Supervision and
Regulation."
Dependence on Key Personnel. The Bank is dependent on certain key
personnel, including Frank G. Cook, B. Ralph Williams, Randall W. Dobbs, Joseph
E. Ives, Mary A. Walker, Sheila J. Duffy, and John M. James, each of whom has
relationships with customers of the Bank that the Bank considers important to
its business. The loss of such individuals or other members of senior management
could have an adverse effect on the Bank's growth and profitability. The Bank
currently does not have employment contracts with any of these officers. See
"Executive Officers of the Registrant."
Certain Charter and Bylaw Provisions. The Bank's Articles of Association
and Bylaws contain certain provisions that could delay, discourage or prevent an
attempted acquisition or change of control of the Bank. These provisions include
(1) a provision establishing certain advance notice procedures for nomination of
candidates for election as directors and for stockholder proposals to be
considered at an annual meeting of stockholders and (2) a provision that special
meetings of the stockholders of the Bank may be called only by the Board of
Directors or the Chairman of the Board.
Shares Eligible for Future Sale. The Bank has 5,054,181 shares of Common
Stock outstanding. The Bank, its executive officers, directors, and certain
stockholders (who collectively own approximately 31.0% of the outstanding
shares) have agreed with Legg Mason Wood Walker, Inc. (the "Underwriter"), the
underwriter of the Bank's initial public offering in October 1997, not to offer,
sell, contract to sell, or otherwise dispose of any of their shares of Common
Stock until after April 1, 1998, without the permission of the Underwriter. 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 of Common Stock (including
36
<PAGE>
shares issued upon exercise of stock options) in the future, or the perception
that such sales could occur, could adversely affect the market price of the
Common Stock.
Management's Ownership Interest and Possible Effects. The Bank's directors
and executive officers beneficially own approximately 29.1% of the outstanding
shares of Common Stock. Accordingly, such persons will be able to influence, to
a significant extent, the outcome of matters required to be submitted to the
Bank's stockholders for approval, including decisions relating to the election
of directors of the Bank, the determination of day-to-day management policies of
the Bank, and other significant transactions, which may include taking actions
that may be inconsistent with the interests of non-affiliated stockholders.
Regulation of Control. Any person (individual or entity), alone or
acting in concert, seeking to acquire 25% or more of any class of voting
securities of, or otherwise to acquire "control" of, the Bank is required to
seek the prior approval of the OCC under the Change in Bank Control Act and
regulations issued by the OCC. After completion of the Offering, the OCC will
presume, unless rebutted, that an acquisition or other disposition of voting
securities of the Bank through which any person alone or acting in concert with
other persons, proposes to acquire ownership of, or the power to vote, 10% or
more of a class of voting securities of the Bank constitutes the acquisition of
"control" of the Bank. In such event, such acquiring person or persons would be
required to obtain the approval of the OCC. No person currently owns, or has the
power to vote, and the Bank does not anticipate that, upon completion of the
Offering, any person will own or have the power to vote 10% or more of the
outstanding shares of Common Stock of the Bank. See "Supervision and
Regulation."
Possible Volatility of Stock Price. The market price of the Bank's Common
Stock could be subject to significant fluctuations in response to variations in
the Bank's quarterly operating results and other factors. The market price of
the Common Stock may be significantly affected by such factors as the
announcement of a proposed acquisition, the proposed sale of additional shares
of Common Stock or other securities by the Bank, the Bank's results of
operations, changes in earnings estimates by market analysts, speculation in
the press or analyst community, and general market conditions or market
conditions specific to particular industries. From time to time in recent
years, the securities markets have experienced significant price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of particular companies. These broad fluctuations may adversely
affect the market price of the Common Stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CONSOLIDATED QUARTERLY FINANCIAL INFORMATION
The following tables present certain unaudited financial information
concerning the Bank's results of operations for each of the two years ended
December 31, 1997. The information should be read in conjunction with the
Consolidated Financial Statements of the Bank and notes thereto included
elsewhere in this Annual Report.
37
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended 1997
--------------------------------------------
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest income................................. $5,385 $5,059 $4,837 $4,660
Interest expense................................ 2,318 2,395 2,250 2,112
----- ----- ----- -----
Net interest income............................. 3,067 2,664 2,587 2,548
Provision for loan losses....................... 370 180 167 160
----- ----- ----- -----
Net interest income after provision for
loan losses.................................... 2,697 2,484 2,420 2,388
Non-interest income............................. 701 703 563 540
Non-interest expense............................ 2,092 1,916 1,868 1,768
----- ----- ----- -----
Income before income taxes...................... 1,306 1,271 1,115 1,160
Applicable income taxes......................... 192 358 308 296
----- ----- ----- -----
Net income...................................... $1,114 $ 913 $ 807 $ 864
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended 1997
--------------------------------------------
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest income................................. $4,553 $4,435 $4,335 $4,049
Interest expense................................ 2,058 1,994 1,940 1,910
----- ----- ----- -----
Net interest income............................. 2,495 2,441 2,395 2,139
Provision for loan losses....................... 135 170 245 105
----- ----- ----- -----
Net interest income after provision for
loan losses.................................... 2,360 2,271 2,150 2,034
Non-interest income............................. 656 600 528 538
Non-interest expense............................ 1,853 1,706 1,711 1,679
----- ----- ----- -----
Income before income taxes...................... 1,163 1,165 967 893
Applicable income taxes......................... 257 382 197 199
----- ----- ----- -----
Net income...................................... $ 906 $ 783 $ 770 $ 694
====== ====== ====== ======
</TABLE>
The other information required by this title is contained in the financial
statements and schedules set forth in Item 14(a) under the captions
"Consolidated Financial Statements" and "Financial Statement Schedules" as a
part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
38
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information regarding directors required by Item 10 is incorporated by
reference from the Bank's definitive proxy statement for its annual meeting of
stockholders to be held May 26, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information regarding directors required by Item 11 is incorporated by
reference from the Bank's definitive proxy statement for its annual meeting of
stockholders' to be held May 26, 1998. The information specified in Item 402(k)
and (l) of Regulation S-K and set forth in the Bank's definitive proxy statement
for its annual stockholders' meeting to be held on May 26, 1998, is not
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information regarding directors required by Item 12 is incorporated by
reference from the Bank's definitive proxy statement for its annual meeting of
stockholders' to be held on May 26, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information regarding directors required by Item 13 is incorporated by
reference from the Bank's definitive proxy statement for its annual meeting of
stockholders' to be held on May 26, 1998.
39
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements:
The following financial statements are filed as part of this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996................. F-3
Consolidated Statements of Income for the Years Ended December 31,
1997, 1996 and 1995................................................ F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
997, 1996, and 1995................................................ F-6
Notes to Consolidated Financial Statements............................ F-7
</TABLE>
(a)(2) Financial Statement Schedules:
All Financial Statement Schedules have been omitted since the required
information is not present or not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the consolidated financial statements or the notes thereto.
(a)(3) Exhibits
The following exhibits are filed herewith or are incorporated by
reference to exhibits previously filed with the Office of the Comptroller of
the Currency. The Bank will furnish copies of exhibits for a reasonable fee
(covering the expense of furnishing copies) upon request.
Exhibit
Number Description
- ------- -----------
3.1 Composite Articles of Association of the Bank [Incorporated by
reference to Exhibit 3.1 to the Form S-1 Registration Statement filed
August 28, 1997, File No., as amended].
3.2 Amended and Restated Bylaws of the Bank. [Incorporated by reference to
Exhibit 3.2 to the Form S-1 Registration Statement filed August 28,
1997, File No., as amended].
10.1* 1992 Stock Option Plan.[Incorporated by reference to Exhibit 10.1 to
the Form S-1 Registration Statement filed August 28, 1997, File No.,
as amended].
10.2* 1994 Stock Option Plan.[Incorporated by reference to Exhibit 10.2 to
the Form S-1 Registration Statement filed August 28, 1997, File No.,
as amended].
10.3* Form of Stock Option Agreement under option plans. [Incorporated by
reference to Exhibit 10.3 to the Form S-1 Registration Statement filed
August 28, 1997, File No., as amended].
40
<PAGE>
Exhibit
Number Description
- ------- -----------
10.4* Form of Executive Severance Agreement.
21.1 Subsidiaries of the Bank.
_________________
* Indicates management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 18, 1998.
CITIZENS NATIONAL BANK OF TEXAS
By: /s/ B. Ralph Williams
----------------------------------
B. Ralph Williams, President
and Chief Executive Officer
41
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dated indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Frank G. Cook Chairman of the Board (Chief Financial March 18, 1998
- --------------------------------- Officer)
Frank G. Cook
/s/ B. Ralph Williams President, Chief Executive Officer, and March 18, 1998
- --------------------------------- Director
B. Ralph Williams
/s/ Randall W. Dobbs Executive Vice President, Chief March 18, 1998
- --------------------------------- Operations Officer, and Director (Chief
Randall W. Dobbs Accounting Officer)
/s/ Mary A. Walker Executive Vice President and Director March 18, 1998
- ---------------------------------
Mary A. Walker
/s/ Joe E. Ives Executive Vice President and Director March 18, 1998
- ---------------------------------
Joe E. Ives
/s/ John B. Barnes Director March 18, 1998
- ---------------------------------
John B. Barnes
/s/ William H. Bruecher, Jr. Director March 18, 1998
- ---------------------------------
William H. Bruecher, Jr.
/s/ C. Joe Chapman Director March 18, 1998
- ---------------------------------
C. Joe Chapman
/s/ Kenneth B. Chapman Director March 18, 1998
- ---------------------------------
Kenneth B. Chapman
/s/ Robert C. Dawson Director March 18, 1998
- ---------------------------------
Robert C. Dawson
/s/ James B. Earthman, III Director March 18, 1998
- ---------------------------------
James B. Earthman, III
/s/ Lura M. Griffin Director March 18, 1998
- ---------------------------------
Lura M. Griffin
/s/ Alton L. Hollis Director March 18, 1998
- ---------------------------------
Alton L. Hollis
/s/ Larry L. January Director March 18, 1998
- ---------------------------------
Larry L. January
/s/ I.W. Marks Director March 18, 1998
- ---------------------------------
I.W. Marks
/s/ David E. Preng Director March 18, 1998
- ---------------------------------
David E. Preng
/s/ James K. Chancellor Director March 18, 1998
- ---------------------------------
James K. Chancellor
</TABLE>
42
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Financial Statements:
Report of Independent Accountants..................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996...................... F-3
Consolidated Statements of Income for the Years Ended December 31, 1997, 1996
and 1995....................................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1997, 1996 and 1995............................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997,
1996 and 1995.................................................................. F-6
Notes to Consolidated Financial Statements........................................ F-7
</TABLE>
Financial Statement Schedules:
All schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the
consolidated financial statements or the notes thereto.
43
<PAGE>
[LETTERHEAD Summit Plaza West
APPEARS HERE] 12 Greenway Plaza/8th Floor
Houston, Texas 77046-1291
(713) 960-1706
(800) 949-1706
FAX: (713) 960-9549
e-mail: [email protected]
www.mfslcpa.com
INDEPENDENT AUDITIOR'S REPORT
To the Board of Directors of
Citizens National Bank of Texas and Subsidiary
Bellaire, Texas
We have audited the accompanying consolidated balance sheets of Citizens
National Bank of Texas and wholly-owned subsidiary as of December 31, 1997 and
1996, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These consolidated financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these consolidated 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 audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Citizens National Bank of Texas and wholly-owned subsidiary as of December 31,
1997 and 1996, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
BAs described in Note A to the consolidated financial statements, Citizens
National Bank of Texas and wholly-owned subsidiary adopted certain new
accounting standards during 1997 as required by the Financial Accounting
Standards Board.
/s/ Mann Frankfort Stein & Lipp, P.C.
Houston, Texas
February 13, 1998
F-2
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
------------------
ASSETS 1997 1996
-------- --------
<S> <C> <C>
Cash and due from banks $ 12,099 $ 10,154
Due from banks - interest bearing overnight funds 3,177 2,235
Investment securities available-for-sale 93,036 79,109
Investment securities held-to-maturity (approximate market
value of $77,569 and $68,338, respectively) 76,795 68,396
Loans, net 101,866 90,597
Bank premises and equipment, net 5,384 5,185
Other assets 3,249 2,474
-------- --------
TOTAL ASSETS $295,606 $258,150
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand $ 54,598 $ 49,813
NOW 20,209 19,644
Savings 6,932 6,461
Money market 68,786 61,942
Time, $100,000 and over 31,173 29,183
Other time 79,209 71,016
-------- --------
TOTAL DEPOSITS 260,907 238,059
Accrued interest and other liabilities 2,483 1,837
Federal income taxes payable 35 258
Deferred income taxes 534 125
-------- --------
TOTAL LIABILITIES 263,959 240,279
COMMITMENTS AND CONTINGENT LIABILITIES - -
STOCKHOLDERS' EQUITY
Common stock, $2.03 and $1.622 par value in 1997 and
1996, respectively; 30,000,000 shares authorized,
5,044,181 and 3,886,491 shares issued and outstanding
in 1997 and 1996, respectively 10,242 6,303
Surplus 16,656 6,303
Retained earnings 3,637 5,025
Net unrealized gains on available-for-sale securities, net of
deferred income taxes of $573 and $124, respectively 1,112 240
-------- --------
TOTAL STOCKHOLDERS' EQUITY 31,647 17,871
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $295,606 $258,150
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 9,572 $ 8,084 $ 6,093
Interest on investment securities:
Available-for-sale:
Taxable 3,406 3,435 882
Non-taxable 1,957 1,263 1,438
------ ------ ------
5,363 4,698 2,320
Held-to-maturity, taxable 5,006 4,590 6,292
------ ------ ------
Total interest on investment securities 10,369 9,288 8,612
------ ------ ------
TOTAL INTEREST INCOME 19,941 17,372 14,705
INTEREST EXPENSE
Interest on deposits 8,821 7,711 6,789
Interest on Federal Home Loan Borrowings 254 191 106
------ ------ ------
Total interest expense 9,075 7,902 6,895
------ ------ ------
Net interest income 10,866 9,470 7,810
PROVISION FOR LOAN LOSSES 877 655 200
------ ------ ------
Net interest income after provision for
loan losses 9,989 8,815 7,610
OTHER INCOME
Service fees 1,950 1,816 1,520
Net realized gains on sale of available-for-sale
securities 263 233 237
Other operating income 294 273 296
------ ------ ------
TOTAL OTHER INCOME 2,507 2,322 2,053
OTHER EXPENSES
Salaries and employee benefits 3,899 3,459 2,922
General and administrative 1,115 1,070 905
Data processing 795 703 603
FDIC assessments 29 2 212
Occupancy expenses, net 523 540 502
Equipment maintenance 516 454 383
Postage and printing fees 414 436 336
Professional fees 353 285 245
------ ------ ------
TOTAL OTHER EXPENSES 7,644 6,949 6,108
------ ------ ------
INCOME BEFORE FEDERAL INCOME
TAXES 4,852 4,188 3,555
Applicable federal income taxes 1,154 1,035 683
------ ------ ------
NET INCOME $3,698 $3,153 $2,872
====== ====== ======
Earnings per share:
Basic $ 0.89 $ 0.81 $ 0.74
====== ====== ======
Fully diluted $ 0.88 $ 0.80 $ 0.73
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
NET UNREALIZED
GAINS (LOSSES)
COMMON STOCK ON AVAILABLE-
------------------ RETAINED FOR-SALE
SHARES PAR VALUE SURPLUS EARNINGS SECURITIES TOTAL
------ --------- ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 3,886,491 $4,817 $5,219 $ 4,171 $ (393) $13,814
Cash dividends ($.08 per share) - - - (321) - (321)
Cash dividends ($.22 per share) - - - (867) - (867)
Net changes in unrealized gains, net
of deferred income taxes of $416 - - - - 808 808
Unrealized gains on investment
securities held-to-maturity,
transferred to investment securities
available-for-sale, net of deferred
income taxes of $316 - - - - 615 615
Net income - - - 2,872 - 2,872
--------- ------- ------- ------- ------ -------
Balance, December 31, 1995 3,886,491 4,817 5,219 5,855 1,030 16,921
Par value change - 1,486 1,084 (2,570) - -
Cash dividends ($.09 per share) - - - (353) - (353)
Cash dividends ($.27 per share) - - - (1,060) - (1,060)
Unrealized losses on investment
securities available-for-sale, net
of deferred income tax benefit
of $406 - - - - (790) (790)
Net income - - - 3,153 - 3,153
--------- ------- ------- ------- ------ -------
Balance, December 31, 1996 3,886,491 6,303 6,303 5,025 240 17,871
Par value change - 1,590 1,594 (3,184) - -
Proceeds from exercise of stock
options 7,690 14 9 - - 23
Cash dividends ($.10 per share) - - - (389) - (389)
Cash dividends ($.30 per share) - - - (1,513) - (1,513)
Net proceeds from issuance of
stock through initial public
offering 1,150,000 2,335 8,750 - - 11,085
Unrealized gains on investment
securities available-for-sale, net
of deferred income taxes of $449 - - - - 872 872
Net income - - - 3,698 - 3,698
--------- ------- ------- ------- ------ -------
Balance, December 31, 1997 5,044,181 $10,242 $16,656 $ 3,637 $1,112 $31,647
========= ======= ======= ======= ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,698 $ 3,153 $ 2,872
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 412 406 367
Premium amortization net of discount accretion (43) 46 115
Provision for loan losses 877 655 200
Net realized gains on available-for-sale securities (263) (233) (237)
Loss on disposal of bank premises and equipment
and other assets 43 90 62
Provision (benefit) for deferred taxes (39) (18) 10
Changes in assets and liabilities:
Accrued interest receivable (861) 118 (293)
Other assets 33 49 (105)
Accrued expenses 62 (155) 209
Accrued interest payable 131 130 238
Federal income taxes payable (223) 258 (76)
------- ------- -------
129 1,346 490
------- ------- -------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 3,827 4,499 3,362
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities (36,387) (33,908) (48,904)
Proceeds from sales of available-for-sale securities 21,359 29,311 15,443
Proceeds from maturities of available-for-sale securities 2,678 1,972 7,316
Purchases of held-to-maturity securities (34,840) (18,080) -
Proceeds from maturities of held-to-maturity securities 26,490 20,495 14,156
Loans originated, net of principal collected (12,258) (24,169) (9,393)
Proceeds from sales of other real estate and repossessed
assets 122 169 239
Cash paid for bank premises and equipment (611) (170) (1,980)
Proceeds from sales of bank premises and equipment - 83 -
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (33,447) (24,297) (23,123)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW,
savings, and money market accounts 12,665 14,810 (954)
Proceeds from sales of time deposits, net of payments
for maturing time deposits 10,183 14,502 24,122
Net change in other borrowings - (3,900) (1,850)
Net proceeds from issuance of common stock 11,108 - -
Dividends paid (1,449) (1,221) (1,124)
------- ------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 32,507 24,191 20,194
------- ------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,887 4,393 433
CASH AND CASH EQUIVALENTS AT JANUARY 1 12,389 7,996 7,563
------- ------- -------
CASH AND CASH EQUIVALENTS AT DECEMBER 31 $15,276 $12,389 $ 7,996
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands, except per share amounts)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of Citizens National Bank of Texas and its wholly-owned subsidiary, CNB
Mortgage Company (collectively referred to as the "Bank"). CNB Mortgage Company
was incorporated March 3, 1994. Significant intercompany accounts and
transactions have been eliminated upon consolidation.
Basis of Accounting: The accounting and reporting policies of the Bank conform
to generally accepted accounting principles and prevailing practices within the
banking industry.
Nature of Operations: Citizens National Bank of Texas and its wholly-owned
subsidiary provide a variety of banking services to local individuals and
businesses through its five locations in Houston and Sugar Land, Texas. Its
primary deposit products are demand deposits, certificates of deposit, and
IRA's, and its primary lending products are commercial business, real estate
mortgage, and installment loans.
Use of Estimates: The preparation of consolidated 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 consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Investment Securities: Bonds, notes, and debentures for which the Bank has the
positive intent and ability to hold to maturity are classified as held-to-
maturity and are carried at cost. The initial premiums and discounts incurred
to acquire the investment are recognized in interest income using methods
approximating the interest method.
Securities to be held for indefinite periods of time, including securities that
management intends to use as part of its asset/liability strategy, or that may
be sold in response to changes in interest rates, changes in prepayment risk,
the need to increase regulatory capital or other similar factors, are classified
as available-for-sale and are carried at fair value. Fair values of securities
are estimated based on available market quotations.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of stockholders'
equity until realized. Realized gains and losses on the sale of available-for-
sale securities and held-to-maturity securities, if any, are determined using
the specific-identification method. The Bank reviews its financial position,
liquidity and future plans in evaluating the criteria for classifying investment
securities. Securities are classified among categories at the time the
securities are purchased. Declines in the fair value of individual held-to-
maturity and available-for-sale securities below their cost that are other than
temporary will result in the write-down of the individual securities to their
fair value. The related write-downs, if any, would be included in earnings as
realized losses. The Bank believes that none of the unrealized losses should be
considered other than temporary. The initial premiums and discounts incurred to
acquire the investment are recognized in interest income using the interest
method over the period of maturity. The Bank does not maintain a trading
portfolio.
Investments in Federal Home Loan Bank (the "FHLB") stock and Federal Reserve
Bank stock are considered restricted investments and classified as other
securities in the available-for-sale category. These investments are carried at
their acquisition cost which approximates fair value. Institutions that are
members of the Federal Reserve system and the FHLB system are required to
maintain certain levels of investment in these stocks.
F-7
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands, except per share amounts)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
On November 30, 1995, the Bank elected to transfer certain securities from the
held-to-maturity category to the available-for-sale category through
reassessment of the appropriateness of their classification in accordance with
transition rules issued by the Financial Accounting Standards Board. See Note B
for further discussion.
Bank Premises and Equipment: Bank premises and equipment are carried at
original cost less accumulated depreciation. Depreciation is computed on the
straight-line basis over the estimated useful lives of 5 to 40 years for the
Bank building and improvements and 4-7 years for the other equipment. Costs
incurred for repairs and maintenance are expensed in the period incurred.
Loans and Allowance for Loan Losses: Installment loans are made on a discount
basis. The unearned discount applicable to such loans is taken into income
monthly, using the sum-of-the-period-balance 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 maintained at a
level considered adequate to provide for potential loan losses. The allowance
is increased by provisions charged to operating expense and reduced by net
charge-offs. The level of the allowance is based on management's evaluation of
potential losses in the loan portfolio, as well as prevailing and anticipated
economic conditions. The evaluation of the adequacy of loan collateral is often
based upon estimates and appraisals. Because of changing economic conditions,
the valuation determined from such estimates and appraisals may also change.
Accordingly, the Bank may ultimately incur losses which vary from management's
current estimates. Adjustments to the allowance for loan losses will be
reported in the period such adjustments become known or are reasonably
estimable. Accrual of interest is discontinued on a loan when management
believes, after considering economic and business conditions and collection
efforts, that the borrower's financial condition is such that collection of
interest is doubtful.
Effective January 1, 1995, the Bank adopted Statement of Financial Accounting
Standards ("SFAS") No. 114, Accounting for Creditors for Impairment of a Loan,
as amended by SFAS No. 118. Under SFAS No. 114, as amended, a loan is
considered impaired, based on current information and events, if it is probable
that the Bank will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement. A
loan is not considered impaired during a period of delay in payment if the Bank
expects to collect all amounts due, including interest past due. The Bank
generally considers a period of delay in payment to include delinquency up to 90
days. Accordingly, for purposes of applying SFAS No. 114, impaired loans have
been defined as all nonaccrual loans. The measurement of impaired loans is
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or the loan's observable market price or based on
the fair value of the collateral if the loan is collateral-dependent. If the
measure of the impaired loan is less than the recorded investment in the loan,
an impairment is recognized through a valuation allowance and a corresponding
charge to operations.
Loans Held for Sale: Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value in
the aggregate. Net unrealized losses, if any, are recognized through a
valuation allowance by charges to income.
F-8
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands, except per share amounts)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Federal Income Taxes: The liability method is used in accounting for income
taxes, whereby tax rates are applied to cumulative temporary differences based
on when and how they are expected to affect future tax returns. Deferred tax
assets and liabilities are adjusted for tax rate changes in the year changes are
enacted. The realizability of deferred tax assets are evaluated annually and a
valuation allowance is provided if it is more likely than not that the deferred
tax assets will not give rise to future benefits in the Bank's tax returns. The
Bank files its federal income tax return on a consolidated basis.
Other Real Estate Owned: Real estate acquired by foreclosure is carried in
other assets at the lower of recorded investment in the property or its fair
value. Prior to foreclosure, the value of the underlying loan is written down
to the fair market value of the real estate to be acquired by a charge to the
allowance for loan losses, if necessary. Any subsequent writedowns are charged
against operating expenses. Operating expenses of such properties, net of
related income and gains and losses on their disposition are included in other
expenses.
Long-Lived Assets: The Bank assesses other-than-temporary impairments of its
long-lived assets on a quarterly basis whenever changes or events indicate that
the carrying amount of an asset is not recoverable. Impairment is measured based
upon the present value of expected cash flows of the asset and its eventual
disposition. During the years ended December 31, 1997, 1996 and 1995, no
impairments of long-lived assets were considered necessary by management.
Employee Stock Options: The Bank has a stock option plan. This plan reserves
shares for the granting of options to key employees of the Bank to purchase
common stock at a price which may be less than the fair market value on the date
of grant.
Earnings Per Share: Effective December 15, 1997, the Bank adopted FASB No. 128,
Earnings per Share, which changes the manner in which earnings per share (EPS)
amounts are calculated and presented. Basic earnings per common share is
calculated by dividing net income by the weighted average number of common
shares outstanding during the period presented. Fully dilutive earnings per
common share is calculated by dividing net income by the weighted average number
of common shares and common share equivalents. Stock options are regarded as
common stock equivalents and are computed using the treasury stock method.
Stock options will have a dilutive effect under the treasury stock method only
when the average market price of the common stock during the period exceeds the
exercise price of the stock options.
Reclassifications: For comparable purposes, certain amounts at December 31,
1996 and 1995 have been reclassified to conform with classifications at December
31, 1997.
Other Accounting Pronouncements: Effective October 1, 1997, the Bank adopted
SFAS No. 123, Accounting for Stock-based Compensation, which requires expanded
disclosures of stock-based compensation arrangements with employees and
encourages, but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. As permitted by this
statement, the Bank continues to follow the rules to measure compensation as
outlined in Accounting Principles Bulletin No. 25, but the Bank is now required
to disclose pro forma amounts of net income and earnings per share that would
have been reported under the fair value recognition provisions of SFAS No.
123. The adoption of SFAS No. 123 had no material impact on the results of
operations or financial condition of the Bank.
F-9
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands, except per share amounts)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Effective January 1, 1997, the Bank adopted SFAS No. 125, Accounting for
Transfers and Servicing of Assets and Extinguishments of Liabilities. This
statement requires that accounting and reporting standards for the transfer of
and servicing of financial assets and extinguishments of liabilities be based on
consistent application of financial-components approach that focuses on control.
Under this approach, after a transfer of financial assets, the Bank recognizes
the financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This statement provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. Provisions of SFAS No. 125 that deal with
securities lending, repurchase and dollar repurchase agreements and the
recognition of collateral will not be adopted until January 1, 1998 as provided
by SFAS No. 127 which allows the deferral of these items. The adoption of SFAS
No. 125 is not expected to have a material impact on the Bank's financial
condition or results of operations.
Effective December 15, 1997, the Bank adopted SFAS No. 129, Disclosure of
Information about Capital Structure, which establishes standards for disclosing
information about the Bank's capital structure. This statement does not change
any previous disclosures but consolidates them in this statement for ease of
retrieval and for greater visibility.
Furthermore, the Financial Accounting Standards Board (the "FASB") has issued
statements of financial accounting standards which will modify the current
method of accounting utilized by the Bank subsequent to the year ending December
31, 1997.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement establishes standards for reporting and disclosure of
comprehensive income and its components. Comprehensive income is defined as
the change in equity during a period. Comprehensive income includes net
income and other comprehensive income which refers to unrealized gains and
losses that under generally accepted accounting principles are excluded
from net income. Under this statement for 1998, the Bank will include a
comprehensive income statement that is presented as a financial statement.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. This statement establishes standards
and requirements for public enterprises regarding information about
operating segments in annual financial statements. This statement also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Operating segments are components of
an enterprise that are evaluated regularly by the chief executive officer
in deciding how to allocate resources and in assessing performance.
The adoption of these statements will impact the disclosures in the Bank's
financial statements, however, management does not believe that adoption of
these statements will have a material impact on the Bank's financial condition
or results of operations.
F-10
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands, except per share amounts)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Statements of Cash Flows: For purposes of the Consolidated Statements of Cash
Flows, cash equivalents include all cash and amounts due from depository
institutions, and interest-bearing deposits in other banks, all of which have
maturities of three months or less.
Cash and cash equivalents include the following:
December 31,
-------------
1997 1996
---- ----
Cash and due from banks $12,099 $10,154
Due from banks - interest bearing overnight funds 3,177 2,235
------- -------
Cash and cash equivalents $15,276 $12,389
======= =======
The following is supplemental information with respect to the Consolidated
Statements of Cash Flows:
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
Cash paid for:
Interest $8,944 $ 7,772 $ 6,657
Income taxes $1,416 $ 795 $ 758
Non-cash activity:
Loans transferred to other real
estate or repossessed assets $ 112 $ 308 $ 276
Par value adjustment to common
stock $3,184 $ 2,570 $ -
Transfer of held-to-maturity
securities to available-for-sale
securities $ - $ - $ 27,121
Change in unrealized gain (loss)
on available-for-sale securities $9,231 $(3,110) $(36,105)
F-11
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands, except per share amounts)
NOTE B - INVESTMENT SECURITIES
The amortized cost and estimated market values of investments in debt and other
securities at December 31, 1997 are as follows:
Available-for-Sale Securities
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
U.S. Government and
agency securities $17,085 $ 262 $ 1 $17,346
Mortgage-backed securities 22,757 259 - 23,016
Obligations of state and
political subdivisions 48,884 1,363 81 50,166
Other securities 2,508 - - 2,508
------- ------ ---- -------
Totals $91,234 $1,884 $ 82 $93,036
======= ====== ==== =======
Held-to-Maturity Securities
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
U.S. Government and
agency securities $49,055 $ 982 $ 24 $50,013
Mortgage-backed securities 27,740 195 379 27,556
------- ------ ---- -------
Totals $76,795 $1,177 $403 $77,569
======= ====== ==== =======
The amortized cost and estimated market values of investments in debt and other
securities at December 31, 1996 are as follows:
Available-for-Sale Securities
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
U.S. Government and
agency securities $30,058 $ 174 $ 86 $30,146
Mortgage-backed securities 20,778 109 230 20,657
Obligations of state and
political subdivisions 25,962 555 5 26,512
Other securities 1,794 - - 1,794
------- ------ ---- -------
Totals $78,592 $ 838 $321 $79,109
======= ====== ==== =======
F-12
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands, except per share amounts)
NOTE B - INVESTMENT SECURITIES (Continued)
Held-to-Maturity Securities
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
U.S. Government and
agency securities $36,574 $ 446 $251 $36,769
Mortgage-backed securities 31,822 217 470 31,569
------- ------ ---- -------
Totals $68,396 $ 663 $721 $68,338
======= ====== ==== =======
The amortized cost and estimated market value of securities held-to-maturity and
securities available-for-sale at December 31, 1997, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Available-for-Sale Held-to-Maturity
Securities Securities
---------------------- ----------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
Due in one year or less $ 1,590 $ 1,592 $ 9,038 $ 9,016
Due after one year
through five years 8,504 8,680 5,009 5,119
Due after five years
through ten years 21,215 21,617 31,451 32,266
Due after ten years 34,660 35,623 3,557 3,612
Mortgage-backed securities 22,757 23,016 27,740 27,556
Other securities 2,508 2,508 - -
------- ------- ------- -------
Totals $91,234 $93,036 $76,795 $77,569
======= ======= ======= =======
F-13
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands, except per share amounts)
NOTE B - INVESTMENT SECURITIES (Continued)
Gross realized gains and losses on sales of available-for-sale securities were:
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
Gross realized gains:
U.S. Government and agency securities $ 72 $ - $ 154
Obligations of state and political subdivisions 204 268 131
Mortgage-backed securities - 105 -
----- ----- -----
$ 276 $ 373 $ 285
===== ===== =====
Gross realized losses:
U.S. Government and agency securities $ - $ 93 $ 48
Obligations of state and political subdivisions - 38 -
Mortgage-backed securities 13 9 -
----- ----- -----
$ 13 $ 140 $ 48
===== ===== =====
In November 1995, the Financial Accounting Standards Board issued "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities" which provided a one-time reassessment of the
appropriateness of the classifications of all securities. Based on such
reassessment, the Bank transferred securities in the held-to-maturity portfolio
to the available-for-sale portfolio in November 1995. The transferred
securities had an amortized cost of $27,121 and market value of $28,051. The
transfer resulted in an increase of $614, net of deferred income taxes of $316,
to consolidated stockholders' equity. Such reassessment does not change
management's intent to hold other debt securities to maturity in the future.
At December 31, 1997 and 1996, investment securities with a carrying value of
$3,436 and $3,480 and a market value of $3,503 and $3,563, respectively, were
pledged to secure public deposits and for other purposes required or permitted
by law.
NOTE C - LOANS
Major classifications of loans are as follows:
December 31,
------------
1997 1996
---- ----
Commercial and industrial $ 25,230 $22,717
Real estate - construction 10,673 6,285
Real estate - other 29,032 27,583
Consumer 41,711 38,209
-------- -------
106,646 94,794
Unearned discount (3,771) (3,510)
-------- -------
102,875 91,284
Allowance for loan losses (1,009) (687)
-------- -------
$101,866 $90,597
======== =======
F-14
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands, except per share amounts)
NOTE C - LOANS (Continued)
Changes in the allowance for loan losses account are as follows:
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
Balance at beginning of year $ 687 $ 484 $ 522
Provision charged to operations 877 655 200
Recoveries 81 26 33
Loans charged off (636) (478) (271)
------ ----- -----
Balance at end of year $1,009 $ 687 $ 484
====== ===== =====
For income tax purposes, $495 at December 31, 1997 and 1996, has been
accumulated in the allowance for loan losses. This amount is based on the
Internal Revenue Code formula.
At December 31, 1997 and 1996, the Bank had loans totaling $279 and $301,
respectively, on which the accrual of interest had been discontinued. The Bank
does not consider these amounts to be material. If interest on these loans had
been accrued, such income would have amounted to $30 and $21 for the years ended
December 31, 1997 and 1996, respectively.
NOTE D - BANK PREMISES AND EQUIPMENT
Major classifications of bank premises and equipment are summarized as follows:
December 31,
------------
1997 1996
---- ----
Land $1,542 $1,542
Building and improvements 3,072 2,984
Equipment 2,922 2,543
Automobiles 19 17
------ ------
7,555 7,086
Less: accumulated depreciation 2,171 1,901
------ ------
Total bank premises and equipment $5,384 $5,185
====== ======
Depreciation expense totaled $412, $406 and $367 for the years ended December
31, 1997, 1996 and 1995, respectively, and are included in occupancy expense and
equipment maintenance in the Consolidated Statements of Income.
F-15
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands, except per share amounts)
NOTE E - DEPOSITS
Scheduled maturities of time deposits are summarized as follows:
December 31,
------------
1997 1996
---- ----
Maturity:
Zero to one year $ 82,624 $ 82,347
One year to two years 20,721 11,951
Two years to three years 1,134 2,406
Three years to four years 3,419 94
Four years to five years 2,484 3,401
Thereafter - -
-------- --------
$110,382 $100,199
======== ========
NOTE F - APPLICABLE FEDERAL INCOME TAXES
Total income tax provision (benefit) in the Consolidated Statements of Income
are as follows:
Year Ended December 31,
---------------------------
1997 1996 1995
---- ---- ----
Current $ 1,193 $ 1,053 $ 673
Deferred (39) (18) 10
------- ------- --------
$ 1,154 $ 1,035 $ 683
======= ======= ========
Applicable income tax expense of $63, $58 and $46 for the years ending December
31, 1997, 1996 and 1995, respectively, on security gains is included in the
provision for income taxes.
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to deferred
income tax assets and liabilities and their approximate tax effects are as
follows:
December 31, 1997 December 31, 1996
------------------- --------------------
Temporary Tax Temporary Tax
Differences Effect Differences Effect
----------- ------ ----------- ------
Premises and equipment $ 21 $ 7 $ 86 $ 29
Allowance for loan losses 514 175 191 65
------- ------ ----- -----
Deferred income tax assets $ 535 182 $ 277 94
======= =====
Unrealized gain on securities
available-for-sale $(1,685) (573) $(365) (124)
Accretion of discount on treasury
and tax exempt securities (422) (143) (279) (95)
------- ------ ----- -----
Deferred income tax liabilities $(2,107) (716) $(644) (219)
======= ====== ===== =====
Net deferred income tax liabilities $ (534) $(125)
====== =====
F-16
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands, except per share amounts)
NOTE F - APPLICABLE FEDERAL INCOME TAXES (Continued)
Applicable federal income taxes for financial reporting purposes differ from the
amount computed by applying the statutory federal income tax rate for the
reasons noted in the table below:
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
Income taxes at statutory rate (34%) $1,650 $1,424 $1,209
Nontaxable investment income (655) (398) (492)
Other 159 9 (34)
------ ------ ------
Applicable federal income taxes $1,154 $1,035 $ 683
====== ====== ======
NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES
The Bank is committed under a long-term contractual agreement for its data
processing services. The agreement, expiring in 2001, contains certain
escalation charges allowing the service bureau to increase its fees if the Bank
sustains a certain level of growth. Lease payments are based upon the level of
activity with the service bureau without provisions for minimum payments.
The Bank is committed under a lease for the land for their premises which
expires February 28, 2001. The Bank has the option to renew the lease at certain
points in time and also has the option to purchase the land for fair market
value at the end of the lease term.
The Bank also leases three facilities for its branch locations under
noncancellable operating leases, which have expiration dates through June 2002.
Minimum future rental payments under these noncancellable operating leases and
agreements which have initial or remaining terms in excess of one year as of
December 31, 1997, for each of the next five years and in the aggregate are:
Year Ending December 31,
- -----------------------
1998 $ 133
1999 135
2000 119
2001 40
2002 15
Thereafter -
------
Total future minimum payments $ 442
======
Total rent expense amounted to $135, $121 and $117 for the years ended December
31, 1997, 1996 and 1995, respectively.
F-17
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands, except per share amounts)
NOTE G - COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
The Bank is a party to a miscellaneous legal proceeding, which arose in the
ordinary course of business. While the outcome cannot be predicted with
certainty, management believes that the ultimate resolution will not have a
material adverse impact on the Bank's financial condition or results of
operation.
NOTE H - RELATED PARTY TRANSACTIONS
At December 31, 1997 and 1996, certain officers, directors and certain officers'
and directors' companies in which they have ten percent or more beneficial
ownership in those companies, were indebted to the Bank in the aggregate amount
of loans and unfunded commitments of $775 and $1,192, respectively.
Following is an analysis of activity with respect to such amounts:
Year Ended December 31,
-----------------------
1997 1996
---- ----
Balance at beginning of period $1,192 $1,262
New loans 465 374
Repayments (882) (444)
------ ------
Balance at end of period $ 775 $1,192
====== ======
Additionally, at December 31, 1997 and 1996, these certain officers, directors
and certain officers' and directors' companies had deposits in the Bank in the
aggregate totaling $5,034 and $6,049, respectively.
NOTE I - OTHER BORROWED FUNDS
Other short-term borrowings generally represent borrowings from the Federal Home
Loan Bank (the "FHLB"). FHLB advances may be utilized from time to time as
either a short-term funding source or a longer-term funding source with
maturities ranging from one to thirty-five days and are secured by either a
blanket pledge on investments and/or a percentage of mortgage loans depending on
the type of borrowings requested. Information relating to these borrowings is
summarized as follows:
December 31,
----------------------
1997 1996 1995
---- ---- ----
Other short-term borrowings:
Average $ 4,582 $3,676 $1,774
Period-end - - 3,900
Maximum month-end balance during period 15,100 7,500 7,600
Interest rate:
Average 5.53% 5.20% 5.96%
Period-end - - 5.75%
Interest expense on short-term borrowings totaled $702, $191 and $106 for the
years ended December 31, 1997, 1996 and 1995, respectively.
F-18
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands, except per share amounts)
NOTE J - INCENTIVE STOCK OPTION PLAN
The Bank has an incentive stock option plan under which shares of common stock
are reserved for the purpose of granting stock options to certain key employees
at the discretion of the Board of Directors. These stock options can be
exercised at a price ranging from $2.75 to $9.00 per share and expire at various
periods through the year 2007.
The Bank has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB No. 25") and related
interpretations in accounting for its stock-based compensation arrangements as
opposed to the alternative fair value accounting provided for under SFAS No.
123, Accounting for Stock-Based Compensation. Under APB No. 25, no compensation
expense is recognized because the exercise price of the Bank's employee stock
options equals the market price of the underlying stock on the date of grant.
The following is a summary of changes in total options outstanding (all option
amounts have been restated for the stock split and stock dividends, as discussed
in Note M):
Options outstanding at January 1, 1995 84,040 $2.75 to $5.79
Granted 12,100 $6.20
-------
Options outstanding at December 31, 1995 96,140 $2.75 to $6.20
Granted -
-------
Options outstanding at December 31, 1996 96,140 $2.75 to $6.20
Granted 95,000 $9.00
Exercised (7,690) $2.75 to $3.03
Canceled (2,500) $9.00
-------
Options outstanding at December 31, 1997 180,950 $2.75 to $9.00
=======
Of the 180,950 outstanding options at December 31, 1997, 45,334 options were
exercisable with the remaining 135,616 options vesting over a period of up to 10
years.
While the Bank will continue to use APB No. 25, proforma information regarding
net income and earnings per shares is required by SFAS No. 123, which also
requires that the information be determined as if the Bank has accounted for its
employee stock options granted subsequent to December 31, 1994 under the fair
value method prescribed by SFAS No. 123.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, the model requires the input of highly subjective
assumptions including the expected stock price volatility. Because the Bank's
employee stock options have characteristics different from those of traded
options, and because changes in input assumptions can materially affect the fair
value estimate, the existing model may not necessarily provide the only measure
of fair value for the employee stock options. The fair value for these options
was estimated at the date of grant using the following weighted-average
assumptions: risk-free interest rates of 5.66%; 4.71% dividend yield; a
volatility factor of the expected market price of the Bank's common stock of
11.46%; and a weighted-average expected life of the options of 10 years.
Compensation cost actually charged to operations for those individuals was
$1,252, $573 and $493 for the years ended December 31, 1997, 1996 and 1995,
respectively. The impact of applying and recognizing compensation costs
pursuant to Statement of Financial Accounting Standards Statement No. 123 is
immaterial to the Bank's financial position and results of operations and did
not change the earning per share amounts currently disclosed.
F-19
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands, except per share amounts)
NOTE K - COMPENSATION AGREEMENTS
The Company has severance agreements with six key employees. The agreement
promises severance benefits to the specified employees if, following a change or
potential change in control, the employees are terminated without cause or
resign for good reason during the term of the agreement. Severance benefits
include 1) a lump sum payment equal to 2.99 times the employee's annual base
salary in effect when employment ends or, if higher, annual base salary in
effect immediately prior to change or potential change in control, and 2)
entitlement to any COBRA rights for group insurance benefit continuation for
employees and employees' dependents at employees' own expense.
NOTE L - BENEFIT PLAN
The Bank has a 401(k) benefit plan that covers all employees who meet certain
age and service requirements. Employees may provide contributions to the plan
through salary deferrals. Additionally, the Bank may provide voluntary
contributions at their discretion. The Bank made contributions to the plan of
$180, $128 and $95 for the years ended December 31, 1997, 1996 and 1995,
respectively.
NOTE M - DIVIDEND AND STOCK TRANSACTIONS
Certain banking regulations limit the amount of dividends that may be paid
without prior approval of the Bank's regulatory agency. All dividends were
within the specified limits.
During July 1997, the Board of Directors authorized an increase in the
authorized shares available for issuance from 5,000,000 shares to 30,000,000
shares.
During the year ended December 31, 1997, a dividend of $.10 per share was
declared to stockholders of record on May 15, 1997 and paid May 30, 1997,
totaling $389. A dividend of $.30 per share was declared to stockholders of
record on December 31, 1997 and paid January 15, 1998, totaling $1,513. On
March 25, 1997, the Board of Directors authorized a 10% stock dividend
representing 353,797 shares of common stock was declared to stockholders of
record on April 30, 1997 and also authorized an increase in the par value of
common stock from $1.622 (after effect of stock dividend) to $2.03 per share
which effectively increased common stock by $1,590 and surplus by $1,594, with a
corresponding charge to retained earnings of $3,184.
During the year ended December 31, 1996, a dividend of $.09 per share was
declared to stockholders of record on June 3, 1996 and paid June 15, 1996,
totaling $353. A dividend of $.27 per share was declared to shareholders of
record on December 31, 1996 and paid January 15, 1997, totaling $1,060. In
April 1996, the Board of Directors authorized an increase in the par value of
common stock from $1.50 to $1.622 (after effect of stock dividend) per share
which effectively increased common stock by $1,486 and surplus by $1,084, with a
corresponding charge to retained earnings of $2,570. Additionally, during the
year ended December 31, 1996, a 10% stock dividend representing 321,098 shares
of common stock was declared to stockholders of record on April 30, 1996.
During the year ended December 31, 1995, a dividend of $.08 per share was
declared to stockholders of record on April 30, 1995 and paid May 15, 1995,
totaling $321. A dividend of $.22 per share was declared to stockholders of
record on December 31, 1995 and paid January 16, 1996, totaling $867.
All references in the accompanying financial statements to the number of common
shares and per share amounts have been restated to reflect the stock split and
stock dividends.
F-20
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands, except per share amounts)
NOTE N - INITIAL PUBLIC OFFERING
The Bank filed a registration statement with the Office of the Comptroller of
the Currency in October 1997 to register the sale of 1,150,000 shares of its
common stock. The net proceeds to the Bank from the sale of the shares offered
by the Bank (after deducting underwriting commissions and other expenses of
$990) were $11,085. The proceeds from the offering are to be used for expansion
of existing facilities and establishments of new locations and for other working
capital purposes.
NOTE O - EARNINGS PER COMMON SHARE
Earnings per common share were computed as follows:
Year Ended December 31,
----------------------------
1997 1996 1995
---- ---- ----
Net income $ 3,698 $ 3,153 $ 2,872
---------- ---------- ----------
Divided by weighted average common shares
and common share equivalents:
Weighted average common shares 4,161,432 3,886,491 3,886,491
Weighted average common share equivalents 62,612 54,693 51,813
---------- ---------- ----------
Total average common share and common
share equivalents 4,224,044 3,941,184 3,938,304
========== ========== ==========
Basic earnings per common share $ .89 $ .81 $ .74
========== ========== ==========
Fully dilutive earnings per common share $ .88 $ .80 $ .73
========== ========== ==========
NOTE P - 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 that the Bank meets all capital
adequacy requirements to which it is subject.
F-21
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands, except per share amounts)
NOTE P - REGULATORY MATTERS (Continued)
As of December 31, 1996 (the most recent review), the Office of the Comptroller
of the Currency categorized the Bank as well-capitalized under the regulatory
framework for prompt corrective action as of its most recent notification. 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.
As of December 31, 1997, there are no conditions or events since that
notification that management believes have changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) $31,543 22.13% $11,404 *8.0% $14,255 *10.0%
Tier I Capital
(to Risk Weighted Assets) 30,535 21.42% 5,702 *4.0% 8,553 *6.0%
Tier I Capital
(to Average Assets) 30,535 11.10% 11,004 *4.0% 13,755 *5.0%
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) 18,318 14.41% 10,169 *8.0% 12,711 *10.0%
Tier I Capital
(to Risk Weighted Assets) 17,631 13.87% 5,084 *4.0% 7,627 *6.0%
Tier I Capital
(to Average Assets) 17,631 7.27% 9,698 *4.0% 12,123 *5.0%
</TABLE>
- --------------------
* Greater than or Equal to.
NOTE Q - CONCENTRATION OF CREDIT RISK
The Bank's operations are affected by various risk factors, including interest-
rate risk, credit risk and risk from geographic concentration of lending
activities. Management attempts to manage interest rate risk through various
asset/liability management techniques designed to match maturities of assets and
liabilities. Loan policies and administration are designed to provide assurance
that loans will only be granted to credit-worthy borrowers, although credit
losses are expected to occur because of subjective factors and factors beyond
the control of the Bank. In addition, the Bank is a community bank and, as such,
is mandated by the Community Reinvestment Act and other regulations to conduct
most of its lending activities within the geographic area where it is located.
As a result, the Bank and its borrowers may be especially vulnerable to the
consequences of changes in the local economy.
F-22
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands, except per share amounts)
NOTE R - 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 and to
reduce its own exposure to fluctuations in interest rates. 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 contract or notional amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual notional amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
Unless noted otherwise, the Bank does not require collateral or other security
to support financial instruments with credit risk.
Commitments to Extend Credit. Commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained if deemed necessary by the Bank upon extension of
credit is based on management's credit evaluation of the counterparty.
Collateral held varies, but may include accounts receivable, inventory,
property, plant, equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Bank holds marketable securities
and certificates of deposit as collateral supporting those commitments for which
collateral is deemed necessary. The extent of collateral held for those
commitments varies from 0 percent to 100 percent.
NOTE S - FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair Values of Financial Instruments: Disclosure about fair value of financial
instruments provided below is the information required by SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. These amounts represent
estimates of fair values at a point in time. Significant estimates regarding
economic conditions, loss experience, risk characteristics associated with
particular financial instruments and other factors were used for the purposes of
this disclosure. These estimates are subjective in nature and involve matters
of judgment. Therefore, they cannot be determined with precision. Changes in
the assumptions could have a material impact on the amounts estimated.
F-23
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands, except per share amounts)
NOTE S - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
While the estimated fair value amounts are designed to represent estimates of
the amounts at which these instruments could be exchanged in a current
transaction between willing parties, many of the Bank's financial instruments
lack an available trading market as characterized by willing parties engaging in
an exchange transaction. In addition, it is the Bank's intent to hold most of
its financial instruments to maturity and, therefore, it is not probable that
the fair values shown will be realized in a current transaction.
The estimated fair values disclosed do not reflect the value of assets and
liabilities that are not considered financial instruments. In addition, the
value of long-term relationships with depositors (core deposit intangibles) and
other customers is not reflected. The value of these items is significant.
Because of the wide range of valuation techniques and the numerous estimates
which must be made, it may be difficult to make reasonable comparisons of the
Bank's fair value information to that of other financial institutions. It is
important that the many uncertainties discussed above be considered when using
the estimated fair value disclosures and to realize that because of these
uncertainties, the aggregate fair value amount should in no way be construed as
representative of the underlying value of the Bank.
The following methods and assumptions were used by the Bank in estimating its
fair values of financial instruments as disclosed herein:
Cash and Due From Banks: The carrying amounts reported in the Consolidated
Balance Sheets for cash and due from banks approximate those assets' fair
values.
Held-to-Maturity and Available-for-Sale Securities: Fair values for
investment securities, excluding restricted equity securities, are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments. The carrying values of restricted equity securities
approximate fair values.
Loans Receivable: For variable-rate loans that reprice frequently and have
no significant change in credit risk, fair values are based on carrying
amounts. The fair values for other loans (for example, fixed rate
commercial real estate and rental property mortgage loans and commercial
and industrial loans) are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms
to borrowers of similar credit quality. Loan fair value estimates include
judgments regarding future expected loss experience and risk
characteristics. Fair value for impaired loans are estimated using
discounted cash flow analyses or underlying collateral values, where
applicable.
Deposit Liabilities: The fair values disclosed for demand deposits (for
example, interest-bearing checking accounts) are, by definition, equal to
the amount payable on demand at the reporting date (that is, their carrying
amounts). The fair values for certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated contractual
maturities on such time deposits.
F-24
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands, except per share amounts)
NOTE S - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Accrued Interest: The carrying amounts of accrued interest approximate
their fair values.
Off-Balance-Sheet Instruments: Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the present creditworthiness of the counterparties.
The estimated fair values of the Bank's financial instruments are as follows:
December 31,
-------------------------------------------
1997 1996
--------------------- --------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Financial assets:
Cash and due from banks $ 15,276 $ 15,276 $ 12,389 $ 12,389
Investment securities
available-for-sale 93,036 93,036 79,109 79,109
Investment securities
held-to-maturity 76,795 77,569 68,396 68,338
Loans, net of allowance for
loan losses 101,866 103,546 90,597 91,058
Accrued interest receivable 3,108 3,108 2,247 2,247
Financial liabilities:
Deposits (260,907) (262,442) (238,058) (233,692)
Accrued interest and other
liabilities (2,483) (2,483) (1,837) (1,837)
Off-balance sheet assets (liabilities):
Commitments to extend credit - 12,331 - 8,876
Credit card arrangements - 6,692 - 7,626
Standby letters of credit - (303) - (348)
A sumary of the contract or notional amounts (used and unused) of the Bank's
financial instruments with off-balance-sheet risk follows:
Contract or Notional Amount
---------------------------
December 31,
---------------------------
1997 1996
---------- ----------
Commitments to extend credit $ 30,626 $ 20,513
Credit card arrangements 9,161 10,271
Standby letters of credit 303 348
F-25
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS
5320 Bellaire Boulevard
Bellaire, Texas 77401
This Proxy is solicited on behalf of the Board of Directors of Citizens National
Bank of Texas (the "Bank") for the Annual Meeting of Stockholders on
May 26, 1998.
The undersigned hereby constitutes and appoints B. Ralph Williams or Frank
Cook, with full power of substitution and revocation to each, the true and
lawful attorneys and proxies of the undersigned at the Annual Meeting of
Stockholders of Citizens National Bank of Texas to be held on May 26, 1998, at
__:___ __.m. local time, at 5320 Bellaire Boulevard, Bellaire, Texas 77401, or
any adjournment thereof (the "Annual Meeting") and to vote the shares of Common
Stock, $2.03 par value per share, of the Bank ("Shares"), standing in the name
of the undersigned on the books of the Bank on April 24, 1998, the record date
for the Annual Meeting, with all powers the undersigned would possess if
personally present at the Annual Meeting.
The undersigned hereby acknowledges previous receipt of the Notice of
Annual Meeting of Stockholders and the Proxy Statement and Prospectus and hereby
revokes any proxy or proxies heretofore given by the undersigned.
_______________________________________________________________________________
Fold and Detach Here
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THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE NOMINEES
AND FOR PROPOSALS 2 AND 3 AND IF NO SPECIFICATION IS MADE, THE SHARES WILL BE
VOTED FOR SAID NOMINEES AND PROPOSALS.
1. Election of Directors. The sixteen nominees for a one-year term or until
their successors are elected and shall qualify are: John B. Barnes, William
H. Bruecher, Jr., James K. Chancelor, C. Joe Chapman, Frank G. Cook, Robert
C. Dawson, James B. Earthman, III, Lura M. Griffin, Alton L. Hollis, Joseph
E. Ives, Larry L. January, Albert V. Kochran, I.W. Marks, David E. Preng,
Mary A. Walker, and B. Ralph Williams. You may withhold authority to vote
for any nominee or otherwise cumulate votes for a specific nominee as you
indicate below:
FOR _______ WITHHELD _______ _____________________________________
FOR ALL NOMINEES EXCEPT AS NOTED
2. Ratification of the appointment of Mann Frankfort Stein & Lipp as the
independent auditors of the Bank for the fiscal year ending December 31,
1998:
FOR __________ AGAINST ___________ ABSTAIN ___________
3. Approval and adoption of the Agreement and Plan of Merger dated as of April
__, 1998, among the Bank, CNBT Bancshares, Inc., and Citizens Bank, N.A.,
together with the Agreement to Merger attached thereto, providing for the
merger of the Bank with and into Citizens Bank, N.A., a wholly-owned
subsidiary of CNBT Bancshares, Inc., a Texas corporation formed to serve as
a holding company for the Bank:
FOR __________ AGAINST ___________ ABSTAIN ____________
4. In their discretion, the proxies are authorized to vote upon such other
matters as may properly come before the meeting.
FOR __________ AGAINST ___________ ABSTAIN ____________
Please sign exactly as name appears hereon. When
shares are held by joint tenants both should sign.
When signing as attorney, executor, administrator,
trustee, or guardian, please give full title as
such. If a corporation, please sign in full
corporate name by President or other authorized
officer. If a partnership, please sign in
partnership name by authorized persons.
Date________________________________________
Signature _________________________________
Signature _________________________________
