AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 11, 1998
REGISTRATION NO.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PROSPERITY BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
TEXAS 6712 74-2331986
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
3040 POST OAK BLVD. TRACY T. RUDOLPH
HOUSTON, TEXAS 77056 CHAIRMAN OF THE BOARD
(713) 993-0002 3040 POST OAK BLVD.
(ADDRESS, INCLUDING ZIP CODE, AND HOUSTON, TEXAS 77056
TELEPHONE NUMBER, (713) 993-0002
INCLUDING AREA CODE, OF REGISTRANT'S (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
PRINCIPAL EXECUTIVE OFFICES) NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
</TABLE>
------------------------
COPIES TO:
WILLIAM T. LUEDKE IV, ESQ. WILLIAM S. RUBENSTEIN, ESQ.
BRACEWELL & PATTERSON, L.L.P. SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
2900 SOUTH TOWER PENNZOIL PLACE 919 THIRD AVENUE
HOUSTON, TEXAS 77002-2781 NEW YORK, NEW YORK 10022
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If any of the Securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration 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. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common Stock, $1.00 par value........ 1,930,000 $15.00 $28,950,000 $8,540
- ------------------------------------------------------------------------------------------------------------------
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(1) Estimated solely for the purpose of calculating the registration fee.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 11, 1998
PROSPECTUS
1,677,783 SHARES
[LOGO]
PROSPERITY BANCSHARES, INC.
COMMON STOCK
Of the 1,677,783 shares of Common Stock (the "Common Stock") offered
hereby (the "Offering"), 925,000 shares are being sold by Prosperity
Bancshares, Inc. (the "Company") and 752,783 shares are being sold by certain
shareholders of the Company (the "Selling Shareholders"). Prior to the
Offering, there has been no established public market for the Common Stock. The
initial public offering price will be determined by negotiations between the
Company and representatives of the Underwriters (the "Representatives"). It is
estimated that the initial public offering price will be in the range of $
to $ per share. See "Underwriting." Application has been made to have the
shares of Common Stock approved for quotation on The Nasdaq Stock Market's
National Market ("Nasdaq/National Market") under the symbol "PRSP."
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT
ACCOUNTS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER
GOVERNMENTAL AGENCY.
SEE "RISK FACTORS" ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PROCEEDS PROCEEDS
PRICE TO UNDERWRITING TO TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
- ------------------------------------------------------------------------------------------------------
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Per Share........... $ $ $ $
- ------------------------------------------------------------------------------------------------------
Total(3)............ $ $ $ $
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(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting offering expenses payable by the Company, estimated at
$300,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
251,667 additional shares of Common Stock, on the same terms and conditions
as set forth above, solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discount,
Proceeds to Company and Proceeds to Selling Shareholders will be
approximately $ , $ , $ and $ , respectively. See
"Underwriting."
The shares of Common Stock to be distributed to the public are offered by
the Underwriters, subject to prior sale, when, as and if received and accepted
by the Underwriters, subject to approval of certain legal matters by counsel for
the Underwriters and certain other conditions. The Underwriters reserve the
right to withdraw, cancel or modify such offer and to reject orders in whole or
in part. It is expected that delivery of the certificates for the shares of
Common Stock will be made against payment therefor in Houston, Texas on or about
, 1998.
------------------------------
KEEFE, BRUYETTE & WOODS, INC. HOEFER & ARNETT
INCORPORATED
------------------------------
The date of this Prospectus is , 1998.
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[Map of Texas Locations]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING THE MARKET PRICE OF
THE COMMON STOCK, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT
POSITIONS AND THE IMPOSITION OF PENALTY BIDS. IN ADDITION, IN CONNECTION WITH
THE OFFERING, THE UNDERWRITERS (AND SELLING GROUP MEMBERS) MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ/NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
2
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY DOES NOT PURPORT TO BE COMPLETE, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND FINANCIAL
STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS.
UNLESS OTHERWISE INDICATED, ALL SHARE AND PER SHARE INFORMATION HAS BEEN
ADJUSTED TO GIVE EFFECT TO A FOUR FOR ONE COMMON STOCK SPLIT EFFECTED IN THE
FORM OF A STOCK DIVIDEND EFFECTIVE AS OF SEPTEMBER 10, 1998. UNLESS OTHERWISE
INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS'
OVER-ALLOTMENT OPTION IS NOT EXERCISED. REFERENCES TO THE COMPANY IN THIS
PROSPECTUS INCLUDE REFERENCES TO FIRST PROSPERITY BANK WHERE THE CONTEXT
REQUIRES.
THE COMPANY
Prosperity Bancshares, Inc. (the "Company") is a bank holding company
headquartered in Houston, Texas. The Company derives substantially all of its
income from the operation of its wholly-owned bank subsidiary, First Prosperity
Bank (the "Bank"), which has 11 full-service banking locations ("Banking
Centers") in the greater Houston metropolitan area and six contiguous counties
situated south and southwest of Houston. As of June 30, 1998, the Company had
total assets of $335.4 million, gross loans of $141.1 million, total deposits of
$307.8 million and total shareholders' equity of $26.5 million. The Company's
financial performance has been characterized by steady asset growth, consistent
core earnings and strong asset quality. The Company has been profitable in every
year of its existence.
The Company was formed in 1983 as a vehicle to acquire the former Allied
Bank in Edna, and has grown through a combination of internal growth, the
acquisition of community banks and the opening of new community banking offices.
From 1988 to 1992, as a sound and profitable institution, the Company took
advantage of the economic downturn in Texas and acquired the deposits and
certain assets of failed banks in West Columbia, El Campo and Cuero and two
failed banks in Houston. The Company opened a full-service Banking Center in
Victoria in 1993 and the following year established a Banking Center in Bay
City. The Company expanded its Bay City presence in 1996 with the acquisition of
an additional branch location from Norwest Bank and in 1997 the Company acquired
the Angleton branch of Wells Fargo Bank. In 1998, the Company enhanced its West
Columbia Banking Center with the purchase of a commercial bank branch located in
West Columbia. As a result of the addition of these branches and internal
growth, the Company's assets have increased from $54.2 million at the end of
1987 to $335.4 million as of June 30, 1998 and its deposits have increased from
$46.0 million to $307.8 million in that same period. In addition, the Company
has executed a definitive agreement to acquire Union State Bank ("Union") in
East Bernard, which had $76.9 million in assets and $63.7 million in deposits as
of June 30, 1998. The acquisition of Union is expected to close on or before
October 1, 1998 and to be immediately accretive to the Company's earnings.
The Company's primary market consists of the communities served by its
three locations in the greater Houston metropolitan area and its eight locations
in six contiguous counties (Brazoria, Wharton, Matagorda, Jackson, Victoria and
DeWitt) neighboring Houston. The diverse nature of the economies in each local
market served by the Company provides the Company with a varied customer base
and allows the Company to spread its lending risk throughout a number of
different industries. The Company's market areas outside of Houston are
dominated by either small community banks or branches of large regional banks.
Management believes that the Company, as one of the few mid-sized financial
institutions that combines responsive community banking with the sophistication
of a regional bank holding company, has a competitive advantage in its market
areas and excellent growth opportunities through acquisitions, new branch
locations and additional business development.
Operating under a community banking philosophy, the Company seeks to
develop broad customer relationships based on service and convenience while
maintaining its conservative approach to lending and strong asset quality. The
Company's Board members and executive officers play an important role in the
Company's business development efforts by actively participating in a number of
civic and public service
3
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activities in the local communities served by the Company. The Company has
invested heavily in its officers and employees by recruiting talented bankers in
its market areas and rewarding excellent performance with stock options and
other economic incentives. Each of the Company's Banking Centers is administered
by a local President and operated as a separate profit center, with each Banking
Center President being held accountable for his Banking Center's performance and
compensated accordingly.
The Company offers a variety of traditional loan and deposit products to
its customers, which consist primarily of consumers and small and medium-sized
businesses. The Company tailors its products to the specific needs of customers
in a given market. The Company offers consumers home mortgage loans with
adjustable rates, automobile loans, home equity loans, debit cards and cash
management services. For businesses, the Company makes available term loans,
lines of credit and loans for working capital, business expansion and the
purchase of equipment and machinery, interim construction loans for builders and
owner-occupied commercial real estate loans. The Company provides all of its
customers with a full complement of traditional deposit products.
The Company's strategic plan includes the following goals:
o INCREASE LOAN VOLUME AND DIVERSIFY LOAN PORTFOLIO. The Company seeks
to increase its ratio of loans to deposits from the June 30, 1998
level of 42.1% to approximately 65%. Given the Company's high level of
low-cost core deposits, increased lending activity is expected to
significantly enhance the Company's net income. Historically, the
Company has elected to sacrifice some earnings for the relative
security of home mortgage loans. While maintaining its conservative
approach to lending, the Company plans to emphasize loan products such
as home equity loans and loans to finance the construction of
commercial owner-occupied real estate, and target professional service
firms such as legal and medical practices and their principals in an
effort to improve the mix of its loan portfolio.
o MAINTAIN EFFICIENCY RATIO. The Company has always emphasized cost
control. The Company has invested significantly in the infrastructure
required to centralize many of its critical operations, which
management believes can accommodate substantial additional growth and
minimize operational costs through certain economies of scale. Since
1993, the Company has acquired two branch locations and established
two new offices while improving its efficiency ratio in each
consecutive year.
o ENHANCE CROSS-SELLING. The Company trains and incents its employees
to cross-sell various products. To assist in this effort, the Company
has updated its technology to help its officers and employees identify
cross-selling opportunities through a readily accessible Customer
Information File. Recent cross-selling efforts have targeted the
Company's existing mortgage and home equity loan customers and small
and medium-sized businesses for the sale of additional loan and
deposit products.
o AUGMENT MARKET SHARE. In recent years, the Company has increased its
market share in each of the communities in which it maintains a
Banking Center. The Company intends to continue seeking opportunities
to expand either by acquiring existing banks or branches of banks or
by establishing new branches. All of the Company's acquisitions have
been accretive to earnings immediately and have supplied the Company
with relatively low-cost deposits which have been used to fund the
Company's lending activities.
4
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THE OFFERING
<S> <C>
Common Stock offered by the
Company.............................. 925,000 shares
Common Stock offered by the Selling
Shareholders....................... 752,783 shares
Common Stock to be outstanding after
the Offering....................... 4,915,308 shares
Use of Proceeds...................... The estimated net proceeds of the Offering (approxi-
mately $ million) will be used for general
corporate purposes, including support of balance sheet
growth, future acquisitions and to repay certain
indebtedness incurred in the acquisition of Union.
Risk Factors......................... See "Risk Factors" and "Dilution" for a discussion
of certain factors that should be considered by each
prospective investor.
Nasdaq/National Market Symbol........ "PRSP"
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5
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data of the Company is derived
from the Selected Consolidated Financial Data appearing elsewhere in this
Prospectus, and should be read in conjunction with the Consolidated Financial
Statements of the Company and the Notes thereto and the information contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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AS OF AND FOR THE
SIX MONTHS ENDED
JUNE 30, AS OF AND FOR THE YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Interest income...................... $ 10,871 $ 9,632 $ 19,970 $ 16,841 $ 14,738 $ 12,644 $ 11,879
Interest expense..................... 4,714 4,453 9,060 7,923 6,904 5,363 4,902
--------- --------- --------- --------- --------- --------- ---------
Net interest income................ 6,157 5,179 10,910 8,918 7,834 7,281 6,977
Provision for credit losses.......... 145 105 190 230 175 188 155
--------- --------- --------- --------- --------- --------- ---------
Net interest income after provision
for credit losses................ 6,012 5,074 10,720 8,688 7,659 7,093 6,822
Noninterest income................... 1,239 1,010 2,264 1,897 1,489 1,500 1,366
Noninterest expense.................. 4,255 3,667 7,836 6,634 6,046 6,021 6,067
--------- --------- --------- --------- --------- --------- ---------
Income before taxes................ 2,996 2,417 5,148 3,951 3,102 2,572 2,121
Provision for income taxes........... 939 756 1,586 1,240 781 609 492
--------- --------- --------- --------- --------- --------- ---------
Net income........................... $ 2,057 $ 1,661 $ 3,562 $ 2,711 $ 2,321 $ 1,963 $ 1,629
========= ========= ========= ========= ========= ========= =========
PER SHARE DATA(1):
Basic earnings per share............. $ 0.52 $ 0.47 $ 0.94 $ 0.77 $ 0.66 $ 0.56 $ 0.47
Diluted earnings per share........... 0.50 0.46 0.92 0.76 0.66 0.56 0.47
Book value........................... 6.64 5.83 6.22 5.36 4.68 3.81 3.66
Tangible book value(2)............... 5.22 4.35 4.81 4.21 3.95 3.02 2.81
Cash dividends....................... 0.10 0.05 0.14 0.10 0.10 0.07 --
Dividend payout ratio................ 19.39% 10.73% 15.27% 12.97% 15.14% 13.42% --%
Weighted average shares outstanding
(basic) (in thousands)............. 3,990 3,564 3,778 3,513 3,514 3,514 3,448
Weighted average shares outstanding
(diluted) (in thousands)........... 4,080 3,648 3,864 3,560 3,523 3,514 3,448
Shares outstanding at end of period
(in thousands)..................... 3,990 3,980 3,990 3,510 3,514 3,514 3,514
BALANCE SHEET DATA:
Total assets......................... $ 335,422 $ 315,079 $ 320,143 $ 293,988 $ 233,492 $ 224,022 $ 214,635
Securities........................... 158,685 157,954 167,868 147,564 117,505 121,912 138,764
Loans................................ 141,080 120,810 120,578 113,382 88,797 76,543 57,495
Allowance for credit losses.......... 1,114 956 1,016 923 753 588 734
Total deposits....................... 307,815 290,252 291,517 270,866 214,534 207,543 198,904
Borrowings and notes payable......... -- 865 2,800 3,267 1,517 2,275 2,275
Total shareholders' equity........... 26,478 23,213 24,818 18,833 16,458 13,374 12,844
AVERAGE BALANCE SHEET DATA:
Total assets......................... $ 330,099 $ 293,896 $ 304,086 $ 257,205 $ 224,701 $ 214,318 $ 202,071
Securities........................... 169,988 150,656 157,677 127,607 119,857 125,585 130,612
Loans................................ 129,228 115,424 117,586 104,534 81,631 69,200 53,422
Allowance for credit losses.......... 1,047 916 961 820 669 686 781
Total deposits....................... 300,938 268,696 278,377 236,334 207,321 197,711 186,673
Total shareholders' equity........... 25,722 20,066 21,821 17,646 14,916 13,109 11,912
PERFORMANCE RATIOS(3):
Return on average assets............. 1.25% 1.13% 1.17% 1.05% 1.03% 0.92% 0.81%
Return on average equity............. 15.99 16.56 16.32 15.36 15.56 14.97 13.68
Net interest margin
(tax-equivalent)(4)................ 4.15 3.95 4.02 3.91 3.96 3.91 3.97
Efficiency ratio(5).................. 57.53 58.83 59.48 61.34 64.85 68.56 72.71
</TABLE>
6
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AS OF AND FOR THE
SIX MONTHS ENDED AS OF AND FOR THE
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSET QUALITY RATIOS(6):
Nonperforming assets to total loans
and other real estate.............. 0.00% 0.12% 0.00% 0.00% 0.00% 0.02% 0.19%
Net loan charge-offs to average
loans.............................. 0.04 0.06 0.08 0.06 0.01 0.48 0.31
Allowance for credit losses to total
loans.............................. 0.79 0.79 0.84 0.81 0.85 0.77 1.28
Allowance for credit losses to
nonperforming loans(7)............. -- -- -- -- -- -- --
CAPITAL RATIOS(6):
Leverage ratio....................... 6.25% 5.73% 6.30% 5.45% 6.05% 5.39% 4.66%
Average shareholders' equity to
average total assets............... 7.79 6.83 7.18 6.86 6.64 6.12 5.89
Tier 1 risk-based capital ratio...... 14.32 14.55 14.94 13.11 14.99 13.75 13.45
Total risk-based capital ratio....... 15.08 15.33 15.73 13.89 15.79 14.37 14.45
</TABLE>
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(1) Adjusted for a four for one stock split effective September 10, 1998.
(2) Calculated by dividing total assets, less total liabilities and goodwill, by
shares outstanding at end of period.
(3) All interim periods have been annualized.
(4) Calculated using a 34% federal income tax rate.
(5) Calculated by dividing total noninterest expense, excluding securities
losses, by net interest income plus noninterest income.
(6) At period end, except net loan charge-offs to average loans and average
shareholders' equity to average total assets.
(7) Nonperforming loans consist of nonaccrual loans and restructured loans.
7
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RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES CERTAIN RISKS. IN
ADDITION TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN,
THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY
BEFORE PURCHASING THE COMMON STOCK OFFERED HEREBY. INFORMATION CONTAINED IN THIS
PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS" WHICH CAN BE IDENTIFIED BY
THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS,"
"WILL," "SHOULD," "PROJECTED," "CONTEMPLATED" OR "ANTICIPATES" OR THE
NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. NO
ASSURANCE CAN BE GIVEN THAT THE FUTURE RESULTS COVERED BY THE FORWARD-LOOKING
STATEMENTS WILL BE ACHIEVED. THE FOLLOWING FACTORS COULD CAUSE ACTUAL EXPERIENCE
TO VARY MATERIALLY FROM THE FUTURE RESULTS COVERED IN SUCH FORWARD-LOOKING
STATEMENTS. OTHER FACTORS, SUCH AS THE GENERAL STATE OF THE ECONOMY, COULD ALSO
CAUSE ACTUAL EXPERIENCE TO VARY MATERIALLY FROM THE MATTERS COVERED IN SUCH
FORWARD-LOOKING STATEMENTS.
RISKS INVOLVED IN ACQUISITIONS
The Company believes that a portion of its growth will come from
acquisitions of banks and other financial institutions. Such acquisitions,
including the acquisition of Union (the "Union Acquisition"), currently
expected to be consummated prior to the consummation of the Offering, involve
risks of changes in results of operations or cash flows, unforeseen liabilities
relating to the acquired institution or arising out of the acquisition, asset
quality problems of the acquired entity and other conditions not within the
control of the Company, such as adverse personnel relations, loss of customers
because of change of identity, deterioration in local economic conditions and
other risks affecting the acquired institution. See "Pending Acquisition."
There can be no assurance that any such acquisitions will enhance the Company's
business, results of operations, cash flows or financial condition, and such
acquisitions may have an adverse effect on the Company's results of operations,
particularly during periods in which the acquisitions are being integrated into
the Company's operations. Operational areas requiring significant integration
include the consolidation of data processing operations, the combination of
employee benefit plans, the creation of joint account and lending products, the
development of unified marketing plans and other related areas. Successful
integration of acquired entities could require significant expenditures by the
Company that could negatively impact the Company's results of operations.
Completion of the acquisition and integration could divert management's
attention from other important issues and impact the Company's operating
results. There can be no assurance that the Company will be able to identify
other suitable acquisition candidates, that acquisitions will be consummated on
acceptable terms or that the Company will be able to successfully integrate the
operations of any acquired entity or business. The Company's ability to acquire
banks and other financial institutions may depend on its ability to obtain
additional debt and equity funding which may not be available on terms as
favorable to the Company as currently available and, if equity funding is
utilized, an acquisition may be dilutive to shareholders.
EXPOSURE TO LOCAL ECONOMIC CONDITIONS
The Company's success is dependent to a significant extent upon general
economic conditions in Texas and to a certain extent, the metropolitan Houston
area. The banking industry in Texas and Houston is affected by general economic
conditions such as inflation, recession, unemployment and other factors beyond
the Company's control. During the mid 1980s, severely depressed oil and gas and
real estate prices materially and adversely affected the Texas and Houston
economies, causing recession and unemployment in the region and resulting in
excess vacancies in the Houston real estate market and elsewhere in the state.
Since 1987, the Texas economy has improved in part due to its expansion into
industries other than those related to energy. As the Texas and Houston
economies have diversified away from the energy industry, however, they have
become more susceptible to adverse effects resulting from recession in the
national economy. Economic recession over a prolonged period or other economic
dislocation in the Texas and Houston area could cause increases in nonperforming
assets, thereby causing operating losses, impairing liquidity and eroding
capital. There can be no assurance that future adverse changes in the Texas or
Houston
8
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economies would not have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
INTEREST RATE RISK
The Company's earnings depend to a great extent on "rate differentials,"
which are the differences between interest income that the Company earns on
loans and investments and the interest expense paid on deposits and other
borrowings. These rates are highly sensitive to many factors which are beyond
the Company's control, including general economic conditions and the policies of
various government and regulatory authorities. Increases in the discount rate by
the Board of Governors of the Federal Reserve System ("Federal Reserve Board")
usually lead to rising interest rates, which affect the Company's interest
income, interest expense and investment portfolio. Also, certain governmental
policies affect the cost of funds. From time to time, maturities of assets and
liabilities are not balanced, and a rapid increase or decrease in interest rates
could have an adverse effect on the net interest margin and results of
operations of the Company. The nature, timing and effect of any future changes
in federal monetary and fiscal policies on the Company and its results of
operations are not predictable. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Financial Condition -- Interest
Rate Sensitivity and Liquidity."
COMPETITION
The banking business is highly competitive, and the profitability of the
Company depends principally upon the Company's ability to compete in the market
areas in which its banking operations are located. The Company competes with
other commercial banks, savings banks, savings and loan associations, credit
unions, finance companies, mutual funds, insurance companies, brokerage and
investment banking firms, asset-based non-bank lenders and certain other
nonfinancial entities, including retail stores which may maintain their own
credit programs and certain governmental organizations which may offer more
favorable financing than the Company. Many of such competitors may have greater
financial and other resources than the Company. The Company has been able to
compete effectively with other financial institutions by emphasizing customer
service, technology and responsive decision-making on loans, by establishing
long-term customer relationships and building customer loyalty and by providing
products and services designed to address the specific needs of its customers.
Although the Company has been able to compete effectively in the past, no
assurances may be given that the Company will continue to be able to compete
effectively in the future. Various legislative acts in recent years have led to
increased competition among financial institutions. There can be no assurance
that the United States Congress or the Texas legislature will not enact
legislation that may further increase competitive pressures on the Company.
Competition from both financial and non-financial institutions is expected to
continue. See "The Company -- Competition."
REGULATION AND SUPERVISION
Bank holding companies and banks operate in a highly regulated environment
and are subject to extensive supervision and examination by several federal and
state regulatory agencies. The Company is subject to the Bank Holding Company
Act of 1956, as amended (the "BHCA"), and to regulation and supervision by the
Federal Reserve Board. The Bank, as a Texas state banking association, is
subject to regulation and supervision by the Texas Banking Department and, as a
result of the insurance of its deposits, by the Federal Deposit Insurance
Corporation ("FDIC"). These regulations are intended primarily for the
protection of depositors and customers, rather than for the benefit of
investors. The Company and the Bank are subject to changes in federal and state
laws, as well as changes in regulations and governmental policies, income tax
laws and accounting principles. The effects of any potential changes cannot be
predicted but could adversely affect the business, operations and cash flows of
the Company and the Bank in the future. See "Supervision and Regulation."
The Federal Reserve Board has adopted a policy that requires a bank holding
company such as the Company to serve as a source of financial strength to its
banking subsidiaries. The Federal Reserve Board has required bank holding
companies to contribute cash to their troubled bank subsidiaries based upon this
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"source of strength" policy, which could have the effect of decreasing funds
available for distributions to shareholders. In addition, a bank holding company
in certain circumstances could be required to guarantee the capital plan of an
undercapitalized banking subsidiary. See "Supervision and Regulation."
DIVIDEND HISTORY AND RESTRICTIONS ON ABILITY TO PAY DIVIDENDS
While the Company currently pays cash dividends on the Common Stock, there
is no assurance that the Company will pay dividends on the Common Stock in the
future. It is the policy of the Federal Reserve Board that bank holding
companies should pay cash dividends on common stock only out of income available
over the past year and only if prospective earnings retention is consistent with
the organization's expected future needs and financial condition. The policy
provides that bank holding companies should not maintain a level of cash
dividends that undermines the bank holding company's ability to serve as a
source of strength to its banking subsidiaries.
The Company's principal source of funds to pay dividends on the shares of
Common Stock will be cash dividends that the Company receives from the Bank. The
payment of dividends by the Bank to the Company is subject to certain
restrictions imposed by federal and state banking laws, regulations and
authorities. The federal banking statutes prohibit federally insured banks from
making any capital distributions (including a dividend payment) if, after making
the distribution, the institution would be "undercapitalized" as defined by
statute. In addition, the relevant federal regulatory agencies also have
authority to prohibit an insured bank from engaging in an unsafe or unsound
practice, as determined by the agency, in conducting an activity. The payment of
dividends could be deemed to constitute such an unsafe or unsound practice,
depending on the financial condition of the Bank. Regulatory authorities could
impose administratively stricter limitations on the ability of the Bank to pay
dividends to the Company if such limits were deemed appropriate to preserve
certain capital adequacy requirements. As of June 30, 1998, an aggregate of
approximately $6.2 million was available for payment of dividends by the Bank to
the Company under applicable restrictions, without regulatory approval. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition -- Capital Resources" and "Supervision and
Regulation -- The Bank."
DEPENDENCE ON KEY PERSONNEL
The Company and the Bank are dependent on certain key personnel including
Tracy T. Rudolph and David Zalman, both of whom are considered to be important
to the success of the Company and the Bank. The unexpected loss of Messrs.
Rudolph or Zalman or other members of senior management could have an adverse
effect on the Company and the Bank. The Company has entered into an employment
agreement with each of Messrs. Rudolph and Zalman. See
"Management -- Employment Agreements."
CERTAIN CHARTER AND BYLAW PROVISIONS
The Company's Articles of Incorporation and Bylaws contain certain
provisions which may delay, discourage or prevent an attempted acquisition or
change of control of the Company. These provisions include: (i) a Board of
Directors classified into three classes of directors with the directors of each
class having staggered, three-year terms, (ii) a provision that any special
meeting of shareholders of the Company may be called only by a majority of the
Board of Directors, the Chairman of the Board, the President or the holders of
at least 50% of the shares entitled to vote on the matter, (iii) a provision
establishing certain advance notice procedures for nomination of candidates for
election as directors and for shareholder proposals to be considered at an
annual or special meeting of shareholders and (iv) a provision that denies
shareholders the right to amend the Bylaws of the Company. The Company's
Articles of Incorporation provide for noncumulative voting for directors and
authorize the Board of Directors of the Company to issue shares of preferred
stock of the Company, $1.00 par value per share, without shareholder approval
and upon such terms as the Board of Directors may determine. The issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions, financings and other corporate purposes, could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, a controlling interest in the
Company. In addition, certain provisions of Texas law, including a
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provision which restricts certain business combinations between a Texas
corporation and certain affiliated shareholders, may delay, discourage or
prevent an attempted acquisition or change in control of the Company. See
"Supervision and Regulation," "Description of Securities of the
Company -- Preferred Stock," and "-- Texas Law and Certain Provisions of the
Articles of Incorporation and Bylaws."
MANAGEMENT'S OWNERSHIP INTEREST AND POSSIBLE EFFECTS
After the consummation of the Offering, the executive officers and
directors of the Company and members of the Executive Committee of the Bank will
beneficially own 21.38% of the outstanding shares of Common Stock, and
approximately 20.34% of such shares of Common Stock if the Underwriters' over-
allotment option is fully exercised. Accordingly, these executive officers and
directors will be able to influence, to a significant extent, the outcome of all
matters required to be submitted to the Company's shareholders for approval,
including decisions relating to the election of directors of the Company, the
determination of day-to-day corporate and management policies of the Company and
other significant corporate transactions. See "Management," "Principal and
Selling Shareholders" and "Description of Securities of the Company."
DILUTION OF COMMON STOCK
Investors purchasing shares of Common Stock in the Offering will incur
immediate dilution of approximately % in their investment, in that the
tangible book value of the Company after the Offering will be approximately
$ compared with an assumed initial public offering price of $ per share
(which is the mid-point of the Offering range). See "Dilution."
NO PRIOR TRADING MARKET
Prior to the Offering, there has been no public market for the shares of
Common Stock. An application has been filed to have the Common Stock approved
for quotation on the Nasdaq/National Market under the symbol "PRSP." The
Representatives have advised the Company that they intend to make a market in
the Common Stock as long as the volume of trading activity in the Common Stock
and certain other market making conditions justify doing so. Nonetheless, there
can be no assurance that an active public market will develop or be sustained
after the Offering or that if such a market develops, investors in the Common
Stock will be able to resell their shares at or above the initial public
offering price. Making a market involves maintaining bid and asked quotations
for the Common Stock and being available as principal to effect transactions in
reasonable quantities at those quoted prices, subject to various securities laws
and other regulatory requirements. A public trading market having the desired
characteristics of depth, liquidity and orderliness depends upon the presence in
the marketplace of willing buyers and sellers of the Common Stock at any given
time, which presence is dependent upon the individual decisions of investors
over which neither the Company nor any market maker has any control.
DETERMINATION OF MARKET PRICE AND POSSIBLE VOLATILITY OF STOCK PRICE
The initial public offering price of the shares of Common Stock will be
determined by negotiations between the Company and the Representatives and will
not necessarily bear any relationship to the Company's book value, past
operating results, financial condition or other established criteria of value
and may not be indicative of the market price of the Common Stock after the
Offering. See "Nature of the Trading Market and Market Prices" and
"Underwriting" for information relating to the method of determining the
initial public offering price. The stock market has from time to time
experienced price and volume volatility. These market fluctuations may be
unrelated to the operating performance of particular companies whose shares are
traded and may adversely affect the market price of the Common Stock. There can
be no assurance that the market price of the Common Stock will not decline below
the initial public offering price.
SHARES ELIGIBLE FOR FUTURE SALE
The Company will have 4,915,308 shares of Common Stock outstanding after
the Offering. The Company, its officers and directors and certain shareholders
(who collectively will own 32.71% of the
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outstanding shares after the consummation of the Offering) have agreed with the
Representatives not to offer, sell, contract to sell or otherwise dispose of any
of their shares of Common Stock for a period of 180 days after the date of this
Prospectus without the permission of the Representatives. The currently
outstanding shares of Common Stock which are not subject to such agreement are
held by approximately 140 shareholders of record, and all of such shares are
"restricted securities" as that term is defined by Rule 144 promulgated under
the Securities Act of 1933, as amended (the "Securities Act") and will be
eligible for sale in compliance with Rule 144 volume and other requirements.
Shares held for at least two years by a person who has not been an "affiliate"
of the Company at any time during the 90 days preceding the sale of such shares
will be freely tradable in accordance with Rule 144(k) under the Securities Act,
without regard to volume and other restrictions of Rule 144. In addition, all of
the shares of Common Stock sold in the Offering, other than shares purchased by
affiliates of the Company, will generally be freely tradable under the
Securities Act. No prediction can be made as to the effect, if any, that future
sales of Common Stock or the availability of Common Stock for future sale will
have on the market price of the Common Stock prevailing from time to time. Sales
of a substantial number of such shares in the future, or the perception that
such sales could occur, could adversely affect the market price of the Common
Stock. See "Management" and "Principal and Selling Shareholders."
REGULATION OF CONTROL
Individuals, alone or acting in concert with others, seeking to acquire 10%
or more of any class of voting securities of the Company must comply with the
Change in Bank Control Act, which requires the prior approval of the Federal
Reserve Board for any such acquisition. Entities seeking to acquire 5% or more
of any class of voting securities of, or otherwise to control, the Company may
be required to obtain the prior approval of the Federal Reserve Board under the
BHCA. Accordingly, prospective investors need to be aware of and to comply with
these requirements, if applicable, in connection with any purchase of shares of
the Common Stock offered hereby.
YEAR 2000 ISSUES
Significant uncertainty exists concerning the potential effects associated
with "Year 2000" issues. The Company formally initiated a project in November
1997 to ensure that its operational and financial systems will not be adversely
affected by Year 2000 software problems. The Company has formed a Year 2000
project team and the Board of Directors and management are supporting all
compliance efforts and allocating the resources that management believes are
necessary to ensure completion. An inventory of all systems and products that
could be affected by the Year 2000 date change has been developed, verified and
categorized as to its importance to the Company. The software for the Company's
systems is primarily provided through service bureaus and software vendors. The
Company is requiring its software providers to demonstrate and represent that
the products provided are or will be Year 2000 compliant and has planned a
program of testing compliance. In the event that its data processing system does
not function properly, the Company is prepared to perform functions manually.
The Company believes it is in compliance with regulatory guidelines regarding
Year 2000 compliance, including the timetable for achieving compliance.
Management does not expect the costs of bringing the Company's systems into Year
2000 compliance will have a material adverse effect on the Company's financial
condition, results of operations or liquidity. Nonetheless, the Company's
ability to predict the costs associated with Year 2000 compliance is subject to
some uncertainties, and the Company may incur unexpected additional expenditures
in connection with Year 2000 compliance, which expenditures could be material.
In addition, there can be no assurance that the Company's operational and
financial systems will not be affected by Year 2000 software problems.
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THE COMPANY
GENERAL
The Company was formed in 1983 as a vehicle to acquire the former Allied
Bank in Edna, which was chartered in 1949. The Company's headquarters are
located at 3040 Post Oak Boulevard in Houston, Texas and its telephone number is
(713) 993-0002. As of June 30, 1998, the Company had approximately 155
shareholders of record.
The Company has grown through a combination of internal growth, the
acquisition of community banks and the opening of new community banking offices.
Utilizing a low cost of funds and employing stringent cost controls, the Company
has been profitable in every year of its existence, including the period of
adverse economic conditions in Texas in the late 1980s. From 1988 to 1992, as a
sound and profitable institution, the Company took advantage of this economic
downturn and acquired the deposits and certain assets of failed banks in West
Columbia, El Campo and Cuero and two failed banks in Houston, which diversified
the Company's franchise and increased its core deposits. The Company opened a
full-service Banking Center in Victoria in 1993 and the following year
established a Banking Center in Bay City. The Company expanded its Bay City
presence in 1996 with the acquisition of an additional branch location from
Norwest Bank and in 1997 the Company acquired the Angleton branch of Wells Fargo
Bank. In 1998, the Company enhanced its West Columbia Banking Center with the
purchase of a commercial bank branch located in West Columbia. As a result of
the addition of these branches and internal growth, the Company's assets have
increased from $54.2 million at the end of 1987 to $335.4 million as of June 30,
1998 and its deposits have increased from $46.0 million to $307.8 million in
that same period. In addition, the Company has executed a definitive agreement
to acquire Union State Bank ("Union") in East Bernard, which had $76.9 million
in assets and $63.7 million in deposits as of June 30, 1998. The Union
Acquisition will augment the Company's market share in Wharton County and is
expected to be immediately accretive to the Company's earnings. See "Pending
Acquisition."
The Company's primary market consists of the communities served by its
three locations in the greater Houston metropolitan area and its eight locations
in six contiguous counties (Brazoria, Wharton, Matagorda, Jackson, Victoria and
DeWitt) located to the south and southwest of Houston. Texas Highway 59
(scheduled to become Interstate Highway 69), which serves as one of the primary
trucking routes linking the interior United States and Mexico, runs directly
through the center of the Company's market area. The increased traffic along
this "NAFTA Highway" has enhanced economic activity in the Company's market
area and created opportunities for growth. The diverse nature of the economies
in each local market served by the Company provides the Company with a varied
customer base and allows the Company to spread its lending risk throughout a
number of different industries including farming, ranching, petrochemicals,
manufacturing, tourism, recreation and professional service firms and their
principals. The Company's market areas outside of Houston are dominated by
either small community banks or branches of large regional banks. Management
believes that the Company, as one of the few mid-sized financial institutions
that combines responsive community banking with the sophistication of a regional
bank holding company, has a competitive advantage in its market area and
excellent growth opportunities through acquisitions, new branch locations and
additional business development.
Operating under a community banking philosophy, the Company seeks to
develop broad customer relationships based on service and convenience while
maintaining its conservative approach to lending and strong asset quality. The
Company's directors and officers are important to the Company's success and play
a key role in the Company's business development efforts by actively
participating in a number of civic and public service activities in the
communities served by the Company, such as the Rotary Club, Lion's Club, United
Way and Chamber of Commerce. In addition, the Company's Banking Centers in Bay
City, Clear Lake, Cuero, Edna and Victoria maintain Community Development
Boards, whose function is to solicit new business, develop customer relations
and provide valuable community knowledge to their respective Banking Center
Presidents.
The Company has invested heavily in its officers and employees by
recruiting talented officers in its market areas and providing them with
economic incentive in the form of stock options and bonuses based
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on cross-selling performance. The senior management team has substantial
experience in both the Houston markets and the surrounding communities in which
the Company has a presence. Each Banking Center location is administered by a
local President with knowledge of the community and banking skills which
complement the local economy. The Company entrusts its Banking Center Presidents
with authority and flexibility with respect to product pricing and decision
making within general parameters established by the Company. The Company
operates each Banking Center as a separate profit center, maintaining separate
data with respect to each Banking Center's net interest income, efficiency
ratio, deposit growth, loan growth and overall profitability. Banking Center
Presidents are accountable for performance in these areas and compensated
accordingly. Each Banking Center has its own local telephone number, which
enables a customer to be served by a local banker.
BUSINESS
The Company offers a variety of traditional loan and deposit products to
its customers, which consist primarily of consumers and small and medium-sized
businesses. The Company tailors its products to the specific needs of customers
in a given market. The Company maintains approximately 25,000 separate deposit
accounts and over 5,000 separate loan accounts. At June 30, 1998, approximately
22.3% of the Company's total deposits were noninterest-bearing demand deposits
and for the period ended June 30, 1998, the Company's average cost of funds was
3.11%.
The Company has been an active mortgage lender, with one-to-four family and
commercial mortgage loans comprising 60.6% of the Company's total loans as of
June 30, 1998. The Company also offers loans for automobiles and other consumer
durables, home equity loans, debit cards, personal computer banking and other
cash management services and telebanking. By offering certificates of deposit,
NOW accounts, savings accounts and overdraft protection at competitive rates,
the Company gives its depositors a full range of traditional deposit products.
The Company has successfully introduced Banclub, which for a monthly fee
provides consumers with a package of benefits including unlimited free checking,
personalized checks, credit card protection, free travelers checks, cashier's
checks and money orders and certain travel discounts.
The businesses targeted by the Company are primarily those that require
loans in the $100,000 to $3.0 million range. The Company offers these businesses
a broad array of loan products including term loans, lines of credit and loans
for working capital, business expansion and the purchase of equipment and
machinery, interim construction loans for builders and owner-occupied commercial
real estate loans. For its business customers, the Company has developed a
specialized checking product called Business 10 Checking which provides
discounted fees for checking and normal account analysis.
STRATEGY
The Company's strategic plan includes the following goals:
INCREASE LOAN VOLUME AND DIVERSIFY LOAN PORTFOLIO. The Company seeks to
increase its ratio of loans to deposits from the June 30, 1998 level of 42.1% to
approximately 65%. Given the Company's high level of low-cost core deposits,
increased lending activity is expected to significantly enhance the Company's
net income. Historically, the Company has elected to sacrifice some earnings for
the relative security of home mortgage loans. While maintaining its conservative
approach to lending, the Company plans to emphasize both new and existing loan
products. Among new loan products, the Company has successfully introduced home
equity lending, which contributed $4.7 million in new loans during the first
half of 1998. The Company has also increased its number of loans to finance the
construction of commercial owner-occupied real estate and loans to commercial
businesses for accounts receivable financing and other purposes. With the Union
Acquisition, the Company's agricultural loans will increase from $8.4 million to
$22.2 million on a pro forma basis as of June 30, 1998. The Company is also
targeting professional service firms such as legal and medical practices for
both loans secured by owner-occupied premises and personal loans to their
principals. As an outgrowth of its traditional mortgage lending activity, the
Company is making more jumbo mortgage loans, particularly in the Houston area.
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MAINTAIN EFFICIENCY RATIO. The Company has always emphasized cost control.
The Company has invested significantly in the infrastructure required to
centralize many of its critical operations, such as data processing and loan
application processing. For its Banking Centers, which the Company operates as
independent profit centers, the Company supplies complete support in the areas
of loan review, internal audit, compliance and training. The Company maintains a
"products committee" which provides support in the areas of product
development, marketing and pricing. Management believes that this centralized
infrastructure can accommodate substantial additional growth while enabling the
Company to minimize operational costs through certain economies of scale. Since
1993, the Company has acquired two branch locations and established two new
offices while improving its efficiency ratio in each consecutive year.
ENHANCE CROSS-SELLING. The Company has increased its focus on
cross-selling opportunities by training employees to identify and maximize
cross-selling opportunities. The Company uses bonuses to encourage cross-selling
efforts, and fosters friendly competition among the Banking Centers to achieve
better cross-selling results. To assist with cross-selling efforts, the Company
has updated its technology to help officers and employees identify cross-selling
opportunities through a readily accessible Customer Information File which
details personal information, existing account relationships and related account
relationships. Recent cross-selling efforts by the Company have targeted the
Company's existing mortgage and home equity loan customers and small and
medium-sized businesses for the sale of additional loan and deposit products.
AUGMENT MARKET SHARE. In recent years, the Company has increased its
market share in each of the communities in which it maintains a Banking Center.
The Company intends to continue seeking opportunities, both inside and outside
its existing markets, to expand either by acquiring existing banks or branches
of banks or by establishing new branches. All of the Company's acquisitions have
been accretive to earnings immediately and have supplied the Company with
relatively low-cost deposits which have been used to fund the Company's lending
activities. Factors used by the Company to evaluate expansion opportunities
include the similarity in management and operating philosophies, whether the
acquisition will be accretive to earnings and enhance shareholder value, the
ability to achieve economies of scale to improve the efficiency ratio and the
opportunity to enhance the Company's image and market presence.
FACILITIES
The Company conducts business at 11 full-service Banking Centers. The
following table sets forth specific information on each such location. The
Company's headquarters are located at 3040 Post Oak Boulevard, in Houston,
Texas. The Company owns all of the buildings in which its Banking Centers are
located other than the Post Oak, Meyerland and Victoria Banking Centers.
DEPOSITS AT
LOCATION JUNE 30, 1998
- ------------------------------------- -----------------------
(DOLLARS IN THOUSANDS)
Angleton............................. $30,751
Bay City (7th Street)................ 14,692
Bay City (Avenue F).................. 31,283
Clear Lake........................... 29,410
Cuero................................ 23,493
Edna................................. 35,540
El Campo............................. 40,795
Houston (Meyerland).................. 19,704
Houston (Post Oak)................... 29,977
Victoria............................. 11,489
West Columbia........................ 40,681
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COMPETITION
The banking business is highly competitive, and the profitability of the
Company depends principally on the Company's ability to compete in its markets.
The Company competes with other commercial banks, savings banks, savings and
loan associations, credit unions, finance companies, mutual funds, insurance
companies, brokerage and investment banking firms, asset-based non-bank lenders
and certain other nonfinancial entities, including retail stores which may
maintain their own credit programs and certain governmental organizations which
may offer more favorable financing than the Company. The Company has been able
to compete effectively with other financial institutions by emphasizing customer
service, technology and responsive decision-making on loans, by establishing
long-term customer relationships and building customer loyalty, and by providing
products and services designed to address the specific needs of its customers.
See "Risk Factors -- Competition."
EMPLOYEES
As of June 30, 1998, the Company had 118 full-time equivalent employees, 50
of whom were officers of the Bank. The Company provides medical and
hospitalization insurance to its full-time employees. The Company considers its
relations with employees to be excellent. Neither the Company nor the Bank is a
party to any collective bargaining agreement.
LEGAL PROCEEDINGS
The Company and the Bank from time to time are parties to or otherwise
involved in legal proceedings arising in the normal course of business.
Management does not believe that there is any pending or threatened proceeding
against the Company or the Bank which, if determined adversely, would have a
material effect on the business, results of operations or financial condition of
the Company or the Bank.
USE OF PROCEEDS
The net proceeds to be received by the Company from the Offering (based
upon an assumed initial public offering price of $ per share), after deducting
the underwriting discount and estimated Offering expenses, are estimated to be
approximately $ million, or $ million if the Underwriters' over-
allotment option is fully exercised. The Company intends to use all of such
proceeds for general corporate purposes, including support for anticipated
balance sheet growth, future acquisitions and the repayment of $2.0 million of
indebtedness (the "Indebtedness") to another commercial bank incurred in
connection with the Union Acquisition. The principal amount of the Indebtedness
is repayable over a seven year period and bears interest at the federal funds
rate plus 2.75%. The Indebtedness is secured by all of the capital stock of the
Bank.
Pending the application of the net proceeds, the Company intends to invest
such proceeds in short-term, interest-bearing securities, certificates of
deposit or guaranteed obligations of the United States of America.
DIVIDEND POLICY
Holders of Common Stock are entitled to receive dividends when, as and if
declared by the Company's Board of Directors out of funds legally available
therefor. While the Company has paid dividends on its Common Stock since 1994,
there is no assurance that dividends will be paid in the future.
For a foreseeable period of time, the principal source of cash revenues to
the Company will be dividends paid by the Bank with respect to the Bank's
capital stock. There are certain restrictions on the payment of such dividends
imposed by federal and state banking laws, regulations and authorities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition -- Capital Resources" and "Supervision and
Regulation -- The Bank."
In the future, the declaration and payment of dividends on the Common Stock
will depend upon the earnings and financial condition of the Company, liquidity
and capital requirements, the general economic and regulatory climate, the
Company's ability to service any equity or debt obligations senior to the
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Common Stock and other factors deemed relevant by the Company's Board of
Directors. See "Supervision and Regulation" and "Description of Securities of
the Company." As of June 30, 1998, an aggregate of approximately $6.2 million
was available for payment of dividends by the Bank to the Company under
applicable restrictions, without regulatory approval. Regulatory authorities
could impose administratively stricter limitations on the ability of the Bank to
pay dividends to the Company if such limits were deemed appropriate to preserve
certain capital adequacy requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial
Condition -- Capital Resources" and "Supervision and Regulation."
DILUTION
As of June 30, 1998, the tangible book value of the Common Stock was $5.22
per share. "Tangible book value per share" represents the amount of total
tangible assets less total liabilities divided by the number of shares of Common
Stock outstanding. After giving effect to the Union Acquisition, including $
million of goodwill and core deposit intangibles and the sale by the
Company of 925,000 shares of Common Stock offered hereby (after deducting the
underwriting discount and other estimated offering expenses to be paid by the
Company), the pro forma tangible book value of the Company as of June 30, 1998
would have been $ per share. This represents an immediate increase in net
tangible book value of $ per share to current shareholders and an immediate
dilution of $ per share to new investors. The following table illustrates this
per share dilution:
Assumed price to public.............. $ 14.00
---------
Tangible book value per share
before Offering................ $ 5.22
Increase per share attributable
to new investors............... $
---------
Pro forma tangible book value per
share after Offering............... $
---------
Dilution to new investors............ $
=========
PENDING ACQUISITION
GENERAL. The Company's Board of Directors actively pursues an acquisition
strategy designed to increase efficiency, market share and return to
shareholders. As part of this strategy, the Company has entered into a
definitive agreement to acquire Union, a Texas banking association organized in
1907, pursuant to a statutory merger. Union is a single location community bank
whose business includes conventional consumer and commercial products and
services, including interest and noninterest-bearing depository accounts and
commercial, industrial, consumer, agricultural and real estate lending. At June
30, 1998, Union had total assets of approximately $76.9 million, total deposits
of approximately $63.7 million (12.9% of which were noninterest-bearing) and
total shareholders' equity of approximately $12.9 million. Union is the only
full-service commercial bank in East Bernard and has a stable customer base.
The Union Acquisition will be accretive to the Company's earnings
immediately and provide the Company a presence in East Bernard, a community of
1,500 located in northern Wharton County. The acquisition will allow the Company
to acquire a larger market share in Wharton County, where the Company's El Campo
Banking Center is located. The acquisition of Union will also help the Company
improve its loan mix by increasing the Company's agriculture loans as of June
30, 1998 from $8.4 million to $22.2 million on a pro forma basis. Union has a
lending philosophy which is similar to that employed by the Company. The
Company's significantly higher lending limit is expected to create lending
opportunities in the market that Union was unable to take advantage of prior to
the acquisition. Similar to its previous acquisitions, the Company believes that
the Union Acquisition will enable the Company to achieve certain economies of
scale and resultant savings from the operation of Union as an additional Banking
Center.
ACQUISITION BY THE COMPANY. On June 5, 1998, the Company entered into an
Agreement and Plan of Reorganization (the "Acquisition Agreement") with Union
pursuant to which the Company will acquire all of the issued and outstanding
shares of Union's common stock (the "Union Common Stock"). The
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<PAGE>
Acquisition Agreement provides that upon consummation of the Union Acquisition,
holders of Union Common Stock will receive $17.6 million in cash as
consideration in exchange for their shares of Union Common Stock. The source of
the Company's funds for the acquisition will be a combination of existing cash
($15.6 million) and borrowed funds ($2.0 million). The Union Acquisition will be
accounted for as a purchase transaction.
The obligations of the parties to complete the acquisition of Union are
subject to certain conditions, including the conditions that: (i) all approvals
of any regulatory authority having jurisdiction have been received and all
applicable statutory waiting periods have expired; (ii) the shareholders of
Union shall have approved the transactions contemplated under the Acquisition
Agreement; and (iii) the holders of not more than 10% of the Union Common Stock
shall have exercised their dissenters' rights of appraisal. In addition, the
Company is not obligated to complete the acquisition of Union unless certain
conditions have been satisfied by Union or waived by the Company, including
that: (i) each of the representations and warranties of Union in the Acquisition
Agreement shall be true in all material respects and Union shall have performed
or complied with all covenants and conditions contained in the Acquisition
Agreement; (ii) Union shall not have suffered any material adverse change in its
financial condition, business or operations; and (iii) Union shall have used its
best efforts to have the directors and officers of Union execute releases
generally releasing Union from virtually all claims by such individuals. At or
prior to the closing of the Union Acquisition, two executive officers of Union
are expected to execute employment agreements which contain two-year
non-competition clauses.
The closing date of the Union Acquisition, which management of the Company
expects to occur prior to the closing of the Offering, will be selected by
mutual agreement of the parties to the Acquisition Agreement following
satisfaction or waiver of all conditions to closing. The closing of the Offering
is not contingent upon the prior or simultaneous closing of the Union
Acquisition. There can be no assurance that the foregoing conditions will be
satisfied or waived or that the Union Acquisition will be completed.
18
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
set forth the consolidated balance sheet at June 30, 1998 and the consolidated
income statements for the six month period ended June 30, 1998 and for the year
ended December 31, 1997, for the Company and Union and the adjustments
reflecting the proposed acquisition of Union and the pro forma combined
information following such transaction. The Union Acquisition will be accounted
for as a purchase and the assets and liabilities will be recorded at their
estimated fair market values, with the excess of the respective purchase prices
over the net fair market values recorded as goodwill. The information with
respect to the Company and Union as of June 30, 1998, and the pro forma
information is unaudited. The pro forma balance sheet assumes that the Union
Acquisition was consummated on the balance sheet date. The pro forma income
statements assume that the Union Acquisition was consummated at the beginning of
the period indicated. The pro forma financial statements should be read in
conjunction with the financial statements and notes thereto appearing elsewhere
in this Prospectus. The pro forma combined balance sheet and statements of
income are not necessarily indicative of the combined financial position at
consummation of the Union Acquisition or the results of operations following
consummation of the Union Acquisition.
PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
-------------------- PRO FORMA
COMPANY UNION DEBITS CREDITS COMBINED
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks.............. $ 13,054 $ 1,673 $ 2,000(b) $ 4,700(b) $ 12,027
Federal funds sold................... 7,875 5,100 -- 12,900(b) 75
--------- --------- --------- --------- ---------
Total cash and cash
equivalents............... 20,929 6,773 2,000 17,600 12,102
Interest-bearing deposits in
financial institutions............. 99 -- 99
SECURITIES
Available-for-sale............... 44,744 20,069 64,813
Held-to-maturity................. 113,941 24,077 192(a) 138,210
--------- --------- ---------
Total securities............ 158,685 44,146 192 203,023
LOANS
Total loans, net of unearned
discount....................... 141,080 25,227 166,307
Allowance for credit losses...... (1,114) (671) (1,785 )
--------- --------- ---------
Net loans................... 139,966 24,556 164,522
Goodwill............................. 5,659 -- $ 4,235(a) 9,894
Premises and equipment............... 5,452 165 566(a) 6,183
Other real estate owned.............. -- 139 139
Other assets......................... 4,632 1,162 5,794
--------- --------- --------- --------- ---------
Total assets................ $ 335,422 $ 76,941 $ 6,993 $ 17,600 $401,756
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits......................... $ 307,815 $ 63,723 $371,538
Funds borrowed/customer
repurchase..................... -- -- $ 2,000(b) 2,000
Other liabilities................ 1,129 354 257(a) 1,740
--------- --------- --------- ---------
Total liabilities........... 308,944 64,077 2,257 375,278
Shareholders' equity:
Common stock..................... 3,994 700 $ 700(c) 3,994
Capital surplus.................. 4,817 3,300 3,300(c) 4,817
Retained earnings................ 17,708 8,929 8,929(c) 17,708
Treasury stock................... (18) -- (18 )
Net unrealized gain (loss) on
available-for-sale
securities..................... (23) (65) 65(a) (23 )
--------- --------- --------- --------- ---------
Total shareholders'
equity.................... 26,478 12,864 12,929 65 26,478
--------- --------- --------- --------- ---------
Total liabilities and
shareholders' equity...... $ 335,422 $ 76,941 $ 12,929 $ 2,322 $401,756
========= ========= ========= ========= =========
</TABLE>
- ------------
(a) This adjustment represents the purchase price adjustments to mark Union's
assets and liabilities to fair value upon the consummation of the Union
Acquisition and results in recording of $4.235 million in goodwill.
(b) This adjustment represents the purchase of 100% of the outstanding shares of
stock of Union for $17.6 million consisting of $15.6 million of existing of
cash and an additional $2.0 million of cash generated from borrowings under
an existing line of credit.
(c) This adjustment represents the elimination of the capital of Union against
the investment in subsidiary of the Company.
19
<PAGE>
PRO FORMA COMBINED INCOME STATEMENT
SIX-MONTH PERIOD ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
------------------ PRO FORMA
COMPANY UNION DEBITS CREDITS COMBINED
---------- ------- ------ ------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans......... $ 5,568 $ 1,040 $ 6,608
Interest on securities............. 5,176 1,375 6,551
Interest on federal funds sold..... 127 196 323
---------- ------- ----------
Total interest income......... 10,871 2,611 13,482
Interest expense:
Interest on deposits............... 4,646 1,238 5,884
Interest on other borrowings....... 68 -- $ 83(a) 151
---------- ------- ------ ----------
Total interest expense........ 4,714 1,238 83 6,035
Net interest income..................... 6,157 1,373 (83) 7,447
Provision for credit losses........ 145 -- 145
---------- ------- ------ ----------
Net interest income after provision for
credit losses......................... 6,012 1,373 (83) 7,302
Noninterest income:
Service charges.................... 1,136 98 1,234
Other noninterest income........... 103 32 135
---------- ------- ----------
Total noninterest income...... 1,239 130 1,369
Noninterest expense:
Salaries and employee benefits..... 2,115 453 2,568
Net occupancy expense.............. 427 58 10(b) 495
Other noninterest expense.......... 1,713 214 141(c) 2,068
---------- ------- ------ ----------
Total noninterest expense..... 4,255 725 151 5,131
Income before federal income taxes...... 2,996 778 (234) 3,540
Federal income taxes............... 939 248 $ 32(d) 1,155
---------- ------- ------ ------- ----------
Net income.................... $ 2,057 $ 530 $ (234) $ 32 2,385
========== ======= ====== ======= ==========
Basic earnings per share:
Net income per share............... $ .52 $ 7.57 $ .60
Average shares outstanding......... 3,990,308 70,000 3,990,308
========== ======= ==========
Diluted earnings per share:
Net income per share............... $ .50 $ 7.57 $ .58
Average shares outstanding......... 4,080,516 70,000 4,080,516
========== ======= ==========
</TABLE>
- ------------
(a) This adjustment represents the interest expense on the additional debt.
(b) This adjustment represents additional depreciation expense on the acquired
buildings.
(c) This adjustment represents the amortization of $4.235 million in goodwill
over 15 years.
(d) This adjustment represents the federal income tax effect of the above
adjustments.
20
<PAGE>
PRO FORMA COMBINED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
------------------- PRO FORMA
COMPANY UNION DEBITS CREDITS COMBINED
---------- --------- ------- ------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans......... $ 10,205 $ 2,135 $ 12,340
Interest on securities............. 9,572 2,790 12,362
Interest on federal funds sold..... 193 267 460
---------- --------- ----------
Total interest income...... 19,970 5,192 25,162
Interest expense:
Interest on deposits............... 8,858 2,504 11,362
Interest on other borrowings....... 202 -- $ 164(a) 366
---------- --------- ------- ----------
Total interest expense..... 9,060 2,504 164 11,728
Net interest income.................. 10,910 2,688 (164) 13,434
Provision for credit losses........ 190 (75) 115
---------- --------- ------- ----------
Net interest income after provision
for credit losses............... 10,720 2,763 (164) 13,319
Noninterest income:
Service charges.................... 2,062 218 2,280
Other noninterest income........... 202 110 312
---------- --------- ----------
Total noninterest income... 2,264 328 2,592
Noninterest expense:
Salaries and employee benefits..... 3,968 945 4,913
Net occupancy expense.............. 811 122 19(b) 952
Other noninterest expense.......... 3,057 436 281(c) 3,774
---------- --------- ------- ----------
Total noninterest
expense................. 7,836 1,503 300 9,639
Income before federal income taxes... 5,148 1,588 (464) 6,272
Federal income taxes............... 1,586 422 $ 62(d) 1,946
---------- --------- ------- ------- ----------
Net income................. $ 3,562 $ 1,166 $ (464) $ 62 $ 4,326
========== ========= ======= ======= ==========
Basic earnings per share:
Net income per share............ $ .94 $ 16.66 $ 1.15
Average shares outstanding...... 3,777,880 70,000 3,777,880
========== ========= ==========
Diluted earnings per share:
Net income per share............ $ .92 $ 16.66 $ 1.12
Average shares outstanding...... 3,863,636 70,000 3,863,636
========== ========= ==========
</TABLE>
- ------------
(a) This adjustment represents the interest expense on the additional debt.
(b) This adjustment represents additional depreciation expense on the acquired
buildings.
(c) This adjustment represents the amortization of $4.235 million in goodwill
over 15 years.
(d) This adjustment represents the federal income tax effect of the above
adjustments.
21
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of June 30, 1998, and as adjusted to give effect to (i) the Union
Acquisition and (ii) the sale by the Company of 925,000 shares of Common Stock
offered hereby, at a per share price of $ , net of the underwriting discount
and other estimated offering expenses. See "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1998
---------------------------------------------
AS ADJUSTED
AS ADJUSTED FOR THE UNION
FOR THE UNION ACQUISITION AND
ACTUAL ACQUISITION THE OFFERING
------- -------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Shareholders' Equity:
Preferred Stock, $1 par value,
20,000,000 shares authorized;
none issued and outstanding..... $ -- -- $
Common Stock, $1 par value;
50,000,000 shares authorized;
3,993,884 shares issued and
3,990,308 shares outstanding;
4,918,884 shares issued and
4,915,308 shares outstanding, as
adjusted........................ $ 3,994 $
Capital surplus.................... 4,817
Retained earnings.................. 17,708
Net unrealized gain (loss) on
available-for-sale securities... (23)
Less common stock held in
treasury-at cost................ (18)
------- --------------
Total shareholders'
equity..................... $26,478 $
======= ==============
</TABLE>
NATURE OF THE TRADING MARKET
Prior to the Offering, there has been no public market for the shares of
Common Stock and there can be no assurance that an active public market will
develop or be sustained after the Offering or that if such a market develops,
investors in the Common Stock will be able to resell their shares at or above
the initial public offering price. See "Risk Factors -- No Prior Trading
Market." The initial public offering price of the shares of Common Stock will
be determined by negotiations between the Company and the Representatives and
will not necessarily bear any relationship to the Company's book value, past
operating results, financial condition or other established criteria of value
and may not be indicative of the market price of the Common Stock after the
Offering. Among the factors considered in such negotiations are prevailing
market and general economic conditions, the market capitalizations, trading
histories and stages of development of other traded companies that the Company
and the Representatives believe to be comparable to the Company, the results of
operations of the Company in recent periods, the current financial position of
the Company, estimates of the business potential of the Company and the present
state of the Company's development and the availability for sale in the market
of a significant number of shares of Common Stock. Additionally, consideration
will be given to the general status of the securities market, the market
conditions for new issues of securities and the demand for securities of
comparable companies at the time the Offering is made. See "Underwriting" for
information relating to the method of determining the initial public offering
price. Application has been made for quotation of the shares of Common Stock on
the Nasdaq/National Market under the symbol "PRSP."
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto, appearing elsewhere in this Prospectus, and the information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The selected historical consolidated financial data as
of December 31, 1997 and 1996 and for the three years in the period ended
December 31, 1997 are derived from the Company's Consolidated Financial
Statements which have been audited by Deloitte & Touche LLP. The selected
historical financial data as of December 31, 1995, 1994 and 1993 and for the two
years in the period ended December 31, 1994 are derived from the Consolidated
Financial Statements which have been audited by independent public accountants.
The selected historical consolidated financial data as of and for each of the
six months ended June 30, 1998 and June 30, 1997, have not been audited but, in
the opinion of management, contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position and
results of operations of the Company as of such dates and for such periods. The
results of operations for the six months ended June 30, 1998, are not
necessarily indicative of the results of operations that may be expected for the
year ended December 31, 1998, or for any future periods.
<TABLE>
<CAPTION>
AS OF AND FOR THE
SIX MONTHS ENDED
JUNE 30, AS OF AND FOR THE YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Interest income......................... $ 10,871 $ 9,632 $ 19,970 $ 16,841 $ 14,738 $ 12,644 $ 11,879
Interest expense........................ 4,714 4,453 9,060 7,923 6,904 5,363 4,902
--------- --------- --------- --------- --------- --------- ---------
Net interest income................. 6,157 5,179 10,910 8,918 7,834 7,281 6,977
Provision for credit losses............. 145 105 190 230 175 188 155
--------- --------- --------- --------- --------- --------- ---------
Net interest income after provision
for credit losses................. 6,012 5,074 10,720 8,688 7,659 7,093 6,822
Noninterest income...................... 1,239 1,010 2,264 1,897 1,489 1,500 1,366
Noninterest expense..................... 4,255 3,667 7,836 6,634 6,046 6,021 6,067
--------- --------- --------- --------- --------- --------- ---------
Income before taxes................. 2,996 2,417 5,148 3,951 3,102 2,572 2,121
Provision for income taxes.............. 939 756 1,586 1,240 781 609 492
--------- --------- --------- --------- --------- --------- ---------
Net income.............................. $ 2,057 $ 1,661 $ 3,562 $ 2,711 $ 2,321 $ 1,963 $ 1,629
========= ========= ========= ========= ========= ========= =========
PER SHARE DATA(1):
Basic earnings per share................ $ 0.52 $ 0.47 $ 0.94 $ 0.77 $ 0.66 $ 0.56 $ 0.47
Diluted earnings per share.............. 0.50 0.46 0.92 0.76 0.66 0.56 0.47
Book value.............................. 6.64 5.83 6.22 5.36 4.68 3.81 3.66
Tangible book value(2).................. 5.22 4.35 4.81 4.21 3.95 3.02 2.81
Cash dividends.......................... 0.10 0.05 0.14 0.10 0.10 0.07 --
Dividend payout ratio................... 19.39% 10.73% 15.27% 12.97% 15.14% 13.42% --%
Weighted average shares outstanding
(basic) (in thousands)................ 3,990 3,564 3,778 3,513 3,514 3,514 3,448
Weighted average shares outstanding
(diluted) (in thousands).............. 4,080 3,648 3,864 3,560 3,523 3,514 3,448
Shares outstanding at end of period (in
thousands)............................ 3,990 3,980 3,990 3,510 3,514 3,514 3,514
BALANCE SHEET DATA:
Total assets............................ $ 335,422 $ 315,079 $ 320,143 $ 293,988 $ 233,492 $ 224,022 $ 214,635
Securities.............................. 158,685 157,954 167,868 147,564 117,505 121,912 138,764
Loans................................... 141,080 120,810 120,578 113,382 88,797 76,543 57,495
Allowance for credit losses............. 1,114 956 1,016 923 753 588 734
Total deposits.......................... 307,815 290,252 291,517 270,866 214,534 207,543 198,904
Borrowings and notes payable............ -- 865 2,800 3,267 1,517 2,275 2,275
Total shareholders' equity.............. 26,478 23,213 24,818 18,833 16,458 13,374 12,844
AVERAGE BALANCE SHEET DATA:
Total assets............................ $ 330,099 $ 293,896 $ 304,086 $ 257,205 $ 224,701 $ 214,318 $ 202,071
Securities.............................. 169,988 150,656 157,677 127,607 119,857 125,585 130,612
Loans................................... 129,228 115,424 117,586 104,534 81,631 69,200 53,422
Allowance for credit losses............. 1,047 916 961 820 669 686 781
Total deposits.......................... 300,938 268,696 278,377 236,334 207,321 197,711 186,673
Total shareholders' equity.............. 25,722 20,066 21,821 17,646 14,916 13,109 11,912
</TABLE>
(TABLE CONTINUED ON FOLLOWING PAGE)
23
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE
SIX MONTHS ENDED
JUNE 30, AS OF AND FOR THE YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS(3):
Return on average assets................ 1.25% 1.13% 1.17% 1.05% 1.03% 0.92% 0.81%
Return on average equity................ 15.99 16.56 16.32 15.36 15.56 14.97 13.68
Net interest margin
(tax-equivalent)(4)................... 4.15 3.95 4.02 3.91 3.96 3.91 3.97
Efficiency ratio(5)..................... 57.53 58.83 59.48 61.34 64.85 68.56 72.71
ASSET QUALITY RATIOS(6):
Nonperforming assets to total loans and
other real estate..................... 0.00% 0.12% 0.00% 0.00% 0.00% 0.02% 0.19%
Net loan charge-offs to average loans... 0.04 0.06 0.08 0.06 0.01 0.48 0.31
Allowance for credit losses to total
loans................................. 0.79 0.79 0.84 0.81 0.85 0.77 1.28
Allowance for credit losses to
nonperforming loans(7)................ -- -- -- -- -- -- --
CAPITAL RATIOS(6):
Leverage ratio.......................... 6.25% 5.73% 6.30% 5.45% 6.05% 5.39% 4.66%
Average shareholders' equity to average
total assets.......................... 7.79 6.83 7.18 6.86 6.64 6.12 5.89
Tier 1 risk-based capital ratio......... 14.32 14.55 14.94 13.11 14.99 13.75 13.45
Total risk-based capital ratio.......... 15.08 15.33 15.73 13.89 15.79 14.37 14.45
</TABLE>
- ------------
(1) Adjusted for a four for one stock split effective September 10, 1998.
(2) Calculated by dividing total assets, less total liabilities and goodwill, by
shares outstanding at end of period.
(3) All interim periods have been annualized.
(4) Calculated using a 34% federal income tax rate.
(5) Calculated by dividing total noninterest expense, excluding securities
losses, by net interest income plus noninterest income.
(6) At period end, except net loan charge-offs to average loans and average
shareholders' equity to average total assets.
(7) Nonperforming loans consist of nonaccrual loans and restructured loans.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company analyzes the major elements of the Company's balance
sheets and statements of income. This section should be read in conjunction with
the Company's financial statements and accompanying notes and other detailed
information appearing elsewhere in this Prospectus.
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
OVERVIEW
The twelve month period ended June 30, 1998 was marked by strong loan
growth of $20.3 million or 16.8% which is attributable to one-to-four family
residential loans and the Company's entrance into the home equity market. The
Company showed positive earnings growth due to the increase in loan volume and
the acquisition of deposits and certain assets of a branch of Wells Fargo Bank
in Angleton, Texas in the second quarter of 1997 (the "Angleton Acquisition").
Net income for the six months ended June 30, 1998 was $2.1 million, which
was $396,000 or 23.8% more than net income for the six months ended June 30,
1997. Diluted earnings per common share were $0.50 for the six months ended June
30, 1998 and $0.46 for the six months ended June 30, 1997. The increase in net
income reflected higher net interest income and noninterest income. The increase
in net interest income was driven by growth in interest-earning assets,
including strong internal loan growth. Annualized return on average assets and
return on average common equity were 1.25% and 15.99%, respectively, for the six
months ended June 30, 1998 compared with 1.13% and 16.56%, respectively, for the
same period in 1997. Return on average assets and return on average equity
excluding amortization of goodwill were 1.39% and 17.82%, respectively, for the
six months ended June 30, 1998 compared with 1.24% and 18.18%, respectively, for
the same period in 1997. The Company's annualized efficiency ratio, calculated
by dividing total noninterest expense (excluding securities losses) by net
interest income plus noninterest income, was 57.53% for the six months ended
June 30, 1998 and 58.83% for the six months ended June 30, 1997. The Company's
efficiency ratio excluding amortization of goodwill was 54.36% for the six
months ended June 30, 1998 and 56.62% for the six months ended June 30, 1997.
Total assets at June 30, 1998 increased to $335.4 million from $315.1
million at June 30, 1997, an increase of $20.3 million or 6.4%. Deposits rose to
$307.8 million at June 30, 1998 from $290.3 million at June 30, 1997, an
increase of $17.5 million or 6.0%. This increase was attributable to internal
growth and a branch acquisition. Total shareholders' equity was $26.5 million at
June 30, 1998, representing an increase of $3.3 million or 14.2% over total
shareholders' equity of $23.2 million at June 30, 1997.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income represents the amount by which interest income on
interest-earning assets, including securities and loans, exceeds interest
expense incurred on interest-bearing liabilities, including deposits and other
borrowed funds. Net interest income is the principal source of the Company's
earnings. Interest rate fluctuations, as well as changes in the amount and type
of earning assets and liabilities, combine to affect net interest income.
Net interest income for the six months ended June 30, 1998 was $6.2 million
compared with $5.2 million for the six months ended June 30, 1997, an increase
of $1.0 million or 19.2%. The Company's net interest margin on a tax-equivalent
basis was 4.15% and 3.95% and net interest spread was 3.19% and 3.06% for the
periods ended June 30, 1998 and June 30, 1997, respectively. Net interest income
increased as a result of an increase in interest-earning assets derived
primarily from growth in loans and securities. Loans increased to $141.1 million
for the six months ended June 30, 1998 from $120.8 million for the six months
ended June 30, 1997, an increase of $20.3 million or 16.8%. Home equity loans
accounted for a significant portion of this growth.
25
<PAGE>
The increase in the net interest margin for the first half of 1998 compared
with the first half of 1997 reflects a three basis point increase in the yield
on average interest-earning assets and a 10 basis point decrease in the cost of
interest-bearing liabilities. The yield on average interest-earning assets
increased to 7.15% for the six months ended June 30, 1998 from 7.12% for the six
months ended June 30, 1997, due primarily to higher-yielding loans and
securities. The cost of interest-bearing liabilities decreased to 3.96% for the
six months ended June 30, 1998 from 4.06% for the six months ended June 30,
1997, due mainly to the lower cost of the funds acquired in the Angleton
Acquisition.
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. Except as
indicated in the footnotes, no tax-equivalent adjustments were made and all
average balances are daily average balances.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------------------
1998 1997
--------------------------------- ---------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- ------- ------- ----------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans............................... $ 129,228 $ 5,568 8.62% $ 115,424 $4,953 8.58%
Securities(1)....................... 169,988 5,175 6.09 150,656 4,563 6.06
Federal funds sold and other
temporary investments............. 4,789 127 5.30 4,626 116 5.02
----------- ------- ------- ----------- ------- -------
Total interest-earning
assets....................... 304,005 10,870 7.15% 270,706 9,632 7.12%
------- ------- ------- -------
Less allowance for credit losses.... (1,047) (916)
----------- -----------
Total interest-earning assets,
net of allowance............. 302,958 269,790
Noninterest-earning assets.............. 27,141 24,106
----------- -----------
Total assets................... $ 330,099 $ 293,896
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits.... $ 41,064 $ 330 1.61% $ 43,706 $ 496 2.27%
Savings and money market accounts... 78,704 1,376 3.50 57,182 934 3.27
Certificates of deposit............. 115,919 2,940 5.07 114,698 2,882 5.03
Federal funds purchased and other
borrowings........................ 2,345 68 5.80 3,755 141 7.51
----------- ------- ------- ----------- ------- -------
Total interest-bearing
liabilities.................. 238,032 4,714 3.96% 219,341 4,453 4.06%
----------- ------- ------- ----------- ------- -------
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits.......................... 65,251 53,109
Other liabilities................... 1,094 1,380
----------- -----------
Total liabilities.............. 304,377 273,830
----------- -----------
Shareholders' equity.................... 25,722 20,066
----------- -----------
Total liabilities and
shareholders' equity......... $ 330,099 $ 293,896
=========== ===========
Net interest rate spread............ 3.19% 3.06%
======= =======
Net interest income and margin(2)... $ 6,156 4.05% $5,179 3.83%
======= ======= ======= =======
Net interest income and margin (tax-
equivalent basis)(3).............. $ 6,308 4.15% $5,347 3.95%
======= ======= ======= =======
</TABLE>
- ------------
(1) Yield is based on amortized cost and does not include any component of
unrealized gains or losses.
(2) The net interest margin is equal to net interest income divided by average
interest-earning assets.
(3) In order to make pre-tax income and resultant yields on tax-exempt
investments and loans comparable to those on taxable investments and loans,
a tax-equivalent adjustment has been computed using a federal income tax
rate of 34%.
26
<PAGE>
The following schedule presents the dollar amount of changes in interest
income and interest expense for the major components of interest-earning assets
and interest-bearing liabilities and distinguishes between the increase related
to higher outstanding balances and the volatility of interest rates. For
purposes of this table, changes attributable to both rate and volume which
cannot be segregated have been allocated to rate.
SIX MONTHS ENDED JUNE 30,
-----------------------------
1998 VS. 1997
-----------------------------
INCREASE
(DECREASE) DUE TO
------------------
VOLUME RATE TOTAL
------ --------- ---------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans........................... $ 592 $ 23 $ 615
Securities...................... 586 26 612
Federal funds sold and other
temporary investments......... 4 7 11
------ --------- ---------
Total increase in interest
income.................. 1,182 56 1,238
------ --------- ---------
Interest-bearing liabilities:
Interest-bearing demand
deposits...................... (30) (136) (166)
Savings and money market
accounts...................... 352 90 442
Certificates of deposit......... 31 27 58
Federal funds purchased and
other borrowings.............. (53) (20) (73)
------ --------- ---------
Total increase (decrease)
in interest expense..... 300 (39) 261
------ --------- ---------
Increase in net interest income...... $ 882 $ 95 $ 977
====== ========= =========
PROVISION FOR CREDIT LOSSES
The provision for credit losses increased to $144,500 for the six months
ended June 30, 1998 from $105,000 for the same time period in 1997, an increase
of $39,500 or 37.6%. The Company had no nonperforming assets at June 30, 1998.
NONINTEREST INCOME
Noninterest income is an important source of revenue for financial
institutions. The Company's primary source of noninterest income is service
charges on deposit accounts. Noninterest income for the six months ended June
30, 1998 was $1.2 million, an increase of $229,000 or 22.7% from $1.0 million
for the same period in 1997 resulting largely from increased fees from service
charges.
The following table presents for the periods indicated the major categories
of noninterest income:
SIX MONTHS ENDED
JUNE 30,
--------------------
1998 1997
--------- ---------
(DOLLARS IN
THOUSANDS)
Service charges on deposit
accounts........................... $ 1,074 $ 863
Other noninterest income............. 165 147
--------- ---------
Total noninterest income........ $ 1,239 $ 1,010
========= =========
Service charges on deposit accounts are the largest component of
noninterest income and a significant source of revenue to the Company. The
increase in service charges on deposit accounts and total noninterest income for
the first six months of 1998 compared with the first six months of 1997 resulted
mainly from the increase in the number and volume of accounts resulting from the
Angleton Acquisition.
27
<PAGE>
NONINTEREST EXPENSE
In the six month period ended June 30, 1998, noninterest expense increased
$588,000 or 16.0% to $4.3 million from $3.7 million for the period ended June
30, 1997. The increase reflected additional expenses resulting from the Angleton
Acquisition.
The following table presents for the periods indicated the major categories
of noninterest expense:
SIX MONTHS ENDED
JUNE 30,
--------------------
1998 1997
--------- ---------
(DOLLARS IN
THOUSANDS)
Salaries and employee benefits....... $ 2,115 $ 1,901
Non-staff expenses:
Net bank premises expense....... 349 314
Equipment rentals, depreciation
and maintenance............... 201 185
Data processing................. 369 291
Professional fees............... 43 36
Regulatory assessments.......... 35 33
Ad valorem and franchise
taxes......................... 101 81
Goodwill amortization........... 235 163
Other........................... 806 663
--------- ---------
Total noninterest
expense................. $ 4,254 $ 3,667
========= =========
Salaries and employee benefits for the six months ended June 30, 1998 was
$2.1 million, an increase of $214,000 or 11.3% from $1.9 million in the same
period of 1997. The increase was principally due to additional staff associated
with the Angleton Acquisition.
Non-staff expenses increased to $2.1 million for the six month period ended
June 30, 1998 from $1.8 million for the same period in 1997, an increase of
$374,000 or 21.1%. This increase also was largely due to additional expenses
associated with the Angleton Acquisition.
INCOME TAXES
Income tax expense includes the regular federal income tax at the statutory
rate plus the income tax component of the Texas franchise tax. The amount of
federal income tax expense is influenced by the amount of taxable income, the
amount of tax-exempt income, the amount of non-deductible interest expense and
the amount of other non-deductible expenses. Taxable income for the income tax
component of the Texas franchise tax is the federal pre-tax income, plus certain
officers' salaries, less interest income on federal securities. The income tax
component of the Texas franchise tax was zero in the first six months of 1998
and 1997. During the six months ended June 30, 1998, income tax expense was
$939,000 compared with $756,000 for the six months ended June 30, 1997. The
effective tax rate for both the six months ended June 30, 1998 and 1997 was
31.3%.
IMPACT OF INFLATION
The effects of inflation on the local economy and on the Company's
operating results have been relatively modest for the past several years. Since
substantially all of the Company's assets and liabilities are monetary in
nature, such as cash, securities, loans and deposits, their values are less
sensitive to the effects of inflation than to changing interest rates, which do
not necessarily change in accordance with inflation rates. The Company tries to
control the impact of interest rate fluctuations by managing the relationship
between its interest rate sensitive assets and liabilities. See "-- Financial
Condition -- Interest Rate Sensitivity and Liquidity."
28
<PAGE>
FINANCIAL CONDITION
LOAN PORTFOLIO
Loans, net of unearned interest, were $141.1 million at June 30, 1998, an
increase of $20.3 million or 16.8% from $120.8 million at June 30, 1997. The
increase was principally due to loans generated under the Company's new home
equity loan program and one-to-four family residential loans. The State of Texas
passed legislation approving home equity lending effective January 1, 1998. The
Company makes home equity loans in amounts up to 80% of the appraised value. At
June 30, 1998, home equity loans totaled $4.7 million. In addition to offering
competitive mortgage rates, the Company marketed a new 15-year loan product
which resulted in an increase in one-to-four family residential loans during the
period. Construction and land development loans were $9.4 million at June 30,
1998, an increase of $3.1 million or 49.7% from $6.3 million at June 30, 1997.
Growth was primarily due to new home construction in the Houston market.
The following table summarizes as of the dates indicated the loan portfolio
of the Company by type of loan:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------------
1998 1997
--------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and industrial............ $ 12,297 8.7% $ 12,870 10.7%
Real estate:
Construction and land
development................... 9,439 6.7 6,307 5.2
1-4 family residential.......... 64,617 45.8 52,780 43.7
Home equity..................... 4,711 3.3 -- --
Commercial mortgages............ 16,201 11.5 14,797 12.2
Farmland........................ 5,502 3.9 5,259 4.4
Multi-family residential........ 1,192 0.8 989 0.8
Agriculture.......................... 8,444 6.0 7,416 6.1
Consumer............................. 18,677 13.3 20,392 16.9
-------- -------- -------- --------
Total loans..................... $141,080 100.0% $120,810 100.0%
======== ======== ======== ========
</TABLE>
The lending focus of the Company is on one-to-four family residential,
agricultural, small and medium-sized business and consumer loans. The Company
offers a variety of commercial lending products including term loans and lines
of credit. A broad range of short to medium-term commercial loans, primarily
collateralized, are made available to businesses for working capital (including
inventory and receivables), business expansion (including acquisitions of real
estate and improvements) and the purchase of equipment and machinery. The
purpose of a particular loan generally determines its structure. All loans in
the one-to-four family residential category were originated by the Company.
Loans from $200,000 to $500,000 are evaluated and acted upon by an
officers' loan committee, which meets weekly. Loans above that amount must be
approved by the Directors Loan Committee, which meets monthly.
Generally, the Company's commercial loans are made in the Company's primary
market area and are underwritten on the basis of the borrower's ability to
service such debt from income. As a general practice, the Company takes as
collateral a lien on any available real estate, equipment or other assets owned
by the borrower and obtains a personal guaranty of the borrower. Working capital
loans are primarily collateralized by short-term assets whereas term loans are
primarily collateralized by long-term assets.
In addition to commercial loans secured by real estate, the Company makes
commercial mortgage loans to finance the purchase of real property which
generally consists of real estate with completed structures. Additionally, a
portion of the Company's lending activity has consisted of the origination of
one-to-four family residential mortgage loans collateralized by owner-occupied
properties located in the
29
<PAGE>
Company's market areas. The Company offers a variety of mortgage loan products
which generally are amortized over five to 25 years. Loans collateralized by
one-to-four family residential real estate generally have been originated in
amounts of no more than 89% of appraised value or have mortgage insurance. The
Company requires mortgage title insurance and hazard insurance. The Company's
commercial mortgage loans are secured by first liens on real estate, typically
have variable interest rates and amortize over a ten to 15 year period. In
underwriting commercial mortgage loans, consideration is given to the property's
operating history, future operating projections, current and projected
occupancy, location and physical condition. The underwriting analysis also
includes credit verification, appraisals and a review of the financial condition
of the borrower.
The Company makes loans to finance the construction of residential and, to
a limited extent, nonresidential properties. Construction loans generally are
secured by first liens on real estate and have floating interest rates. The
Company conducts periodic inspections, either directly or through an agent,
prior to approval of periodic draws on these loans. Underwriting guidelines
similar to those described above are also used in the Company's construction
lending activities. In keeping with the community-oriented nature of its
customer base, the Company provides construction and permanent financing for
churches located within its market area.
Consumer loans made by the Company include direct "A"-credit automobile
loans, recreational vehicle loans, boat loans, home improvement loans, home
equity loans, personal loans (collateralized and uncollateralized) and deposit
account collateralized loans. The terms of these loans typically range from 12
to 120 months and vary based upon the nature of collateral and size of loan.
The contractual maturity ranges of the commercial and industrial and
construction and land development portfolios and the amount of such loans with
predetermined interest rates and floating interest rates in each maturity range
as of June 30, 1998 are summarized in the following table:
<TABLE>
<CAPTION>
JUNE 30, 1998
---------------------------------------------------
AFTER ONE
ONE YEAR THROUGH AFTER FIVE
OR LESS FIVE YEARS YEARS TOTAL
--------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and industrial............ $ 5,875 $ 5,626 $ 796 $ 12,297
Construction and land development.... 3,528 2,800 3,111 9,439
--------- ----------- ----------- ---------
Total........................... $ 9,403 $ 8,426 $ 3,907 $ 21,736
========= =========== =========== =========
Loans with a predetermined interest
rate............................... $ 3,060 $ 6,264 $ 703 $ 10,027
Loans with a floating interest
rate............................... 6,343 2,162 3,204 11,709
--------- ----------- ----------- ---------
Total........................... $ 9,403 $ 8,426 $ 3,907 $ 21,736
========= =========== =========== =========
</TABLE>
NONPERFORMING ASSETS
The Company has several procedures in place to assist it in maintaining the
overall quality of its loan portfolio. The Company has established underwriting
guidelines to be followed by its officers. The Company also monitors its
delinquency levels for any negative or adverse trends. There can be no
assurance, however, that the Company's loan portfolio will not become subject to
increasing pressures from deteriorating borrower credit due to general economic
conditions.
The Company has historically had strong asset quality. There were no
nonperforming assets (nonaccrual loans, restructured loans and other real
estate) at June 30, 1998 compared with $144,000 at June 30, 1997 which consisted
of a single one-to-four family property which was sold later in the year at a
loss of $8,500. The Company records real estate acquired by foreclosure at the
lesser of the outstanding loan balance or the fair value at the time of
foreclosure, less estimated costs to sell.
The Company requires appraisals on loans secured by real estate. With
respect to potential problem loans, an evaluation of the borrower's overall
financial condition is made to determine the need, if any, for possible
writedowns or appropriate additions to the allowance for credit losses.
30
<PAGE>
The Company generally places a loan on nonaccrual status and ceases
accruing interest when the payment of principal or interest is delinquent for 90
days, or earlier in some cases, unless the loan is in the process of collection
and the underlying collateral fully supports the carrying value of the loan. The
Company generally charges off all loans before attaining nonacccrual status.
The following table presents information regarding nonperforming assets at
June 30, 1998 and June 30, 1997:
JUNE 30,
--------------------
1998 1997
--------- ---------
(DOLLARS IN
THOUSANDS)
Nonaccrual loans..................... $ -- $ --
Restructured loans................... -- --
Other real estate.................... -- 144
--------- ---------
Total nonperforming assets...... $ -- $ 144
========= =========
Nonperforming assets to total loans
and other real estate.............. 0.00% 0.12%
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is a reserve established through charges to
earnings in the form of a provision for credit losses. Management has
established an allowance for credit losses which it believes is adequate for
estimated losses in the Company's loan portfolio. Based on an evaluation of the
loan portfolio, management presents a monthly review of the allowance for credit
losses to the Bank's Board of Directors, indicating any change in the allowance
since the last review and any recommendations as to adjustments in the
allowance. In making its evaluation, management considers the diversification by
industry of the Company's commercial loan portfolio, the effect of changes in
the local real estate market on collateral values, the results of recent
regulatory examinations, the effects on the loan portfolio of current economic
indicators and their probable impact on borrowers, the amount of charge-offs for
the period, the amount of nonperforming loans and related collateral security,
the evaluation of its loan portfolio by the loan review function and the annual
examination of the Company's financial statements by its independent auditors.
Charge-offs occur when loans are deemed to be uncollectible.
The Company follows a loan review program to evaluate the credit risk in
the loan portfolio. Through the loan review process, the Company maintains an
internally classified loan list which, along with the delinquency list of loans,
helps management assess the overall quality of the loan portfolio and the
adequacy of the allowance for credit losses. Loans classified as "substandard"
are those loans with clear and defined weaknesses such as a highly-leveraged
position, unfavorable financial ratios, uncertain repayment sources or poor
financial condition, which may jeopardize recoverability of the debt. Loans
classified as "doubtful" are those loans which have characteristics similar to
substandard accounts but with an increased risk that a loss may occur, or at
least a portion of the loan may require a charge-off if liquidated at present.
Loans classified as "loss" are those loans which are in the process of being
charged off.
In addition to the internally classified loan list and delinquency list of
loans, the Company maintains a separate "watch list" which further aids the
Company in monitoring loan portfolios. Watch list loans have one or more
deficiencies that require attention in the short term or pertinent ratios of the
loan account that have weakened to a point where more frequent monitoring is
warranted. These loans do not have all of the characteristics of a classified
loan (substandard or doubtful) but do show weakened elements compared with those
of a satisfactory credit. The Company reviews these loans to assist in assessing
the adequacy of the allowance for credit losses.
In order to determine the adequacy of the allowance for credit 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
31
<PAGE>
the Company's historical charge-off experience. The Company then charges to
operations a provision for credit losses to maintain the allowance for credit
losses at an adequate level determined by the foregoing methodology.
For the six months ended June 30, 1998, net charge-offs totaled $47,000 or
0.04% of average loans outstanding for the period, compared with $72,000 in net
charge-offs or 0.06% of average loans outstanding for the six months ended June
30, 1997. The majority of the charge-offs were loans acquired in acquisitions.
During the six months ended June 30, 1998, the Company recorded a provision for
credit losses of $144,500 compared with $105,000 for the six months ended June
30, 1997. At June 30, 1998, the allowance totaled $1.1 million, or 0.79% of
total loans.
The following table presents for the periods indicated an analysis of the
allowance for credit losses and other related data:
SIX MONTHS ENDED JUNE
30,
----------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
Average loans outstanding............ $ 129,228 $ 115,424
========== ==========
Gross loans outstanding at end of
period............................. $ 141,080 $ 120,810
========== ==========
Allowance for credit losses at
beginning of period................ $ 1,016 $ 923
Provision for credit losses.......... 145 105
Charge-offs:
Commercial and industrial....... (1) (26)
Real estate and agriculture..... (12) (36)
Consumer........................ (42) (25)
Recoveries:
Commercial and industrial....... 2 13
Real estate and agriculture..... -- --
Consumer........................ 6 2
---------- ----------
Net (charge-offs) recoveries......... (47) (72)
---------- ----------
Allowance for credit losses at end of
period............................. $ 1,114 $ 956
========== ==========
Ratio of allowance to end of period
loans.............................. 0.79% 0.79%
Ratio of net charge-offs to average
loans.............................. 0.04 0.06
Ratio of allowance to end of period
nonperforming loans................ -- --
32
<PAGE>
The following table describes the allocation of the allowance for credit
losses among various categories of loans and certain other information for the
dates indicated. The allocation is made for analytical purposes and is not
necessarily indicative of the categories in which future losses may occur. The
total allowance is available to absorb losses from any segment of loans.
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------------------
1998 1997
--------------------- ---------------------
PERCENT OF PERCENT OF
LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance of allowance for credit
losses applicable to:
Commercial and industrial....... $ 8 8.7% $ -- 10.7%
Real estate..................... 42 72.0 6 66.3
Agriculture..................... -- 6.0 -- 6.1
Consumer........................ 47 13.3 2 16.9
Unallocated..................... 1,017 948
------ ----------- ------ -----------
Total allowance for credit
losses.................. $1,114 100.0% $ 956 100.0%
====== =========== ====== ===========
</TABLE>
The Company believes that the allowance for credit losses at June 30, 1998
is adequate to cover losses inherent in the portfolio as of such date. There can
be no assurance, however, that the Company will not sustain losses in future
periods, which could be substantial in relation to the size of the allowance at
June 30, 1998.
SECURITIES
The Company uses its securities portfolio both as a source of income and as
a source of liquidity. At June 30, 1998, investment securities totaled $158.7
million, an increase of $739,000 from $158.0 million at June 30, 1997. At June
30, 1998, investment securities represented 47.3% of total assets, compared with
50.1% of total assets at June 30, 1997. The yield on the investment portfolio
for the six months ended June 30, 1998 was 6.09% compared with a yield of 6.06%
for the six months ended June 30, 1997.
The following table presents the amortized cost and fair value of
securities classified as available-for-sale at June 30, 1998:
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies........... $27,584 $ 27 $ 20 $27,591
Mortgage-backed securities.............. 15,932 40 158 15,814
States and political subdivisions....... 1,263 76 -- 1,339
--------- ---------- ---------- -------
Total.............................. $44,779 $ 143 $ 178 $44,744
========= ========== ========== =======
</TABLE>
33
<PAGE>
The following table presents the amortized cost and fair value of
securities classified as held-to-maturity at June 30, 1998:
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies........... $ 59,467 $ 293 $ 22 $ 59,738
Mortgage-backed securities.............. 36,327 66 194 36,199
States and political subdivisions....... 12,515 72 39 12,548
Collateralized mortgage obligations..... 5,632 -- 12 5,620
--------- ---------- ---------- --------
Total.............................. $ 113,941 $ 431 $ 267 $114,105
========= ========== ========== ========
</TABLE>
Mortgage-backed securities are securities which have been developed by
pooling a number of real estate mortgages and are principally issued by federal
agencies such as the Federal National Mortgage Association and the Federal Home
Loan Mortgage Corporation. These securities are deemed to have high credit
ratings, and minimum regular monthly cash flows of principal and interest are
guaranteed by the issuing agencies.
At June 30, 1998, 30.0% of the mortgage-backed securities held by the
Company had contractual final maturities of more than ten years with a weighted
average life of 3.1 years. However, unlike U.S. Treasury and U.S. government
agency securities, which have a lump sum payment at maturity, mortgage-backed
securities provide cash flows from regular principal and interest payments and
principal prepayments throughout the lives of the securities. Mortgage-backed
securities which are purchased at a premium will generally suffer decreasing net
yields as interest rates drop because home owners tend to refinance their
mortgages. Thus, the premium paid must be amortized over a shorter period.
Therefore, these securities purchased at a discount will obtain higher net
yields in a decreasing interest rate environment. As interest rates rise, the
opposite will generally be true. During a period of increasing interest rates,
fixed rate mortgage-backed securities do not tend to experience heavy
prepayments of principal and consequently, the average life of this security
will not be unduly shortened. If interest rates begin to fall, prepayments will
increase.
The following table summarizes the contractual maturity of investment
securities (including federal funds sold) and their weighted average yields.
Available-for-sale securities are not adjusted for unrealized gains or losses.
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------------------------------------------------------------------------
AFTER FIVE YEARS
AFTER ONE YEAR
BUT BUT
WITHIN ONE YEAR WITHIN FIVE WITHIN TEN YEARS AFTER TEN YEARS
YEARS TOTAL
---------------- ---------------- ---------------- ---------------- --------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL
------- ----- ------- ----- ------- ----- ------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
U.S. Treasury securities and obligations
of U.S. government agencies........... $16,483 6.06 % $53,486 6.36 % $17,081 6.26 % $ -- -- % $ 87,050
Mortgage-backed securities.............. 3,515 5.74 15,127 6.15 17,928 6.10 15,689 6.18 52,259
States and political subdivisions....... 2,893 4.40 6,669 5.10 3,844 5.10 372 7.14 13,778
Collateralized mortgage obligations..... -- -- 3,286 6.60 2,347 6.69 -- -- 5,633
Federal funds sold...................... 7,875 5.60 -- -- -- -- -- -- 7,875
------- ----- ------- ----- ------- ----- ------- ----- --------
Total............................... $30,766 5.75 % $78,568 6.22 % $41,200 6.11 % $16,061 6.20 % $166,595
======= ===== ======= ===== ======= ===== ======= ===== ========
</TABLE>
YIELD
-----
U.S. Treasury securities and obligations
of U.S. government agencies........... 6.28 %
Mortgage-backed securities.............. 6.11
States and political subdivisions....... 5.01
Collateralized mortgage obligations..... 6.64
Federal funds sold...................... 5.60
-----
Total............................... 6.10 %
=====
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES ("SFAS 115"). At the date of purchase, the Company is required to
classify debt and equity securities into one of three categories:
held-to-maturity, trading or available-for-sale. At each reporting date, the
appropriateness of the classification is reassessed. Investments in debt
securities are classified as held-to-maturity and measured at amortized cost in
the
34
<PAGE>
financial statements only if management has the positive intent and ability to
hold those securities to maturity. Securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading and measured at fair value in the financial statements with unrealized
gains and losses included in earnings. Investments not classified as either
held-to-maturity or trading are classified as available-for-sale and measured at
fair value in the financial statements with unrealized gains and losses
reported, net of tax, in a separate component of shareholders' equity until
realized.
DEPOSITS
The Company offers a variety of deposit accounts having a wide range of
interest rates and terms. The Company's deposits consist of demand, savings,
money market and time accounts. The Company relies primarily on competitive
pricing policies and customer service to attract and retain these deposits. The
Company does not have any brokered deposits.
The Company's average total deposits for the six months ended June 30, 1998
were $300.9 million or 12.0% over average total deposits during the same period
in 1997. The Company's total deposits at June 30, 1998, were $307.8 million, up
$17.6 million or 6.1% over total deposits at June 30, 1997. The increase in
deposits is attributable to internal growth.
The Company's lending and investing activities are funded principally by
deposits, approximately 61.5% of which are demand and savings deposits. Average
noninterest-bearing deposits at June 30, 1998 increased to $65.3 million
compared with $53.1 million for the first six months of 1997, an increase of
$12.2 million or 23.0% over 1997. Approximately 21.7% of the average deposits
were noninterest-bearing for the six months ended June 30, 1998. As a result,
the Company had a total cost of deposits of 3.11%.
The daily average balances and weighted average rates paid on
interest-bearing deposits for the period ended June 30, 1998 are presented
below:
SIX MONTHS ENDED
JUNE 30, 1998
---------------------
AMOUNT RATE
---------- ---------
(DOLLARS IN
THOUSANDS)
Interest-bearing checking............... $ 41,064 1.61%
Regular savings......................... 9,842 2.46
Money market savings.................... 68,862 3.68
Time deposits........................... 115,919 5.12
---------- ---------
Total interest-bearing deposits.... 235,687 3.98
Noninterest-bearing deposits............ 65,251 --
---------- ---------
Total deposits..................... $ 300,938 3.11%
========== =========
The following table sets forth the amount of the Company's certificates of
deposit that are $100,000 or greater by time remaining until maturity:
JUNE 30, 1998
----------------------
(DOLLARS IN THOUSANDS)
Three months or less................. $ 11,888
Over three through six months........ 5,734
Over six through 12 months........... 11,130
Over 12 months....................... 3,199
----------------------
Total........................... $ 31,951
======================
The Company expects that the majority of the certificates of deposit
maturing within one year will renew. Should this not occur, management believes
that there will be sufficient cash to fund payments.
35
<PAGE>
OTHER BORROWINGS
Deposits are the primary source of funds for the Company's lending and
investment activities. Occasionally, the Company obtains additional funds from
the Federal Home Loan Bank ("FHLB") and correspondent banks. During 1997, the
Company entered into an agreement with another commercial bank to borrow up to
$8.0 million under a reducing, revolving line of credit (the "Line.") At June
30, 1998, the Company had no borrowings under the Line compared with $865,000
under a previous line of credit at June 30, 1997.
INTEREST RATE SENSITIVITY AND LIQUIDITY
The Company's Asset Liability and Funds Management Policy provides
management with the necessary guidelines for effective funds management, and the
Company has established a measurement system for monitoring its net interest
rate sensitivity position. The Company manages its sensitivity position within
established guidelines.
Interest rate risk is managed by the Asset Liability Committee ("ALCO"),
which is composed of senior officers of the Company, in accordance with policies
approved by the Company's Board of Directors. The ALCO formulates strategies
based on appropriate levels of interest rate risk. In determining the
appropriate level of interest rate risk, the ALCO considers the impact on
earnings and capital of the current outlook on interest rates, potential changes
in interest rates, regional economies, liquidity, business strategies and other
factors. The ALCO meets regularly to review, among other things, the sensitivity
of assets and liabilities to interest rate changes, the book and market values
of assets and liabilities, unrealized gains and losses, purchase and sale
activities, commitments to originate loans and the maturities of investments and
borrowings. Additionally, the ALCO reviews liquidity, cash flow flexibility,
maturities of deposits and consumer and commercial deposit activity. Management
uses two methodologies to manage interest rate risk: (i) an analysis of
relationships between interest-earning assets and interest-bearing liabilities;
and (ii) an interest rate shock simulation model. The Company has traditionally
managed its business to reduce its overall exposure to changes in interest
rates.
The Company manages its exposure to interest rates by structuring its
balance sheet in the ordinary course of business. The Company does not enter
into instruments such as leveraged derivatives, interest rate swaps, financial
options, financial future contracts or forward delivery contracts for the
purpose of reducing interest rate risk.
An interest rate sensitive asset or liability is one that, within a defined
time period, either matures or experiences an interest rate change in line with
general market interest rates. The management of interest rate risk is performed
by analyzing the maturity and repricing relationships between interest-earning
assets and interest-bearing liabilities at specific points in time ("GAP") and
by analyzing the effects of interest rate changes on net interest income over
specific periods of time by projecting the performance of the mix of assets and
liabilities in varied interest rate environments. Interest rate sensitivity
reflects the potential effect on net interest income of a movement in interest
rates. A company is considered to be asset sensitive, or having a positive GAP,
when the amount of its interest-earning assets maturing or repricing within a
given period exceeds the amount of its interest-bearing liabilities also
maturing or repricing within that time period. Conversely, a company is
considered to be liability sensitive, or having a negative GAP, when the amount
of its interest-bearing liabilities maturing or repricing within a given period
exceeds the amount of its interest-earning assets also maturing or repricing
within that time period. During a period of rising interest rates, a negative
GAP would tend to affect net interest income adversely, 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.
36
<PAGE>
The following table sets forth an interest rate sensitivity analysis for
the Company at June 30, 1998:
<TABLE>
<CAPTION>
VOLUMES SUBJECT TO REPRICING WITHIN
------------------------------------------------------------------------
0-30 DAYS 31-180 DAYS 181-365 DAYS AFTER ONE YEAR TOTAL
--------- ----------- ------------ -------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities............................ $ 15,941 $ 14,900 $ 28,950 $ 98,894 $ 158,685
Loans................................. 24,255 6,709 10,431 99,685 141,080
Federal funds sold and other temporary
investments......................... 7,974 -- -- -- 7,974
--------- ----------- ------------ -------------- ---------
Total interest-earning assets....... 48,170 21,609 39,381 198,579 307,739
--------- ----------- ------------ -------------- ---------
Interest-bearing liabilities:
Demand, money market and savings
deposits............................ 118,726 -- -- -- 118,726
Certificates of deposit and other time
deposits............................ 11,667 51,235 38,179 19,445 120,526
--------- ----------- ------------ -------------- ---------
Total interest-bearing
liabilities....................... 130,393 51,235 38,179 19,445 239,252
--------- ----------- ------------ -------------- ---------
Period GAP.............................. $ (82,223) $ (29,626) $ 1,202 $179,134 $ 68,487
Cumulative GAP.......................... $ (82,223) $(111,849) $ (110,647) $ 68,487
Period GAP to total assets.............. (24.51)% (8.83)% 0.36% 53.41%
Cumulative GAP to total assets.......... (24.51)% (33.35)% (32.99)% 20.42%
</TABLE>
Shortcomings are inherent in any GAP analysis since certain assets and
liabilities may not move proportionally as interest rates change. In addition to
GAP analysis, the Company uses an interest rate risk simulation model and shock
analysis to test the interest rate sensitivity of net interest income and the
balance sheet, respectively. Contractual maturities and repricing opportunities
of loans are incorporated in the model as are prepayment assumptions, maturity
data and call options within the investment portfolio. Assumptions based on past
experience are incorporated into the model for nonmaturity deposit accounts.
Based on the Company's June 30, 1998 simulation analysis, the Company estimates
that a 200 basis point rise or decline in rates over the next 12 month period
would have an impact of less than 6% on its net interest income for the period.
The change is relatively small, despite the Company's liability sensitive GAP
position. The results are primarily from the behavior of demand, money market
and savings deposits. The Company has found that historically interest rates on
these deposits change more slowly in a rising rate environment than in a
declining rate environment. This assumption is incorporated into the simulation
model and is generally not fully reflected in a GAP analysis. The Company
maintains an Investment Committee that reviews the Company's interest rate risk
position, generally on a quarterly basis.
As a financial institution, the Company's primary component of market risk
is interest rate volatility. Fluctuations in interest rates will ultimately
impact both the level of income and expense recorded on most of the Company's
assets and liabilities, and the market value of all interest-earning assets and
interest-bearing liabilities, other than those which have a short term to
maturity. Based upon the nature of the Company's operations, the Company is not
subject to foreign exchange or commodity price risk. The Company does not own
any trading assets.
The Company's exposure to market risk is reviewed on a regular basis.
Interest rate risk is the potential of economic losses due to future interest
rate changes. These economic losses can be reflected as a loss of future net
interest income and/or a loss of current fair market values. The objective is to
measure the effect on net interest income and to adjust the balance sheet to
minimize the inherent risk while at the same time maximizing income. Management
realizes certain risks are inherent, and that the goal is to identify and accept
the risks.
Liquidity involves the Company's ability to raise funds to support asset
growth or reduce assets to meet deposit withdrawals and other payment
obligations, to maintain reserve requirements and otherwise to operate the
Company on an ongoing basis. During the past three years, the Company's
liquidity needs have primarily been met by growth in core deposits, as
previously discussed. Although access to purchased funds from correspondent
banks is available and has been utilized on occasion to take advantage of
investment
37
<PAGE>
opportunities, the Company does not generally rely on these external funding
sources. The cash and federal funds sold position, supplemented by amortizing
investment and loan portfolios, have generally created an adequate liquidity
position.
CAPITAL RESOURCES
Capital management consists of providing equity to support both current and
future operations. The Company is subject to capital adequacy requirements
imposed by the Federal Reserve Board and the Bank is subject to capital adequacy
requirements imposed by the FDIC and the Texas Banking Department. Both the
Federal Reserve Board and the FDIC have adopted risk-based capital requirements
for assessing bank holding company and bank capital adequacy. These standards
define capital and establish minimum capital requirements in relation to assets
and off-balance sheet exposure, adjusted for credit risk. The risk-based capital
standards currently in effect are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among bank holding
companies and banks, to account for off-balance sheet exposure and to minimize
disincentives for holding liquid assets. Assets and off-balance sheet items are
assigned to broad risk categories, each with appropriate relative risk weights.
The resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance sheet items.
The risk-based capital standards issued by the Federal Reserve Board
require all bank holding companies to have "Tier 1 capital" of at least 4.0%
and "total risk-based" capital (Tier 1 and Tier 2) of at least 8.0% of total
risk-adjusted assets. "Tier 1 capital" generally includes common shareholders'
equity and qualifying perpetual preferred stock together with related surpluses
and retained earnings, less deductions for goodwill and various other
intangibles. "Tier 2 capital" may consist of a limited amount of
intermediate-term preferred stock, a limited amount of term subordinated debt,
certain hybrid capital instruments and other debt securities, perpetual
preferred stock not qualifying as Tier 1 capital, and a limited amount of the
general valuation allowance for loan losses. The sum of Tier 1 capital and Tier
2 capital is "total risk-based capital."
The Federal Reserve Board has also adopted guidelines which supplement the
risk-based capital guidelines with a minimum ratio of Tier 1 capital to average
total consolidated assets ("leverage ratio") of 3.0% for institutions with
well diversified risk, including no undue interest rate exposure; excellent
asset quality; high liquidity; good earnings; and that are generally considered
to be strong banking organizations, rated composite 1 under applicable federal
guidelines, and that are not experiencing or anticipating significant growth.
Other banking organizations are required to maintain a leverage ratio of at
least 4.0% to 5.0%. These rules further provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
capital positions substantially above the minimum supervisory levels and
comparable to peer group averages, without significant reliance on intangible
assets.
Pursuant to Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), each federal banking agency revised its risk-based capital
standards to ensure that those standards take adequate account of interest rate
risk, concentration of credit risk and the risks of nontraditional activities,
as well as reflect the actual performance and expected risk of loss on
multifamily mortgages. The Bank is subject to capital adequacy guidelines of the
FDIC that are substantially similar to the Federal Reserve Board's guidelines.
Also pursuant to FDICIA, the FDIC has promulgated regulations setting the levels
at which an insured institution such as the Bank would be considered "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." Under the FDIC's
regulations, the Bank is classified "well capitalized" for purposes of prompt
corrective action. See "Supervision and Regulation -- The Company" and
"-- the Bank."
Shareholders' equity increased from $23.2 million at June 30, 1997 to $26.5
million at June 30, 1998, an increase of $3.3 million or 14.2%. This increase
was primarily the result of net income of $4.0 million, less dividends paid on
Common Stock of approximately $800,000.
38
<PAGE>
The following table provides a comparison of the Company's and the Bank's
leverage and risk-weighted capital ratios as of June 30, 1998 to the minimum and
well capitalized regulatory standards:
<TABLE>
<CAPTION>
TO BE WELL
MINIMUM CAPITALIZED UNDER
REQUIRED FOR CAPITAL PROMPT CORRECTIVE ACTUAL RATIO AT
ADEQUACY PURPOSES ACTION PROVISIONS JUNE 30, 1998
--------------------- ------------------- ----------------
<S> <C> <C>
THE COMPANY
Leverage ratio....................... 3.00%(1) N/A 6.25%
Tier 1 risk-based capital ratio...... 4.00% N/A 14.32%
Risk-based capital ratio............. 8.00% N/A 15.08%
THE BANK
Leverage ratio....................... 3.00%(2) 5.00% 6.21%
Tier 1 risk-based capital ratio...... 4.00% 6.00% 14.22%
Risk-based capital ratio............. 8.00% 10.00% 14.99%
</TABLE>
- ------------
(1) The Federal Reserve Board may require the Company to maintain a leverage
ratio of up to 200 basis points above the required minimum.
(2) The FDIC may require the Bank to maintain a leverage ratio of up to 200
basis points above the required minimum.
YEAR 2000 COMPLIANCE
The Company formally initiated its Year 2000 project in November 1997 to
insure that its operational and financial systems will not be adversely affected
by Year 2000 problems. The Company has formed a Year 2000 project team and the
Board of Directors and management are supporting all compliance efforts and
allocating the necessary resources to ensure completion. An inventory of all
systems and products (including both information technology and
non-informational technology systems) that could be affected by the Year 2000
date change has been developed, verified and categorized as to its importance to
the Company. The software for the Company's systems is provided through service
bureaus and software vendors. The Company has contacted all of its third party
vendors and software providers and is requiring them to demonstrate and
represent that the products provided are or will be Year 2000 compliant and has
planned a program of testing compliance. The service bureau has asserted that it
is Year 2000 compliant and pursuant to applicable regulatory guidelines the
Company is currently testing its system to verify this assertion. The Company
has also surveyed its largest dollar deposit and loan customers to determine
their readiness for Year 2000.
Management does not expect the costs of bringing the Company's systems into
Year 2000 compliance will have a material adverse effect on the Company's
financial conditions, results of operations or liquidity. The Company has
budgeted $10,000 to address Year 2000 issues. As of June 30, 1998, the Company
has not incurred any significant costs in relation to Year 2000. The largest
potential risk to the Company concerning Year 2000 is the malfunction of its
data processing system. In the event its data processing system does not
function properly, the Company is prepared to perform functions manually. The
Company believes it is in compliance with regulatory guidelines regarding Year
2000 compliance, including the timetable for achieving compliance.
39
<PAGE>
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
OVERVIEW
Net income was $3.6 million, $2.7 million and $2.3 million for the years
ended December 31, 1997, 1996 and 1995, respectively, and diluted earnings per
share were $0.92, $0.76 and $0.66 for these same periods. Earnings growth from
1995 to 1996 and from 1996 to 1997 resulted principally from loan growth and
branch acquisitions. The Company posted returns on average assets of 1.17%,
1.05% and 1.03% and returns on average equity of 16.32%, 15.36% and 15.56% for
the years ended 1997, 1996 and 1995, respectively. The Company posted returns on
average assets excluding amortization of goodwill of 1.30%, 1.15% and 1.13% and
returns on average equity excluding amortization of goodwill of 18.17%, 16.82%
and 16.96% for the years ended December 31, 1997, 1996 and 1995, respectively.
The Company's efficiency ratio was 59.48% in 1997, 61.34% in 1996 and 64.85% in
1995. The Company's efficiency ratio excluding amortization of goodwill was
56.43% in 1997, 58.96% in 1996 and 62.61% in 1995.
Total assets at December 31, 1997, 1996 and 1995 were $320.1 million,
$294.0 million and $233.5 million, respectively. Total deposits at December 31,
1997, 1996 and 1995 were $291.5 million, $270.9 million and $214.5 million,
respectively, with deposit growth in each period resulting largely from the
branch acquisitions in 1996 and 1997. Loans were $120.6 million at December 31,
1997, an increase of $7.2 million or 6.3% from $113.4 million at the end of
1996. Loans were $88.8 million at year end 1995. Shareholders' equity was $24.8
million, $18.8 million and $16.5 million at December 31, 1997, 1996 and 1995,
respectively.
RESULTS OF OPERATIONS
NET INTEREST INCOME
1997 VERSUS 1996. Net interest income for 1997 was $10.9 million, compared
with $8.9 million for 1996, an increase of $2.0 million or 22.5%. The
improvement in net interest income for 1997 was mainly due to an increase in
total interest-earning assets, primarily in the loan portfolio. During 1997, the
yield on interest-earning assets increased eight basis points from 7.08% in 1996
to 7.16% in 1997 primarily due to an increase in the volume of higher-yielding
loans. Total funding costs decreased seven basis points from 4.11% in 1996 to
4.04% in 1997 primarily due to an increase in noninterest-bearing deposits. For
1997, the net interest margin on a tax-equivalent basis increased 11 basis
points to 4.02% from 3.91% in 1996.
1996 VERSUS 1995. Net interest income for the Company in 1996 was $8.9
million, an increase of 14.1% over the 1995 level of $7.8 million, due to an
increase in the loan portfolio in 1996. For 1996 as a whole, the Company's net
interest expense increased eight basis points from 4.03% to 4.11% while asset
yields increased two basis points from 7.06% to 7.08%.
40
<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. Except as
indicated in the footnotes, no tax-equivalent adjustments were made and all
average balances are daily average balances. Nonaccruing loans have been
included in the tables as loans carrying a zero yield.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1997 1996 1995
---------------------------------- ---------------------------------- -----------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING
BALANCE PAID RATE BALANCE PAID RATE BALANCE
----------- -------- ------- ----------- -------- ------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans................................. $ 117,586 $10,205 8.68% $ 104,534 $ 9,136 8.74% $ 81,631
Securities(1)......................... 157,677 9,572 6.07 127,607 7,396 5.80 119,857
Federal funds sold and other temporary
investments.......................... 3,545 193 5.44 5,743 309 5.38 7,285
----------- -------- ------- ----------- -------- ------- -----------
Total interest-earning assets....... 278,808 19,970 7.16% 237,884 16,841 7.08% 208,773
-------- ------- -------- -------
Less allowance for credit losses...... (961) (820) (669)
----------- ----------- -----------
Total interest-earning assets, net of
allowance............................ 277,847 237,064 208,104
Noninterest-earning assets.............. 26,239 20,141 16,597
----------- ----------- -----------
Total assets........................ $ 304,086 $ 257,205 $ 224,701
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits...... $ 42,898 $ 915 2.13% $ 35,285 $ 741 2.10% $ 30,309
Savings and money market accounts..... 64,448 2,158 3.35 49,429 1,620 3.28 42,286
Certificates of deposit............... 113,669 5,785 5.09 105,538 5,359 5.08 96,649
Federal funds purchased and other
borrowings........................... 3,030 202 6.67 2,402 203 8.45 1,922
----------- -------- ------- ----------- -------- ------- -----------
Total interest-bearing
liabilities........................ 224,045 9,060 4.04% 192,654 7,923 4.11% 171,166
----------- -------- ------- ----------- -------- ------- -----------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits... 57,362 46,082 38,077
Other liabilities..................... 858 823 542
----------- ----------- -----------
Total liabilities................... 282,265 239,559 209,785
----------- ----------- -----------
Shareholders' equity.................... 21,821 17,646 14,916
----------- ----------- -----------
Total liabilities and shareholders'
equity............................. $ 304,086 $ 257,205 $ 224,701
=========== =========== ===========
Net interest rate spread................ 3.12% 2.97%
======= =======
Net interest income and margin(2)....... $10,910 3.91% $ 8,918 3.75%
======== ======= ======== =======
Net interest income and margin
(tax-equivalent basis)(3).............. $11,222 4.02% $ 9,290 3.91%
======== ======= ======== =======
</TABLE>
INTEREST AVERAGE
EARNED/ YIELD/
PAID RATE
-------- -------
ASSETS
Interest-earning assets:
Loans................................. $ 7,203 8.82%
Securities(1)......................... 7,107 5.93
Federal funds sold and other temporary
investments.......................... 428 5.88
-------- -------
Total interest-earning assets....... 14,738 7.06%
-------- -------
Less allowance for credit losses......
Total interest-earning assets, net of
allowance............................
Noninterest-earning assets..............
Total assets........................
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits...... $ 545 1.80%
Savings and money market accounts..... 1,328 3.14
Certificates of deposit............... 4,876 5.05
Federal funds purchased and other
borrowings........................... 155 8.06
-------- -------
Total interest-bearing
liabilities........................ 6,904 4.03%
-------- -------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits...
Other liabilities.....................
Total liabilities...................
Shareholders' equity....................
Total liabilities and shareholders'
equity.............................
Net interest rate spread................ 3.03%
=======
Net interest income and margin(2)....... $ 7,384 3.75%
======== =======
Net interest income and margin
(tax-equivalent basis)(3).............. $ 8,272 3.96%
======== =======
- ------------
(1) Yield is based on amortized cost and does not include any component of
unrealized gains or losses.
(2) The net interest margin is equal to net interest income divided by average
interest-earning assets.
(3) In order to make pre-tax income and resultant yields on tax-exempt
investments and loans comparable to those on taxable investments and loans,
a tax-equivalent adjustment has been computed using a federal income tax
rate of 34%.
41
<PAGE>
The following schedule presents the dollar amount of changes in interest
income and interest expense for the major components of interest-earning assets
and interest-bearing liabilities and distinguishes between the increase related
to higher outstanding balances and the volatility of interest rates. For
purposes of this table, changes attributable to both rate and volume which can
not be segregated have been allocated to rate.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1997 VS. 1996 1996 VS. 1995
------------------------- --------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO DUE TO
--------------- ----------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ----- ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans................................. $1,141 $ (72) $1,069 $2,020 $ (87) $1,933
Securities............................ 1,744 432 2,176 460 (171) 289
Federal funds sold and other temporary
investments........................ (118) 2 (116) (91) (28) (119)
------ ----- ------ ------ ------ ------
Total increase (decrease) in
interest income.................. 2,767 362 3,129 2,389 (286) 2,103
------ ----- ------ ------ ------ ------
Interest-bearing liabilities:
Interest-bearing demand deposits...... 160 14 174 90 106 196
Savings and money market accounts..... 493 45 538 224 68 292
Certificates of deposit............... 413 13 426 449 34 483
Federal funds purchased and other
borrowings......................... 53 (54) (1) 38 10 48
------ ----- ------ ------ ------ ------
Total increase in interest
expense.......................... 1,119 18 1,137 801 218 1,019
------ ----- ------ ------ ------ ------
Increase (decrease) in net interest
income................................ $1,648 $ 344 $1,992 $1,588 $ (504) $1,084
====== ===== ====== ====== ====== ======
</TABLE>
PROVISION FOR CREDIT LOSSES
The allowance for credit losses at December 31, 1997 was $1.0 million,
representing 0.84% of outstanding loans. One year earlier, this ratio was 0.81%
of outstanding loans. The provision for credit losses charged against earnings
was $190,000 in 1997 compared with $230,000 in 1996. The Company recorded a
lower provision in 1997 because it had specific reserves in the amount of
$45,000 which were no longer necessary due to the repayment of the related
loans. Net loans charged off in 1997 were $97,000 compared with $60,000 in 1996.
During 1996, the Company made provisions totaling $230,000 to the allowance
for credit losses, an increase of $55,000 compared with 1995.
NONINTEREST INCOME
For 1997, noninterest income totaled $2.3 million, an increase of $367,000
or 19.3% versus $1.9 million in 1996. The increase was primarily due to the
branch acquisitions in Bay City and Angleton and an increase in customer service
fees. Noninterest income for 1996 was $1.9 million, a $408,000 or 27.4% increase
from 1995 resulting largely from an increase in income from insufficient funds
charges and customer service fees.
The following table presents for the periods indicated the major categories
of noninterest income:
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Service charges on deposit accounts..... $ 1,948 $ 1,633 $ 1,280
Other noninterest income................ 316 264 209
--------- --------- ---------
Total noninterest income........... $ 2,264 $ 1,897 $ 1,489
========= ========= =========
42
<PAGE>
NONINTEREST EXPENSE
For the years ended 1997, 1996 and 1995, noninterest expense totaled $7.8
million, $6.6 million and $6.0 million, respectively. The Company's efficiency
ratio showed a positive trend over this period, reflecting the Company's
continued success in controlling operating expenses and integrating its branch
acquisitions.
The following table presents for the periods indicated the major categories
of noninterest expense:
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Salaries and employee benefits.......... $ 3,968 $ 3,415 $ 3,041
Non-staff expenses
Net bank premises expense.......... 683 604 522
Equipment rentals, depreciation and
maintenance...................... 375 294 282
Data processing.................... 642 493 387
Professional fees.................. 97 114 103
Regulatory assessments and FDIC
insurance........................ 63 28 253
Ad valorem and franchise taxes..... 164 140 115
Goodwill amortization.............. 402 257 209
Other.............................. 1,442 1,289 1,134
--------- --------- ---------
Total noninterest expense..... $ 7,836 $ 6,634 $ 6,046
========= ========= =========
For 1997, noninterest expense totaled $7.8 million, an increase of $1.2
million or 18.2% over $6.6 million in 1996. Salaries and employee benefits for
1997 totaled $4.0 million, an increase of $553,000 or 16.2% over $3.4 million
for 1996. Other operating expenses of $1.4 million represented an increase of
$153,000 or 11.9% compared with $1.3 million in 1996. These increases were
principally due to the Bay City and Angleton branch acquisitions. Total
noninterest expenses in 1996 were $6.6 million, a 9.7% increase over the prior
year's level of $6.0 million. Salaries and employee benefits in 1996 increased
by 12.3% from $3.0 million to $3.4 million.
INCOME TAXES
Income tax expense includes the regular federal income tax at the statutory
rate plus the income tax component of the Texas franchise tax. The income tax
component of the Texas franchise tax was zero in 1997, 1996 and 1995. In 1997
income tax expense was $1.6 million compared with $1.2 million in 1996. The 1995
amount was $781,000. The effective tax rates in 1997, 1996 and 1995,
respectively, were 30.8%, 31.4% and 25.2%.
FINANCIAL CONDITION
LOAN PORTFOLIO
At December 31, 1997, loans were $120.6 million, an increase of $7.2
million or 6.3% over loans at December 31, 1996 of $113.4 million. The growth in
the loan portfolio was due to continued strong loan demand, especially in the
real estate area. At December 31, 1997, total loans were 41.4% of deposits and
37.7% of total assets. At December 31, 1996, total loans were 41.9% of deposits
and 38.6% of total assets.
Loans increased 27.7% during 1996 from $88.8 million at December 31, 1995
to $113.4 million at December 31, 1996. The loan growth during 1996 was spread
between real estate and consumer loans. One-to-four family residential loans
increased from $40.3 million at December 31, 1995 to $49.8 million at year end
1996. Consumer loans also had a substantial increase from $13.3 million at year
end 1995 to $21.3 million at year end 1996.
43
<PAGE>
The following table summarizes as of the dates indicated the loan portfolio
of the Company by type of loan:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------------------
1997 1996 1995 1994
-------------------- -------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- -------- --------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial............ $ 11,611 9.6% $ 10,633 9.4% $ 10,445 11.8% $ 9,479 12.4%
Real estate:
Construction and land
development....................... 6,453 5.3 5,021 4.4 2,507 2.8 2,139 2.8
1-4 family residential.............. 53,625 44.5 49,845 44.0 40,331 45.4 37,247 48.7
Commercial mortgages................ 16,277 13.5 14,376 12.7 12,835 14.5 9,520 12.5
Farmland............................ 5,804 4.8 5,468 4.8 3,989 4.5 3,529 4.6
Multi-family residential............ 937 0.8 1,068 0.9 716 0.8 64 0.0
Agriculture.......................... 6,359 5.3 5,686 5.0 4,666 5.2 4,605 6.0
Consumer............................. 19,512 16.2 21,285 18.8 13,308 15.0 9,960 13.0
--------- --- --------- --- --------- --- --------- ---
Total loans......................... $ 120,578 100.0% $ 113,382 100.0% $ 88,797 100.0% $ 76,543 100.0%
========= === ========= === ========= === ========= ===
</TABLE>
1993
--------------------
AMOUNT PERCENT
--------- --------
Commercial and industrial............ $ 4,466 7.8%
Real estate:
Construction and land
development....................... 2,495 4.4
1-4 family residential.............. 26,815 46.7
Commercial mortgages................ 7,152 12.5
Farmland............................ 3,149 5.5
Multi-family residential............ 132 0.0
Agriculture.......................... 3,060 5.3
Consumer............................. 10,226 17.8
--------- ---
Total loans......................... $ 57,495 100.0%
========= ===
The contractual maturity ranges of the commercial and industrial and
construction and land development portfolios and the amount of such loans with
predetermined interest rates and floating rates in each maturity range as of
December 31, 1997 are summarized in the following table:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------
AFTER ONE
ONE YEAR THROUGH AFTER FIVE
OR LESS FIVE YEARS YEARS TOTAL
--------- ------------ ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and industrial............ $ 4,337 $6,815 $ 459 $ 11,611
Construction and land development.... 1,750 1,747 2,956 6,453
--------- ------------ ----------- ---------
Total...................... $ 6,087 $8,562 $ 3,415 $ 18,064
========= ============ =========== =========
Loans with a predetermined interest
rate............................... $ 2,944 $4,805 $ 447 $ 8,196
Loans with a floating interest
rate............................... 3,143 3,757 2,968 9,868
--------- ------------ ----------- ---------
Total...................... $ 6,087 $8,562 $ 3,415 $ 18,064
========= ============ =========== =========
</TABLE>
The Company has adopted Statement of Accounting Standards No. 114,
ACCOUNTING FOR CREDITORS FOR IMPAIRMENT OF A LOAN ("SFAS 114"), as amended by
Statement of Accounting Standards No. 118, ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN-INCOME RECOGNITION AND DISCLOSURES. Under SFAS No. 114, as
amended, a loan is considered impaired based on current information and events,
if it is probable that the Company will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. The fair value of impaired loans is based on the present
value of expected future cash flows discounted at the loan's effective interest
rate or the loan's observable market price or based on the fair value of the
collateral if the loan is collateral-dependent. The implementation of SFAS Nos.
114 and 118 did not have a material adverse affect on the Company's financial
statements.
NONPERFORMING ASSETS
The Company's conservative lending approach, as well as a healthy local
economy, has resulted in strong asset quality. The Company had no nonperforming
assets as of December 31, 1997, 1996 or 1995.
44
<PAGE>
The following table presents information regarding nonperforming assets at
the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans..................... $ -- $ -- $ -- $ -- $ --
Restructured loans................... -- -- -- -- --
Other real estate.................... -- -- -- 15 112
--------- --------- --------- --------- ---------
Total nonperforming assets...... $ -- $ -- $ -- $ 15 $ 112
========= ========= ========= ========= =========
Nonperforming assets to total loans
and other real estate.............. 0.00% 0.00% 0.00% 0.02% 0.19%
</TABLE>
ALLOWANCE FOR CREDIT LOSSES
For the year ended 1997, net charge-offs totaled $97,000 or 0.08% of
average loans outstanding for the period, compared with $60,000 or 0.06% in net
charge-offs during 1996. The Company's net charge-offs totaled $10,000 or 0.01%
of average loans outstanding in 1995. During 1997, the Company recorded a
provision for credit losses of $190,000 compared with $230,000 for 1996. At
December 31, 1997, the allowance totaled $1.0 million, or 0.84% of total loans.
The Company made a provision for credit losses of $230,000 during 1996 compared
with a provision of $175,000 for 1995. At December 31, 1996, the allowance
aggregated $923,000, or 0.81% of total loans. At December 31, 1995, the
allowance was $753,000, or 0.85% of total loans.
The following table presents for the periods indicated an analysis of the
allowance for credit losses and other related data:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average loans outstanding............ $ 117,586 $ 104,534 $ 81,631 $ 69,200 $ 53,422
========== ========== ========= ========= =========
Gross loans outstanding at end of
period............................. $ 120,578 $ 113,382 $ 88,797 $ 76,543 $ 57,495
========== ========== ========= ========= =========
Allowance for credit losses at
beginning of period................ $ 923 $ 753 $ 588 $ 734 $ 745
Provision for credit losses.......... 190 230 175 188 155
Charge-offs:
Commercial and industrial.......... (26) (9) (6) (31) (119)
Real estate and agriculture........ (47) -- (2) (270) (120)
Consumer........................... (57) (64) (24) (129) (195)
Recoveries:
Commercial and industrial.......... 15 -- -- 17 31
Real estate and agriculture........ 7 -- 3 51 152
Consumer........................... 11 13 19 28 85
---------- ---------- --------- --------- ---------
Net (charge-offs) recoveries......... (97) (60) (10) (334) (166)
---------- ---------- --------- --------- ---------
Allowance for credit losses at end of
period............................. $ 1,016 $ 923 $ 753 $ 588 $ 734
========== ========== ========= ========= =========
Ratio of allowance to end of period
loans.............................. 0.84% 0.81% 0.85% 0.77% 1.28%
Ratio of net charge-offs to average
loans.............................. 0.08 0.06 0.01 0.48 0.31
Ratio of allowance to end of period
nonperforming loans................ -- -- -- -- --
</TABLE>
45
<PAGE>
The following tables describe the allocation of the allowance for credit
losses among various categories of loans and certain other information for the
dates indicated. The allocation is made for analytical purposes and is not
necessarily indicative of the categories in which future losses may occur. The
total allowance is available to absorb losses from any segment of loans.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
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 credit losses
applicable to:
Commercial and industrial.......... $ 41 9.6% $ 9 9.4%
Real estate........................ 59 68.9 34 66.8
Agriculture........................ -- 5.3 -- 5.0
Consumer........................... 51 16.2 6 18.8
Unallocated........................ 865 874
------ ----------- ------ -----------
Total allowance for credit
losses..................... $1,016 100.0% $ 923 100.0%
====== =========== ====== ===========
</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 credit losses
applicable to:
Commercial and industrial.......... $ 7 11.8% $ 15 12.4% $ 3 7.8%
Real estate........................ 27 68.0 33 68.6 194 69.1
Agriculture........................ -- 5.2 -- 6.0 -- 5.3
Consumer........................... 6 15.0 4 13.0 9 17.8
Unallocated........................ 713 536 528
------ ----------- ------ ----------- ------ -----------
Total allowance for credit
losses..................... $ 753 100.0% $ 588 100.0% $ 734 100.0%
====== =========== ====== =========== ====== ===========
</TABLE>
SECURITIES
The following table summarizes the amortized cost of investment securities
as of the dates shown (available-for-sale securities are not adjusted for
unrealized gains or losses):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies........... $ 83,160 $ 60,830 $ 42,147 $ 33,037 $ 31,892
Mortgage-backed securities.............. 64,168 59,382 41,278 34,956 47,282
States and political subdivisions....... 11,829 13,042 15,753 17,440 19,175
Collateralized mortgage obligations..... 8,749 14,341 18,411 36,676 40,415
---------- ---------- ---------- ---------- ----------
Total.............................. $ 167,906 $ 147,595 $ 117,589 $ 122,109 $ 138,764
========== ========== ========== ========== ==========
</TABLE>
46
<PAGE>
The following table summarizes the contractual maturity of investment
securities and their weighted average yields. Available-for-sale securities are
not adjusted for unrealized gains or losses.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------------------------------------------
AFTER ONE YEAR AFTER FIVE YEARS
BUT BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS
TOTAL
----------------- ----------------- ----------------- ----------------- ---------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL
--------- ----- --------- ----- --------- ----- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
U.S. Treasury securities and obligations
of U.S. government agencies............ $ 28,392 5.97 % $ 54,768 6.27 % $ -- -- % $ -- -- % $ 83,160
Mortgage-backed securities.............. 2,223 4.85 26,679 6.43 18,249 6.11 17,017 6.24 64,168
States and political subdivisions....... 3,903 4.61 5,107 5.24 2,447 5.80 372 7.24 11,829
Collateralized mortgage obligations..... -- -- 4,258 6.45 4,491 6.13 -- -- 8,749
--------- ----- --------- ----- --------- ----- --------- ----- ---------
Total................................ $ 34,518 5.74 % $ 90,812 6.27 % $ 25,187 6.23 % $ 17,389 6.26 % $ 167,906
========= ===== ========= ===== ========= ===== ========= ===== =========
</TABLE>
YIELD
-----
U.S. Treasury securities and obligations
of U.S. government agencies............ 6.24 %
Mortgage-backed securities.............. 6.23
States and political subdivisions....... 5.21
Collateralized mortgage obligations..... 6.18
-----
Total................................ 6.16 %
=====
The following table summarizes the carrying value by classification of
securities as of the dates shown:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Available-for-sale...................... $ 38,612 $ 49,342 $ 35,452 $ 25,411 $ --
Held-to-maturity........................ 129,256 98,222 82,053 96,501 138,764
---------- ---------- ---------- ---------- ----------
Total.............................. $ 167,868 $ 147,564 $ 117,505 $ 121,912 $ 138,764
========== ========== ========== ========== ==========
</TABLE>
At December 31, 1997, investment securities of $167.9 million increased
$20.3 million from $147.6 million at December 31, 1996, as the Company invested
excess deposits from the Angleton Acquisition. At December 31, 1997, investment
securities represented 57.6% of total deposits and 52.4% of total assets.
Approximately $66.4 million or 40.0% of the Company's investment securities
reprice within one year.
Investment securities increased from $117.5 million at December 31, 1995 to
$147.6 million at December 31, 1996, largely due to the Bay City branch
acquisition.
The following tables present the amortized cost and fair value of
securities classified as available-for-sale at December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------------------------ -------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES VALUE COST GAINS LOSSES
--------- ---------- ---------- ------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies........... $19,988 $ 56 $ -- $20,044 $29,980 $127 $ --
Mortgage-backed securities.............. 17,299 62 258 17,103 17,952 43 306
States and political subdivisions....... 1,363 102 -- 1,465 1,441 105 --
--------- ---------- ---------- ------- --------- ---------- ----------
Total............................... $38,650 $220 $258 $38,612 $49,373 $275 $306
========= ========== ========== ======= ========= ========== ==========
</TABLE>
FAIR
VALUE
-------
U.S. Treasury securities and obligations
of U.S. government agencies........... $30,107
Mortgage-backed securities.............. 17,689
States and political subdivisions....... 1,546
-------
Total............................... $49,342
=======
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies........... $20,247 $ 69 $ -- $20,316
Mortgage-backed securities.............. 13,860 -- 294 13,566
States and political subdivisions....... 1,429 141 -- 1,570
--------- ---------- ---------- -------
Total.............................. $35,536 $ 210 $ 294 $35,452
========= ========== ========== =======
</TABLE>
47
<PAGE>
The following tables present the amortized cost and fair value of
securities classified as held-to-maturity at December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------------------------- -------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES VALUE COST GAINS LOSSES
--------- ---------- ---------- -------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies........... $ 63,171 $244 $ 20 $ 63,395 $30,849 $121 $121
Mortgage-backed securities.............. 46,871 369 219 47,021 41,431 90 704
States and political
subdivisions.......................... 10,465 141 -- 10,606 11,601 173 18
Collateralized mortgage
obligations........................... 8,749 19 15 8,753 14,341 -- 103
--------- ---------- ---------- -------- --------- ---------- ----------
Total............................... $129,256 $773 $254 $129,775 $98,222 $384 $946
========= ========== ========== ======== ========= ========== ==========
</TABLE>
FAIR
VALUE
-------
U.S. Treasury securities and obligations
of U.S. government agencies........... $30,849
Mortgage-backed securities.............. 40,817
States and political
subdivisions.......................... 11,756
Collateralized mortgage
obligations........................... 14,238
-------
Total............................... $97,660
=======
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies........... $21,900 $ 21 $ 169 $21,752
Mortgage-backed securities.............. 27,417 6 420 27,003
States and political subdivisions....... 14,324 248 40 14,532
Collateralized mortgage obligations..... 18,412 1 238 18,175
--------- ---------- ---------- -------
Total.............................. $82,053 $ 276 $ 867 $81,462
========= ========== ========== =======
</TABLE>
DEPOSITS
Deposits at December 31, 1997 were $291.5 million, an increase of $20.6
million, or 7.6% from $270.9 million at December 31, 1996. The increase was
mainly due to the Angleton Acquisition in the second quarter of 1997.
Noninterest-bearing deposits of $61.4 million at December 31, 1997 increased
$6.2 million, or 11.2% from $55.2 million at December 31, 1996.
Noninterest-bearing deposits as of December 31, 1996 were $55.2 million compared
with $42.9 million at December 31, 1995. Interest-bearing deposits were $215.7
million, up $44.0 million or 25.6% from $171.7 million at December 31, 1995. The
Company does not accept brokered deposits. Total deposits at December 31, 1995
were $214.6 million.
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>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ---- -------- ---- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing checking............... $ 42,898 2.13% $ 35,285 2.10% $ 30,309 1.80%
Regular savings......................... 9,215 2.32 7,674 2.46 6,772 2.47
Money market savings.................... 55,233 3.50 41,755 3.43 35,514 3.27
Time deposits........................... 113,669 5.08 105,538 5.08 96,649 5.05
-------- ---- -------- ---- -------- ----
Total interest-bearing deposits.... 221,015 4.00 190,252 4.06 169,244 3.99
Noninterest-bearing deposits............ 57,362 -- 46,082 -- 38,077 --
-------- ---- -------- ---- -------- ----
Total deposits..................... $278,377 3.18% $236,334 3.27% $207,321 3.26%
======== ==== ======== ==== ======== ====
</TABLE>
48
<PAGE>
The following table sets forth the amount of the Company's certificates of
deposit that are $100,000 or greater by time remaining until maturity:
DECEMBER 31, 1997
----------------------
(DOLLARS IN THOUSANDS)
Three months or less.................... $ 4,198
Over three through six months........... 4,349
Over six through 12 months.............. 8,300
Over 12 months.......................... 2,029
----------------------
Total.............................. $ 18,876
======================
OTHER BORROWINGS
Deposits are the primary source of funds for the Company's lending and
investment activities. Occasionally, the Company obtains additional funds from
the FHLB and correspondent banks. At December 31, 1997, the Company had
borrowings of $2.8 million compared to zero at both December 31, 1996 and 1995.
At December 31, 1997, the Company had no outstanding borrowings under the
Line extended by a commercial bank. During 1997, the Company paid off the
outstanding balance under a similar agreement (the "Old Line") with another
commercial bank. At December 31, 1996 and 1995, borrowings under the Old Line
totaled $3.3 million and $1.5 million, respectively.
INTEREST RATE SENSITIVITY AND LIQUIDITY
The following table sets forth an interest rate sensitivity analysis for
the Company at December 31, 1997:
<TABLE>
<CAPTION>
VOLUMES SUBJECT TO REPRICING WITHIN
-----------------------------------------------------------
0-30 31-180 181-365 AFTER
DAYS DAYS DAYS ONE YEAR TOTAL
---------- ---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities.......................... $ 9,644 $ 36,432 $ 20,379 $ 101,413 $ 167,868
Loans............................... 16,621 18,020 12,279 73,658 120,578
Other temporary investments......... 198 -- -- -- 198
---------- ---------- ---------- --------- ---------
Total interest-earning
assets....................... 26,463 54,452 32,658 175,071 288,644
---------- ---------- ---------- --------- ---------
Interest-bearing liabilities:
Demand, money market and savings
deposits.......................... 119,770 -- -- -- 119,770
Certificates of deposit and other
time deposits..................... 18,495 46,730 30,773 14,302 110,300
Federal funds purchased and FHLB
advances.......................... 2,800 -- -- -- 2,800
---------- ---------- ---------- --------- ---------
Total interest-bearing
liabilities.................. 141,065 46,730 30,773 14,302 232,870
---------- ---------- ---------- --------- ---------
Period GAP..................... $ (114,602) $ 7,722 $ 1,885 $ 160,769 $ 55,774
Cumulative GAP................. $ (114,602) $ (106,880) $ (104,995) $ 55,774
Period GAP to total assets..... (35.80)% 2.41% 0.59% 50.22%
Cumulative GAP to total
assets....................... (35.80)% (33.39)% (32.80)% 17.42%
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Interest Rate Sensitivity and Liquidity" for the six months ended
June 30, 1998 and June 30, 1997 for a discussion of the Company's policies
regarding asset and liability risk management.
CAPITAL RESOURCES
Shareholders' equity increased to $24.8 million at December 31, 1997 from
$18.8 million at December 31, 1996, an increase of $6.0 million or 31.9%. This
increase was primarily the result of net income of $3.6 million plus a Common
Stock issuance of $3.0 million, less dividends paid on Common Stock of $574,000.
During 1996, shareholders' equity increased by $2.3 million or 13.9% from $16.5
million at December 31, 1995.
49
<PAGE>
The following table provides a comparison of the Company's and the Bank's
leverage and risk-weighted capital ratios as of December 31, 1997 to the minimum
and well capitalized regulatory standards:
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
MINIMUM REQUIRED UNDER PROMPT
FOR CAPITAL CORRECTIVE ACTION ACTUAL RATIO AT
ADEQUACY PURPOSES PROVISIONS DECEMBER 31, 1997
----------------- ----------------------- ------------------
<S> <C> <C> <C>
THE COMPANY
Leverage ratio....................... 3.00%(1) N/A 6.30%
Tier 1 risk-based capital ratio...... 4.00% N/A 14.94%
Risk-based capital ratio............. 8.00% N/A 15.73%
THE BANK
Leverage ratio....................... 3.00%(2) 5.00% 6.13%
Tier 1 risk-based capital ratio...... 4.00% 6.00% 14.80%
Risk-based capital ratio............. 8.00% 10.00% 15.59%
</TABLE>
- ------------
(1) The Federal Reserve Board may require the Company to maintain a leverage
ratio of up to 200 basis points above the required minimum.
(2) The FDIC may require the Bank to maintain a leverage ratio of up to 200
basis points above the required minimum.
50
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following is a list of all of the directors and executive officers of
the Company and members of the Executive Committee of the Bank, their respective
positions with the Company and the Bank and their ages.
NAME POSITION AGE
- ----------------------------------------------------------------------- ---
Harry Bayne....................... Director of the Company 58
Robert L. Benter.................. President of the Bank's Post Oak 46
Banking Center;
Member of the Executive Committee
of the Bank
Donald A. Bolton, Jr.............. President of the Bank's Victoria 49
Banking Center;
Member of the Executive Committee
of the Bank
James A. Bouligny................. Director of the Company 62
J.T. Herin........................ Director of the Company 82
Randy D. Hester................... President of the Bank's West Columbia 39
Banking
Center; Member of the Executive
Committee of
the Bank
David Hollaway.................... Treasurer and Chief Financial Officer 42
of the Company and Senior Vice
President and Chief Financial
Officer of the Bank
Tracy T. Rudolph.................. Chairman of the Board and President 59
of the
Company and Chairman of the Board
of the Bank
Charles M. Slavik................. Director of the Company 82
Harrison Stafford................. Director of the Company 86
Robert Steelhammer................ Director of the Company 57
David Zalman...................... Director and Vice President/Secretary 42
of the
Company; Director and President of
the Bank
HARRY BAYNE. Mr. Bayne has been a director of the Company since 1989. He
is President and Chief Executive Officer of Varitec Industries, Inc. in Houston.
Since 1967, Mr. Bayne has served as President of Bayne TV & Appliance Co., a
subsidiary of Varitec Industries, Inc. Mr. Bayne is active in the Houston and
Bay Area Chambers of Commerce.
ROBERT L. BENTER. Mr. Benter, President of the Bank's Post Oak Banking
Center in Houston, joined the Bank in 1992 as an Executive Vice President and
senior lending officer. From 1988 to 1992, he served as an Executive Vice
President of Compass Bank-Houston. From 1978 to 1988, Mr. Benter was employed by
First Republic Bank-San Felipe and attained the position of Banking Center
President. Mr. Benter began his banking career in 1974 at Community Bank in
Austin.
DONALD A. BOLTON, JR. Mr. Bolton has been President of the Bank's Victoria
Banking Center since 1993 and currently oversees all of the Bank's lending
activity outside of Houston. Prior to joining the Bank, Mr. Bolton was employed
by First Victoria National Bank for 20 years, progressing from Senior Vice
President to Chief Lending Officer.
JAMES A. BOULIGNY. Mr. Bouligny has been a director of the Company since
1991. Mr. Bouligny is a name partner in the El Campo law firm of Duckett,
Bouligny & Collins, LLP. Mr. Bouligny received a Bachelor of Business
Administration degree and a Juris Doctor degree from the University of Texas.
Mr. Bouligny's civic activities include a 24 year tenure as a member of the
Board of Directors of Wharton County Junior College. He is currently a member of
the MG and Lillie Johnson Foundation.
J.T. HERIN. Mr. Herin has been a director of the Company since 1989. His
affiliation with the Bank started in 1953 with his election to the Board of
Directors. He is the owner of the J-Bar Ranch in Ganado.
RANDY D. HESTER. Mr. Hester is President of the Bank's West Columbia
Banking Center. He joined the Bank in 1991 as Manager of the Loan Function and
Operations of the Cuero Banking Center. Prior to
51
<PAGE>
joining the Bank, Mr. Hester was President of Texas Premier Bank in Victoria and
held various lending and management positions at its affiliate, Bank of
Kerrville. Mr. Hester began his banking career in 1978 at First City-Windsor
Park Bank in San Antonio.
DAVID HOLLAWAY. Mr. Hollaway has been Senior Vice President and Chief
Financial Officer of the Bank since 1992 and Treasurer of the Company since
1993. He became Chief Financial Officer of the Company in 1998. From 1990 to
1992, Mr. Hollaway worked for the Resolution Trust Corporation in its Gulf Coast
Consolidated Office in Houston. From 1988 to 1990, he worked as the Cost
Accounting Manager of San Jacinto Savings Association in Bellaire, Texas. From
1981 to 1988, Mr. Hollaway was Vice President-Auditor of South Main Bank in
Houston. Mr. Hollaway is a Certified Public Accountant.
TRACY T. RUDOLPH. Mr. Rudolph founded the Company in 1983 and has served
as Chairman of the Board since its inception. From 1980 to 1986, Mr. Rudolph was
Chairman and Chief Executive Officer of South Main Bank in Houston. Prior to
that, he worked at Town & Country Bank in Houston from 1972 to 1980, where he
became Chairman and Chief Executive Officer prior to the bank's acquisition by
Allied Bancshares, Inc. Mr. Rudolph has over 35 years of commercial banking
experience.
CHARLES M. SLAVIK. Mr. Slavik has been a director of the Company since
1993 and was a founding director of the Bank in 1949. Mr. Slavik is currently
Chairman of the Board of both Slavik's, Inc. and Slavik's Funeral Home. Mr.
Slavik attended St. Edward's University and Landig College of Mortuary Science.
He was commissioned as a Second Lieutenant in World War II and was released from
active duty as a Captain in 1946. Mr. Slavik has served as a member of the Edna
Rotary Club, Veterans of Foreign Wars, the Edna Hospital Board and the Chamber
of Commerce. From 1959 to 1963, Mr. Slavik served as Mayor of Edna.
HARRISON STAFFORD. Mr. Stafford has been a director of the Company since
1987 and was involved in the founding of the Bank in 1949. Mr. Stafford engages
in farming, ranching and investments. Mr. Stafford graduated from the University
of Texas, where he was a three year All-Conference football player. Mr. Stafford
has been inducted into the National Collegiate Football Hall of Fame, the
University of Texas Hall of Fame and the Texas High School Hall of Fame. Mr.
Stafford has participated actively in the Edna Rotary Club and the University of
Texas Ex's Association, and has served as president of the Edna Independent
School District Board and as a member of the Lavaca Navidad River Authority.
ROBERT STEELHAMMER. Mr. Steelhammer has been a director of the Company
since its inception. Mr. Steelhammer is a partner with the law firm of
Steelhammer & Miller, P.C. in Houston. He received a Bachelor of Science degree
from the University of Texas and a Juris Doctor degree from South Texas College
of Law. He is a member of the State Bar of Texas, a registered professional
engineer for the State of Texas and a member of the American Institute of
Chemical Engineers.
DAVID ZALMAN. Mr. Zalman joined the Bank as President in 1986 and became a
director and Vice President/Secretary of the Company in 1987. From 1978 to 1986,
Mr. Zalman was employed by Commercial Bancshares, Inc. in El Campo, beginning as
cashier and rising to become Chief Executive Officer. Mr. Zalman received a
Bachelor of Business Administration degree in Finance and Marketing from the
University of Texas in 1978. He has served as a member of the El Campo City
Council, the Edna Rotary Club and the El Campo Lion's Club and as president of
the West Wharton County United Way.
Directors are elected for three year terms, classified into Classes I, II
and III. Messrs. Herin, Slavik and Stafford are Class I directors with terms of
office expiring on the date of the Company's annual meeting of shareholders in
1999; Messrs. Bayne, Bouligny and Steelhammer are Class II directors with terms
of office expiring on the date of the Company's annual meeting of shareholders
in 2000; and Messrs. Rudolph and Zalman are Class III directors with terms of
office expiring on the date of the Company's annual meeting of shareholders in
2001. Each officer of the Company is elected by the Board of Directors of the
Company and holds office until his successor is duly elected and qualified or
until his or her earlier death, resignation or removal.
The Board of Directors has established Audit and Compensation Committees.
The Audit Committee reviews the general scope of the audit conducted by the
Company's independent auditors and matters
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relating to the Company's internal control systems. In performing its function,
the Audit Committee meets separately with representatives of the Company's
independent auditors and with representatives of senior management. The Audit
Committee is composed of Messrs. Bayne, Bouligny and Steelhammer, all of whom
are outside directors.
The Compensation Committee is responsible for making recommendations to the
Board of Directors with respect to the compensation of the Company's executive
officers and is responsible for the establishment of policies dealing with
various compensation and employee benefit matters. The Compensation Committee
also administers the Company's stock option plans and makes recommendations to
the Board of Directors as to option grants to Company employees under such
plans. The Compensation Committee is comprised of Messrs. Bayne, Bouligny,
Herin, Slavik, Stafford and Steelhammer, all of whom are outside directors.
EMPLOYMENT AGREEMENTS
Tracy T. Rudolph and David Zalman have entered into employment agreements
with the Company. Each agreement is for a term of three years and automatically
renews each year unless terminated in accordance with its terms. The employment
agreements provide that if the employee is terminated without cause (including
constructive termination) or if a change in control of the Company occurs, the
employee shall be entitled to receive from the Company a lump sum payment equal
to three years' base salary.
DIRECTOR COMPENSATION
Directors of the Company receive a $1,250 fee for each Board meeting
attended and no fees for each committee meeting attended. Directors of the Bank
receive a $350 fee for each Board meeting attended and $300 for each committee
meeting attended.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table provides certain summary information concerning
compensation paid or accrued by the Company to or on behalf of the Company's
Chairman of the Board and President and each of the other two most highly
compensated executive officers of the Company whose compensation exceeds
$100,000 (determined as of the end of the last fiscal year) for the fiscal years
ended December 31, 1997:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
- ---------------------------------------- --------- ---------- --------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Tracy T. Rudolph........................ 1997 $ 225,000 $ -- $ -- $ 7,348(1)
Chairman of the Board and President of
the Company and Chairman of the Board
the Bank
David Zalman............................ 1997 185,000 -- -- 7,630(2)
Vice President/Secretary of the
Company and President of the Bank
Robert L. Benter........................ 1997 92,500 12,000 -- 1,020(3)
President of the Post Oak Banking
Center; Member of the Executive
Committee of the Bank
</TABLE>
- ------------
(1) Consists of contributions by the Company to the 401(k) Plan of $4,750 and
premiums paid by the Company on a life insurance policy for Mr. Rudolph.
(2) Consists of contributions by the Company to the 401(k) Plan of $4,750 and
premiums paid by the Company on two life insurance policies for Mr. Zalman.
(3) Consists of contributions by the Company to the 401(k) Plan.
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<PAGE>
STOCK OPTION PLANS
The Company has outstanding options to purchase 320,000 shares of Common
Stock issued pursuant to a stock option plan approved by the shareholders in
1995 (the "1995 Plan") for executive officers and directors. Under the 1995
Plan, the options vest ratably over a ten year period beginning on the date of
the grant; however, no options may be exercised until the optionee has completed
five years of employment with the Company after the date of the grant. The
options were granted at an average exercise price of $4.75. Compensation expense
was not recognized for the options because the options had an exercise price
approximating the fair value of the Common Stock at the time of the grant. No
options granted under the 1995 Plan will be exercisable until May 31, 2000.
Options to purchase an additional 20,000 shares are available for issuance under
the 1995 Plan.
The Company's Board of Directors and shareholders approved a new stock
option plan in 1998 (the "1998 Plan") which authorizes the issuance of up to
460,000 shares of Common Stock under both "non-qualified" and "incentive
stock" options to employees and "non-qualified" stock options to directors
who are not employees. Generally, under the 1998 Plan it is intended that the
options will vest 60% at the end of the third year following the date of grant
and an additional 20% at the end of each of the two following years; however, an
individual option may vest as much as 20% at the end of the first or second year
following the date of grant if necessary to maximize the "incentive" tax
treatment to the optionee for the particular option being granted. Options under
the 1998 Plan generally must be exercised within 10 years following the date of
grant or no later than three months after optionee's termination with the
Company, if earlier. No options have been granted under the 1998 Plan. The 1998
Plan provides that in the event of a change in control of the Company, all
options granted immediately vest and become exercisable.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("SFAS 123"). This statement established fair value based
accounting and reporting standards for all transactions in which a company
acquires goods or services by issuing its equity investments, which includes
stock-based compensation plans. Under SFAS 123, compensation cost is measured at
the grant date based on the value of the award and is recognized over the
service period, which is usually the vesting period. Fair value of stock options
is determined using an option-pricing model. This statement encourages companies
to adopt as prescribed the fair value based method of accounting to recognize
compensation expense for employee stock compensation plans. However, it does not
require the fair value based method to be adopted but a company must comply with
the disclosure requirements set forth in the statement. The Company has
continued to apply Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, ("APB 25") and related Interpretations, and,
accordingly, will provide the pro forma disclosures of net income and earnings
per share.
OPTIONS GRANTED DURING 1997
The Company did not grant any options to its executive officers during
1997.
BENEFIT PLAN
The Company has established a contributory profit sharing plan (the
"Plan") pursuant to Internal Revenue Code Section 401(k) covering
substantially all employees. At least one year of service is required to be
eligible for employer-matching contributions. Participants may contribute up to
15% of their compensation to the Plan. Each year the Company determines, at its
discretion, the amount of matching contributions. Total Plan expense charged to
the Company's operations for 1997 and 1996 was approximately $87,000 and
$72,000, respectively. The Company has expensed $48,000 for 1998 contributions
during the period ended June 30, 1998.
INTERESTS OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
Many of the directors, executive officers and principal shareholders of the
Company (I.E., those who own 10% or more of the Common Stock) and their
associates, which include corporations, partnerships and other organizations in
which they are officers or partners or in which they and their immediate
families have
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<PAGE>
at least a 5% interest, are customers of the Company. During 1997, the Company
made loans in the ordinary course of business to many of the directors,
executive officers and principal shareholders of the Company and their
associates, all of which were on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with persons unaffiliated with the Company and did not involve more
than the normal risk of collectibility or present other unfavorable features.
Loans to directors, executive officers and principal shareholders of the Company
are subject to limitations contained in the Federal Reserve Act, the principal
effect of which is to require that extensions of credit by the Company to
executive officers, directors and principal shareholders satisfy the foregoing
standards. On June 30, 1998, all of such loans aggregated $3.0 million, which
was approximately 0.01% of the Company's Tier 1 capital at such date.
The Company expects to have such transactions or transactions on a similar
basis with its directors, executive officers and principal shareholders and
their associates in the future.
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of June 30, 1998, by (i) each
director and executive officer of the Company and members of the Executive
Committee of the Bank, (ii) each person who is known by the Company to own
beneficially 5% or more of the Common Stock, (iii) all directors and executive
officers as a group and (iv) the Selling Shareholders, who will sell 641,905
shares of Common Stock in the Offering. Unless otherwise indicated, each person
has sole voting and dispositive power over the shares indicated as owned by such
person and the address of each shareholder is the same as the address of the
Company. Messrs. Bayne, Bouligny, Herin, Rudolph, Stafford, Steelhammer and
Zalman have each been a director of the Company for more than three years. See
"Management -- Directors and Executive Officers of the Company.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING(1)
----------------------- NUMBER OF SHARES ------------------------
BENEFICIAL OWNER NUMBER PERCENT TO BE SOLD NUMBER PERCENT
- ---------------------------------------- --------- ------- ---------------- --------- -------
PRINCIPAL AND OTHER SHAREHOLDERS
- ----------------------------------------
<S> <C> <C> <C> <C> <C>
Dr. Perry Mueller....................... 200,000(2) 5.01% -0- 200,000 4.07%
Louis Tittizer.......................... 280,472(3) 7.03 -0- 280,472 5.71
LLPA General Partnership................ 228,160(4) 5.72 166,667 61,493 1.25
Joe Zalman, Jr.......................... 89,732 2.29 75,000 14,732 *
DIRECTORS AND EXECUTIVE OFFICERS
- ----------------------------------------
Harry Bayne............................. 168,324 4.22% 73,615 94,709 1.93
Robert L. Benter........................ 2,920(5) * -0- 2,920 *
Donald A. Bolton, Jr.................... 12,000(6) * -0- 12,000 *
James A. Bouligny....................... 201,756 5.06 43,750 158,006 3.21
J.T. Herin.............................. 100,400 2.52 66,667 33,733 *
Randy D. Hester......................... 14,272(7) * -0- 14,272
David Hollaway.......................... 2,000 * -0- 2,000
Tracy T. Rudolph........................ 320,000(8) 8.02 180,000 140,000 2.85
Charles M. Slavik....................... 43,740(9) 1.10 8,750 34,990 *
Harrison Stafford....................... 132,800(10) 3.33 42,500 90,300 1.84
Robert Steelhammer...................... 176,000 4.41 75,000 101,000 2.05
David Zalman............................ 387,868(11) 9.72 20,834 367,034 7.47
Directors and Executive Officers as a
Group................................. 1,562,080 39.15% 511,116 1,050,964 21.38%
</TABLE>
- ------------
* Denotes ownership of less than 1.0%
(1) Assumes (i) the issuance of 925,000 shares in the Offering and (ii) the
sale of 752,783 shares by the Selling Shareholders.
(2) Includes 107,144 shares held of record by First National Bank of Lake
Jackson as custodian for Dr. Mueller's self-directed IRA and 26,188 shares
held of record by First Prosperity Bank as custodian for Dr. Mueller's
self-directed IRA. Perry Mueller's address is 203 That Way, Lake Jackson,
Texas 77566.
(3) Louis Tittizer's address is P. O. Box 519, Edna, Texas 77976.
(4) LLPA General Partnership's address is 1177 West Loop South, Suite 1450,
Houston, Texas 77027.
(5) Includes 920 shares held of record by the Company's 401(k) Plan as
custodian for Mr. Benter.
(6) Includes 8,000 shares held of record by Bolton Brothers Separate Property
Investment Partnership, of which Mr. Bolton is a general partner and 4,000
shares held of record by the Company's 401(k) Plan as custodian for Mr.
Bolton.
(7) Includes 8,000 shares held of record by the Company's 401(k) Plan as
custodian for Mr. Hester and 4,000 shares held of record by the Company's
401(k) Plan as custodian for Janet L. Hester, the wife of Mr. Hester.
(8) Includes 4,640 shares held of record by the Company's 401(k) Plan as
custodian for Mr. Rudolph.
(9) Includes 38,740 shares held of record by the Charles and Emma Slavik
Investment Partnership, of which Mr. Slavik is general partner.
(10) Includes 132,800 shares held of record by the Harrison Stafford Investment
Partnership, of which Mr. Stafford is general partner.
(11) Includes 3,200 shares held of record by Mr. Zalman as custodian for Britain
Zalman, the minor son of Mr. Zalman, and 3,200 shares held of record by Mr.
Zalman as custodian for Cullen Zalman, the minor son of Mr. Zalman.
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<PAGE>
SUPERVISION AND REGULATION
The supervision and regulation of bank holding companies and their
subsidiaries is intended primarily for the protection of depositors, the deposit
insurance funds of the FDIC and the banking system as a whole, and not for the
protection of the bank holding company shareholders or creditors. The banking
agencies have broad enforcement power over bank holding companies and banks
including the power to impose substantial fines and other penalties for
violations of laws and regulations.
The following description summarizes some of the laws to which the Company
and the Bank are subject. References herein to applicable statutes and
regulations are brief summaries thereof, do not purport to be complete, and are
qualified in their entirety by reference to such statutes and regulations.
THE COMPANY
The Company is a bank holding company registered under the BHCA, and it is
subject to supervision, regulation and examination by the Federal Reserve Board.
The BHCA and other federal laws subject bank holding companies to particular
restrictions on the types of activities in which they may engage, and to a range
of supervisory requirements and activities, including regulatory enforcement
actions for violations of laws and regulations.
REGULATORY RESTRICTIONS ON DIVIDENDS; SOURCE OF STRENGTH. It is the policy
of the Federal Reserve Board that bank holding companies should pay cash
dividends on common stock only out of income available over the past year and
only if prospective earnings retention is consistent with the organization's
expected future needs and financial condition. The policy provides that bank
holding companies should not maintain a level of cash dividends that undermines
the bank holding company's ability to serve as a source of strength to its
banking subsidiaries.
Under Federal Reserve Board policy, a bank holding company is expected to
act as a source of financial strength to each of its banking subsidiaries and
commit resources to their support. Such support may be required at times when,
absent this Federal Reserve Board policy, a holding company may not be inclined
to provide it. As discussed below, a bank holding company in certain
circumstances could be required to guarantee the capital plan of an
undercapitalized banking subsidiary.
In the event of a bank holding company's bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is required
to cure immediately any deficit under any commitment by the debtor holding
company to any of the federal banking agencies to maintain the capital of an
insured depository institution, and any claim for breach of such obligation will
generally have priority over most other unsecured claims.
ACTIVITIES "CLOSELY RELATED" TO BANKING. The BHCA prohibits a bank
holding company, with certain limited exceptions, from acquiring direct or
indirect ownership or control of any voting shares of any company which is not a
bank or from engaging in any activities other than those of banking, managing or
controlling banks and certain other subsidiaries, or furnishing services to or
performing services for its subsidiaries. One principal exception to these
prohibitions allows the acquisition of interests in companies whose activities
are found by the Federal Reserve Board, by order or regulation, to be so closely
related to banking or managing or controlling banks, as to be a proper incident
thereto. Some of the activities that have been determined by regulation to be
closely related to banking are making or servicing loans, performing certain
data processing services, acting as an investment or financial advisor to
certain investment trusts and investment companies, and providing securities
brokerage services. Other activities approved by the Federal Reserve Board
include consumer financial counseling, tax planning and tax preparation, futures
and options advisory services, check guaranty services, collection agency and
credit bureau services, and personal property appraisals. In approving
acquisitions by bank holding companies of companies engaged in banking-related
activities, the Federal Reserve Board considers a number of factors, and weighs
the expected benefits to the public (such as greater convenience and increased
competition or gains in efficiency) against the risks of possible adverse
effects (such as undue concentration of resources, decreased or unfair
competition, conflicts of interest, or unsound banking practices). The Federal
Reserve
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<PAGE>
Board is also empowered to differentiate between activities commenced de novo
and activities commenced through acquisition of a going concern.
SECURITIES ACTIVITIES. The Federal Reserve Board has approved applications
by bank holding companies to engage, through nonbank subsidiaries, in certain
securities-related activities (underwriting of municipal revenue bonds,
commercial paper, consumer receivable-related securities and one-to-four family
mortgage-backed securities), provided that the affiliates would not be
"principally engaged" in such activities for purposes of Section 20 of the
Glass-Steagall Act. In limited situations, holding companies may be able to use
such subsidiaries to underwrite and deal in corporate debt and equity
securities.
SAFE AND SOUND BANKING PRACTICES. Bank holding companies are not permitted
to engage in unsafe and unsound banking practices. The Federal Reserve Board's
Regulation Y, for example, generally requires a holding company to give the
Federal Reserve Board prior notice of any redemption or repurchase of its own
equity securities, if the consideration to be paid, together with the
consideration paid for any repurchases or redemptions in the preceding year, is
equal to 10% or more of the company's consolidated net worth. The Federal
Reserve Board may oppose the transaction if it believes that the transaction
would constitute an unsafe or unsound practice or would violate any law or
regulation. Depending upon the circumstances, the Federal Reserve Board could
take the position that paying a dividend would constitute an unsafe or unsound
banking practice.
The Federal Reserve Board has broad authority to prohibit activities of
bank holding companies and their nonbanking subsidiaries which represent unsafe
and unsound banking practices or which constitute violations of laws or
regulations, and can assess civil money penalties for certain activities
conducted on a knowing and reckless basis, if those activities caused a
substantial loss to a depository institution. The penalties can be as high as
$1,000,000 for each day the activity continues.
ANTI-TYING RESTRICTIONS. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a holding company or its affiliates.
CAPITAL ADEQUACY REQUIREMENTS. The Federal Reserve Board has adopted a
system using risk-based capital guidelines to evaluate the capital adequacy of
bank holding companies. Under the guidelines, specific categories of assets are
assigned different risk weights, based generally on the perceived credit risk of
the asset. These risk weights are multiplied by corresponding asset balances to
determine a "risk-weighted" asset base. The guidelines require a minimum total
risk-based capital ratio of 8.0% (of which at least 4.0% is required to consist
of Tier 1 capital elements). Total capital is the sum of Tier 1 and Tier 2
capital. As of June 30, 1998, the Company's ratio of Tier 1 capital to total
risk-weighted assets was 14.32% and its ratio of total capital to total
risk-weighted assets was 15.08%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Financial Condition -- Capital
Resources."
In addition to the risk-based capital guidelines, the Federal Reserve Board
uses a leverage ratio as an additional tool to evaluate the capital adequacy of
bank holding companies. The leverage ratio is a company's Tier 1 capital divided
by its average total consolidated assets. Certain highly-rated bank holding
companies may maintain a minimum leverage ratio of 3.0%, but other bank holding
companies may be required to maintain a leverage ratio of up to 200 basis points
above the regulatory minimum. As of June 30, 1998, the Company's leverage ratio
was 6.25%.
The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
certain specified criteria, assuming that they have the highest regulatory
rating. Banking organizations not meeting these criteria are expected to operate
with capital positions well above the minimum ratios. The federal bank
regulatory agencies may set capital requirements for a particular banking
organization that are higher than the minimum ratios when circumstances warrant.
Federal Reserve Board guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets.
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<PAGE>
IMPOSITION OF LIABILITY FOR UNDERCAPITALIZED SUBSIDIARIES. Bank regulators
are required to take "prompt corrective action" to resolve problems associated
with insured depository institutions whose capital declines below certain
levels. In the event an institution becomes "undercapitalized," it must submit
a capital restoration plan. The capital restoration plan will not be accepted by
the regulators unless each company having control of the undercapitalized
institution guarantees the subsidiary's compliance with the capital restoration
plan up to a certain specified amount. Any such guarantee from a depository
institution's holding company is entitled to a priority of payment in
bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank
is limited to the lesser of 5% of the institution's assets at the time it became
undercapitalized or the amount necessary to cause the institution to be
"adequately capitalized." The bank regulators have greater power in situations
where an institution becomes "significantly" or "critically"
undercapitalized or fails to submit a capital restoration plan. For example, a
bank holding company controlling such an institution can be required to obtain
prior Federal Reserve Board approval of proposed dividends, or might be required
to consent to a consolidation or to divest the troubled institution or other
affiliates.
ACQUISITIONS BY BANK HOLDING COMPANIES. The BHCA requires every bank
holding company to obtain the prior approval of the Federal Reserve Board before
it may acquire all or substantially all of the assets of any bank, or ownership
or control of any voting shares of any bank, if after such acquisition it would
own or control, directly or indirectly, more than 5% of the voting shares of
such bank. In approving bank acquisitions by bank holding companies, the Federal
Reserve Board is required to consider the financial and managerial resources and
future prospects of the bank holding company and the banks concerned, the
convenience and needs of the communities to be served, and various competitive
factors.
CONTROL ACQUISITIONS. The Change in Bank Control Act prohibits a person or
group of persons from acquiring "control" of a bank holding company unless the
Federal Reserve Board has been notified and has not objected to the transaction.
Under a rebuttable presumption established by the Federal Reserve Board, the
acquisition of 10% of more of a class of voting stock of a bank holding company
with a class of securities registered under Section 12 of the Exchange Act, such
as the Company, would, under the circumstances set forth in the presumption,
constitute acquisition of control of the Company.
In addition, any entity is required to obtain the approval of the Federal
Reserve Board under the BHCA before acquiring 25% (5% in the case of an acquiror
that is a bank holding company) or more of the outstanding Common Stock of the
Company, or otherwise obtaining control or a "controlling influence" over the
Company.
THE BANK
The Bank is a Texas-chartered banking association, the deposits of which
are insured by the Bank Insurance Fund ("BIF"). The Bank is not a member of
the Federal Reserve System; therefore, the Bank is subject to supervision and
regulation by the FDIC and the Texas Banking Department. Such supervision and
regulation subjects the Bank to special restrictions, requirements, potential
enforcement actions and periodic examination by the FDIC and the Texas Banking
Department. Because the Federal Reserve Board regulates the bank holding company
parent of the Bank, the Federal Reserve Board also has supervisory authority
which directly affects the Bank.
EQUIVALENCE TO NATIONAL BANK POWERS. The Texas Constitution, as amended in
1986, provides that a Texas-chartered bank has the same rights and privileges
that are or may be granted to national banks domiciled in Texas. To the extent
that the Texas laws and regulations may have allowed state-chartered banks to
engage in a broader range of activities than national banks, the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA") has operated to limit
this authority. FDICIA provides that no state bank or subsidiary thereof may
engage as principal in any activity not permitted for national banks, unless the
institution complies with applicable capital requirements and the FDIC
determines that the activity poses no significant risk to the insurance fund. In
general, statutory restrictions on the activities of banks are aimed at
protecting the safety and soundness of depository institutions.
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<PAGE>
BRANCHING. Texas law provides that a Texas-chartered bank can establish a
branch anywhere in Texas provided that the branch is approved in advance by the
Texas Banking Department. The branch must also be approved by the FDIC, which
considers a number of factors, including financial history, capital adequacy,
earnings prospects, character of management, needs of the community and
consistency with corporate powers.
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES AND INSIDERS. Transactions
between the Bank and its nonbanking subsidiaries, including the Company, are
subject to Section 23A of the Federal Reserve Act. In general, Section 23A
imposes limits on the amount of such transactions, and also requires certain
levels of collateral for loans to affiliated parties. It also limits the amount
of advances to third parties which are collateralized by the securities or
obligations of the Company or its subsidiaries.
Affiliate transactions are also subject to Section 23B of the Federal
Reserve Act which generally requires that certain transactions between the Bank
and its affiliates be on terms substantially the same, or at least as favorable
to the Bank, as those prevailing at the time for comparable transactions with or
involving other nonaffiliated persons.
The restrictions on loans to directors, executive officers, principal
shareholders and their related interests (collectively referred to herein as
"insiders") contained in the Federal Reserve Act and Regulation O apply to all
insured institutions and their subsidiaries and holding companies. These
restrictions include limits on loans to one borrower and conditions that must be
met before such a loan can be made. There is also an aggregate limitation on all
loans to insiders and their related interests. These loans cannot exceed the
institution's total unimpaired capital and surplus, and the FDIC may determine
that a lesser amount is appropriate. Insiders are subject to enforcement actions
for knowingly accepting loans in violation of applicable restrictions.
RESTRICTIONS ON DISTRIBUTION OF SUBSIDIARY BANK DIVIDENDS AND
ASSETS. Dividends paid by the Bank have provided a substantial part of the
Company's operating funds and for the foreseeable future it is anticipated that
dividends paid by the Bank to the Company will continue to be the Company's
principal source of operating funds. Capital adequacy requirements serve to
limit the amount of dividends that may be paid by the Bank. Under federal law,
the Bank cannot pay a dividend if, after paying the dividend, the Bank will be
"undercapitalized." The FDIC may declare a dividend payment to be unsafe and
unsound even though the Bank would continue to meet its capital requirements
after the dividend.
Because the Company is a legal entity separate and distinct from its
subsidiaries, its right to participate in the distribution of assets of any
subsidiary upon the subsidiary's liquidation or reorganization will be subject
to the prior claims of the subsidiary's creditors. In the event of a liquidation
or other resolution of an insured depository institution, the claims of
depositors and other general or subordinated creditors are entitled to a
priority of payment over the claims of holders of any obligation of the
institution to its shareholders, including any depository institution holding
company (such as the Company) or any shareholder or creditor thereof.
EXAMINATIONS. The FDIC periodically examines and evaluates insured banks.
Based upon such an evaluation, the FDIC may revalue the assets of the
institution and require that it establish specific reserves to compensate for
the difference between the FDIC-determined value and the book value of such
assets. The Texas Banking Department also conducts examinations of state banks
but may accept the results of a federal examination in lieu of conducting an
independent examination.
AUDIT REPORTS. Insured institutions with total assets of $500 million or
more must submit annual audit reports prepared by independent auditors to
federal and state regulators. In some instances, the audit report of the
institution's holding company can be used to satisfy this requirement. Auditors
must receive examination reports, supervisory agreements and reports of
enforcement actions. In addition, financial statements prepared in accordance
with generally accepted accounting principles, management's certifications
concerning responsibility for the financial statements, internal controls and
compliance with legal requirements designated by the FDIC, and an attestation by
the auditor regarding the statements of management relating to the internal
controls must be submitted. For institutions with total assets of more
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than $3 billion, independent auditors may be required to review quarterly
financial statements. FDICIA requires that independent audit committees be
formed, consisting of outside directors only. The committees of such
institutions must include members with experience in banking or financial
management, must have access to outside counsel, and must not include
representatives of large customers.
CAPITAL ADEQUACY REQUIREMENTS. The FDIC has adopted regulations
establishing minimum requirements for the capital adequacy of insured
institutions. The FDIC may establish higher minimum requirements if, for
example, a bank has previously received special attention or has a high
susceptibility to interest rate risk.
The FDIC's risk-based capital guidelines generally require state banks to
have a minimum ratio of Tier 1 capital to total risk-weighted assets of 4.0% and
a ratio of total capital to total risk-weighted assets of 8.0%. The capital
categories have the same definitions for the Bank as for the Company. As of June
30, 1998, the Bank's ratio of Tier 1 capital to total risk-weighted assets was
14.22% and its ratio of total capital to total risk-weighted assets was 14.99%.
See "Management's Discussion and Analysis of Financial Condition and Result of
Operation of the Company -- Financial Condition -- Capital Resources."
The FDIC's leverage guidelines require state banks to maintain Tier 1
capital of no less than 5.0% of average total assets, except in the case of
certain highly rated banks for which the requirement is 3.0% of average total
assets. The Texas Banking Department has issued a policy which generally
requires state chartered banks to maintain a leverage ratio (defined in
accordance with federal capital guidelines) of 6%. As of June 30, 1998, the
Bank's ratio of Tier 1 capital to average total assets (leverage ratio) was
6.21%. See "Management's Discussion and Analysis of Financial Condition and
Result of Operation of the Company -- Financial Condition -- Capital
Resources."
CORRECTIVE MEASURES FOR CAPITAL DEFICIENCIES. The federal banking
regulators are required to take "prompt corrective action" with respect to
capital-deficient institutions. Agency regulations define, for each capital
category, the levels at which institutions are "well capitalized,"
"adequately capitalized," "under capitalized," "significantly under
capitalized" and "critically under capitalized." A "well capitalized" bank
has a total risk-based capital ratio of 10.0% or higher; a Tier 1 risk-based
capital ratio of 6.0% or higher; a leverage ratio of 5.0% or higher; and is not
subject to any written agreement, order or directive requiring it to maintain a
specific capital level for any capital measure. An "adequately capitalized"
bank has a total risk-based capital ratio of 8.0% or higher; a Tier 1 risk-based
capital ratio of 4.0% or higher; a leverage ratio of 4.0% or higher (3.0% or
higher if the bank was rated a composite 1 in its most recent examination report
and is not experiencing significant growth); and does not meet the criteria for
a well capitalized bank. A bank is "under capitalized" if it fails to meet any
one of the ratios required to be adequately capitalized.
In addition to requiring undercapitalized institutions to submit a capital
restoration plan, agency regulations contain broad restrictions on certain
activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment and expansion into new lines of business.
With certain exceptions, an insured depository institution is prohibited from
making capital distributions, including dividends, and is prohibited from paying
management fees to control persons if the institution would be undercapitalized
after any such distribution or payment.
As an institution's capital decreases, the FDIC's enforcement powers become
more severe. A significantly undercapitalized institution is subject to mandated
capital raising activities, restrictions on interest rates paid and transactions
with affiliates, removal of management and other restrictions. The FDIC has only
very limited discretion in dealing with a critically undercapitalized
institution and is virtually required to appoint a receiver or conservator.
Banks with risk-based capital and leverage ratios below the required
minimums may also be subject to certain administrative actions, including the
termination of deposit insurance upon notice and hearing, or a temporary
suspension of insurance without a hearing in the event the institution has no
tangible capital.
DEPOSIT INSURANCE ASSESSMENTS. The Bank must pay assessments to the FDIC
for federal deposit insurance protection. The FDIC has adopted a risk-based
assessment system as required by FDICIA. Under
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this system, FDIC-insured depository institutions pay insurance premiums at
rates based on their risk classification. Institutions assigned to higher risk
classifications (that is, institutions that pose a greater risk of loss to their
respective deposit insurance funds) pay assessments at higher rates than
institutions that pose a lower risk. An institution's risk classification is
assigned based on its capital levels and the level of supervisory concern the
institution poses to the regulators. In addition, the FDIC can impose special
assessments in certain instances.
The FDIC established a process for raising or lowering all rates for
insured institutions semi-annually if conditions warrant a change. Under this
new system, the FDIC has the flexibility to adjust the assessment rate schedule
twice a year without seeking prior public comment, but only within a range of
five cents per $100 above or below the premium schedule adopted. Changes in the
rate schedule outside the five cent range above or below the current schedule
can be made by the FDIC only after a full rulemaking with opportunity for public
comment.
On September 30, 1996, President Clinton signed into law an act that
contained a comprehensive approach to recapitalizing the SAIF and to assure the
payment of the Financing Corporation's ("FICO") bond obligations. Under this
new act, banks insured under the BIF are required to pay a portion of the
interest due on bonds that were issued by FICO to help shore up the ailing
Federal Savings and Loan Insurance Corporation in 1987. The BIF rate must equal
one-fifth of the SAIF rate through year-end 1999, or until the insurance funds
are merged, whichever occurs first. Thereafter BIF and SAIF payers will be
assessed pro rata for the FICO bond obligations. With regard to the assessment
for the FICO obligation, the current BIF rate is .0126% of deposits and the SAIF
rate is .0630% of deposits.
ENFORCEMENT POWERS. The FDIC and the other federal banking agencies have
broad enforcement powers, including the power to terminate deposit insurance,
impose substantial fines and other civil and criminal penalties and appoint a
conservator or receiver. Failure to comply with applicable laws, regulations and
supervisory agreements could subject the Company or its banking subsidiaries, as
well as officers, directors and other institution-affiliated parties of these
organizations, to administrative sanctions and potentially substantial civil
money penalties. The appropriate federal banking agency may appoint the FDIC as
conservator or receiver for a banking institution (or the FDIC may appoint
itself, under certain circumstances) if any one or more of a number of
circumstances exist, including, without limitation, the fact that the banking
institution is undercapitalized and has no reasonable prospect of becoming
adequately capitalized; fails to become adequately capitalized when required to
do so; fails to submit a timely and acceptable capital restoration plan; or
materially fails to implement an accepted capital restoration plan.
BROKERED DEPOSIT RESTRICTIONS. Adequately capitalized institutions cannot
accept, renew or roll over brokered deposits except with a waiver from the FDIC,
and are subject to restrictions on the interest rates that can be paid on such
deposits. Undercapitalized institutions may not accept, renew, or roll over
brokered deposits.
CROSS-GUARANTEE PROVISIONS. The Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee"
provision which generally makes commonly controlled insured depository
institutions liable to the FDIC for any losses incurred in connection with the
failure of a commonly controlled depository institution.
COMMUNITY REINVESTMENT ACT. The Community Reinvestment Act of 1977
("CRA") and the regulations issued thereunder are intended to encourage banks
to help meet the credit needs of their service area, including low and moderate
income neighborhoods, consistent with the safe and sound operations of the
banks. These regulations also provide for regulatory assessment of a bank's
record in meeting the needs of its service area when considering applications to
establish branches, merger applications and applications to acquire the assets
and assume the liabilities of another bank. FIRREA requires federal banking
agencies to make public a rating of a bank's performance under the CRA. In the
case of a bank holding company, the CRA performance record of the banks involved
in the transaction are reviewed in connection with the filing of an application
to acquire ownership or control of shares or assets of a bank or to merge with
any other bank holding company. An unsatisfactory record can substantially delay
or block the transaction.
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CONSUMER LAWS AND REGULATIONS. In addition to the laws and regulations
discussed herein, the Bank is also subject to certain consumer laws and
regulations that are designed to protect consumers in transactions with banks.
While the list set forth herein is not exhaustive, these laws and regulations
include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds
Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity
Act, and the Fair Housing Act, among others. These laws and regulations mandate
certain disclosure requirements and regulate the manner in which financial
institutions must deal with customers when taking deposits or making loans to
such customers. The Bank must comply with the applicable provisions of these
consumer protection laws and regulations as part of their ongoing customer
relations.
INSTABILITY OF REGULATORY STRUCTURE
Various legislation, including proposals to overhaul the bank regulatory
system, expand the powers of banking institutions and bank holding companies and
limit the investments that a depository institution may make with insured funds,
is from time to time introduced in Congress. Such legislation may change banking
statutes and the operating environment of the Company and its banking
subsidiaries in substantial and unpredictable ways. The Company cannot determine
the ultimate effect that potential legislation, if enacted, or implementing
regulations with respect thereto, would have upon the financial condition or
results of operations of the Company or its subsidiaries.
EXPANDING ENFORCEMENT AUTHORITY
One of the major additional burdens imposed on the banking industry by
FDICIA is the increased ability of banking regulators to monitor the activities
of banks and their holding companies. In addition, the Federal Reserve Board and
FDIC are possessed of extensive authority to police unsafe or unsound practices
and violations of applicable laws and regulations by depository institutions and
their holding companies. For example, the FDIC may terminate the deposit
insurance of any institution which it determines has engaged in an unsafe or
unsound practice. The agencies can also assess civil money penalties, issue
cease and desist or removal orders, seek injunctions, and publicly disclose such
actions. FDICIA, FIRREA and other laws have expanded the agencies' authority in
recent years, and the agencies have not yet fully tested the limits of their
powers.
EFFECT ON ECONOMIC ENVIRONMENT
The policies of regulatory authorities, including the monetary policy of
the Federal Reserve Board, have a significant effect on the operating results of
bank holding companies and their subsidiaries. Among the means available to the
Federal Reserve Board to affect the money supply are open market operations in
U.S. Government securities, changes in the discount rate on member bank
borrowings, and changes in reserve requirements against member bank deposits.
These means are used in varying combinations to influence overall growth and
distribution of bank loans, investments and deposits, and their use may affect
interest rates charged on loans or paid for deposits.
Federal Reserve Board monetary policies have materially affected the
operating results of commercial banks in the past and are expected to continue
to do so in the future. The nature of future monetary policies and the effect of
such policies on the business and earnings of the Company and its subsidiaries
cannot be predicted.
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DESCRIPTION OF SECURITIES OF THE COMPANY
AUTHORIZED CAPITAL STOCK
The authorized capital stock of the Company consists of (i) 20,000,000
shares of preferred stock, $1.00 per share par value ("Preferred Stock"),
issuable in series, none of which are issued and outstanding and (ii) 50,000,000
shares of Common Stock, $1.00 per share par value, of which 3,993,884 shares
were issued and 3,990,308 shares were outstanding as of June 30, 1998. The terms
of any new series of preferred stock may be fixed by the Board of Directors of
the Company within certain limits set by the Company's Articles of
Incorporation.
The following discussion of the terms and provisions of the Company's
capital stock is qualified in its entirety by reference to the Company's
Articles of Incorporation and Bylaws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part.
PREFERRED STOCK
The Company is authorized to issue 20,000,000 shares of Preferred Stock.
The Preferred Stock (or other securities convertible in whole or in part into
Preferred Stock) is available for issuance from time to time for various
purposes as determined by the Company's Board of Directors, including, without
limitation, making future acquisitions, raising additional equity capital and
financing. Subject to certain limits set by the Company's Articles of
Incorporation, the Preferred Stock (or such convertible securities) may be
issued on such terms and conditions, and at such times and in such situations,
as the Board of Directors in its sole discretion determines to be appropriate,
without any further approval or action by the shareholders (unless otherwise
required by laws, rules, regulations or agreements applicable to the Company).
Moreover, except as otherwise limited by the Articles of Incorporation or
applicable laws, rules or regulations, the Board of Directors has the sole
authority to determine the relative rights and preferences of the Preferred
Stock and any series thereof without shareholder approval. The Company's
Articles of Incorporation require all shares of Preferred Stock to be identical,
except as to the following characteristics, which may vary between different
series of Preferred Stock:
(i) dividend rate, preference of dividend with respect to any other
class or series of stock, and cumulativity, non-cumulativity or partial
cumulativity of dividends;
(ii) redemption price and terms, including, to the extent permitted
by law, the manner in which shares are to be chosen for redemption if less
than all the shares of a series are to be redeemed;
(iii) sinking fund provisions for the redemption or purchase of
shares;
(iv) the amount payable upon shares in the event of voluntary or
involuntary liquidation;
(v) the terms and conditions on which shares may be converted, if the
shares of any series are issued with the privilege of conversion;
(vi) voting rights; and
(vii) such other powers, preferences and rights as the Board of
Directors shall determine.
The Board of Directors does not intend to seek shareholder approval prior
to any issuance of Preferred Stock or any series thereof, unless otherwise
required by law. Under the Texas Business Corporation Act ("TBCA"),
shareholder approval prior to the issuance of shares of Common Stock or
Preferred Stock is required in connection with certain mergers. Frequently,
opportunities arise that require prompt action, such as the possible acquisition
of a property or business or the private sale of securities, and it is the
belief of the Board of Directors that the delay necessary for shareholder
approval of a specific issuance could be to the detriment of the Company and its
shareholders. The Board of Directors does not intend to issue any shares of
Common Stock or Preferred Stock except on terms which the Board of Directors
deems to be in the best interests of the Company and its then existing
shareholders.
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Although the Preferred Stock could be deemed to have an anti-takeover
effect, the Board of Directors is not aware of any takeover efforts. If a
hostile takeover situation should arise, shares of Preferred Stock could be
issued to purchasers sympathetic with the Company's management or others in such
a way as to render more difficult or to discourage a merger, tender offer, proxy
contest, the assumption of control by a holder of a large block of the Company's
securities or the removal of incumbent management.
The effects of the issuance of the Preferred Stock on the holders of Common
Stock could include, among other things, (i) reduction of the amount otherwise
available for payments of dividends on Common Stock if dividends are payable on
the series of Preferred Stock; (ii) restrictions on dividends on Common Stock if
dividends on the series of Preferred Stock are in arrears; (iii) dilution of the
voting power of Common Stock if the series of Preferred Stock has voting rights,
including a possible "veto" power if the series of Preferred Stock has class
voting rights; (iv) dilution of the equity interest of holders of Common Stock
if the series of Preferred Stock is convertible, and is converted, into Common
Stock; and (v) restrictions on the rights of holders of Common Stock to share in
the Company's assets upon liquidation until satisfaction of any liquidation
preference granted to the holders of the series of Preferred Stock. Holders of
Common Stock have no preemptive rights to purchase or otherwise acquire any
Preferred Stock that may be issued.
COMMON STOCK
The holders of the Common Stock are entitled to one vote for each share of
Common Stock owned. Except as expressly provided by law and except for any
voting rights which may be conferred by the Board of Directors on any shares of
Preferred Stock issued, all voting power is in the Common Stock. Holders of
Common Stock may not cumulate their votes for the election of directors. Holders
of Common Stock do not have preemptive rights to acquire any additional,
unissued or treasury shares of the Company, or securities of the Company
convertible into or carrying a right to subscribe for or acquire shares of the
Company.
Holders of Common Stock will be entitled to receive dividends out of funds
legally available therefor, if and when properly declared by the Board of
Directors. See "Risk Factors -- Dividend History and Restrictions on Ability to
Pay Dividends" and "Supervision and Regulation."
On the liquidation of the Company, the holders of Common Stock are entitled
to share pro rata in any distribution of the assets of the Company, after the
holders of shares of Preferred Stock have received the liquidation preference of
their shares plus any cumulated but unpaid dividends (whether or not earned or
declared), if any, and after all other indebtedness of the Company has been
retired.
TEXAS LAW AND CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS
Certain provisions of Texas law, the Company's Articles of Incorporation
and the Company's Bylaws could make more difficult the acquisition of the
Company by means of a tender offer, a proxy contest or otherwise and the removal
of incumbent officers and directors. These provisions are intended to discourage
certain types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of the Company to negotiate first
with the Company.
The Company is subject to the provisions of the Texas Business Combination
Law (Articles 13.01 through 13.08 of the TBCA), which provides that a Texas
corporation such as the Company may not engage in certain business combinations,
including mergers, consolidations and asset sales, with a person, or an
affiliate or associate of such person, who is an "Affiliated Shareholder"
(generally defined as the holder of 20% or more of the corporation's voting
shares) for a period of three years from the date such person became an
Affiliated Shareholder unless: (i) the business combination or purchase or
acquisition of shares made by the Affiliated Shareholder was approved by the
board of directors of the corporation before the Affiliated Shareholder became
an Affiliated Shareholder or (ii) the business combination was approved by the
affirmative vote of the holders of at least two-thirds of the outstanding voting
shares of the corporation not beneficially owned by the Affiliated Shareholder,
at a meeting of shareholders called for that purpose (and not by written
consent), not less than six months after the Affiliated Shareholder became an
Affiliated Shareholder. The Texas Business Combination Law is not applicable to:
(i) the business combination of a
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corporation: (a) where the corporation's original charter or bylaws contain a
provision expressly electing not to be governed by the Texas Business
Combination Law, (b) that adopted an amendment to its charter or bylaws before
December 31, 1997, expressly electing not to be governed by the Texas Business
Combination Law, or (c) that adopts an amendment to its charter or bylaws after
December 31, 1997, by the affirmative vote of the holders, other than Affiliated
Shareholders, of at least two-thirds of the outstanding voting shares of the
corporation, expressly electing not to be governed by the Texas Business
Combination Law; (ii) a business combination of a corporation with an Affiliated
Shareholder that became an Affiliated Shareholder inadvertently, if the
Affiliated Shareholder: (a) as soon as practicable divests itself of enough
shares to no longer be an Affiliated Shareholder and (b) would not at any time
within the three year period preceding the announcement of the business
combination have been an Affiliated Shareholder but for the inadvertent
acquisition; (iii) a business combination with an Affiliated Shareholder that
was the beneficial owner of 20% or more of the outstanding voting shares of the
corporation on December 31, 1996, and continuously until the announcement date
of the business combination; (iv) a business combination with an Affiliated
Shareholder who became an Affiliated Shareholder through a transfer of shares of
the corporation by will or intestate succession and continuously was such an
Affiliated Shareholder until the announcement date of the business combination;
and (v) a business combination of a corporation with a wholly owned subsidiary
if the subsidiary is not an affiliate or associate of the Affiliated Shareholder
other than by reason of the Affiliated Shareholder's beneficial ownership of the
voting shares of the corporation. Neither the Articles of Incorporation nor the
Bylaws of the Company contain any provision expressly providing that the Company
will not be subject to the Texas Business Combination Law. The Texas Business
Combination Law may have the effect of inhibiting a non-negotiated merger or
other business combination involving the Company, even if such event would be
beneficial to the Company's shareholders.
The following discussion is a summary of certain material provisions of the
Company's Articles of Incorporation and the Company's Bylaws, copies of which
are filed as exhibits to the Registration Statement of which this Prospectus is
a part.
CLASSIFIED BOARD OF DIRECTORS. Under the Company's Bylaws, the Board of
Directors is classified into three classes, with the directors being elected for
staggered, three-year terms. The classification of the Company's Board of
Directors will have the effect of making it more difficult to change the
composition of the Board of Directors, because at least two annual meetings of
the shareholders would be required to change the control of the Board of
Directors rather than one. In addition, the Bylaws provide that directors may be
removed by the shareholders only for cause and that vacancies on the Board of
Directors may be filled by the remaining directors.
ADVANCE NOTICE OF SHAREHOLDER PROPOSALS AND NOMINATIONS. The Company's
Bylaws establish an advance notice procedure for shareholders to make
nominations of candidates for election as directors or bring other business
before any meeting of shareholders of the Company (the "Shareholder Notice
Procedure"). The Shareholder Notice Procedure provides that only persons who
are nominated by, or at the direction of, the Board, or by a shareholder who has
given timely written notice to the Secretary of the Company prior to the meeting
at which directors are to be elected, will be eligible for election as directors
of the Company and that, at a shareholders' meeting, only such business may be
conducted as has been brought before the meeting by, or at the direction of, the
Board of Directors or by a shareholder who has given timely written notice to
the Secretary of the Company of such shareholder's intention to bring such
business before such meeting.
Under the Shareholder Notice Procedure, for notice of shareholder
nominations or other business to be made at a shareholders' meeting to be
timely, such notice must be received by the Company not less than 60 days prior
to the meeting.
A shareholder's notice to the Company proposing to nominate a person for
election as a director or proposing other business must contain certain
information specified in the Bylaws, including the identity and address of the
nominating shareholder, a representation that the shareholder is a record holder
of stock of the Company entitled to vote at the meeting and information
regarding each proposed nominee or each
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proposed matter of business that would be required under the federal securities
laws to be included in a proxy statement soliciting proxies for the proposed
nominee or the proposed matter of business.
The Shareholder Notice Procedure may have the effect of precluding a
contest for the election of directors or the consideration of shareholder
proposals if the proper procedures are not followed, and of discouraging or
deterring a third party from conducting a solicitation of proxies to elect its
own slate of directors or to approve its own proposal, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to
the Company and its shareholders.
SPECIAL MEETINGS OF SHAREHOLDERS. The Articles of Incorporation provide
that special meetings of shareholders can be called by shareholders only at the
request of the holders of not less than one-half of the outstanding shares of
stock entitled to vote at the meeting.
REDUCED SHAREHOLDER VOTE REQUIRED FOR CERTAIN ACTIONS. The Company's
Articles of Incorporation provide that, notwithstanding any provision of the
TBCA that would require approval of more than a majority of the shares entitled
to vote on such matter and present or represented by proxy at the meeting, the
vote or approval of a majority of the shares of the Company's stock entitled to
vote on such matter will be sufficient to approve such matter. This provision
reduces the required shareholder approval level for certain actions such as a
merger, a consolidation, a share exchange, certain sales of substantially all of
the Company's assets, a dissolution or an amendment to the Company's Articles of
Incorporation, each of which would otherwise require two-thirds shareholder
approval under Texas law.
NO ACTION BY WRITTEN CONSENT WITHOUT UNANIMOUS WRITTEN CONSENT. Under the
TBCA, no action required or permitted to be taken at an annual or special
meeting of shareholders may be taken by written consent in lieu of a meeting of
shareholders without the unanimous written consent of all shareholders unless
the articles of incorporation specifically allow action by less than unanimous
consent. The Company's Articles of Incorporation do not contain such a
provision.
AMENDMENT OF BYLAWS. The Company's Bylaws provide that the Bylaws may be
amended only by the Board of Directors. Shareholders do not have the power to
amend the Company Bylaws.
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UNDERWRITING
Subject to the terms and conditions of the Purchase Agreement among the
Company, the Selling Shareholders and the Representatives on behalf of the
Underwriters, the Underwriters have agreed severally to purchase from the
Company and the Selling Shareholders the following respective number of shares
of Common Stock at the initial public offering price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus.
NAME NO. OF SHARES
- ------------------------------------- --------------
Keefe, Bruyette & Woods, Inc.........
Hoefer & Arnett, Incorporated........
--------------
Total...........................
==============
The Purchase Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all such shares of the Common Stock if any of such shares are
purchased. The Underwriters are obligated to take and pay for all of the shares
of Common Stock offered hereby (other than those covered by the over-allotment
option described below) if any are taken.
The Company has been advised by the Representatives that the Underwriters
propose to offer to such shares of Common Stock to the public at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share to certain other dealers. After the initial public
offering, the offering price and other selling terms may be changed by the
Underwriters.
Pursuant to the Purchase Agreement, the Company has granted to the
Underwriters an option, exercisable not later than 30 days after the date of
this Prospectus, to purchase up to 251,667 additional shares of Common Stock at
the public offering price, less the underwriting discounts and commissions set
forth on the cover page of this Prospectus, solely to cover over-allotments. To
the extent that the Underwriters exercise such option, the Underwriters will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional shares as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of shares in
such table, and the Company will be obligated, pursuant to the option, to sell
such shares to the Underwriters.
The Company, each of its directors and executive officers, each of the
Selling Shareholders and certain other shareholders of the Company have agreed
not to sell or otherwise dispose of any shares of Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent of
the Representatives. See "Risk Factors -- Shares Eligible for Future Sale."
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
Until the distribution of the Common Stock is completed, rules of the
Commission (as defined herein) may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., if they sell a greater aggregate number of
shares of Common Stock than is set forth on the cover page of this Prospectus,
the Underwriters may reduce the short position by purchasing shares of Common
Stock in the
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open market. The Underwriters may also elect to reduce any short position by
exercising all or part of the over-allotment option described above.
The Underwriters may also impose a penalty bid on certain selling group
members. This means that if the Underwriters purchase Common Stock in the open
market to reduce the selling group members' short position or to stabilize the
price of the Common Stock, they may reclaim the amount of the selling concession
from the selling group members who sold those shares of Common Stock as part of
the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor the Representatives make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor the Representatives make any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Underwriters and dealers may engage in passive market making
transactions in the shares of Common Stock in accordance with Rule 103 of
Regulation M promulgated by the Commission. In general, a passive market maker
may not bid for, or purchase, shares of Common Stock at a price that exceeds the
highest independent bid. In addition, the net daily purchases made by any
passive market maker generally may not exceed 30% of its average daily trading
volume in the Common Stock during a specified two month prior period, or 200
shares, whichever is greater. A passive market maker must identify passive
market making bids as such on the Nasdaq electronic inter-dealer reporting
system. Passive market making may stabilize or maintain the market price of the
Common Stock above independent market levels. Underwriters and dealers are not
required to engage in passive market making and may end passive market making
activities at any time.
Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock has
been determined by negotiations between the Company and the Representatives.
Among the factors considered in such negotiations were prevailing market and
general economic conditions, the market capitalizations, trading histories and
stages of development of other traded companies that the Company and the
Representatives believed to be comparable to the Company, the results of
operations of the Company in recent periods, the current financial position of
the Company, estimates of the business potential of the Company and the present
state of the Company's development and the availability for sale in the market
of a significant number of shares of Common Stock. Additionally, consideration
has been given to the general status of the securities market, the market
conditions for new issues of securities and the demand for securities of
comparable companies at the time the Offering was made.
Application has been made for quotation of the Common Stock on the
Nasdaq/National Market.
LEGAL MATTERS
The validity of the shares of Common Stock to be issued by the Company will
be passed upon by Bracewell & Patterson, L.L.P., Houston, Texas. Certain legal
matters with respect to the Common Stock offered hereby will be passed upon for
the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New
York.
69
<PAGE>
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1997 and
1996 and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997, included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein, and are
included in reliance upon the reports of such firm, given upon their authority
as experts in accounting and auditing.
The statements of condition of Union as of December 31, 1997 and 1996 and
the related statements of income, changes in shareholders' equity and cash flows
for each of the two years in the period ended December 31, 1997 included in this
Prospectus have been audited by Harper & Pearson Company, independent auditors,
as stated in their reports appearing herein, and are included in reliance upon
the reports of such firm, given upon their authority as experts in accounting
and auditing.
AVAILABLE INFORMATION
The Company has not previously been subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended. The Company has filed with
the Securities and Exchange Commission (the "Commission") a Registration
Statement on Form S-1 (the "Registration Statement") under the Securities Act,
with respect to the offer and sale of Common Stock pursuant to this Prospectus.
This Prospectus, filed as a part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement or the exhibits
and schedules thereto in accordance with the rules and regulations of the
Commission and reference is hereby made to such omitted information. Statements
made in this Prospectus concerning the contents of any contract, agreement or
other document filed as an exhibit to the Registration Statement are summaries
of the terms of such contracts, agreements or documents and are not necessarily
complete. Reference is made to each such exhibit for a more complete description
of the matters involved and such statements shall be deemed qualified in their
entirety by such reference. The Registration Statement and the exhibits and
schedules thereto filed with the Commission may be inspected, without charge,
and copies may be obtained at prescribed rates, at the public reference facility
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located at
7 World Trade Center, 13th Floor, New York, New York 10048 and CitiCorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60621-2511. For further
information pertaining to the Common Stock offered by this Prospectus and the
Company, reference is made to the Registration Statement. The Registration
Statement and other information filed by the Company with the Commission are
also available at the Commission's World Wide Web site on the Internet at
http://www.sec.gov.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements certified by independent auditors and
quarterly reports containing unaudited financial statements for the first three
quarters of each fiscal year.
70
<PAGE>
TABLE OF CONTENTS TO FINANCIAL STATEMENTS
PAGE
----
PROSPERITY BANCSHARES, INC.
Report of Independent Auditors..... F-2
Consolidated Balance Sheet as of
June 30, 1998 (Unaudited) and
December 31, 1997 and 1996....... F-3
Consolidated Statement of Income
for the Six Months Ended June 30,
1998 (Unaudited) and June 30, 1997
(Unaudited) and for the Years
Ended December 31, 1997, 1996
and 1995......................... F-4
Consolidated Statement of Changes
in Shareholders' Equity for the
Years Ended December 31, 1997,
1996 and 1995 and for the Six
Months Ended
June 30, 1998 (Unaudited)........ F-5
Consolidated Statement of Cash
Flows for the Six Months Ended
June 30, 1998 (Unaudited) and June
30, 1997 (Unaudited) and for the
Years Ended
December 31, 1997, 1996 and
1995.............................. F-6
Notes to Consolidated Financial
Statements........................ F-8
UNION STATE BANK
Independent Auditor's Report....... F-27
Statements of Condition as of June
30, 1997 and 1996 (Unaudited)..... F-28
Statements of Condition as of
December 31, 1997 and 1996........ F-29
Statements of Income for the Six
Months Ended June 30, 1998 and
1997 (Unaudited).................. F-30
Statements of Income for the Years
Ended December 31, 1997 and
1996.............................. F-31
Statements of Changes in
Shareholders' Equity for the Six
Months Ended June 30, 1998 and
1997 (Unaudited).................. F-32
Statements of Changes in
Shareholders' Equity for the Years
Ended December 31, 1997 and
1996.............................. F-33
Statements of Cash Flows for the
Six Months Ended June 30, 1998 and
1997 (Unaudited).................. F-34
Statements of Cash Flows for the
Years Ended December 31, 1997 and
1996.............................. F-35
Notes to Financial Statements for
the Years Ended December 31, 1997
and 1996.......................... F-36
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
Prosperity Bancshares, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Prosperity
Bancshares, Inc. and subsidiaries (collectively, the "Company") as of December
31, 1997 and 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion such consolidated financial statements present fairly, in
all material respects, the financial position of Prosperity Bancshares, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
January 23, 1998 (except
for Note 23 as to which the
date is September 10, 1998)
Houston, Texas
F-2
<PAGE>
PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------------
1998 1997 1996
--------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks (Note 3)........ $ 13,054,238 $ 17,372,158 $ 15,954,319
Federal funds sold...................... 7,875,000 5,790,000
--------------- --------------- ---------------
Total cash and cash
equivalents................ 20,929,238 17,372,158 21,744,319
Interest-bearing deposits in financial
institutions.......................... 99,000 198,000 396,000
Available for sale securities, at fair
value (amortized cost of $44,779,100
(unaudited), $38,650,389 and
$49,372,925, respectively) (Note 4)... 44,744,151 38,612,395 49,341,523
Held to maturity securities, at cost
(fair value of $114,105,268
(unaudited), $129,774,737 and
$97,659,201, respectively) (Note 4)... 113,941,104 129,256,453 98,222,352
Loans (Notes 5 and 6)................... 141,079,572 120,577,987 113,382,477
Less allowance for credit losses (Note
7).................................... (1,113,713) (1,015,576) (922,833)
--------------- --------------- ---------------
Loans, net.................... 139,965,859 119,562,411 112,459,644
Accrued interest receivable............. 3,003,004 2,500,976 2,204,402
Goodwill, net of accumulated
amortization of $2,811,310
(unaudited), $2,576,686 and
$2,175,167, respectively.............. 5,658,789 5,643,413 4,054,818
Bank premises and equipment, net (Note
8).................................... 5,451,855 5,529,664 4,500,146
Other assets............................ 1,629,212 1,467,612 1,065,249
--------------- --------------- ---------------
TOTAL................................... $ 335,422,212 $ 320,143,082 $ 293,988,453
=============== =============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits (Note 9):
Noninterest-bearing................ $ 68,563,414 $ 61,447,143 $ 55,180,183
Interest-bearing................... 239,251,963 230,069,769 215,686,187
--------------- --------------- ---------------
Total deposits................ 307,815,377 291,516,912 270,866,370
Note payable (Note 10)................ 3,266,666
Other borrowings (Note 10)............ 2,800,000
Accrued interest payable.............. 724,784 708,494 688,139
Other liabilities..................... 404,232 300,079 333,966
--------------- --------------- ---------------
Total liabilities............. 308,944,393 295,325,485 275,155,141
COMMITMENTS AND CONTINGENCIES
(Notes 12 and 16)
SHAREHOLDERS' EQUITY (Notes 14, 17, 18
and 22):
Common stock, $1 par value; 50,000,000
shares authorized; 3,993,884
(unaudited), 3,993,884 and
3,513,884 shares issued at June 30,
1998, December 31, 1997 and 1996,
respectively; 3,990,308
(unaudited), 3,990,308 and
3,510,148 shares outstanding at
June 30, 1998, December 31, 1997
and 1996, respectively............. 3,993,884 3,993,884 3,513,884
Capital surplus....................... 4,817,782 4,817,782 2,297,602
Retained earnings..................... 17,707,546 16,049,334 13,061,698
Accumulated other comprehensive
income -- net unrealized losses on
available for sale investment
securities, net of tax of $11,883
(unaudited), $12,919 and $10,677,
respectively....................... (23,066) (25,076) (20,725)
Less treasury stock, at cost 3,576
(unaudited), 3,576 and 3,736
shares, respectively............... (18,327) (18,327) (19,147)
--------------- --------------- ---------------
Total shareholders' equity.... 26,477,819 24,817,597 18,833,312
--------------- --------------- ---------------
TOTAL................................... $ 335,422,212 $ 320,143,082 $ 293,988,453
=============== =============== ===============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE YEARS ENDED
JUNE 30, DECEMBER 31,
-------------------------- ------------------------------------------
1998 1997 1997 1996 1995
------------ ------------ -------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees.............. $ 5,568,210 $ 4,953,742 $ 10,205,405 $ 9,136,451 $ 7,203,450
Investment securities:
Taxable......................... 4,876,213 4,228,118 8,950,157 6,647,877 6,241,258
Nontaxable...................... 295,080 325,640 604,968 723,285 850,410
Federal funds sold................. 126,531 115,523 193,300 309,396 428,161
Deposits in financial
institutions.................... 4,635 9,161 15,842 23,990 14,682
------------ ------------ -------------- ------------ ------------
Total interest income......... 10,870,669 9,632,184 19,969,672 16,840,999 14,737,961
------------ ------------ -------------- ------------ ------------
INTEREST EXPENSE:
Deposits........................... 4,646,711 4,312,058 8,858,172 7,719,880 6,749,468
Note payable and federal funds
purchased....................... 66,638 49,398 132,106 203,204 154,776
Other.............................. 1,414 91,809 69,566
------------ ------------ -------------- ------------ ------------
Total interest expense........ 4,714,763 4,453,265 9,059,844 7,923,084 6,904,244
------------ ------------ -------------- ------------ ------------
NET INTEREST INCOME.................. 6,155,906 5,178,919 10,909,828 8,917,915 7,833,717
PROVISION FOR CREDIT LOSSES (Note
7)................................. 144,500 104,970 189,970 230,000 175,000
------------ ------------ -------------- ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES.................. 6,011,406 5,073,949 10,719,858 8,687,915 7,658,717
------------ ------------ -------------- ------------ ------------
NONINTEREST INCOME:
Customer service fees.............. 1,135,887 918,678 2,061,799 1,742,200 1,391,196
Investment securities losses....... (28,424)
Other.............................. 103,485 91,013 202,239 155,298 126,193
------------ ------------ -------------- ------------ ------------
Total noninterest income...... 1,239,372 1,009,691 2,264,038 1,897,498 1,488,965
------------ ------------ -------------- ------------ ------------
NONINTEREST EXPENSE:
Salaries and employee benefits
(Note 15)....................... 2,144,627 1,900,744 3,967,508 3,414,553 3,040,540
Net occupancy expense.............. 426,514 377,394 810,717 710,400 608,26
Data processing.................... 369,246 290,532 641,813 493,257 387,499
Federal Deposit Insurance
Corporation assessment.......... 234,454
Goodwill amortization.............. 234,623 162,730 401,520 257,406 208,794
Depreciation expense............... 253,457 198,086 431,169 366,598 323,859
Other.............................. 856,235 737,533 1,582,807 1,392,024 1,241,855
------------ ------------ -------------- ------------ ------------
Total noninterest expense..... 4,254,702 3,667,019 7,835,534 6,634,238 6,045,526
------------ ------------ -------------- ------------ ------------
INCOME BEFORE INCOME TAXES........... 2,996,076 2,416,621 5,148,362 3,951,175 3,102,156
PROVISION FOR INCOME TAXES (Note
13)................................ 938,832 755,795 1,586,190 1,240,443 780,729
------------ ------------ -------------- ------------ ------------
NET INCOME........................... $ 2,057,244 $ 1,660,826 $ 3,562,172 $ 2,710,732 $ 2,321,427
============ ============ ============== ============ ============
EARNINGS PER SHARE
(Note 1):
Basic.............................. $ 0.52 $ 0.47 $ 0.94 $ 0.77 $ 0.66
============ ============ ============== ============ ============
Diluted............................ $ 0.50 $ 0.46 $ 0.92 $ 0.76 $ 0.66
============ ============ ============== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED OTHER
COMPREHENSIVE
INCOME --
NET UNREALIZED
LOSS ON
COMMON STOCK AVAILABLE FOR
--------------------- CAPITAL RETAINED SALE INVESTMENT
SHARES AMOUNT SURPLUS EARNINGS SECURITIES
-------- --------- --------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995........... 3,513,884 $3,513,884 $2,297,602 $8,732,315 $ (648,417)
Net income....................... 2,321,427
Accretion of unrealized loss.....
Unrealized loss on held to
maturity investment securities
transferred to available for
sale investments securities in
accordance with the FASB
one-time reassessment (Note
3)............................. (502,175)
Net change in unrealized loss on
available for sale investment
securities..................... 1,095,062
Total comprehensive income.......
Cash dividends declared, $0.10
per share...................... (351,388)
-------- --------- --------- ---------- ------------------
BALANCE AT DECEMBER 31, 1995......... 3,513,884 3,513,884 2,297,602 10,702,354 (55,530)
Net income....................... 2,710,732
Net change in unrealized loss on
available for sale investment
securities..................... 34,805
Total comprehensive income.......
Purchase of treasury stock.......
Cash dividends declared, $0.10
per share...................... (351,388)
-------- --------- --------- ---------- ------------------
BALANCE AT DECEMBER 31, 1996......... 3,513,884 3,513,884 2,297,602 13,061,698 (20,725)
Net income....................... 3,562,172
Net change in unrealized loss on
available for sale.............
Net change in unrealized loss on
available for sale investment
securities..................... (4,351)
Total comprehensive income.......
Sale of treasury stock........... 180
Issuance of common stock......... 480,000 480,000 2,520,000
Cash dividends declared, $0.15
per share...................... (574,536)
-------- --------- --------- ---------- ------------------
BALANCE AT DECEMBER 31, 1997......... 3,993,884 3,993,884 4,817,782 16,049,334 (25,076)
Net income (unaudited)........... 2,057,244
Net change in unrealized loss on
available for sale investment
securities (unaudited)......... 2,010
Total comprehensive income
(unaudited)....................
Cash dividends declared, $0.10
per share (unaudited).......... (399,032)
-------- --------- --------- ---------- ------------------
BALANCE AT JUNE 30, 1998
(UNAUDITED)........................ 3,993,884 $3,993,884 $4,817,782 $17,707,546 $ (23,066)
======== ========= ========= ========== ==================
</TABLE>
<TABLE>
<CAPTION>
NET UNREALIZED
LOSS ON HELD TO
MATURITY INVESTMENT
SECURITIES TOTAL
TRANSFERRED FROM TREASURY SHAREHOLDERS'
AVAILABLE FOR SALE STOCK EQUITY
-------------------- -------- -------------
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1995........... $ (512,407) $13,373,977
Net income....................... 2,321,427
Accretion of unrealized loss..... 19,232 19,232
Unrealized loss on held to
maturity investment securities
transferred to available for
sale investments securities in
accordance with the FASB
one-time reassessment (Note
3)............................. 502,175
Net change in unrealized loss on
available for sale investment
securities..................... 1,095,062
-------------
Total comprehensive income....... 3,435,721
Cash dividends declared, $0.10
per share...................... (351,388)
-------------------- -------- -------------
BALANCE AT DECEMBER 31, 1995......... 16,458,310
Net income....................... 2,710,732
Net change in unrealized loss on
available for sale investment
securities..................... 34,805
-------------
Total comprehensive income....... 2,745,537
Purchase of treasury stock....... $(19,147) (19,147)
Cash dividends declared, $0.10
per share...................... (351,388)
-------------------- -------- -------------
BALANCE AT DECEMBER 31, 1996......... (19,147 ) 18,833,312
Net income....................... 3,562,172
Net change in unrealized loss on
available for sale.............
Net change in unrealized loss on
available for sale investment
securities..................... (4,351)
-------------
Total comprehensive income....... 3,557,821
Sale of treasury stock........... 820 1,000
Issuance of common stock......... 3,000,000
Cash dividends declared, $0.15
per share...................... (574,536)
-------------------- -------- -------------
BALANCE AT DECEMBER 31, 1997......... (18,327 ) 24,817,597
Net income (unaudited)........... 2,057,244
Net change in unrealized loss on
available for sale investment
securities (unaudited)......... 2,010
-------------
Total comprehensive income
(unaudited).................... 2,059,244
Cash dividends declared, $0.10
per share (unaudited).......... (399,032)
-------------------- -------- -------------
BALANCE AT JUNE 30, 1998
(UNAUDITED)........................ $ $(18,327) $26,477,819
==================== ======== =============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE YEARS ENDED
JUNE 30, DECEMBER 31,
---------------------------- -------------------------------------------
1998 1997 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 2,057,244 $ 1,660,826 $ 3,562,172 $ 2,710,732 $ 2,321,427
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization.... 488,080 380,816 832,689 624,004 532,652
Provision for credit losses...... 144,500 104,970 189,970 230,000 175,000
Gain on disposal of bank premises
and equipment.................. (362) (2,032)
Net amortization (accretion) of
premium/discount on
investments.................... 78,717 135,264 340,156 284,992 (135,615)
Loss on sale of investment
securities..................... 28,424
Loss on sale of real estate
acquired by foreclosure........ 1,888 2,383 2,332
Increase in accrued interest
receivable..................... (502,028) (319,486) (296,574) (124,910) (441,971)
(Increase) decrease in other
assets......................... (161,600) (284,499) (396,589) (222,481) 662,993
(Decrease) increase in accrued
interest payable and other
liabilities.................... 92,968 164,843 (80,190) (137,708) 369,338
------------- ------------- ------------- ------------- -------------
Total adjustments.............. 142,525 161,908 591,845 653,535 1,191,121
------------- ------------- ------------- ------------- -------------
Net cash provided by operating
activities.................. 2,199,769 1,822,734 4,154,017 3,364,267 3,512,548
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and
principal paydowns of held to
maturity in investment
securities....................... 26,923,917 9,582,598 35,405,320 23,334,343 9,999,261
Purchase of held to maturity
investment securities............ (11,813,919) (26,965,495) (66,765,304) (39,744,846) (10,693,295)
Proceeds from sales of available
for sale investment securities... 21,892,501
Proceeds from maturities and
principal paydowns of available
for sale investment securities... 17,584,015 8,789,159 14,205,712 12,061,185 9,324,042
Purchase of available for sale
investment securities............ (23,586,091) (1,995,313) (3,497,451) (25,941,913) (25,894,641)
Net increase in loans.............. (20,485,851) (7,643,171) (7,481,819) (14,189,016) (12,357,605)
Net proceeds from sale of real
estate acquired by foreclosure... 186,699 106,882
Purchase of bank premises and
equipment........................ (175,647) (100,025) (742,949) (363,769) (741,934)
Proceeds from sale of bank premises
and equipment.................... 40,000 3,642 2,430
Net decrease (increase) in
interest-bearing deposits in
financial institutions........... 99,000 198,000 198,000 (198,000)
Premium paid for Angleton branch... (1,990,114) (1,990,114)
Net liabilities acquired in
purchase of Angleton branch (net
of acquired cash of $565,247).... 28,646,876 28,646,876
Premium paid for Bay City branch... (1,750,000)
Net liabilities acquired in
purchase of Bay City branch (net
of acquired cash of $492,210).... 27,541,971
Premium paid for West Columbia
branch........................... (250,000)
------------- ------------- ------------- ------------- -------------
Net liabilities acquired in
purchase of West Columbia branch
(net of acquired cash of
$5,548,318)...................... 5,798,318
Net cash (used in) provided by
investing activities........ (5,866,258) 8,522,516 (1,835,030) (19,246,403) (8,362,359)
------------- ------------- ------------- ------------- -------------
</TABLE>
(TABLE CONTINUED ON FOLLOWING PAGE)
F-6
<PAGE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE YEARS ENDED
JUNE 30, DECEMBER 31,
---------------------------- -------------------------------------------
1998 1997 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing
deposits......................... $ 6,892,880 $ (2,000,318) $ 1,209,964 $ 5,211,914 $ 1,785,696
Net (decrease) increase in
interest-bearing deposits........ 3,529,721 (8,403,089) (9,860,910) 12,455,035 5,205,012
Proceeds from line of credit....... 3,266,666
Repayments of note payable......... (2,402,017) (3,266,666) (1,156,666) (758,334)
Proceeds from other borrowings..... 283,860,000 144,525,000 296,585,000
Repayments of other borrowings..... (286,660,000) (144,525,000) (293,785,000)
Proceeds from the issuance of
common stock..................... 2,938,175 3,000,000
Purchase of treasury stock......... (19,147)
Sale of treasury stock............. 1,000
Payments of cash dividends......... (399,032) (175,505) (574,536) (351,388) (351,388)
------------- ------------- ------------- ------------- -------------
Net cash (used) provided by
financing activities........ 7,223,569 (10,042,754) (6,691,148) 19,046,414 5,880,986
------------- ------------- ------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS................... $ 3,557,080 $ 302,496 $ (4,372,161) $ 3,164,278 $ 1,031,175
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD.......................... 17,372,158 21,744,319 21,744,319 18,580,041 17,548,866
------------- ------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD............................. $ 20,929,238 $ 22,046,815 $ 17,372,158 $ 21,744,319 $ 18,580,041
============= ============= ============= ============= =============
INCOME TAXES PAID.................... $ 834,011 $ 725,000 $ 1,681,354 $ 1,111,805 $ 742,787
============= ============= ============= ============= =============
INTEREST PAID........................ $ 4,698,473 $ 4,335,396 $ 9,039,489 $ 7,849,375 $ 6,757,099
============= ============= ============= ============= =============
</TABLE>
NONCASH INVESTING ACTIVITIES:
The Company acquired certain real
estate through foreclosure of
collateral on loans totaling
approximately $189,082, $0, and
$94,000 during the year ended
December 31, 1997, 1996, and 1995,
respectively.
The Company transferred securities
classified as held to maturity with
a cost basis of $14,970,881 and a
carrying value of $14,210,010 to
available for sale during November
1995 in connection with the one
time reassessment permitted by the
FASB.
The Company transferred securities
classified as held to maturity with
a cost basis of $51,999,852 to
available for sale on January 1,
1995 in connection with the
adoption of SFAS No. 115.
See notes to consolidated financial statements.
F-7
<PAGE>
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES
NATURE OF OPERATIONS -- Prosperity Bancshares, Inc. ("Bancshares") and
its subsidiaries, Prosperity Holdings, Inc. ("Holdings") and First Prosperity
Bank (the "Bank") (collectively referred to as the "Company") provide retail
and commercial banking services.
The Bank operates eleven branch banking offices in South Central Texas,
with three locations in Houston and eight locations south, southeast and
southwest of Houston in Angleton, Bay City, Cuero, Edna, El Campo, West Columbia
and Victoria.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Bancshares and its wholly owned subsidiaries. All
significant intercompany transactions have been eliminated in consolidation. The
accounting and reporting policies of the Company conform to generally accepted
accounting principles ("GAAP") and the prevailing practices within the banking
industry. A summary of significant accounting and reporting policies is as
follows:
INTERIM FINANCIAL INFORMATION -- Financial information as of June 30, 1998
and for the six months ended June 30, 1998 and 1997 is unaudited. Such
information includes all adjustments (consisting of only normal recurring
adjustments), that are necessary in the opinion of management, for a fair
statement of the financial information in the interim periods. The results from
operations for the periods ended June 30, 1998 is not necessarily indicative of
the results for the full fiscal year.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
SECURITIES -- Investment securities held to maturity are carried at cost,
adjusted for the amortization of premiums and the accretion of discounts.
Management has the positive intent and the Company has the ability to hold these
assets as long-term investments until their estimated maturities. Under certain
circumstances (including the deterioration of the issuer's creditworthiness or a
change in tax law or statutory or regulatory requirements), securities may be
sold or transferred to another portfolio.
Securities available for sale are carried at fair value. Unrealized gains
and losses are excluded from earnings and reported, net of tax, as a separate
component of shareholders' equity until realized. Securities within the
available for sale portfolio may be used as part of the Company's
asset/liability strategy and may be sold in response to changes in interest
risk, prepayment risk or other similar economic factors.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary
would result in write-downs of the individual securities to their fair value.
The related write-downs would be included in earnings as realized losses.
Premiums and discounts are amortized and accreted to operations using the
level-yield method of accounting, adjusted for prepayments as applicable. The
specific identification method of accounting is used to compute gains or losses
on the sales of these assets. Interest earned on these assets is included in
interest income.
LOANS -- Loans are stated at the principal amount outstanding, net of
unearned discount and fees. Unearned discount relates principally to consumer
installment loans. The related interest income for multipayment loans is
recognized principally by the "sum of the digits" method which records
interest in proportion to the declining outstanding balances of the loans; for
single payment loans, such income is recognized using the straight-line method.
F-8
<PAGE>
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan -- Income Recognition and Disclosure." SFAS No. 114
applies to all impaired loans, with the exception of groups of smaller-balance
homogeneous loans that are collectively evaluated for impairment. A loan is
defined as impaired by SFAS No. 114 if, based on current information and events,
it is probable that a creditor will be unable to collect all amounts due, both
interest and principal, according to the contractual terms of the loan
agreement. Specifically, SFAS No. 114 requires that the allowance for credit
losses related to impaired loans be determined based on the difference of
carrying value of loans and the present value of expected cash flows discounted
at the loan's effective interest rate or, as a practical expedient, the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. Prior to the adoption of SFAS No. 114, the Company's
methodology for determining the adequacy of the allowance for credit losses did
not incorporate the concept of the time value of money and the expected future
interest cash flow.
As permitted by SFAS No. 118, interest revenue received on impaired loans
continues to be either applied against principal or realized as interest
revenue, according to management's judgment as to the collectibility of
principal. Adoption of these pronouncements, SFAS Nos. 114 and 118, had no
impact on the Company's consolidated financial statements including the level of
the allowance for credit losses.
OTHER REAL ESTATE -- Real estate properties acquired through, or in lieu
of, loan foreclosure are to be sold and are initially recorded at the lesser of
the outstanding loan balance or the fair value at the date of foreclosure
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of carrying
amount or fair value less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in the net gain/loss and
carrying costs of other real estate.
NONREFUNDABLE FEES AND COSTS ASSOCIATED WITH LENDING ACTIVITIES -- Loan
origination fees are recognized over the life of the related loan as an
adjustment to yield using the interest method.
Generally, loan commitment fees are deferred, except for certain
retrospectively determined fees, and recognized as an adjustment of yield by the
interest method over the related loan life or, if the commitment expires
unexercised, recognized in income upon expiration of the commitment.
NONPERFORMING LOANS AND PAST DUE LOANS -- Included in the nonperforming
loan category are loans which have been categorized by management as nonaccrual
because collection of interest is doubtful and loans which have been
restructured to provide a reduction in the interest rate or a deferral of
interest or principal payments. When the payment of principal or interest on a
loan is delinquent for 90 days, or earlier in some cases, the loan is placed on
nonaccrual status unless the loan is in the process of collection and the
underlying collateral fully supports the carrying value of the loan. If the
decision is made to continue accruing interest on the loan, periodic reviews are
made to confirm the accruing status of the loan. When a loan is placed on
nonaccrual status, interest accrued during the current year prior to the
judgment of uncollectibility is charged to operations. Interest accrued during
prior periods is charged to allowance for credit losses. Generally, any payments
received on nonaccrual loans are applied first to outstanding loan amounts and
next to the recovery of charged-off loan amounts. Any excess is treated as
recovery of lost interest.
Restructured loans are those loans on which concessions in terms have been
granted because of a borrower's financial difficulty. Interest is generally
accrued on such loans in accordance with the new terms.
ALLOWANCE FOR CREDIT LOSSES -- The allowance for credit losses is a
valuation allowance available for losses incurred on loans. All losses are
charged to the allowance when the loss actually occurs or when a
F-9
<PAGE>
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
determination is made that such a loss is probable. Recoveries are credited to
the allowance at the time of recovery.
Throughout the year, management estimates the probable level of losses to
determine whether the allowance for credit losses is adequate to absorb losses
in the existing portfolio. Based on these estimates, an amount is charged to the
provision for credit losses and credited to the allowance for credit losses in
order to adjust the allowance to a level determined to be adequate to absorb
losses.
Management's judgment as to the level of losses on existing loans involves
the consideration of current and anticipated economic conditions and their
potential effects on specific borrowers; an evaluation of the existing
relationships among loans, probable credit losses and the present level of the
allowance; results of examinations of the loan portfolio by regulatory agencies;
and management's internal review of the loan portfolio. In determining the
collectibility of certain loans, management also considers the fair value of any
underlying collateral. The amounts ultimately realized may differ from the
carrying value of these assets because of economic, operating or other
conditions beyond the Company's control.
Estimates of credit losses involve an exercise of judgment. While it is
possible that in the short term the Company may sustain losses which are
substantial in relation to the allowance for credit losses, it is the judgment
of management that the allowance for credit losses reflected in the consolidated
balance sheets is adequate to absorb probable losses that exist in the current
loan portfolio.
PREMISES AND EQUIPMENT -- Premises and equipment are carried at cost less
accumulated depreciation. Depreciation expense is computed principally using the
straight-line method over the estimated useful lives of the assets which range
from three to thirty years.
AMORTIZATION OF GOODWILL -- Goodwill is amortized using the straight-line
method over a period of 15 to 25 years. Goodwill is periodically assessed for
impairment.
INCOME TAXES -- Bancshares files a consolidated federal income tax return.
The Bank computes federal income taxes as if it filed a separate return and
remits to, or is reimbursed by, Bancshares based on the portion of taxes
currently due or refundable. Deferred tax assets and liabilities are recognized
for the estimated tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.
Realization of net deferred tax assets is dependent on generating
sufficient future taxable income. Although realization is not assured,
management believes it is more likely than not that all of the net deferred tax
assets will be realized. The amount of the net deferred tax asset considered
realizable, however, could be reduced in the short term if estimates of future
taxable income are reduced.
STOCK-BASED COMPENSATION -- The Company accounts for its employee stock
options using the intrinsic value-based method and makes pro forma disclosures
of net income and earnings per share using the fair value-based method (see Note
14).
STATEMENTS OF CASH FLOWS -- For purposes of reporting cash flows, cash and
cash equivalents include cash and due from banks as well as federal funds sold
that mature in three days or less.
RECLASSIFICATIONS -- Certain reclassifications have been made to 1997, 1996
and 1995 balances to conform to the current year presentation. All
reclassifications have been applied consistently for the periods presented.
EARNINGS PER SHARE -- SFAS No. 128, "Earnings per share," requires
presentation of basic and diluted earnings per share. Basic earnings per share
has been computed by dividing net income available to common shareholders by the
weighted average number of common shares outstanding for the reporting period.
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. Net income per common
F-10
<PAGE>
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
share for all periods presented has been calculated in accordance with SFAS 128.
Outstanding stock options issued by the Company represent the only dilutive
effect reflected in diluted weighted average shares.
The following table illustrates the computation of basic and diluted
earnings per share after effect of stock split (Note 22):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------------------------------- -------------------------------------------------
1998 1997 1997 1996 1995
----------------- ----------------- ----------------- ----------------- ---------
PER PER PER PER
SHARE SHARE SHARE SHARE
AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
--------- ------ --------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income........................... $2,057,244 $1,660,826 $3,562,172 $2,710,732 $2,321,427
Basic --
Weighted average shares
outstanding.................... 3,990,308 $0.52 3,564,216 $0.47 3,770,880 $0.94 3,513,260 $0.77 3,513,884
====== ====== ====== ======
Diluted:
Weighted average shares
outstanding.................... 3,990,308 3,564,216 3,777,880 3,513,260 3,513,884
Effect of dilutive securities --
options........................ 90,208 84,248 85,756 46,472 9,156
--------- --------- --------- --------- ---------
Total............................ $4,080,516 $0.50 $3,648,464 $0.46 $3,863,636 $0.92 $3,559,732 $0.76 $3,523,040
========= ====== ========= ====== ========= ====== ========= ====== =========
</TABLE>
PER
SHARE
AMOUNT
------
Net income...........................
Basic --
Weighted average shares
outstanding.................... $0.66
======
Diluted:
Weighted average shares
outstanding....................
Effect of dilutive securities --
options........................
Total............................ $0.66
======
RECENTLY ISSUED ACCOUNTING STANDARDS -- Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities" establishes accounting and reporting standards for
derivative instruments and requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. This statement is effective for periods beginning after June 15,
1999. Management believes the implementation of this pronouncement will not have
a material effect on the Company's financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes new standards for public companies to report
information about their operating segments, products and services, geographic
areas and major customers. The statement is effective for financial statements
issued for periods beginning after December 15, 1997. Management has not yet
determined what its reporting segments will be under SFAS No. 131.
2. ACQUISITION OF BRANCHES
ANGLETON BRANCH -- During March 1997, the Company entered into a purchase
and assumption agreement with another bank to purchase certain assets and to
assume certain deposit accounts and related accrued interest payable of a branch
located in Angleton, Texas. Effective June 20, 1997, the Company purchased
approximately $723,000 in real property and fixed assets and assumed deposits,
including unpaid accrued interest, totaling approximately $29,370,000.
In connection with the purchase, the Company paid a cash premium of
approximately $1,990,000. This premium was recorded as goodwill and will be
amortized on a straight-line basis over 15 years. The acquisition was partially
financed with proceeds from the common stock issuance (see Note 17).
The acquisition was accounted for using the purchase method of accounting.
Accordingly, the assets and liabilities of the acquired branch were recorded at
their fair values at the acquisition date.
BAY CITY BRANCH -- During March 1996, the Company entered into a purchase
and assumption agreement with another bank to purchase certain assets and to
assume certain deposit accounts and related accrued interest payable of a branch
located in Bay City, Texas. Effective June 21, 1996, the Company purchased
approximately $10,600,000 in loans and $680,000 in real property and fixed
assets and assumed deposits, including unpaid accrued interest, totaling
approximately $38,824,000.
F-11
<PAGE>
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the purchase, the Company paid a cash premium of
$1,750,000. This premium was recorded as goodwill and will be amortized on a
straight-line basis over 15 years. The acquisition was financed with proceeds
from a note payable to an unaffiliated bank (see Note 10).
The acquisition was accounted for using the purchase method of accounting.
Accordingly, the assets and liabilities of the acquired branch were recorded at
their fair values at the acquisition date.
3. CASH AND DUE FROM BANKS
The Bank is required by the Federal Reserve Bank to maintain average
reserve balances. "Cash and due from banks" in the consolidated balance sheets
includes amounts so restricted of approximately $2,980,000, $5,849,000 and
$5,300,000 at June 30, 1998 (unaudited) and December 31, 1997 and 1996,
respectively.
4. INVESTMENT SECURITIES
The amortized cost and fair value of investments in debt securities are as
follows:
<TABLE>
<CAPTION>
JUNE 30, 1998 (UNAUDITED)
-----------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
--------------- ---------- ---------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury securities and
obligations of U.S. government
agencies........................... $ 27,583,488 $ 27,053 $ 19,700 $ 27,590,823 $ 27,590,823
States and political subdivisions.... 1,263,712 75,612 1,339,324 1,339,324
Mortgage-backed securities........... 15,931,900 40,558 158,454 15,815,004 15,814,004
--------------- ---------- ---------- --------------- ---------------
Total................................ $ 44,779,100 $ 143,205 $ 178,154 $ 44,744,151 $ 44,744,151
=============== ========== ========== =============== ===============
HELD TO MATURITY
U.S. Treasury securities and
obligations of U.S. government
agencies........................... $ 59,467,478 $ 292,615 $ 21,904 $ 59,738,189 $ 59,467,478
States and political subdivisions.... 12,514,684 72,228 39,260 12,547,652 12,514,684
Collateralized mortgage
obligations........................ 5,632,377 12,079 5,620,298 5,632,377
Mortgage-backed securities........... 36,326,565 66,440 193,876 36,199,129 36,326,565
--------------- ---------- ---------- --------------- ---------------
Total................................ $ 113,941,104 $ 431,283 $ 267,119 $ 114,105,268 $ 113,941,104
=============== ========== ========== =============== ===============
</TABLE>
F-12
<PAGE>
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
--------------- ---------- ---------- --------------- ---------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury securities and
obligations of U.S. government
agencies........................... $ 19,988,186 $ 56,500 $ 20,044,686 $ 20,044,686
States and political subdivisions.... 1,363,584 101,972 1,465,556 1,465,556
Mortgage-backed securities........... 17,298,619 61,928 $ 258,394 17,102,153 17,102,153
--------------- ---------- ---------- --------------- ---------------
Total................................ $ 38,650,389 $ 220,400 $ 258,394 $ 38,612,395 $ 38,612,395
=============== ========== ========== =============== ===============
HELD TO MATURITY
U.S. Treasury securities and
obligations of U.S. government
agencies........................... $ 63,171,223 $ 224,781 $ 20,836 $ 63,395,168 $ 63,171,223
States and political subdivisions.... 10,464,979 141,304 754 10,605,529 10,464,979
Collateralized mortgage
obligations........................ 8,748,951 18,729 14,852 8,752,828 8,748,951
Mortgage-backed securities........... 46,871,300 372,485 222,573 47,021,212 46,871,300
--------------- ---------- ---------- --------------- ---------------
Total................................ $ 129,256,453 $ 777,299 $ 259,015 $ 129,774,737 $ 129,256,453
=============== ========== ========== =============== ===============
DECEMBER 31, 1996
---------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
----------- ---------- ---------- ----------- -----------
AVAILABLE FOR SALE
U.S. Treasury securities and
obligations of U.S. government
agencies........................... $29,979,702 $ 127,534 $30,107,236 $30,107,236
States and political subdivisions.... 1,441,325 105,576 $ 345 1,546,556 1,546,556
Mortgage-backed securities........... 17,951,898 42,808 306,975 17,687,731 17,687,731
----------- ---------- ---------- ----------- -----------
Total................................ $49,372,925 $ 275,918 $ 307,320 $49,341,523 $49,341,523
=========== ========== ========== =========== ===========
HELD TO MATURITY
U.S. Treasury securities and
obligations of U.S. government
agencies........................... $30,849,828 $ 120,934 $ 121,381 $30,849,381 $30,849,828
States and political subdivisions.... 11,601,438 172,603 17,934 11,756,107 11,601,438
Collateral mortgage obligations...... 14,340,845 397 103,724 14,237,518 14,340,845
Mortgage-backed securities........... 41,430,241 90,859 704,905 40,816,195 41,430,241
----------- ---------- ---------- ----------- -----------
Total................................ $98,222,352 $ 384,793 $ 947,944 $97,659,201 $98,222,352
=========== ========== ========== =========== ===========
</TABLE>
F-13
<PAGE>
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and fair value of debt securities 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.
<TABLE>
<CAPTION>
HELD TO MATURITY AVAILABLE FOR SALE
---------------------------- --------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less.............. $ 14,205,605 $ 14,222,315 $18,090,971 $18,138,915
Due after one year through five
years.............................. 55,875,860 58,187,772 1,997,215 2,005,924
Due after five years through ten
years.............................. 3,554,737 1,590,610 891,197 957,512
Due after ten years.................. 372,387 407,891
------------ ------------ ----------- -----------
Subtotal............................. 73,636,202 74,000,697 21,351,770 21,510,242
Mortgage-backed securities and
collateralized mortgage
obligations........................ 55,620,251 55,774,040 17,298,619 17,102,153
------------ ------------ ----------- -----------
Total................................ $129,256,453 $129,774,737 $38,650,389 $38,612,395
============ ============ =========== ===========
</TABLE>
There were no sales of held to maturity or available for sale investments
in debt securities during 1998 (unaudited), 1997 and 1996. In 1995, there were
no sales of held to maturity investments in debt securities. During 1995,
proceeds from sales of available for sale investments in debt securities were
$21,892,501. Gross gains of $140,330 and gross losses of $168,754 for 1995, were
realized on those sales.
The Company does not own securities of any one issuer (other than the U.S.
government and its agencies) for which aggregate adjusted cost exceeds 10% of
the consolidated shareholders' equity at June 30, 1998 (unaudited) and December
31, 1997. Securities with amortized costs of approximately $58,104,387,
$61,303,319 and $66,267,494 and a fair value of approximately $58,032,496,
$61,146,428 and $65,456,055 at June 30, 1998 (unaudited) and December 31, 1997
and 1996, respectively, were pledged to secure public deposits and for other
purposes required or permitted by law.
5. LOANS
The loan portfolio consists of various types of loans made principally to
borrowers located in Southeast Texas and is classified by major type as follows
(rounded):
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------------
1998 1997 1996
------------ --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Commercial and industrial............ $ 12,297,000 $ 11,611,000 $ 10,633,000
Real estate:
Construction and land
development..................... 9,439,000 6,453,000 5,021,000
I-4 family residential............. 69,328,000 53,625,000 49,845,000
Commercial mortgages............... 16,201,000 16,277,000 14,376,000
Farmland........................... 5,502,000 5,804,000 5,468,000
Multi-family residential........... 1,192,000 937,000 1,068,000
Agriculture.......................... 8,444,000 6,359,000 5,686,000
Consumer............................. 19,502,000 20,498,000 22,561,000
------------ --------------- ---------------
Total................................ 141,905,000 121,564,000 114,658,000
Less unearned discount............... 825,000 986,000 1,276,000
------------ --------------- ---------------
Total................................ $141,080,000 $ 120,578,000 $ 113,382,000
============ =============== ===============
</TABLE>
F-14
<PAGE>
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As discussed in Note 1, the Bank adopted SFAS No. 114 and 118 effective
January 1, 1995. Adoption of these statements had no impact on the Company's
financial statements including the level of the allowance for credit losses.
Instead, it resulted only in a reallocation of the existing allowance for credit
losses.
At June 30, 1998 (unaudited) and December 31, 1997 and 1996, there was no
recorded investment in impaired loans under SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan." At December 31, 1995, the recorded
investment in impaired loans under SFAS No. 114 was approximately $23,000 and
required an allowance for credit losses of approximately $5,000. The average
recorded investment in impaired loans for the year ended December 31, 1995 was
approximately $19,000. The Company recognized interest revenue on these impaired
loans of approximately $3,000 in 1995.
As of June 30, 1998 (unaudited) and December 31, 1997 and 1996, loans
outstanding to directors, officers and their affiliates were approximately
$3,036,000, $2,432,000 and $3,210,000, respectively. In the opinion of
management, all transactions entered into between the Company and such related
parties have been, and are, in the ordinary course of business, made on the same
terms and conditions as similar transactions with unaffiliated persons.
An analysis of activity with respect to these related-party loans is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
SIX MONTHS ENDED ------------------------------
JUNE 30, 1998 1997 1996
---------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Beginning balance.................... $2,432,000 $ 3,210,000 $ 3,046,000
New loans and reclassified related
loans.............................. 1,476,000 1,045,000 1,262,000
Repayments........................... (872,000) (1,823,000) (1,098,000)
---------------- -------------- --------------
Ending balance....................... $3,036,000 $ 2,432,000 $ 3,210,000
================ ============== ==============
</TABLE>
6. NONPERFORMING LOANS AND PAST DUE LOANS
The Company had no nonaccrual, 90 days or more past due, or restructured
loans at June 30, 1998 (unaudited), December 31, 1997 or 1996.
7. ALLOWANCE FOR CREDIT LOSSES
An analysis of activity in the allowance for credit losses is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------------ ------------------------------------
1998 1997 1997 1996 1995
------------ ---------- ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year......... $ 1,015,576 $ 922,833 $ 922,833 $ 752,972 $ 588,321
Addition -- provision charged to
operations.................... 144,500 104,970 189,970 230,000 175,000
Net charge-offs:
Loans charged off.......... (54,777) (87,226) (130,086) (73,360) (32,206)
Loan recoveries............ 8,414 15,567 32,859 13,221 21,857
------------ ---------- ------------ ---------- ----------
Total net charge-offs................ (46,363) (71,659) (97,227) (60,139) (10,349)
------------ ---------- ------------ ---------- ----------
Balance at end of period............. $ 1,113,713 $ 956,144 $ 1,015,576 $ 922,833 $ 752,972
============ ========== ============ ========== ==========
</TABLE>
F-15
<PAGE>
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
YEAR ENDED
DECEMBER 31,
JUNE 30, --------------------------
1998 1997 1996
----------- ------------ ------------
(UNAUDITED)
Land................................. $ 934,559 $ 934,559 $ 624,858
Buildings............................ 5,180,418 4,766,007 4,322,046
Furniture, fixtures and equipment.... 2,258,240 2,164,222 1,868,563
Construction in progress............. 16,439 388,269 12,719
----------- ------------ ------------
Total................................ 8,389,656 8,253,057 6,828,186
Less accumulated depreciation........ 2,937,801 2,723,393 2,328,040
----------- ------------ ------------
Premises and equipment, net.......... $ 5,451,855 $ 5,529,664 $ 4,500,146
=========== ============ ============
9. DEPOSITS
Included in interest-bearing deposits are certificates of deposit in
amounts of $100,000 or more. These certificates and their remaining maturities
at June 30, 1998 and December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------------
1998 1997 1996
------------ -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Three months or less................. $ 11,888,000 $ 1,567,000 $ 12,570,000
Greater than three through six
months............................. 5,734,000 3,370,000 8,320,000
Greater than six through twelve
months............................. 11,130,000 11,992,000 5,669,000
Thereafter........................... 3,199,000 6,226,000 3,504,000
------------ -------------- --------------
Total................................ $ 31,951,000 $ 23,155,000 $ 30,063,000
============ ============== ==============
</TABLE>
Interest expense for certificates of deposit in excess of $100,000 was
approximately $593,000, $1,264,000, $1,291,000, and $1,247,000 for the periods
ended June 30, 1998 (unaudited), December 31, 1997, 1996, and 1995,
respectively.
The Company has no brokered deposits and there are no major concentrations
of deposits.
10. NOTE PAYABLE AND OTHER BORROWINGS
NOTE PAYABLE -- During December 1997, Bancshares entered into an agreement
with a bank to borrow up to $8,000,000 under a reducing, revolving line of
credit (the "Line"). The purpose of the Line is to provide funding for
potential acquisitions in the future. The maximum amount available under the
Line is reduced by $1,142,857 each year beginning December 1998 with all amounts
due and payable on December 31, 2004. The Line bears interest, payable
quarterly, at the Federal Funds Rate plus 2.75%. The Line is collateralized by
100% of the issued and outstanding common shares of Holdings and the Bank. At
June 30, 1998 (unaudited) and December 31, 1997, Bancshares had no outstanding
borrowings under the Line. During 1997, Bancshares paid off the outstanding
balance under a similar agreement (the "Old Line") with a bank. At December
31, 1996, borrowings under the Old Line totaled $3,266,666.
OTHER BORROWINGS -- At December 31, 1997, Federal Home Loan Bank ("FHLB")
advances totaled $2,800,000 with a floating interest rate of 6.9%. There were no
advances at June 30, 1998 (unaudited) or
F-16
<PAGE>
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1996. The FHLB line of credit agreement matures May 14, 1999. The
advances under the FHLB line of credit are secured by a blanket pledge of the
Bank's one-to-four family mortgages.
11. INTEREST RATE RISK
The Company is principally engaged in providing real estate, consumer and
commercial loans, with interest rates that are both fixed and variable. These
loans are primarily funded through short-term demand deposits and longer-term
certificates of deposit with variable and fixed rates. The fixed real estate
loans are more sensitive to interest rate risk because of their fixed rates and
longer maturities.
12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, the Company is a party to various
financial instruments with off-balance-sheet risk 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. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amounts recognized in the
consolidated balance sheets. The contract or notional amounts of these
instruments reflect the extent of the Company's involvement in particular
classes of financial instruments.
The Company'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 amount of those
instruments. The Company uses the same credit policies in making these
commitments and conditional obligations as it does for on-balance-sheet
instruments.
The following is a summary of the various financial instruments entered
into by the Company:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------------
1998 1997 1996
------------ -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit.... $ 10,348,000 $ 11,856,158 $ 11,660,000
Standby letters of credit....... 279,000 315,200 45,000
</TABLE>
At June 30, 1998 (unaudited), approximately $3,900,000 of commitments to
extend credit have fixed rates ranging from 6.60% to 11.50%. 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
fully drawn upon, the total commitment amounts disclosed above do not
necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
The Company evaluates customer creditworthiness on a case-by-case basis.
The amount of collateral obtained, if considered necessary by the Company upon
extension of credit, is based on management's credit evaluation of the customer.
F-17
<PAGE>
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. INCOME TAXES
The components of the provision for federal income taxes are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
------------ ------------ ----------
Current.............................. $ 1,634,000 $ 1,340,000 $ 686,000
Deferred............................. (48,000) (100,000) 95,000
------------ ------------ ----------
Total................................ $ 1,586,000 $ 1,240,000 $ 781,000
============ ============ ==========
The provision for federal income taxes differs from the amount computed by
applying the federal income tax statutory rate on income as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Taxes calculated at statutory rate... $ 1,750,000 $ 1,343,000 $ 1,055,000
Increase (decrease) resulting from:
Tax-exempt interest............. (251,000) (258,000) (295,000)
Amortization of goodwill........ 57,000 57,000 50,000
Other, net...................... 30,000 98,000 (29,000)
------------ ------------ ------------
Total................................ $ 1,586,000 $ 1,240,000 $ 781,000
============ ============ ============
Deferred tax assets and liabilities are as follows:
DECEMBER 31,
----------------------
1997 1996
---------- ----------
Deferred tax assets --
Allowance for credit losses..... $ 225,000 $ 194,000
---------- ----------
Total deferred tax assets............ 225,000 194,000
---------- ----------
Deferred tax liabilities:
Accretion on investments........ $ 189,000 $ 162,000
Bank premises and equipment..... 24,000 71,000
Unrealized loss on available for
sale investment securities.... 13,000 11,000
Other........................... 7,000 4,000
---------- ----------
Total deferred tax liabilities....... 233,000 248,000
---------- ----------
Net deferred tax liabilities......... $ (8,000) $ (54,000)
========== ==========
14. STOCK INCENTIVE PROGRAM
During 1995 the Company's Board of Directors approved a stock option plan
(the "Plan") for executive officers and key employees to purchase common stock
of Bancshares. On May 31, 1995, the Company granted 260,000 options, after stock
split, (see Note 22) which vest over a ten-year period beginning on the date of
grant. Fifty percent of the options vest after the five year period and ten
percent vest in each year thereafter. The options may not be exercised until the
optionee has completed five years of employment after the date of grant. The
options were granted at an average exercise price of $4.40 (after stock split).
Compensation expense was not recognized for the stock options because the
options had an
F-18
<PAGE>
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exercise price approximating the fair value of Bancshares' common stock at the
date of grant. The maximum number of options available for grant under the Plan
is 340,000 (after stock split).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
JUNE 30, 1998 1997 1996 1995
---------------------- ---------------------- ---------------------- ---------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE NUMBER
OF EXERCISE OF EXERCISE OF EXERCISE OF
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS
--------- ---------- --------- ---------- --------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of
period............................. 260,000 $ 4.40 260,000 $ 4.40 260,000 $ 4.40
Options granted...................... 60,000 6.25 260,000
--------- ---------- --------- ---------- --------- ---------- ---------
Options outstanding, end of period... 320,000 $ 4.75 260,000 $ 4.40 260,000 $ 4.40 260,000
========= ========== ========= ========== ========= ========== =========
</TABLE>
WEIGHTED-
AVERAGE
EXERCISE
PRICE
----------
Options outstanding, beginning of
period.............................
Options granted...................... $ 4.40
----------
Options outstanding, end of period... $ 4.40
==========
There were no options granted, exercised, forfeited, or expired during 1997
and 1996. At June 30, 1998 (unaudited) and December 31, 1997 and 1996, there
were no options that were exercisable under the Plan. On February 10, 1998, the
Company granted 60,000 options under the Plan. The options were granted at an
exercise price of $6.25. Compensation expense was not recorded for the stock
options because the exercise price approximated the fair value of common stock
at the date of grant.
The weighted-average grant date fair value of the stock options granted in
1995 was $.39. The weighted-average remaining contractual life of options
outstanding at December 31, 1997 was 7.42 years. The fair value of each stock
option was estimated using an option-pricing model with the following
assumptions used: risk-free interest rate of 6.49%; dividend yield of 4.54%; and
an expected life of 6.5 years.
If compensation expense had been recorded based on the fair value at the
grant date for awards consistent with SFAS No. 123, the Company's net income
would have been $2,052,660, $3,555,480, $2,704,040 and $2,317,522 and earnings
per share would have been $.53, $.94, $.77 and $.66 for the six months ended
June 30, 1998 (unaudited) and the years ended December 31, 1997, 1996 and 1995,
respectively.
15. PROFIT SHARING PLAN
The Company has adopted a profit sharing plan pursuant to Section 401(k) of
the Internal Revenue Code whereby participants may contribute up to 15% of their
compensation. Matching contributions are made at the discretion of the Company.
Such matching contributions were approximately $48,000, $38,000, $87,000,
$72,000 and $56,000 for the six months ended June 30, 1998 (unaudited) and 1997
(unaudited) and the years ended December 31, 1997, 1996, and 1995, respectively.
16. COMMITMENTS AND CONTINGENCIES
LEASES -- A summary of noncancelable future operating lease commitments as
of December 31, 1997 follows:
1998................................. $ 189,606
1999................................. 102,214
2000................................. 50,821
2001................................. 50,821
2002................................. 50,821
----------
Total................................ $ 444,283
==========
F-19
<PAGE>
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
It is expected that in the normal course of business, expiring leases will
be renewed or replaced by leases on other property or equipment.
Rent expense under all noncancelable operating lease obligations aggregated
approximately $191,000 for the year ended December 31, 1997 and $180,000 for the
years ended December 31, 1996 and 1995.
LITIGATION -- Various lawsuits are pending against the Company. Management,
after reviewing these lawsuits with outside counsel, considers that the
aggregate liabilities, if any, will not be material to the consolidated
financial statements.
17. SHAREHOLDERS' EQUITY
During 1997, the Company sold 480,000 shares of common stock at $6.25 per
share, after stock split, (see Note 22), which approximated the book value of
the Company at the time of the sale. Proceeds to the Company totaling $3,000,000
were used to fund the acquisition of a branch (see Note 2) and to repay
borrowings under a line of credit arrangement with a bank (Note 10).
Dividends paid by Bancshares and the Bank are subject to restrictions by
certain regulatory agencies. There was an aggregate of approximately $7,300,000
and $4,835,000 available for payment of dividends by Bancshares and by the Bank
to Bancshares, respectively, at December 31, 1997 under these restrictions.
Dividends paid by Bancshares during the years ended December 31, 1997 and 1996
were $574,536 and $351,388, respectively. Dividends paid by the Bank to
Bancshares during the years ended December 31, 1997 and 1996 were $2,922,150 and
$661,000, respectively.
18. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Any institution that
fails to meet its minimum capital requirements is subject to actions by
regulators that could have a direct material effect on the Company's and the
Bank's financial statements. Under the capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines based on the Bank's assets, liabilities and certain off-
balance-sheet items as calculated under regulatory accounting practices. The
Company's and the Bank's capital amounts and the Bank's classification under the
regulatory framework for prompt corrective action are also subject to
qualitative judgments by the regulators about the components, risk weightings
and other factors.
To meet the capital adequacy requirements, the Company and the Bank must
maintain minimum capital amounts and ratios as defined in the regulations.
Management believes, as of June 30, 1998 and December 31, 1997, that the Company
and the Bank met all capital adequacy requirements to which they are subject.
At December 31, 1997, the most recent notification from the State of Texas
Department of Banking categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based
and Tier I leverage ratios as set forth in the table. There have been no
conditions or events since that notification which management believes have
changed the Bank's category.
F-20
<PAGE>
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the Company's and the Bank's capital ratios
at June 30, 1998 (unaudited), December 31, 1997 and 1996:
<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>
CONSOLIDATED:
AS OF JUNE 30, 1998 (UNAUDITED):
Total Capital (to Risk Weighted
Assets)........................ $ 21,974,135 15.08% $ 11,656,560 8.0% N/A N/A
Tier I Capital (to Risk Weighted
Assets)........................ 20,860,423 14.32% 5,828,280 4.0% N/A N/A
Tier I Capital (to Average
Assets)........................ 20,860,423 6.25% 10,017,360 3.0% N/A N/A
AS OF DECEMBER 31, 1997:
Total Capital (to Risk Weighted
Assets)........................ $ 20,233,587 15.73% $ 10,292,800 8.0% N/A N/A
Tier I Capital (to Risk Weighted
Assets)........................ 19,217,587 14.94% 5,146,400 4.0% N/A N/A
Tier I Capital (to Average
Assets)........................ 19,217,587 6.30% 9,150,600 3.0% N/A N/A
AS OF DECEMBER 31, 1996:
Total Capital (to Risk Weighted
Assets)........................ $ 15,756,054 13.89% $ 9,076,240 8.0% N/A N/A
Tier I Capital (to Risk Weighted
Assets)........................ 14,878,054 13.11% 4,538,120 4.0% N/A N/A
Tier I Capital (to Average
Assets)........................ 14,878,054 5.45% 8,186,910 3.0% N/A N/A
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------------- ---------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------ ------ -------------- ----- ----------- -----
BANK ONLY:
AS OF JUNE 30, 1998 (UNAUDITED):
Total Capital (to Risk Weighted
Assets)........................ $ 21,837,916 14.99% $ 11,656,080 8.0% $14,570,100 10.0%
Tier I Capital (to Risk Weighted
Assets)........................ 20,724,204 14.22% 5,828,040 4.0% 8,742,060 6.0%
Tier I Capital (to Average
Assets)........................ 20,724,204 6.21% 10,016,160 3.0% 16,693,600 5.0%
AS OF DECEMBER 31, 1997:
Total Capital (to Risk Weighted
Assets)........................ $ 20,056,438 15.59% $ 10,291,920 8.0% $12,864,900 10.0%
Tier I Capital (to Risk Weighted
Assets)........................ 19,040,438 14.80% 5,145,960 4.0% 7,718,940 6.0%
Tier I Capital (to Average
Assets)........................ 19,040,438 6.13% 9,319,920 3.0% 15,533,200 5.0%
AS OF DECEMBER 31, 1996:
Total Capital (to Risk Weighted
Assets)........................ $ 18,827,802 16.60% $ 9,075,840 8.0% $11,344,800 10.0%
Tier I Capital (to Risk Weighted
Assets)........................ 17,949,802 15.82% 4,537,920 4.0% 6,806,880 6.0%
Tier I Capital (to Average
Assets)........................ 17,949,802 6.48% 8,306,760 3.0% 13,844,600 5.0%
</TABLE>
F-21
<PAGE>
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INFORMATION
Disclosures of the estimated fair value amounts of financial instruments
have been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is
necessarily required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies could have a material effect on the estimated fair value amounts.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND CASH EQUIVALENTS -- For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
SECURITIES -- For securities held as investments, fair value equals quoted
market price, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
LOAN RECEIVABLES -- For certain homogeneous categories of loans (such as
some residential mortgages and other consumer loans), fair value is estimated by
discounting the future cash flows using the risk-free Treasury rate for the
applicable maturity, adjusted for servicing and credit risk. The carrying value
of variable rate loans approximates fair value because the loans reprice
frequently to current market rates.
DEPOSIT LIABILITIES -- The fair value of demand deposits, savings accounts
and certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit is
estimated using the rates currently offered for deposits of similar remaining
maturities.
LONG-TERM DEBT AND OTHER BORROWINGS -- Rates currently available to the
Company for debt with similar terms and remaining maturities are used to
estimate the fair value of existing debt.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS -- The fair value of commitments to
extend credit and standby letters of credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreement and the present creditworthiness of the
counterparties.
The estimated fair values of the Company's financial instruments are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1997 1996
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents....... $ 17,372 $ 17,372 $ 21,744 $ 21,744
Interest-bearing deposits in
financial institutions........ 198 198 396 396
Held to maturity securities..... 129,256 129,775 98,222 97,659
Available for sale securities... 38,612 38,612 49,342 49,342
Loans........................... 120,578 129,601 113,382 117,976
Less allowance for loan
losses........................ (1,016) (1,016) (923) (923)
---------- ---------- ---------- ----------
Total................................ $ 305,000 $ 314,542 $ 282,163 $ 286,194
========== ========== ========== ==========
Financial liabilities:
Deposits........................ $ 291,517 $ 291,779 $ 270,866 $ 271,274
Note payable.................... 3,267 3,267
Other borrowing................. 2,800 2,800
---------- ---------- ---------- ----------
Total................................ $ 294,317 $ 294,579 $ 274,133 $ 274,541
========== ========== ========== ==========
</TABLE>
F-22
<PAGE>
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The differences in fair value and carrying value of commitments to extend
credit and standby letters of credit were not material at December 31, 1997 and
1996.
The fair value estimates presented herein are based on pertinent
information available to management as of the dates indicated. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since those dates and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
20. COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income" requires that all
components of comprehensive income and total comprehensive income be reported on
one of the following: (1) the statement of income, (2) the statement of
stockholders' equity, or (3) a separate statement of comprehensive income.
Comprehensive income is comprised of net income and all changes to stockholders'
equity, except those due to investments by owners (changes in paid-in capital)
and distributions to owners (dividends). The Company adopted this statement
effective January 1, 1998 and has elected to report comprehensive income in the
consolidated statements of stockholders' equity.
Other comprehensive income consists of unrealized gains and losses on
available for sale securities. For the six months ended June 30, 1998, the
change in net unrealized loss on available for sale securities is reported in
the consolidated statement of stockholders' equity.
21. PARENT COMPANY ONLY FINANCIAL STATEMENTS
PROSPERITY BANCSHARES, INC.
(PARENT COMPANY ONLY)
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1998 1997 1996
------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash................................. $ 111,410 $ 153,610 $ 111,848
Investment in subsidiaries........... 20,747,224 19,065,984 17,988,765
Goodwill, net........................ 5,612,701 5,592,791 3,995,130
Other assets......................... 12,163 11,008 5,455
------------- -------------- --------------
TOTAL................................ $ 26,483,498 $ 24,823,393 $ 22,101,198
============= ============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Note payable.................... $ 3,266,666
Accrued interest payable and
other liabilities............. $ 5,679 $ 5,796 1,220
------------- -------------- --------------
Total liabilities.......... 5,679 5,796 3,267,886
------------- -------------- --------------
SHAREHOLDERS' EQUITY:
Common Stock.................... 3,993,884 3,993,884 3,513,884
Capital surplus................. 4,817,782 4,817,782 2,797,607
Retained earnings............... 17,707,546 16,049,334 13,061,698
Unrealized losses on available
for sale investment
securities, net of tax........ (23,066) (25,076) (20,725)
Less treasury stock, at cost
3,576 (unaudited), 3,576 and
3,736 shares at June 30, 1998,
December 31, 1997 and 1996,
respectively)................. (18,327) (18,327) (19,147)
------------- -------------- --------------
Total shareholders'
equity.................. 26,477,819 24,817,597 18,833,312
------------- -------------- --------------
TOTAL................................ $ 26,483,498 $ 24,823,393 $ 22,101,198
============= ============== ==============
</TABLE>
F-23
<PAGE>
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROSPERITY BANCSHARES, INC.
(PARENT COMPANY ONLY)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
-------------------------- ----------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING INCOME --
Dividends from subsidiaries..... $ 595,000 $ 2,039,000 $ 2,922,150 $ 661,000 $ 1,352,777
OPERATING EXPENSE:
Interest expense................ 1,414 91,809 119,682 202,649 153,152
Amortization of goodwill........ 230,090 158,197 392,453 248,339 199,728
Other expenses.................. 56,947 28,688 66,416 48,987 31,135
------------ ------------ ------------ ------------ ------------
Total operating expense.... 288,451 278,694 578,551 499,975 384,015
------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAX BENEFIT AND
EQUITY IN UNDISTRIBUTED EARNINGS OF
SUBSIDIARIES....................... 306,549 1,760,306 2,343,599 161,025 968,762
FEDERAL INCOME TAX BENEFIT........... 71,465 41,323 137,003 85,555 62,658
------------ ------------ ------------ ------------ ------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES........... 378,014 1,801,629 2,480,602 246,580 1,031,420
EQUITY IN UNDISTRIBUTED EARNINGS OF
SUBSIDIARIES 1,679,230 (140,803) 1,081,570 2,464,152 1,290,007
------------ ------------ ------------ ------------ ------------
NET INCOME........................... $ 2,057,244 $ 1,660,826 $ 3,562,172 $ 2,710,732 $ 2,321,427
============ ============ ============ ============ ============
</TABLE>
F-24
<PAGE>
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROSPERITY BANCSHARES, INC.
(PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 20, FOR THE YEARS ENDED DECEMBER 31,
-------------------------- ----------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 2,057,244 $ 1,660,826 $ 3,562,172 $ 2,710,732 $ 2,321,427
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed earnings
of subsidiaries................ (1,679,230) 140,803 (1,081,570) (2,464,152) (1,290,007)
Decrease in due to subsidiary.... (157,777)
Amortization of goodwill......... 230,090 158,197 392,453 248,339 199,728
(Increase) decrease in other
assets......................... (1,155) 8,442 (5,553) (1,570) 1,601
Increase (decrease) in other
liabilities.................... (117) 36,694 4,576 (33,577) 34,791
------------ ------------ ------------ ------------ ------------
Total adjustments........... (1,450,412) 344,136 (690,094) (2,250,960) (1,211,664)
------------ ------------ ------------ ------------ ------------
Net cash flows provided by
operating activities...... 606,832 2,004,962 2,872,078 459,772 1,109,763
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Premium paid for branch
acquisition...................... (250,000) (1,990,114) (1,990,114) (1,750,000)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable......... (2,402,017) (3,266,666) (1,516,666) (758,334)
Proceeds from line of credit....... 3,266,666
Issuance of common stock........... 2,938,175 3,000,000
Payments of cash dividends......... (399,032) (175,505) (574,536) (351,388) (351,388)
Sale (purchase) of treasury
stock............................ 1,000 (19,147)
------------ ------------ ------------ ------------ ------------
Net cash flows (used in)
provided by financing
activities................ (399,032) 360,653 (840,202) 1,379,465 (1,109,722)
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (42,200) 375,501 41,762 89,237 41
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD.......................... 153,610 111,848 111,848 22,611 22,570
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD............................. $ 111,410 $ 487,349 $ 153,610 $ 111,848 $ 22,611
============ ============ ============ ============ ============
</TABLE>
F-25
<PAGE>
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
22. PENDING ACQUISITION
During November 1997, the Company entered into a purchase and assumption
agreement with another bank to purchase certain assets and to assume certain
deposit accounts and related accrued interest payable of a branch located in
West Columbia, Texas. This transaction, which has met regulatory approval, is
expected to be completed on or about February 27, 1998. At that time, the
Company expects to purchase loans totaling approximately $120,000 and assume
deposit liabilities of approximately $7,500,000. The Company expects to pay a
cash premium totaling approximately $250,000 for the transaction.
23. SUBSEQUENT EVENTS
On September 10, 1998, the Company effected a four for one common stock
split in the form of a common stock dividend (the "Stock Split"). All share
and per share information for common stock has been restated to reflect the
Stock Split. In September 1998, the Company increased the number of authorized
shares of common stock from 1,000,000 to 50,000,000 and authorized 20,000,000
shares of preferred stock with a par value of $1.
In June 1998, the Company entered into a merger agreement with a bank
located in East Bernard, Texas. This transaction, which has met regulatory
approval, is expected to be completed on or about October 1, 1998.
On February 10, 1998, the Company granted 60,000 options under the 1995
stock option plan. The options were granted at an exercise price of $6.25.
Compensation expense was not recorded for the stock options because the exercise
price approximated the fair value of common stock at the date of the grant.
In 1998, the Company approved a new stock option plan which authorizes the
issuance of up to 460,000 shares of common stock.
******
F-26
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Union State Bank
East Bernard, Texas
We have audited the accompanying statements of condition of Union State
Bank as of December 31, 1997 and 1996, and the related statements of income,
changes in shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Union State Bank at December
31, 1997 and 1996, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
/s/ Harper & Pearson Company
Houston, Texas
January 23, 1998
F-27
<PAGE>
UNION STATE BANK
STATEMENTS OF CONDITION
JUNE 30, 1998 AND 1997
(UNAUDITED)
1998 1997
-------------- --------------
ASSETS
Cash and due from banks.............. $ 1,672,840 $ 1,681,819
Federal funds sold................... 5,100,000 3,100,000
-------------- --------------
Total cash and cash equivalents...... 6,772,840 4,781,819
Securities available for sale, less
unrealized losses.................. 20,069,030 15,847,429
Securities to be held to maturity.... 24,076,943 31,153,834
Loans................................ 25,227,167 23,626,280
Less allowance for possible loan
losses........................ 670,702 718,656
-------------- --------------
Loans, net...................... 24,556,465 22,907,624
Bank premises and equipment, net..... 165,029 209,013
Accrued interest receivable.......... 1,083,643 1,082,035
Deferred federal income taxes........ 33,255 110,225
Other assets, net.................... 183,385 211,428
-------------- --------------
$ 76,940,590 $ 76,303,407
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing............. $ 8,203,315 $ 7,715,830
Interest-bearing................ 55,519,663 56,442,834
-------------- --------------
Total Deposits.................. 63,722,978 64,158,664
Accrued interest payable........ 293,691 264,928
Other liabilities............... 59,680 79,347
-------------- --------------
Total Liabilities............... 64,076,349 64,502,939
-------------- --------------
Commitments
Shareholders' Equity
Common stock, $10 par value,
70,000 shares authorized,
issued and outstanding........ 700,000 700,000
Capital surplus................. 3,300,000 3,300,000
Retained earnings............... 8,928,797 7,998,818
Net unrealized losses on
securities available for sale,
net........................... (64,556) (198,350)
-------------- --------------
Total Shareholders' Equity...... 12,864,241 11,800,468
-------------- --------------
$ 76,940,590 $ 76,303,407
============== ==============
See accompanying notes.
F-28
<PAGE>
UNION STATE BANK
STATEMENTS OF CONDITION
DECEMBER 31, 1997 AND 1996
1997 1996
-------------- --------------
ASSETS
Cash and due from banks................. $ 2,513,928 $ 2,502,038
Federal funds sold...................... 6,300,000 6,000,000
-------------- --------------
Total cash and cash equivalents.... 8,813,928 8,502,038
Securities available for sale, less
unrealized losses..................... 19,195,963 18,373,655
Securities to be held to maturity....... 29,620,984 31,181,829
Loans................................... 20,438,344 19,473,356
Less allowance for possible loan
losses........................... 649,669 702,274
-------------- --------------
Loans, net......................... 19,788,675 18,771,082
Bank premises and equipment, net........ 186,731 209,606
Accrued interest receivable............. 795,002 779,924
Deferred federal income taxes........... 82,206 108,162
Other assets, net....................... 215,349 435,554
-------------- --------------
$ 78,698,838 $ 78,361,850
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing................ $ 8,550,127 $ 9,020,075
Interest-bearing................... 57,593,728 57,624,409
-------------- --------------
Total Deposits..................... 66,143,855 66,644,484
Accrued interest payable........... 276,145 256,372
Other liabilities.................. 23,842 2,632
-------------- --------------
Total Liabilities.................. 66,443,842 66,903,488
-------------- --------------
Commitments
Shareholders' Equity
Common stock, $10 par value, 70,000
shares authorized, issued and
outstanding...................... 700,000 700,000
Capital surplus.................... 3,300,000 3,300,000
Retained earnings.................. 8,398,957 7,652,705
Net unrealized losses on securities
available for sale, net.......... (143,961) (194,343)
-------------- --------------
Total Shareholders' Equity......... 12,254,996 11,458,362
-------------- --------------
$ 78,698,838 $ 78,361,850
============== ==============
See accompanying notes.
F-29
<PAGE>
UNION STATE BANK
STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
1998 1997
------------ ------------
INTEREST INCOME
Interest and fees on loans...... $ 1,040,303 $ 980,080
Securities available for sale... 599,768 514,952
Securities to be held to
maturity....................... 775,749 967,480
Federal funds sold.............. 195,565 77,371
------------ ------------
Total Interest Income........... 2,611,385 2,539,883
------------ ------------
INTEREST EXPENSE
Deposits........................ 1,238,241 1,229,806
------------ ------------
Total Interest Expense.......... 1,238,241 1,229,806
------------ ------------
NET INTEREST INCOME.................. 1,373,144 1,310,077
PROVISION FOR POSSIBLE CREDIT LOSSES -- --
------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR
POSSIBLE CREDIT LOSSES............. 1,373,144 1,310,077
------------ ------------
OTHER INCOME
Customer service charges........ 97,678 98,899
Other service charges and
fees........................... 23,453 25,186
Other........................... 9,156 59,473
------------ ------------
Total Other Income.............. 130,287 183,558
------------ ------------
OTHER EXPENSE
Salaries and employee
benefits....................... 453,222 438,171
Net occupancy and equipment
expense........................ 58,271 59,137
Data processing................. 52,417 49,227
Professional services fees...... 37,505 38,427
Taxes other than income taxes... 55,499 55,335
Other........................... 68,443 71,225
------------ ------------
Total Other Expense............. 725,357 711,522
------------ ------------
EARNINGS BEFORE INCOME TAXES......... 778,074 782,113
INCOME TAXES......................... 248,234 226,000
------------ ------------
NET EARNINGS......................... $ 529,840 $ 556,113
============ ============
See accompanying notes.
F-30
<PAGE>
UNION STATE BANK
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
------------ ------------
INTEREST INCOME
Interest and fees on loans...... $ 2,135,057 $ 2,180,517
Securities available for sale... 964,771 965,685
Securities to be held to
maturity....................... 1,825,390 1,908,964
Federal funds sold.............. 266,891 149,549
------------ ------------
Total Interest Income........... 5,192,109 5,204,715
------------ ------------
INTEREST EXPENSE
Deposits........................ 2,504,186 2,505,963
------------ ------------
Total Interest Expense.......... 2,504,186 2,505,963
------------ ------------
NET INTEREST INCOME.................. 2,687,923 2,698,752
REDUCTION OF ALLOWANCE FOR POSSIBLE
CREDIT LOSSES...................... 75,000 55,000
------------ ------------
NET INTEREST INCOME AFTER REDUCTION
OF ALLOWANCE FOR POSSIBLE CREDIT
LOSSES............................. 2,762,923 2,753,752
------------ ------------
OTHER INCOME
Customer service charges........ 218,173 172,749
Other service charges and
fees............................ 37,561 46,815
Other........................... 72,984 59,908
------------ ------------
Total Other Income.............. 328,718 279,472
------------ ------------
OTHER EXPENSE
Salaries and employee
benefits....................... 945,129 931,227
Net occupancy and equipment
expense........................ 121,879 139,302
Data processing................. 101,001 115,103
Professional services fees...... 64,227 65,518
Taxes other than income taxes... 105,828 106,967
Other real estate losses and
expenses....................... 5,247 100,381
Other........................... 160,078 159,520
------------ ------------
Total Other Expense............. 1,503,389 1,618,018
------------ ------------
EARNINGS BEFORE INCOME TAXES......... 1,588,252 1,415,206
INCOME TAXES......................... 422,000 406,674
------------ ------------
NET EARNINGS......................... $ 1,166,252 $ 1,008,532
============ ============
See accompanying notes.
F-31
<PAGE>
UNION STATE BANK
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
NET
UNREALIZED
LOSSES ON
SECURITIES
COMMON CAPITAL RETAINED AVAILABLE
STOCK SURPLUS EARNINGS FOR SALE TOTAL
---------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -- December 31, 1997......... $ 700,000 $ 3,300,000 $ 8,398,957 $ (143,961) $ 12,254,996
Net Earnings......................... -- -- 529,840 -- 529,840
Dividends............................ -- -- -- -- --
Net Change in Unrealized Losses On
Securities Available for Sale...... -- -- -- 79,405 79,405
---------- ------------ ------------ ------------ --------------
Balance -- June 30, 1998............. $ 700,000 $ 3,300,000 $ 8,928,797 $ (64,556) $ 12,864,241
========== ============ ============ ============ ==============
UNION STATE BANK
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
NET
UNREALIZED
LOSSES ON
SECURITIES
COMMON CAPITAL RETAINED AVAILABLE
STOCK SURPLUS EARNINGS FOR SALE TOTAL
---------- ------------ ------------ ------------ --------------
Balance -- December 31, 1996......... $ 700,000 $ 3,300,000 $ 7,652,705 $ (194,343) $ 11,458,362
Net Earnings......................... -- -- 556,113 -- 556,113
Dividends............................ -- -- (210,000) -- (210,000)
Net Change in Unrealized Losses On
Securities Available for Sale...... -- -- -- (4,007) (4,007)
---------- ------------ ------------ ------------ --------------
Balance -- June 30, 1997............. $ 700,000 $ 3,300,000 $ 7,998,818 $ (198,350) $ 11,800,468
========== ============ ============ ============ ==============
</TABLE>
See accompanying notes.
F-32
<PAGE>
UNION STATE BANK
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
NET
UNREALIZED
LOSSES ON
SECURITIES
COMMON CAPITAL RETAINED AVAILABLE
STOCK SURPLUS EARNINGS FOR SALE TOTAL
---------- ------------ ------------ ------------ --------------
<S> <C> <C>
Balance -- December 31, 1995......... $ 700,000 $ 3,300,000 $ 7,064,173 $ (124,976) $ 10,939,197
Net Earnings......................... -- -- 1,008,532 -- 1,008,532
Dividends............................ -- -- (420,000) -- (420,000)
Net Change in Unrealized Losses On
Securities Available for Sale...... -- -- -- (69,367) (69,367)
---------- ------------ ------------ ------------ --------------
Balance -- December 31, 1996......... 700,000 3,300,000 7,652,705 (194,343) 11,458,362
Net Earnings......................... -- -- 1,166,252 -- 1,166,252
Dividends............................ -- -- (420,000) -- (420,000)
Net Change in Unrealized Losses On
Securities Available for Sale...... -- -- -- 50,382 50,382
---------- ------------ ------------ ------------ --------------
Balance -- December 31, 1997......... $ 700,000 $ 3,300,000 $ 8,398,957 $ (143,961) $ 12,254,996
========== ============ ============ ============ ==============
</TABLE>
See accompanying notes.
F-33
<PAGE>
UNION STATE BANK
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
1998 1997
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.................... $ 529,840 $ 556,113
-------------- --------------
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Provision for depreciation and
amortization............... 21,702 21,067
Deferred federal income
taxes...................... 48,951 (2,063)
Change in operating assets and
liabilities:
Accrued interest receivable... (288,641) (302,111)
Other assets.................. 31,964 224,126
Accrued interest payable...... 17,546 8,556
Other liabilities............. 35,838 76,715
-------------- --------------
Total adjustments............... (132,640) 26,290
-------------- --------------
Net cash provided by operating
activities.................... 397,200 582,403
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities
available for sale............ (4,115,000) --
Purchases of securities to be
held to maturity.............. -- (3,131,678)
Proceeds from paydowns and
maturities of securities...... 8,865,379 5,681,892
Loans originated/proceeds
received, net................. (4,767,790) (4,136,542)
Capital expenditures, net....... -- (20,474)
-------------- --------------
Net cash used by investing
activities.................... (17,411) (1,606,802)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits.......... (2,420,877) (2,485,820)
Dividends paid.................. -- (210,000)
-------------- --------------
Net cash used by financing
activities.................... (2,420,877) (2,695,820)
-------------- --------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS........................ (2,041,088) (3,720,219)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 8,813,928 8,502,038
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 6,772,840 $ 4,781,819
============== ==============
See accompanying notes.
F-34
<PAGE>
UNION STATE BANK
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.................... $ 1,166,252 $ 1,008,532
-------------- --------------
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Reduction of allowance for
possible credit losses..... (75,000) (55,000)
Provision for depreciation and
amortization............... 43,349 56,889
Deferred federal income
taxes...................... -- 67,025
Change in operating assets and
liabilities:
Accrued interest receivable... (15,078) 112,773
Other assets.................. 220,205 394,445
Accrued interest payable...... 19,773 (29,250)
Other liabilities............. 21,210 (32,143)
-------------- --------------
Total adjustments............... 214,459 514,739
-------------- --------------
Net cash provided by operating
activities.................... 1,380,711 1,523,271
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities
available for sale............ (5,997,276) (5,024,297)
Purchases of securities to be
held to maturity.............. (5,329,972) (4,383,004)
Proceeds from maturities of
securities.................... 12,142,123 12,342,209
Loans originated/proceeds
received, net................. (942,593) 1,381,848
Capital expenditures, net....... (20,474) (68,107)
-------------- --------------
Net cash (used) provided by
investing activities.......... (148,192) 4,248,649
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits.......... (500,629) (256,505)
Dividends paid.................. (420,000) (420,000)
-------------- --------------
Net cash used by financing
activities.................... (920,629) (676,505)
-------------- --------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 311,890 5,095,415
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 8,502,038 3,406,623
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 8,813,928 $ 8,502,038
============== ==============
See accompanying notes.
F-35
<PAGE>
UNION STATE BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
The accounting and reporting policies of Union State Bank are in accordance
with generally accepted accounting principles and the prevailing practices
within the banking industry. A summary of significant accounting policies is as
follows:
ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for possible credit losses on
loans, the valuation of real estate acquired in connection with foreclosures or
in satisfaction of loans and in the determination of investment security
estimated market values. In connection with the determination of the allowances
for possible losses on loans and foreclosed real estate, management obtains
independent appraisals for significant properties. The estimated market value of
investment securities is determined by a third party investment company.
While management uses available information to recognize losses on loans
and foreclosed real estate, further reductions in the carrying amounts of loans
and foreclosed assets may be necessary based on changes in local economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the estimated losses on loans and
foreclosed real estate. Such agencies may require the Bank to recognize
additional losses based on their judgments about information available to them
at the time of their examination. Because of these factors, it is reasonably
possible that the estimated losses on loans and foreclosed real estates may
change materially in the near term. However, the amount of the change that is
reasonably possible cannot be estimated.
INTERIM FINANCIAL INFORMATION -- Financial information as of and for the
six months ended June 30, 1998 and 1997 is unaudited. Such information includes
all adjustments (consisting of only normal recurring adjustments), that are
necessary in the opinion of management, for a fair statement of the financial
information in the interim periods. The results from operations for the periods
ended June 30, 1998 is not necessarily indicative of the results for the full
fiscal year.
TRADING SECURITIES -- Securities that are held for short-term resale are
classified as trading account securities and recorded at their fair values.
Realized and unrealized gains and losses on trading account securities are
included in other income. At December 31, 1997 and 1996, the Bank did not
classify any of its securities as trading securities.
SECURITIES HELD TO MATURITY -- Government, Federal agency, and corporate
debt securities that management has the positive intent and ability to hold to
maturity are reported at cost, adjusted for amortization of premiums and the
accretion of discounts that are recognized in interest income using methods
approximating the interest method over the period to maturity. Mortgage backed
securities represent participating interests in pools of long-term first
mortgage loans originated and serviced by issuers of the securities. Mortgage
backed securities are carried at unpaid principal balances, adjusted for
unamortized premiums and unearned discounts. Premiums and discounts are
amortized using methods approximating the interest method over the remaining
period to contractual maturity, adjusted for anticipated prepayments.
SECURITIES AVAILABLE FOR SALE -- Available for sale securities consist of
investment securities not classified as trading securities nor as held to
maturity securities. Unrealized holding gains and losses, net of tax, on
available for sale securities are reported as a net amount in a separate
component of shareholders'
F-36
<PAGE>
UNION STATE BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
equity until realized. Gains and losses on the sale of available for sale
securities are determined using the specific identification method. The
amortization of premiums and the accretion of discounts are recognized in
interest income using methods approximating the interest method over the period
of maturity.
Declines in the fair value of individual held to maturity and available for
sale securities below their cost that are other than temporary result in
write-downs of the individual securities to their fair value. The related
write-downs are included in earnings as realized losses.
CONCENTRATIONS OF CREDIT -- Substantially all of the Bank's loans,
commitments and letters of credit have been granted to customers in the Bank's
market area. Generally, such customers are depositors of the Bank. The
concentrations of credit by type of loan are set forth in Note C. It is the
Bank's policy to not extend credit to any single borrower or group of related
borrowers in excess of the Bank's legal lending limit.
INTEREST RATE RISK -- The Bank is principally engaged in providing
short-term commercial loans with interest rates that fluctuate with various
market indices and intermediate-term, fixed rate real estate loans. These loans
are primarily funded through short-term demand deposits and longer-term
certificates of deposit with fixed rates.
LOANS -- Loans are stated at the principal amount outstanding, net of
unearned discount. Unearned discount relates principally to consumer installment
loans. The related interest income for multi-payment loans is recognized as
interest in proportion to the declining outstanding balances of the loans; for
single payment loans such income is recognized under the straight-line method.
Both methods approximate the interest method.
NON-PERFORMING LOANS AND PAST DUE LOANS -- Included in the non-performing
loan category are loans which have been categorized by management as nonaccrual
because collection of interest is doubtful and loans which have been
restructured to provide a reduction in the interest rate or a deferral of
interest or principal payments.
When the payment of principal or interest on a loan is delinquent for 90
days, or earlier in some cases, the loan is placed on nonaccrual status, unless
the loan is in the process of collection and the underlying collateral fully
supports the carrying value of the loan. If the decision is made to continue
accruing interest on the loan, periodic reviews are made to confirm the accruing
status of the loan.
When a loan is placed on nonaccrual status or identified as impaired,
interest accrued and uncollected during the current year prior to the judgment
of uncollectibility, is charged to operations. Interest accrued during prior
periods is charged to allowance for possible credit losses. Generally, any
payments received on nonaccrual loans are applied first to outstanding loan
amounts and next to the recovery of charged-off loan amounts. Any excess is
treated as recovery of lost interest.
Renegotiated loans are those loans on which concessions in terms have been
granted because of a borrower's financial difficulty. Interest is generally
accrued on such loans in accordance with the new terms.
ALLOWANCE FOR POSSIBLE CREDIT LOSSES -- The allowance for possible credit
losses is a valuation allowance available for losses incurred on loans and other
commitments to extend credit. All losses are charged to the allowance for
possible credit losses when the loss actually occurs or when a determination is
made that a loss is likely to occur. Recoveries are credited to the allowance at
the time of recovery.
Throughout the year, management estimates the likely level of losses to
determine whether the allowance for possible credit losses is adequate to absorb
anticipated losses in the existing portfolio. Based on these estimates, an
amount is charged to the provision for possible credit losses and credited to
the
F-37
<PAGE>
UNION STATE BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
allowance for possible credit losses in order to adjust the allowance to a level
determined to be adequate to absorb losses.
Management's judgment as to the level of losses on existing loans involves
the consideration of current and anticipated economic conditions and their
potential effects on specific borrowers; an evaluation of the existing
relationships among loans, potential loan losses, and the present level of the
allowance; results of examinations of the loan portfolio by regulatory agencies;
results of examinations of the loan portfolio by an external consultant; and
management's internal review of the loan portfolio. In determining the
collectibility of certain loans, management also considers the fair value of any
underlying collateral. The amounts ultimately realized may differ from the
carrying value of these assets because of economic, operating or other
conditions beyond the Bank's control.
It should be understood that estimates of credit losses involve judgment.
While it is possible that in particular periods the Bank may sustain losses
which are substantial relative to the allowance for credit losses, it is the
judgment of management that the allowances for credit losses reflected in the
statements of condition are adequate to absorb losses which may exist in the
current loan portfolio.
BANK PREMISES AND EQUIPMENT -- Bank Premises and equipment are carried at
cost less accumulated depreciation and amortization. Depreciation expense is
computed principally on a tax method which approximates the straight-line method
over the estimated useful lives of the assets.
REAL ESTATE ACQUIRED BY FORECLOSURE -- Real estate acquired by foreclosure
is recorded at the fair value of the property less any selling costs, as
applicable, at the time of foreclosure. Subsequent to foreclosure, real estate
is carried at the lower of its new cost basis or fair value, less estimated
costs to sell. Any adjustments to reflect declines in value below the recorded
amounts are recognized and are charged to income in the period such
determination is assessed. Required developmental costs associated with
foreclosed property under construction are capitalized and considered in
determining the fair value of the property.
Operating expenses of such properties, net of related income, and gains and
losses on their disposition are included in other non-interest expense.
INCOME TAXES -- Under SFAS No. 109, the Bank uses the balance sheet
approach for recording deferred taxes. The balance sheet approach accounts for
deferred income taxes by applying statutory tax rates in effect at the balance
sheet date to differences between the book basis and the tax basis of assets and
liabilities. The resulting deferred tax assets and liabilities are adjusted to
reflect changes in tax law or rates.
STATEMENTS OF CASH FLOWS -- For purposes of reporting cash flows, cash and
cash equivalents include cash and due from banks and federal funds sold.
Generally, federal funds are sold for one-day periods.
F-38
<PAGE>
UNION STATE BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B INVESTMENT SECURITIES
Investment securities have been classified according to management's
intent. The amortized cost and estimated market values of investments in debt
securities at December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
1997
Securities Available For Sale:
U.S. Gov't & Agency Securities..... $ 9,323,464 $ 9,409 $ (12,512) $ 9,320,361
Collateralized Mortgage
Obligations...................... 3,161,837 -- (150,038) 3,011,799
Mortgage-backed Securities......... 6,928,785 32,864 (97,846) 6,863,803
-------------- ---------- ---------- --------------
$ 19,414,086 $ 42,273 $ (260,396) $ 19,195,963
============== ========== ========== ==============
Securities to be Held to Maturity:
U.S. Gov't & Agency Securities..... $ 13,795,511 $ 47,936 $ (28,149) $ 13,815,298
Municipal -- Nontaxable............ 7,017,330 139,447 (1,069) 7,155,708
Municipal -- Taxable............... 300,000 -- (1,627) 298,373
Mortgage-backed Securities......... 8,508,143 68,157 (55,761) 8,520,539
-------------- ---------- ---------- --------------
$ 29,620,984 $ 255,540 $ (86,606) $ 29,789,918
============== ========== ========== ==============
1996
Securities Available For Sale:
U.S. Gov't Agency Securities....... $ 6,822,059 $ 14,780 $ (12,250) $ 6,824,589
Collateralized Mortgage
Obligations...................... 3,596,195 -- (189,508) 3,406,687
Mortgage-backed Securities......... 8,249,861 27,747 (135,229) 8,142,379
-------------- ---------- ---------- --------------
$ 18,668,115 $ 42,527 $ (336,987) $ 18,373,655
============== ========== ========== ==============
Securities to be Held to Maturity:
U.S. Gov't & Agency Securities..... $ 16,147,535 $ 74,505 $ (70,749) $ 16,151,291
Municipal -- Nontaxable............ 7,201,160 101,610 (26,054) 7,276,716
Mortgage-backed Securities......... 7,833,134 80,173 (115,698) 7,797,609
-------------- ---------- ---------- --------------
$ 31,181,829 $ 256,288 $ (212,501) $ 31,225,616
============== ========== ========== ==============
</TABLE>
F-39
<PAGE>
UNION STATE BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and estimated market value of debt securities at
December 31, 1997, by contractual maturities, 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.
<TABLE>
<CAPTION>
SECURITIES HELD TO SECURITIES AVAILABLE FOR
MATURITY SALE
-------------------------- --------------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Due in 1 year or less................ $ 6,551,243 $ 6,540,982 $ 4,980,875 $ 4,975,879
Due from 1 year to 5 years........... 10,405,983 10,507,451 4,343,589 4,344,482
Due from 5 years to 10 years......... 4,155,615 4,220,946 -- --
Due after 10 years................... -- -- -- --
Collateralized Mortgage
Obligations........................ -- -- 3,161,837 3,011,799
Mortgage-Backed Securities........... 8,508,143 8,520,539 6,928,785 6,863,803
----------- ----------- ----------- -----------
$29,620,984 $29,789,918 $19,414,086 $19,195,963
=========== =========== =========== ===========
</TABLE>
Investment securities with a carrying amount of $5,459,692 and $8,576,876
at December 31, 1997 and 1996, respectively, were pledged to secure public
deposits and other borrowings.
There were no significant realized gains or losses in 1997 or 1996.
NOTE C LOANS
The loan portfolio consists of various types of loans made principally to
borrowers located in Wharton and Ft. Bend Counties, Texas, and are classified by
major type as follows:
1997 1996
-------------- --------------
Commercial........................... $ 2,335,648 $ 3,408,195
Real Estate.......................... 6,005,292 5,398,113
Consumer............................. 2,229,856 2,355,088
Farming.............................. 9,849,895 8,296,194
Other................................ 17,653 15,786
-------------- --------------
20,438,344 19,473,376
Less unearned discount............... -- (20)
-------------- --------------
$ 20,438,344 $ 19,473,356
============== ==============
Loan maturities of the loan portfolio at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
WITHIN 1 YEAR 1 - 5 YEARS AFTER 5 YEARS TOTAL
------------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Loans at fixed interest rates........... $ 3,267,161 $ 5,396,306 $ 2,167,650 $ 10,831,117
Loans at variable interest rates........ 9,607,227 -- -- 9,607,227
------------- ----------- ------------- --------------
$ 12,874,388 $ 5,396,306 $ 2,167,650 $ 20,438,344
============= =========== ============= ==============
</TABLE>
F-40
<PAGE>
UNION STATE BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In the ordinary course of business, the Bank has and expects to continue to
have transactions, including borrowings, with its officers, directors, principal
stockholders, and their affiliates. In the opinion of management, such
transactions were on substantially the same terms, including interest rates and
collateral, as those prevailing at the time of comparable transactions with
other persons and did not involve more than a normal risk of collectibility or
present any other unfavorable features to the Bank. Loans to such borrowers are
summarized as follows:
1997 1996
------------ -------------
Balance, January 1...................... $ 551,554 $ 872,768
New loans during the year............... 482,225 991,170
Repayments during the year.............. (144,441) (1,312,384)
Other reductions........................ (203,818) --
------------ -------------
Balance, December 31.................... $ 685,520 $ 551,554
============ =============
NOTE D NONPERFORMING LOANS AND PAST DUE LOANS
The following table presents information relating to non-performing loans
and past due loans:
1997 1996
--------- ---------
Nonaccrual loans........................ $ 17,902 $ 36,507
========= =========
90 days or more past due loans.......... $ 3,556 $ 12,630
========= =========
With respect to the above nonperforming loans, the following table presents
interest income that would have been earned under the original terms of the
loans.
1997 1996
--------- ---------
Foregone income......................... $ 6,534 $ 7,567
========= =========
NOTE E ALLOWANCE FOR POSSIBLE CREDIT LOSSES
An analysis of activity in the allowance for possible credit losses is as
follows:
1997 1996
---------- ----------
Balance at beginning of year............ $ 702,274 $ 737,099
Reduction of allowance for possible
credit losses......................... (75,000) (55,000)
Loan recoveries......................... 24,455 20,175
Loans charged off....................... (2,060) --
---------- ----------
Balance at end of year.................. $ 649,669 $ 702,274
========== ==========
Impaired loans as defined by FASB Statement No. 114, "Accounting by
Creditors for Impairment of a Loan" are not significant at December 31, 1997
and 1996.
F-41
<PAGE>
UNION STATE BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized below:
1997 1996
------------ ------------
Land.................................... $ 10,675 $ 10,675
Buildings............................... 566,071 566,071
Furniture, fixtures and equipment....... 415,073 407,250
------------ ------------
991,819 983,996
Less accumulated depreciation........... (805,088) (774,390)
------------ ------------
$ 186,731 $ 209,606
============ ============
NOTE G ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 1997 and 1996 consists of the
following:
1997 1996
---------- ----------
Loans................................... $ 312,922 $ 256,210
Mortgage-backed securities.............. 95,867 103,772
Investments and other................... 386,213 419,942
---------- ----------
$ 795,002 $ 779,924
========== ==========
NOTE H OTHER ASSETS
Other assets are summarized below:
1997 1996
------------ ------------
Other real estate.................... $ -- $ 84,530
Contracts for deed................... 35,525 57,478
Notes receivable..................... 105,929 220,881
Purchased interest and other......... 73,895 72,665
------------ ------------
$ 215,349 $ 435,554
============ ============
An analysis of activity in real estate acquired by foreclosure for the year
ended December 31, 1997 and 1996 is as follows:
1997 1996
------------ ------------
Balance, beginning of year........... $ 84,530 525,313
Real estate foreclosures............. 45,735 25,276
Real estate sales and payments....... (130,265) (375,004)
------------ ------------
Balance, end of year................. -- 175,585
Allowance for loss on real estate.... -- (91,055)
------------ ------------
Real estate acquired by foreclosure,
net................................ $ -- $ 84,530
============ ============
F-42
<PAGE>
UNION STATE BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I DEPOSITS
Included in interest-bearing deposits are certificates of deposit in
amounts of $100,000 or more. These certificates and their remaining maturities
at December 31, 1997 and 1996 are as follows:
1997 1996
------------ ------------
Three months or less................. $ 3,233,424 $ 3,830,295
Four through twelve months........... 5,604,437 4,663,921
Thereafter........................... 955,409 915,750
------------ ------------
$ 9,793,270 $ 9,409,966
============ ============
Interest expense for certificates of deposit in excess of $100,000 amounted
to approximately $476,281 and $477,270 for the years ended December 31, 1997 and
1996, respectively. The bank has no brokered deposits and there are no major
concentrations of deposits.
NOTE J FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is party to various financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized in
the statements of condition. The contract or notional amounts of those
instruments reflect the extent of the 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 amount of those instruments. The Bank uses the same credit policies
in making these commitments and conditional obligations as it does for
on-balance-sheet instruments.
The following is a summary of the various financial instruments whose
contract amounts represent credit risk:
1997 1996
------------ ------------
Commitments to extend credit............ $ 7,792,741 $ 6,416,767
Standby letters of credit............... $ 16,800 $ 67,700
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 fully drawn upon, the total commitment amounts disclosed
above do not necessarily represent future cash requirements.
The Bank evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if considered necessary by the Bank
upon extension of credit, is based on management's credit evaluation of the
customer.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to its customers.
NOTE K EMPLOYEE BENEFITS
The Bank has a defined contribution savings plan in effect for
substantially all full-time employees. An employee must contribute at least four
percent of base pay to participate, which is then matched by the Bank. The Board
of Directors may also make discretionary contributions each year. Benefit
expenses amounted to $27,413 and $28,519 in 1997 and 1996, respectively.
F-43
<PAGE>
UNION STATE BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE L INCOME TAXES
Income tax expense consists of the following:
1997 1996
---------- ----------
Current................................. $ 422,000 $ 339,649
Deferred................................ -- 67,025
---------- ----------
$ 422,000 $ 406,674
========== ==========
The provision for federal income taxes differs from the amount computed by
applying the federal income tax statutory rate on earnings as follows:
1997 1996
------------ ----------
Taxes calculated at statutory rate...... $ 540,006 $ 481,170
Increase (decrease) resulting from:
Nontaxable interest income......... (103,249) (94,785)
Other, net......................... (14,757) 20,289
------------ ----------
$ 422,000 $ 406,674
============ ==========
Deferred income taxes result primarily from temporary differences relating
to the loan loss reserve and the recognition of unrealized investment losses on
securities available for sale.
NOTE M STATEMENTS OF CASH FLOWS
Interest payments of $2,484,413 and $2,531,832 were made during 1997 and
1996, respectively. Federal income tax payments of $406,708 and $358,769 were
made during 1997 and 1996, respectively.
NOTE N REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements. Failure to
meet the minimum regulatory capital requirements can initiate certain mandatory,
and possible additional discretionary actions by regulators, that if undertaken,
could have a direct material affect on the Bank's financial statements. Under
the regulatory capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines
involving 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 under the prompt corrective action
guidelines 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 of total risk-based
capital and Tier I capital to risk-weighted assets (as defined in the
regulations), and Tier I capital to adjusted total assets (as defined).
Management believes, as of December 31, 1997 and 1996, that the Bank meets all
the capital adequacy requirements to which it is subject.
F-44
<PAGE>
UNION STATE BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1997, the Bank was categorized as well capitalized under
the regulatory framework for prompt corrective action. To remain categorized as
well capitalized, the Bank will have to maintain minimum total risk-based, Tier
I risk-based, and Tier I leverage ratios as disclosed in the table below. There
are no conditions or events since the most recent notification that management
believes have changed the Bank's prompt corrective action category.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------ ----- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
1997
Total Risk Based Capital
(to Risk Weighted Assets)............. $ 12,771,000 43.3 % $ 2,361,680 8.0% $ 2,952,100 10.0%
Tier I Capital
(to Risk Weighted Assets)............. $ 12,399,000 42.0 % $ 1,180,840 4.0% $ 1,771,260 6.0%
Tier I Capital
(to Adjusted Total Assets)............ $ 12,399,000 15.6 % $ 3,182,560 4.0% $ 3,978,200 5.0%
1996
Total Risk Based Capital
(to Risk Weighted Assets)............. $ 12,009,000 42.5 % $ 2,262,560 8.0% 2,828,200 10.0%
Tier I Capital
(to Risk Weighted Assets)............. $ 11,652,000 41.2 % $ 1,131,280 4.0% $ 1,696,920 6.0%
Tier I Capital
(to Adjusted Total Assets)............ $ 11,652,000 15.1 % $ 3,091,520 4.0% $ 3,864,400 5.0%
</TABLE>
F-45
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES OF COMMON STOCK OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
SOLICITATION OR OFFER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary................... 3
Summary Consolidated Financial
Data............................... 6
Risk Factors......................... 8
The Company.......................... 13
Use of Proceeds...................... 16
Dividend Policy...................... 16
Dilution............................. 17
Pending Acquisition.................. 17
Unaudited Pro Forma Combined
Condensed Financial Statements..... 19
Capitalization....................... 22
Nature of the Trading Market......... 22
Selected Consolidated Financial
Data............................... 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 25
Management........................... 51
Principal and Selling Shareholders... 56
Supervision and Regulation........... 57
Description of Securities of the
Company............................ 64
Underwriting......................... 68
Legal Matters........................ 69
Experts.............................. 70
Available Information................ 70
Table of Contents to Financial
Statements......................... F-1
------------------------------
UNTIL , (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
1,677,783 SHARES
[LOGO]
PROSPERITY BANCSHARES, INC.
COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
KEEFE, BRUYETTE & WOODS, INC.
HOEFER & ARNETT
INCORPORATED
, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated fees and expenses incurred by the Registrant in connection
with this Offering are as follows:
Securities and Exchange Commission
registration fee................... $ 8,540
National Association of Securities
Dealers, Inc. filing fee........... $
Printing and engraving expenses...... $
Legal fees and expenses of counsel
for the Registrant................. $
Accounting fees and expenses......... $
Blue sky filing fees and expenses
(including legal fees and
expenses).......................... $
Transfer Agent fees.................. $
Miscellaneous........................ $
------------
Total................................ $
============
- ------------
* To be supplied by Amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Articles of Incorporation and Bylaws require the
Registrant to indemnify officers and directors of the Registrant to the fullest
extent permitted by Article 2.02-1 of the Business Corporation Act of the State
of Texas (the "TBCA"). The Articles of Incorporation and Bylaws of the
Registrant are filed as Exhibit 3.1 and 3.2 to the Registration Statement.
Generally, Article 2.02-1 of the TBCA permits a corporation to indemnify a
person who was, is, or is threatened to be made a named defendant or respondent
in a proceeding because the person was or is a director or officer if it is
determined that such person (i) conducted himself in good faith, (ii) reasonably
believed (a) in the case of conduct in his official capacity as a director or
officer of the corporation, that his conduct was in the corporation's best
interests, and/or (b) in other cases, that his conduct was at least not opposed
to the corporation's best interests, and (iii) in the case of any criminal
proceeding, had no reasonable cause to believe that his conduct was unlawful. In
addition, the TBCA requires a corporation to indemnify a director or officer for
any action that such director or officer is wholly successfully in defending on
the merits.
The Registrant's Articles of Incorporation provide that a director of the
Registrant will not be liable to the corporation for monetary damages for an act
or omission in the director's capacity as a director, except to the extent not
permitted by law. Texas law does not permit exculpation of liability in the case
of (i) a breach of the director's duty of loyalty to the corporation or its
shareholders, (ii) an act or omission not in good faith that involves
intentional misconduct or a knowing violation of the law, (iii) a transaction
from which a director received an improper benefit, whether or not the benefit
resulted from an action taken within the scope of the director's office, (iv) an
act or omission for which the liability of the director is expressly provided by
statute, or (v) an act related to an unlawful stock repurchase or dividend.
Pursuant to the Purchase Agreement, a form of which is filed as Exhibit 1.1
to this Registration Statement, the Underwriters have agreed to indemnify the
directors, officers and controlling persons of the Registrant against certain
civil liabilities that may be incurred in connection with this Offering,
including certain liabilities under the Securities Act.
The Registrant may provide liability insurance for each director and
officer for certain losses arising from claims or changes made against them
while acting in their capabilities as directors or officers of Registrant,
whether or not Registrant would have the power to indemnify such person against
such liability, as permitted by law.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On June 2, 1997, the Company issued 480,000 shares of Common Stock to
certain individuals at $6.25 per share.
Each sale was for cash and was made pursuant to the registration exemption
provided by Section 3(a)(11) of the Securities Act of 1933, as amended.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
The following documents are filed as exhibits to this Registration
Statement:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------------------------------------------------------------
*1 -- Form of Purchase Agreement by and
among the Underwriters, the Selling
Stockholders and the Company
3.1 -- Amended and Restated Articles of
Incorporation of the Company
3.2 -- Amended and Restated Bylaws of the
Company
*4 -- Form of Certificate representing
shares of Common Stock
*5 -- Opinion of Bracewell & Patterson,
L.L.P. as to the legality of the
securities being registered
10.1 -- 1995 Stock Option Plan
10.2 -- 1998 Stock Incentive Plan
10.3 -- Employment Agreements
10.4 -- Agreement and Plan of Reorganization
dated June 5, 1998 between the
Company, First Prosperity Bank and
Union State Bank
21 -- Subsidiaries of the Registrant
23.1 -- Consent of Deloitte & Touche LLP
23.2 -- Consent of Harper & Pearson Company
*23.3 -- Consent of Bracewell & Patterson,
L.L.P. (included in the opinion to be
filed as Exhibit 5 to this
Registration Statement)
27 -- Financial Data Schedule
- ------------
* To be supplied by amendment.
(B) FINANCIAL STATEMENT SCHEDULES
None.
All other schedules for which provision is made in Regulation S-X of the
Commission are not required under the related instructions or are inapplicable
and, therefore, have been omitted.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide the
Underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, 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 for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
II-2
<PAGE>
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
PROSPERITY BANCSHARES, INC., HAS DULY CAUSED THIS REGISTRATION STATEMENT OR
AMENDMENT THERETO TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF HOUSTON AND STATE OF TEXAS ON SEPTEMBER 11, 1998.
PROSPERITY BANCSHARES, INC.
By: /s/ TRACY T. RUDOLPH
TRACY T. RUDOLPH
CHAIRMAN OF THE BOARD
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT OR AMENDMENT THERETO HAS BEEN SIGNED BY THE
FOLLOWING PERSONS IN THE INDICATED CAPACITIES ON SEPTEMBER 11, 1998.
SIGNATURE POSITIONS
--------- ---------
/s/ TRACY T. RUDOLPH Chairman of the Board (principal
Tracy T. Rudolph executive officer)
/s/ DAVID HOLLAWAY Chief Financial Officer (principal
David Hollaway financial officer and principal
accounting officer)
/s/ HARRY BAYNE Director
Harry Bayne
/s/ JAMES A. BOULIGNY Director
James A. Bouligny
/s/ J.T. HERIN Director
J.T. Herin
/s/ CHARLES M. SLAVIK Director
Charles M. Slavik
/s/ HARRISON STAFFORD Director
Harrison Stafford
/s/ ROBERT STEELHAMMER Director
Robert Steelhammer
/s/ DAVID ZALMAN Director
David Zalman
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGES
- ------------------------ ----------------------------------------------------------------------------------------- -------------
<S> <C> <C>
*1 -- Form of Purchase Agreement by and among the Underwriters, the Selling Stockholders and
the Company
3.1 -- Amended and Restated Articles of Incorporation of the Company
3.2 -- Amended and Restated Bylaws of the Company
*4 -- Form of Certificate representing shares of Common Stock
*5 -- Opinion of Bracewell & Patterson, L.L.P. as to the legality of the securities being
registered
10.1 -- 1995 Stock Option Plan
10.2 -- 1998 Stock Incentive Plan
10.3 -- Employment Agreements
10.4 -- Agreement and Plan of Reorganization dated June 5, 1998 between the Company, First
Prosperity Bank and Union State Bank
21 -- Subsidiaries of the Registrant
23.1 -- Consent of Deloitte & Touche LLP
23.2 -- Consent of Harper & Pearson Company
*23.3 -- Consent of Bracewell & Patterson, L.L.P. (included in the opinion to be filed as Exhibit
5 to this Registration Statement)
27 -- Financial Data Schedule
</TABLE>
- ------------
* To be supplied by amendment.
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
PROSPERITY BANCSHARES, INC.
ARTICLE 1.
The name of the Corporation is Prosperity Bancshares, Inc.
ARTICLE 2.
The period of duration of the Corporation is perpetual.
ARTICLE 3.
The purpose for which the Corporation is organized is to engage in any or
all lawful acts, activities or businesses for which a corporation may be
organized under the Texas Business Corporation Act.
ARTICLE 4.
Section 4.1 AUTHORIZED SHARES. The aggregate number of all classes of
stock which the Corporation has authority to issue is 70,000,000 shares divided
into (A) one class of 50,000,000 shares of Common Stock with a par value of
$1.00 per share, and (B) one class of 20,000,000 shares of Preferred Stock with
a par value of $1.00 per share, which may be divided into and issued in series
as set forth in this Article Four.
Section 4.2 AUTHORIZATION OF DIRECTORS TO DETERMINE CERTAIN RIGHTS OF
PREFERRED STOCK. The shares of Preferred Stock may be divided into and issued in
series. The Board of Directors shall have the authority to establish series of
unissued shares of Preferred Stock by fixing and determining the relative rights
and preferences of the shares of any series so established, and to increase or
decrease the number of shares within each such series; provided, however, that
the Board of Directors may not decrease the number of shares within a series of
Preferred Stock to less than the number of shares within such series that are
then issued. The Preferred Stock of each such series shall have such
designations, preferences, limitations, or relative rights, including voting
rights, as shall be set forth in the resolution or resolutions establishing such
series adopted by the Board of Directors, including, but without limiting the
generality of the foregoing, the following:
(A) The distinctive designation of, and the number of shares of
Preferred Stock that shall constitute, such series, which number (except
where otherwise provided by the Board of Directors in the resolution
establishing such series) may be increased or decreased
<PAGE>
(but not below the number of shares of such series then outstanding) from
time to time by like action of the Board of Directors;
(B) The rights in respect of dividends, if any, of such series of
Preferred Stock, the extent of the preference or relation, if any, of such
dividends to the dividends payable on any other class or classes or any
other series of the same or other class or classes of capital stock of the
Corporation and whether such dividends shall be cumulative or
noncumulative;
(C) The right, if any, of the holders of such series of Preferred
Stock to convert the same into, or exchange the same for, shares of any
other class or classes or of any other series of the same or any other
class or classes of capital stock, obligations, indebtedness, rights to
purchase securities or other securities of the Corporation or other
entities, domestic or foreign, or for other property or for any
combination of the foregoing, and the terms and conditions of such
conversion or exchange;
(D) Whether or not shares of such series of Preferred Stock shall be
subject to redemption, and the redemption price or prices and the time or
times at which, and the terms and conditions on which, shares of such
series of Preferred Stock may be redeemed;
(E) The rights, if any, of the holders of such series of Preferred
Stock upon the voluntary or involuntary liquidation, dissolution or
winding-up of the Corporation or in the event of any merger or
consolidation of or sale of assets by the Corporation;
(F) The terms of any sinking fund or redemption or repurchase or
purchase account, if any, to be provided for shares of such series of
Preferred Stock;
(G) The voting powers, if any, of the holders of any series of
Preferred Stock generally or with respect to any particular matter, which
may be less than, equal to or greater than one vote per share, and which
may, without limiting the generality of the foregoing, include the right,
voting as a series of Preferred Stock as a class, to elect one or more
directors of the Corporation generally or under such specific
circumstances and on such conditions, as shall be provided in the
resolution or resolutions of the Board of Directors adopted pursuant
hereto, including, without limitation, in the event there shall have been
a default in the payment of dividends on or redemption of any one or more
series of Preferred Stock; and
(H) Such other powers, preferences and relative, participating,
optional and other special rights, and the qualifications, limitations and
restrictions thereof, as the Board of Directors shall determine.
Section 4.3. PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS OF ALL CLASSES
OF CAPITAL STOCK.
(A) GENERAL. All shares of Common Stock shall have rights identical
to those of all other such shares. Except as they may vary among series
established pursuant to
-2-
<PAGE>
Section 4.2 of this Article Four, all shares of Preferred Stock shall have
preferences, limitations, and relative rights identical to those of all
other such shares.
(B) LIQUIDATION PREFERENCE. In the event of dissolution,
liquidation, or winding up of the Corporation (whether voluntary or
involuntary), after payment or provision for payment of debts but before
any distribution to the holders of Common Stock, the holders of each
series of Preferred Stock then outstanding shall be entitled to receive
the amount fixed by the Board of Directors pursuant to Section 4.2 of this
Article Four and no more. All remaining assets shall be distributed pro
rata among the holders of Common Stock. If the assets distributable among
the holders of Preferred Stock are insufficient to permit full payment to
them, the entire assets shall be distributed among the holders of the
Preferred Stock in proportion to their respective liquidation preferences
unless otherwise provided by the Board of Directors pursuant to Section
4.2 of this Article Four. Neither the consolida tion, merger, or
reorganization of the Corporation with any other corporation or
corporations, nor the sale of all or substantially all the assets of the
Corporation, nor the purchase or redemption by the Corporation of any of
its outstanding shares shall be deemed to be a dissolution, liquidation,
or winding up within the meaning of this paragraph.
(C) REDEMPTION.
(1) RIGHT; METHOD. All or any part of any one or more series
of Preferred Stock may be redeemed at any time or times at the option of
the Corporation, by resolution of the Board of Directors, in accordance
with the terms and conditions of this Article Four and those fixed by the
Board of Directors pursuant to Section 4.2 of this Article Four. The
Corporation may redeem shares of any one or more series without redeeming
shares of any other series. If less than all the shares of any series are
to be redeemed, the shares of the series to be redeemed shall be selected
ratably or by lot or by any other equitable method determined by the Board
of Directors.
(2) NOTICE. Notice shall be given to the holders of shares to
be redeemed, either personally or by mail, not less than twenty nor more
than fifty days before the date fixed for redemption.
(3) PAYMENT. Holders of redeemed shares shall be paid in cash
the amount fixed by the Board of Directors pursuant to Section 4.2 of this
Article Four.
(4) PROVISION FOR PAYMENT. On or before the date fixed for
redemption, the Corporation may provide for payment of a sum sufficient to
redeem the shares called for redemption either (a) by setting aside the
sum, separate from its other funds, in trust for the benefit of the
holders of the shares to be redeemed, or (b) by depositing such sum in a
bank or trust company (either one in Texas having capital and surplus of
at least $10,000,000 according to its latest statement of condition, or
one anywhere in the United States duly appointed and acting as transfer
agent of the Corporation) as a trust fund, with irrevocable instructions
and authority to the bank or trust company to give or complete the notice
of
-3-
<PAGE>
redemption and to pay to the holders of the shares to be redeemed, on or
after the date fixed for redemption, the redemption price on surrender of
their respective share certificates. The holders of shares to be redeemed
may be evidenced by a list certified by the Corporation (by its president
or a vice president and by its secretary or an assistant secretary) or by
its transfer agent. If the Corporation so provides for payment, then from
and after the date fixed for redemption (a) the shares shall be deemed to
be redeemed, (b) dividends thereon shall cease to accrue, (c) such setting
aside or deposit shall be deemed to constitute full payment for the
shares, (d) the shares shall no longer be deemed to be outstanding, (e)
the holders thereof shall cease to be shareholders with respect to such
shares, and (f) the holders shall have no rights with respect thereto
except the right to receive (without interest) their proportionate shares
of the funds so set aside or deposited upon surrender of their respective
certificates, and any right to convert such shares which may exist. Any
interest accrued on funds so set aside or deposited shall belong to the
Corporation. If the holders of the shares do not, within six years after
such deposit, claim any amount so deposited for redemption thereof, the
bank or trust company shall upon demand pay over to the Corporation the
balance of the funds so deposited, and the bank or trust company shall
thereupon be relieved of all responsibility to such holders.
(5) STATUS OF REDEEMED SHARES. Shares of Preferred Stock which
are redeemed shall be canceled and shall be restored to the status of
authorized but unissued shares.
(D) PURCHASE. Except as fixed by the Board of Directors pursuant to
Section 4.2 of this Article Four or as otherwise expressly provided by
law, nothing herein shall limit the right of the Corporation to purchase
any of its outstanding shares in accordance with law, by public or private
transaction.
ARTICLE 5.
The Corporation will not commence business until it has received for the
issuance of its shares consideration of the value of at least $1,000.00,
consisting of money, labor done or property actually received.
ARTICLE 6.
Without necessity for action by its shareholders, the Corporation may
purchase, directly or indirectly, its own shares to the extent of the aggregate
of unrestricted capital surplus available therefor and unrestricted reduction
surplus available therefor.
ARTICLE 7.
No contract or other transaction between the Corporation and one or more
of its directors, officers or securityholders or between the Corporation and
another corporation, partnership, joint venture, trust or other enterprise of
which one or more of the Corporation's directors, officers or
-4-
<PAGE>
securityholders are members, officers, securityholders, directors or employees
or in which they are otherwise interested, directly or indirectly, shall be
invalid solely because of such relationship, or solely because such director,
officer or securityholder is present at or participates in the meeting of the
Board of Directors or committee thereof which authorizes the contract or other
transaction, or solely because his or their votes are counted for such purpose,
if: (a) the material facts as to his relationship or interest and as to the
contract or other transaction are known or disclosed to the Board of Directors
or committee thereof, and such board or committee in good faith authorizes the
contract or other transaction by the affirmative votes of a majority of the
disinterested directors even though the disinterested directors be less than a
quorum; or (b) the material facts as to his relationship or interest and as to
the contract or other transaction are known or disclosed to the shareholders
entitled to vote thereon, and the contract or other transaction is specifically
approved in good faith by vote of the shareholders; or (c) the contract or other
transaction is fair as to the Corporation as of the time it is authorized,
approved or ratified by the Board of Directors, a committee thereof, or the
shareholders.
ARTICLE 8.
Section 8.1 INDEMNIFICATION. As permitted by Section G of Article 2.02-1
of the Texas Business Corporation Act or any successor statute (the
"Indemnification Article"), the Corporation hereby:
(A) makes mandatory the indemnification permitted under Section B of
the Indemnification Article as contemplated by Section G thereof;
(B) makes mandatory its payment or reimbursement of the reasonable
expenses incurred by a former or present director who was, is, or is
threatened to be made a named defendant or respondent in a proceeding upon
such director's compliance with the requirements of Section K of the
Indemnification Article; and
(C) extends the mandatory indemnification referred to in Section
8.1(a) above and the mandatory payment or reimbursement of expenses
referred to in Section 8.1(b) above (i) to all former or present officers
of the Corporation and (ii) to all persons who are or were serving at the
request of the Corporation as a director, officer, partner or trustee of
another foreign or domestic corporation, partnership, joint venture, trust
or employee benefit plan, to the same extent that the Corporation is
obligated to indemnify and pay or reimburse expenses to directors.
Section 8.2 NONEXCLUSIVITY. The indemnification provided by this Article
shall not be deemed exclusive of any other rights to which the person
indemnified may be entitled under any bylaw, agreement, authorization of
shareholders or disinterested directors or otherwise, both as to action in such
person's official capacity and as to action in another capacity while holding
such office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall enure to the benefit of such person's heirs
and legal representatives.
-5-
<PAGE>
Section 8.3 INSURANCE. The Corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee, or agent of the Corporation or who is or was serving at the request of
the Corporation as a director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another business, foreign, domestic or
non-profit corporation, partnership, joint venture, sole proprietorship, trust
or other enterprise or employee benefit plan, against any liability asserted
against such person and incurred by such person in such a capacity or arising
out of such person's status as such a person, whether or not the Corporation
would have the power to indemnify such person against that liability under the
provisions of this Article or the Texas Business Corporation Act.
Section 8.4 WITNESSES. Notwithstanding any other provision of this
Article, the Corporation shall pay or reimburse expenses incurred by any
director, officer, employee or agent in connection with such person's appearance
as a witness or other participation in a proceeding at a time when such person
is not a named defendant or respondent in such proceeding.
ARTICLE 9.
In performing his duties, a director of the Corporation shall be entitled
to rely on information, opinions, reports or statements, including financial
statements and other financial data, in each case prepared or presented by: (a)
one or more officers or employees of the Corporation whom the director
reasonably believes to be reliable and competent in the matters presented, (b)
counsel, public accountants or other persons as to matters which the director
reasonably believes to be within such person's professional or expert
competence, or (c) a committee of the Board of Directors upon which he does not
serve, duly designed in accordance with a provision of the by-laws, as to
matters within its designated authority, which committee the director deems to
merit confidence, but he shall not be considered to be acting in good faith if
he has knowledge concerning the matter in question that would cause such
reliance to be unwarranted. A person who so performs his duties shall have no
liability to the Corporation (whether asserted directly or derivatively) by
reason of being or having been a director of the Corporation.
ARTICLE 10.
The address of the registered office of the Corporation is 3040 Post Oak
Boulevard, Suite 150, Houston, Texas 77056, the name of the registered agent of
the Corporation at such address is Tracy T. Rudolph.
ARTICLE 11.
The initial Board of Directors shall consist of three (3) members who
shall serve as directors until the first annual meeting of shareholders or until
their respective successors shall have been elected and qualified, and whose
names and addresses are as follows:
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<PAGE>
NAME ADDRESS
---- -------
Gene A. Ratliff 102 North Wells
Edna, Texas 77957
Tracy T. Rudolph 3001 Main Street
Houston, Texas 77002
5922 Beaudry
Robert H. Steelhammer Houston, Texas 77035
ARTICLE 12.
The name and address of the incorporator of the Corporation is as follows:
NAME ADDRESS
2900 South Tower
Pennzoil Place
William T. Luedke IV Houston, Texas 77002
ARTICLE 13.
No holder of any shares of any class of stock of the Corporation shall, as such
holder, have any preemptive or preferential right to receive, purchase, or
subscribe to (1) any unissued or treasury shares of any class of stock (whether
now or hereafter authorized) of the Corporation, (2) any obligations, evidences
of indebtedness, or other securities of the Corporation convertible into or
exchangeable for, or carrying or accompanied by any rights to receive, purchase,
or subscribe to, any such unissued or treasury shares, (3) any right of
subscription to or to receive, or any warrant or option for the purchase of, any
of the foregoing securities, (4) any other securities that may be issued or sold
by the Corporation, other than such (if any) as the Board of Directors of the
Corporation, in its sole and absolute discretion, may determine from time to
time.
ARTICLE 14.
Cumulative voting shall not be permitted.
ARTICLE 15.
Except to the extent otherwise required by law, the vote or concurrence of
the holders of a majority of the shares of the Corporation entitled to vote and
represented in person or by proxy at a meeting of the shareholders at which a
quorum is present shall be the act of the shareholders. With
-7-
<PAGE>
respect to any matter for which the affirmative vote of a portion of the shares
of the Corporation entitled to vote greater than a majority of such shares is
required by the Texas Business Corporation Act (or any successor or replacement
statute), as the same now exists or may hereafter be amended, the affirmative
vote of the holders of a majority of the shares of the Corporation entitled to
vote on the matter shall be the act of the shareholders.
ARTICLE 16.
No director of the Corporation shall be liable to the Corporation or its
shareholders for monetary damages for any act or omission in the director's
capacity as a director, except to the extent that the foregoing exculpation from
liability is not permitted under the applicable provisions of the Texas
Miscellaneous Corporation Laws Act (or any successor or replacement statute) as
the same now exists or may hereafter be amended. Any repeal or modification of
the provisions of the foregoing sentence shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
ARTICLE 17.
Special meetings of the shareholders of the Corporation may be called only
(1) by the Chairman of the Board, by the President, by a majority of the Board
of Directors, or by such other person or persons as may be authorized in the
Bylaws or (2) by the holders of 50% of the outstanding shares of the Corporation
entitled to vote at the proposed special meeting.
-8-
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
PROSPERITY BANCSHARES, INC.
A Texas Corporation
Date of Adoption
July 30, 1998
<PAGE>
TABLE OF CONTENTS
Page
Article 1
Offices
Section 1.1.Registered Office..........................................1
Section 1.2.Other Offices..............................................1
Article 2
Shareholders
Section 2.1.Place of Meetings..........................................1
Section 2.2.Quorum; Adjournment of Meetings...........................1
Section 2.3.Annual Meetings............................................2
Section 2.4.Special Meetings...........................................2
Section 2.5.Record Date................................................2
Section 2.6.Notice of Meetings.........................................3
Section 2.7.Shareholder List...........................................3
Section 2.8.Proxies....................................................3
Section 2.9.Voting; Election; Inspectors...............................4
Section 2.10.Conduct of Meetings.......................................5
Section 2.11.Notifications of Nominations and Proposed Business........5
Section 2.12.Treasury Stock............................................6
Article 3
Board of Directors
Section 3.1.Power; Number; Term of Office..............................6
Section 3.2.Classified Board...........................................7
Section 3.3.Quorum; Voting.............................................7
Section 3.4.Place of Meetings; Order of Business.......................7
Section 3.5.First Meeting..............................................7
Section 3.6.Regular Meetings...........................................8
Section 3.7.Special Meetings...........................................8
Section 3.8.Removal....................................................8
Section 3.9.Vacancies; Increases in the Number of Directors............8
Section 3.10.Compensation..............................................8
-i-
<PAGE>
Section 3.11.Action Without a Meeting; Telephone Conference Meeting....8
Section 3.12.Approval or Ratification of Acts or Contracts by
Shareholders..............................................9
Article 4
Committees
Section 4.1.Designation; Powers........................................9
Section 4.2.Procedure; Meetings; Quorum...............................10
Section 4.3.Substitution and Removal of Members; Vacancies............10
Article 5
Officers
Section 5.1.Number, Titles and Term of Office.........................10
Section 5.2.Powers and Duties of the Chairman of the Board............11
Section 5.3.Powers and Duties of the President........................11
Section 5.4.Vice Presidents...........................................11
Section 5.5.Secretary.................................................11
Section 5.6.Assistant Secretaries.....................................12
Section 5.7.Treasurer.................................................12
Section 5.8.Assistant Treasurers......................................12
Section 5.9.Action with Respect to Securities of Other Corporations...12
Section 5.10.Delegation...............................................12
Article 6
Capital Stock
Section 6.1.Certificates of Stock.....................................13
Section 6.2.Transfer of Shares........................................13
Section 6.3.Ownership of Shares.......................................13
Section 6.4.Regulations Regarding Certificates........................13
Section 6.5.Lost or Destroyed Certificates............................14
Article 7
Miscellaneous Provisions
Section 7.1.Fiscal Year...............................................14
Section 7.2.Corporate Seal............................................14
Section 7.3.Notice and Waiver of Notice...............................14
-ii-
<PAGE>
Section 7.4.Facsimile Signatures......................................15
Section 7.5.Reliance upon Books, Reports and Records..................15
Section 7.6.Application of Bylaws.....................................15
Article 8
Indemnification of Officers and Directors
Section 8.1.Indemnification...........................................15
Section 8.2.Nonexclusivity............................................16
Section 8.3.Insurance.................................................16
Section 8.4.Witnesses.................................................16
Article 9
Amendments
Section 9.1.Amendments................................................16
-iii-
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
PROSPERITY BANCSHARES, INC.
Article 1
OFFICES
SECTION 1.1. REGISTERED OFFICE. The registered office of the Corporation
required by the State of Texas to be maintained in the State of Texas shall be
the registered office named in the Articles of Incorporation of the Corporation,
or such other office as may be designated from time to time by the Board of
Directors in the manner provided by law.
SECTION 1.2. OTHER OFFICES. The Corporation may also have offices at such
other places both within and without the State of Texas as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
Article 2
SHAREHOLDERS
SECTION 2.1. PLACE OF MEETINGS. All meetings of the shareholders shall be
held at the principal office of the Corporation, or at such other place within
or without the State of Texas as shall be specified or fixed in the notices or
waivers of notice thereof.
SECTION 2.2. QUORUM; ADJOURNMENT OF MEETINGS. Unless otherwise required by
law or provided in the Articles of Incorporation of the Corporation or these
Bylaws, the holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at any meeting of shareholders for the transaction of
business. The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.
Notwithstanding the other provisions of the Articles of Incorporation of
the Corporation or these Bylaws, the chairman of the meeting or the holders of a
majority of the issued and outstanding stock, present in person or represented
by proxy and entitled to vote thereat, at any meeting of shareholders, whether
or not a quorum is present, shall have the power to adjourn such meeting from
time to time, without any notice other than announcement at the meeting of the
time and place of the
<PAGE>
holding of the adjourned meeting. If the adjournment is for more than thirty
(30) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
shareholder of record entitled to vote at such meeting. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally called.
SECTION 2.3. ANNUAL MEETINGS. An annual meeting of the shareholders, for
the election of directors to succeed those whose terms expire and for the
transaction of such other business as may properly come before the meeting,
shall be held at such place (within or without the State of Texas), on such
date, and at such time as the Board of Directors shall fix and set forth in the
notice of the meeting, which date shall be within thirteen (13) months
subsequent to the last annual meeting of shareholders.
SECTION 2.4. SPECIAL MEETINGS. Unless otherwise provided in the Articles
of Incorporation of the Corporation, special meetings of the shareholders for
any purpose or purposes may be called at any time by the Chairman of the Board,
by the President, by a majority of the Board of Directors, or by a majority of
the executive committee (if any) or by the holders of 50% of the outstanding
shares of the Company entitled to vote at the proposed special meeting, at such
time and at such place as may be stated in the notice of the meeting. Business
transacted at a special meeting shall be confined to the purpose(s) stated in
the notice of such meeting.
SECTION 2.5. RECORD DATE. For the purpose of determining shareholders
entitled to notice of or to vote at any meeting of shareholders, or any
adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors of the Corporation may fix a date as
the record date for any such determination of shareholders, which record date
shall not precede the date on which the resolutions fixing the record date are
adopted and which record date shall not be more than sixty (60) days nor less
than ten (10) days before the date of such meeting of shareholders, nor more
than sixty (60) days prior to any other action to which such record date
relates.
If the Board of Directors does not fix a record date for any meeting of
the shareholders, the record date for determining shareholders entitled to
notice of or to vote at such meeting shall be at the close of business on the
day next preceding the day on which notice is given, or, if in accordance with
Article 7, Section 7.3 of these Bylaws notice is waived, at the close of
business on the day next preceding the day on which the meeting is held. The
record date for determining shareholders for any other purpose (other than the
consenting to corporate action in writing without a meeting) shall be at the
close of business on the day on which the Board of Directors adopts the
resolution relating thereto. A determination of shareholders of record entitled
to notice of or to vote at a meeting of
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<PAGE>
shareholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
For the purpose of determining the shareholders entitled to consent to
corporate action in writing without a meeting, the Board of Directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which date shall not be more than ten (10) days after the date upon which the
resolution fixing the record date is adopted by the Board of Directors. If the
Board of Directors does not fix the record date, the record date for determining
shareholders entitled to consent to corporate action in writing without a
meeting, when no prior action by the Board of Directors is necessary, shall be
the first date on which a signed written consent setting forth the action taken
or proposed to be taken is delivered to the Corporation at its registered office
in the State of Texas or at its principal place of business. If the Board of
Directors does not fix the record date, and prior action by the Board of
Directors is necessary, the record date for determining shareholders entitled to
consent to corporate action in writing without a meeting shall be at the close
of business on the day on which the Board of Directors adopts the resolution
taking such prior action.
SECTION 2.6. NOTICE OF MEETINGS. Written notice of the place, date and
hour of all meetings, and, in case of a special meeting, the purpose or purposes
for which the meeting is called, shall be given by or at the direction of the
Board of Directors or the other person(s) calling the meeting to each
shareholder entitled to vote thereat not less than ten (10) nor more than sixty
(60) days before the date of the meeting. Such notice may be delivered either
personally or by mail. If mailed, notice is given when deposited in the United
States mail, postage prepaid, directed to the shareholder at such shareholder's
address as it appears on the records of the Corporation.
SECTION 2.7. SHAREHOLDER LIST. A complete list of shareholders entitled to
vote at any meeting of shareholders, arranged in alphabetical order for each
class of stock and showing the address of each such shareholder and the number
of shares registered in the name of such shareholder, shall be open to the
examination of any shareholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The shareholder list
shall also be produced and kept at the time and place of the meeting during the
whole time thereof, and may be inspected by any shareholder who is present.
SECTION 2.8. PROXIES. Each shareholder entitled to vote at a meeting of
shareholders or to express consent or dissent to a corporate action in writing
without a meeting may authorize another person or persons to act for him by
proxy. Proxies for use at any meeting of shareholders shall be filed with the
Secretary, or such other officer as the Board of Directors may from time to time
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determine by resolution, before or at the time of the meeting. All proxies shall
be received and taken charge of and all ballots shall be received and canvassed
by the secretary of the meeting, who shall decide all questions touching upon
the qualification of voters, the validity of the proxies, and the acceptance or
rejection of votes, unless an inspector or inspectors shall have been appointed
by the chairman of the meeting, in which event such inspector or inspectors
shall decide all such questions.
No proxy shall be valid after eleven (11) months from its date, unless the
proxy provides for a longer period. Each proxy shall be revocable unless
expressly provided therein to be irrevocable and coupled with an interest
sufficient in law to support an irrevocable power.
Should a proxy designate two or more persons to act as proxies, unless
such instrument shall provide the contrary, a majority of such persons present
at any meeting at which their powers thereunder are to be exercised shall have
and may exercise all the powers of voting or giving consents thereby conferred,
or if only one be present, then such powers may be exercised by that one; or, if
an even number attend and a majority do not agree on any particular issue, each
proxy so attending shall be entitled to exercise such powers in respect of such
portion of the shares as is equal to the reciprocal of the fraction equal to the
number of proxies representing such shares divided by the total number of shares
represented by such proxies.
SECTION 2.9. VOTING; ELECTION; INSPECTORS. Unless otherwise required by
law or provided in the Articles of Incorporation of the Corporation, each
shareholder shall on each matter submitted to a vote at a meeting of
shareholders have one vote for each share of the stock entitled to vote which is
registered in his name on the record date for the meeting. For the purposes
hereof, each election to fill a directorship shall constitute a separate matter.
Shares registered in the name of another corporation, domestic or foreign, may
be voted by such officer, agent or proxy as the bylaws (or comparable body) of
such corporation may determine. Shares registered in the name of a deceased
person may be voted by the executor or administrator of such person's estate,
either in person or by proxy.
All voting, except as required by the Articles of Incorporation of the
Corporation or where otherwise required by law, may be by a voice vote;
provided, however, upon request of the chairman of the meeting or upon demand
therefor by shareholders holding a majority of the issued and outstanding stock
present in person or by proxy at any meeting a stock vote shall be taken. Every
stock vote shall be taken by written ballots, each of which shall state the name
of the shareholder or proxy voting and such other information as may be required
under the procedure established for the meeting. All elections of directors
shall be by written ballots, unless otherwise provided in the Articles of
Incorporation of the Corporation.
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At any meeting at which a vote is taken by written ballots, the chairman
of the meeting may appoint one or more inspectors, each of whom shall subscribe
an oath or affirmation to execute faithfully the duties of inspector at such
meeting with strict impartiality and according to the best of such inspector's
ability. Such inspector shall receive the written ballots, count the votes, and
make and sign a certificate of the result thereof. The chairman of the meeting
may appoint any person to serve as inspector, except no candidate for the office
of director shall be appointed as an inspector.
Unless otherwise provided in the Articles of Incorporation of the
Corporation, cumulative voting for the election of directors shall be
prohibited.
SECTION 2.10. CONDUCT OF MEETINGS. The meetings of the shareholders shall
be presided over by the Chairman of the Board, or, if the Chairman of the Board
is not present, by the President, or, if the President is not present, by any
Vice President, or if no Vice President is present, by a chairman elected at the
meeting. The Secretary of the Corporation, if present, shall act as secretary of
such meetings, or, if the Secretary is not present, an Assistant Secretary shall
so act; if neither the Secretary or an Assistant Secretary is present, then a
secretary shall be appointed by the chairman of the meeting.
The chairman of any meeting of shareholders shall determine the order of
business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of discussion as seem to the chairman in order.
SECTION 2.11. NOTIFICATIONS OF NOMINATIONS AND PROPOSED BUSINESS. Subject
to the rights of holders of any class of capital stock of the Corporation (other
than the common stock), nominations for the election of directors and proposals
for business to be brought before any shareholder meeting may be made by the
Board of Directors or by any shareholder entitled to vote in the election of
directors generally. However, any such shareholder may nominate one or more
persons for election as directors at a meeting or propose business to be brought
before a meeting, or both, only if such shareholder has given timely notice in
proper written form of his intent to make such nomination or nominations or to
propose such business. To be timely, a shareholder's notice must be delivered to
or mailed and received by the Secretary of the Corporation not later than sixty
(60) days prior to such meeting. To be in proper written form, a shareholder's
notice to the Secretary shall set forth:
(i) the name and address of the shareholder who intends to
make the nominations or propose the business and, in the case of
nominations for the election of directors, of the person or persons to be
nominated;
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(ii) a representation that the shareholder is a holder of
record of stock of the Corporation entitled to vote at such meeting and,
if applicable, intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice or propose the
business specified in the notice;
(iii) if applicable, a description of all arrangements or
understandings between the shareholder and each nominee and any other
person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the shareholder;
(iv) such other information regarding each nominee or each
matter of business to be proposed by such shareholder as would be required
to be included in a proxy statement filed pursuant to the proxy rules of
the Securities and Exchange Commission had the nominee been nominated or
the matter been proposed by the Board of Directors; and
(v) if applicable, the consent of each nominee to serve as
director of the Corporation if so elected.
A nomination of any person or proposal of any business not made in
compliance with the foregoing procedures shall not be eligible to be voted upon
by the shareholders at the meeting.
SECTION 2.12.TREASURY STOCK. The Corporation shall not vote, directly or
indirectly, shares of its own stock owned by it and such shares shall not be
counted for quorum purposes. Nothing in this Section 2.11 shall be construed as
limiting the right of the Corporation to vote stock, including but not limited
to its own stock, held by it in a fiduciary capacity.
Article 3
BOARD OF DIRECTORS
SECTION 3.1.POWER; NUMBER; TERM OF OFFICE. The business and affairs of the
Corporation shall be managed by or under the direction of the Board of
Directors, and, subject to the restrictions imposed by law or the Articles of
Incorporation of the Corporation, the Board of Directors may exercise all the
powers of the Corporation.
The number of directors which shall constitute the whole Board of
Directors shall be determined from time to time by the Board of Directors
(provided that no decrease in the number of directors which would have the
effect of shortening the term of an incumbent director may be made by the Board
of Directors). If the Board of Directors makes no such determination, the number
of directors shall be three. Each director shall hold office for the term for
which such director is
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elected, and until such director's successor shall have been elected and
qualified or until such director's earlier death, resignation or removal.
Unless otherwise provided in the Articles of Incorporation of the
Corporation, directors need not be shareholders nor residents of the State of
Texas.
SECTION 3.2.CLASSIFIED BOARD. The directors of the Corporation shall be
divided into three classes, with respect to the time that they severally hold
office, as nearly equal in number as possible, with the initial term of office
of the first class of directors (the "Class I Directors") to expire at the 1999
annual meeting of holders of capital stock of the Corporation, the initial term
of office of the second class of directors (the "Class II Directors") to expire
at the 2000 annual meeting of holders of capital stock of the Corporation and
the initial term of office of the third class of directors (the "Class III
Directors") to expire at the 2001 annual meeting of holders of capital stock of
the Corporation. Directors elected to succeed those directors whose terms have
thereupon expired shall be elected for a term of office to expire at the third
succeeding annual meeting of holders of capital stock of the Corporation after
their election. If the number of directors is changed, any increase or decrease
shall be apportioned among the classes so as to maintain or attain, if possible,
the equality of the number of directors in each class, but in no case will a
decrease in the number of directors shorten the term of any incumbent director.
If such equality is not possible, the increase or decrease shall be apportioned
among the classes in such a way that the difference in the number of directors
in any two classes shall not exceed one.
SECTION 3.3.QUORUM; VOTING. Unless otherwise provided in the Articles of
Incorporation of the Corporation, a majority of the number of directors fixed in
accordance with Section 3.1 shall constitute a quorum for the transaction of
business of the Board of Directors and the vote of a majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors.
SECTION 3.4.PLACE OF MEETINGS; ORDER OF BUSINESS. The directors may hold
their meetings and may have an office and keep the books of the Corporation,
except as otherwise provided by law, in such place or places, within or without
the State of Texas, as the Board of Directors may from time to time determine.
At all meetings of the Board of Directors business shall be transacted in such
order as shall from time to time be determined by the Chairman of the Board, or
in the Chairman of the Board's absence by the President, or in the President's
absence by the Vice President, or by the Board of Directors.
SECTION 3.5.FIRST MEETING. Each newly elected Board of Directors may hold
its first meeting for the purpose of organization and the transaction of
business, if a quorum is present, immediately after and at the same place as the
annual meeting of the shareholders. Notice of such
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meeting shall not be required. At the first meeting of the Board of Directors in
each year at which a quorum shall be present, held after the annual meeting of
shareholders, the Board of Directors shall elect the officers of the
Corporation.
SECTION 3.6.REGULAR MEETINGS. Regular meetings of the Board of Directors
shall be held at such times and places as shall be designated from time to time
by the Chairman of the Board, or in the absence of the Chairman of the Board, by
the President, or in the President's absence, by the Vice President, or in the
absence of the Vice President, by another officer of the Corporation. Notice of
such regular meetings shall not be required.
SECTION 3.7.SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by the Chairman of the Board, the President or, on the written
request of any director, by the Secretary, in each case on at least twenty-four
(24) hours personal, written, telegraphic, cable or wireless notice to each
director. Such notice, or any waiver thereof pursuant to Article 7, Section 7.3
hereof, need not state the purpose or purposes of such meeting, except as may
otherwise be required by law or provided for in the Articles of Incorporation of
the Corporation or these Bylaws. Meetings may be held at any time without notice
if all the directors are present or if those not present waive notice of the
meeting in writing.
SECTION 3.8.REMOVAL. Any director or the entire Board of Directors may be
removed, but only for cause, by the holders of a majority of the shares then
entitled to vote at an election of directors.
SECTION 3.9.VACANCIES; INCREASES IN THE NUMBER OF DIRECTORS. Unless
otherwise provided in the Articles of Incorporation of the Corporation,
vacancies existing on the Board of Directors for any reason may be filled by the
affirmative vote of a majority of the directors then in office, although less
than a quorum, or by a sole remaining director; and any director so chosen shall
hold office until the next annual meeting held for the election of directors of
the class of directors to which such director has been appointed and until such
director's successor shall have been elected and qualified, or until such
director's earlier death, resignation or removal.
SECTION 3.10.COMPENSATION. Directors and members of standing committees
may receive such compensation as the Board of Directors from time to time shall
determine to be appropriate, and shall be reimbursed for all reasonable expenses
incurred in attending and returning from meetings of the Board of Directors.
SECTION 3.11.ACTION WITHOUT A MEETING; TELEPHONE CONFERENCE MEETING.
Unless otherwise restricted by the Articles of Incorporation of the Corporation,
any action required or permitted to be taken at any meeting of the Board of
Directors or any committee designated by the Board of
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Directors may be taken without a meeting if all members of the Board of
Directors or committee, as the case may be, consent thereto in writing, and the
writing or writings are filed with the minutes of proceedings of the Board of
Directors or committee. Such consent shall have the same force and effect as a
unanimous vote at a meeting, and may be stated as such in any document or
instrument filed with the Secretary of State of the State of Texas.
Unless otherwise restricted by the Articles of Incorporation of the
Corporation, subject to the requirement for notice of meetings, members of the
Board of Directors, or members of any committee designated by the Board of
Directors, may participate in a meeting of such Board of Directors or committee,
as the case may be, by means of a conference telephone connection or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in such a meeting shall
constitute presence in person at such meeting, except where a person
participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
SECTION 3.12.APPROVAL OR RATIFICATION OF ACTS OR CONTRACTS BY
SHAREHOLDERS. The Board of Directors in its discretion may submit any act or
contract for approval or ratification at any annual meeting of the shareholders,
or at any special meeting of the shareholders called for the purpose of
considering any such act or contract, and any act or contract that shall be
approved or be ratified by the vote of the shareholders holding a majority of
the issued and outstanding shares of stock of the Corporation entitled to vote
and present in person or by proxy at such meeting (provided that a quorum is
present) shall be as valid and as binding upon the Corporation and upon all the
shareholders as if it has been approved or ratified by every shareholder of the
Corporation. In addition, any such act or contract may be approved or ratified
by the written consent of shareholders holding a majority of the issued and
outstanding shares of capital stock of the Corporation entitled to vote, and
such consent shall be as valid and binding upon the Corporation and upon all the
shareholders as if it had been approved or ratified by every shareholder of the
Corporation.
Article 4
COMMITTEES
SECTION 4.1.DESIGNATION; POWERS. The Board of Directors may, by resolution
passed by a majority of the whole board, designate one or more committees,
including, if they shall so determine, an executive committee, with each such
committee to consist of one or more of the directors of the Corporation. Any
such designated committee shall have and may exercise such of the powers and
authority of the Board of Directors in the management of the business and
affairs of the Corporation as may be provided in such resolution, except that no
such committee shall have the power or authority of the Board of Directors in
reference to amending the Articles of Incorporation of the Corporation, adopting
an agreement of merger or consolidation, recommending to the
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shareholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the shareholders a
dissolution of the Corporation or a revocation of a dissolution of the
Corporation, or amending, altering or repealing these Bylaws or adopting new
bylaws for the Corporation. Any such designated committee may authorize the seal
of the Corporation to be affixed to all papers which may require it. In addition
to the above, such committee or committees shall have such other powers and
limitations of authority as may be determined from time to time by the Board of
Directors.
SECTION 4.2.PROCEDURE; MEETINGS; QUORUM. Any committee designated pursuant
to this Article 4 shall keep regular minutes of its actions and proceedings in a
book provided for that purpose and report the same to the Board of Directors at
its meeting next succeeding such action, shall fix its own rules or procedures,
and shall meet at such times and at such place or places as may be provided by
such rules, or by such committee or the Board of Directors. Should a committee
fail to fix its own rules, the provisions of these Bylaws, pertaining to the
calling of meetings and conduct of business by the Board of Directors, shall
apply as nearly as may be possible. At every meeting of any such committee, the
presence of a majority of all the members thereof shall constitute a quorum,
except as provided in Section 4.3 of this Article 4, and the affirmative vote of
a majority of the members present shall be necessary for the adoption by it of
any resolution.
SECTION 4.3.SUBSTITUTION AND REMOVAL OF MEMBERS; VACANCIES. The Board of
Directors may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
such committee. In the absence or disqualification of a member of a committee,
the member or members present at any meeting and not disqualified from voting,
whether or not constituting a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of the absent or
disqualified member. The Board of Directors shall have the power at any time to
remove any member(s) of a committee and to appoint other directors in lieu of
the person(s) so removed and shall also have the power to fill vacancies in a
committee.
Article 5
OFFICERS
SECTION 5.1.NUMBER, TITLES AND TERM OF OFFICE. The officers of the
Corporation shall be a Chairman of the Board, a President, one or more Vice
Presidents (any one or more of whom may be designated Executive Vice President
or Senior Vice President), a Treasurer, a Secretary, and such other officers as
the Board of Directors may from time to time elect or appoint (including, but
not limited to, one or more Assistant Secretaries and one or more Assistant
Treasurers). Each officer shall hold office until such officer's successor shall
be duly elected and shall qualify or until such officer's death or until such
officer shall resign or shall have been removed. Any number of offices
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may be held by the same person, unless the Articles of Incorporation of the
Corporation provide otherwise. Except for the Chairman of the Board, no officer
need be a director.
SECTION 5.2.POWERS AND DUTIES OF THE CHAIRMAN OF THE BOARD. The Chairman
of the Board shall be the chief executive officer of the Corporation. Subject to
the control of the Board of Directors and the Executive Committee (if any), the
Chairman of the Board shall have general executive charge, management and
control of the properties, business and operations of the Corporation with all
such powers as may be reasonably incident to such responsibilities; may agree
upon and execute all leases, contracts, evidences of indebtedness and other
obligations in the name of the Corporation and may sign all certificates for
shares of capital stock of the Corporation; and shall have such other powers and
duties as designated in accordance with these Bylaws and as from time to time
may be assigned to the Chairman of the Board by the Board of Directors. The
Chairman of the Board shall preside at all meetings of the shareholders and of
the Board of Directors.
SECTION 5.3.POWERS AND DUTIES OF THE PRESIDENT. Unless the Board of
Directors otherwise determines, the President shall have the authority to agree
upon and execute all leases, contracts, evidences of indebtedness and other
obligations in the name of the Corporation; and, unless the Board of Directors
otherwise determines, the President shall, in the absence of the Chairman of the
Board or if there be no Chairman of the Board, preside at all meetings of the
shareholders and of the Board of Directors; and the President shall have such
other powers and duties as designated in accordance with these Bylaws and as
from time to time may be assigned to the President by the Board of Directors or
the Chairman of the Board.
SECTION 5.4.VICE PRESIDENTS. Each Vice President shall at all times
possess power to sign all certificates, contracts and other instruments of the
Corporation, except as otherwise limited in writing by the Chairman of the Board
or the President of the Corporation. Each Vice President shall have such other
powers and duties as from time to time may be assigned to such Vice President by
the Board of Directors, the Chairman of the Board or the President.
SECTION 5.5.SECRETARY. The Secretary shall keep the minutes of all
meetings of the Board of Directors, committees of the Board of Directors and the
shareholders, in books provided for that purpose; shall attend to the giving and
serving of all notices; may in the name of the Corporation affix the seal of the
Corporation to all contracts and attest the affixation of the seal of the
Corporation thereto; may sign with the other appointed officers all certificates
for shares of capital stock of the Corporation; shall have charge of the
certificate books, transfer books and stock ledgers, and such other books and
papers as the Board of Directors may direct, all of which shall at all
reasonable times be open to inspection of any director upon application at the
office of the Corporation during business hours; shall have such other powers
and duties as designated in these
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Bylaws and as from time to time may be assigned to the Secretary by the Board of
Directors, the Chairman of the Board or the President; and shall in general
perform all acts incident to the office of Secretary, subject to the control of
the Board of Directors, the Chairman of the Board or the President.
SECTION 5.6.ASSISTANT SECRETARIES. Each Assistant Secretary shall have the
usual powers and duties pertaining to such offices, together with such other
powers and duties as designated in these Bylaws and as from time to time may be
assigned to an Assistant Secretary by the Board of Directors, the Chairman of
the Board, the President or the Secretary. The Assistant Secretaries shall
exercise the powers of the Secretary during that officer's absence or inability
or refusal to act.
SECTION 5.7.TREASURER. The Treasurer shall have responsibility for the
custody and control of all the funds and securities of the Corporation, and
shall have such other powers and duties as designated in these Bylaws and as
from time to time may be assigned to the Treasurer by the Board of Directors,
the Chairman of the Board or the President. The Treasurer shall perform all acts
incident to the position of Treasurer, subject to the control of the Board of
Directors, the Chairman of the Board or the President; and the Treasurer shall,
if required by the Board of Directors, give such bond for the faithful discharge
of the Treasurer's duties in such form as the Board of Directors may require.
SECTION 5.8.ASSISTANT TREASURERS. Each Assistant Treasurer shall have the
usual powers and duties pertaining to such office, together with such other
powers and duties as designated in these Bylaws and as from time to time may be
assigned to each Assistant Treasurer by the Board of Directors, the Chairman of
the Board, the President, or the Treasurer. The Assistant Treasurers shall
exercise the powers of the Treasurer during that officer's absence or inability
or refusal to act.
SECTION 5.9.ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS.
Unless otherwise directed by the Board of Directors, the Chairman of the Board
or the President, together with the Secretary or any Assistant Secretary shall
have power to vote and otherwise act on behalf of the Corporation, in person or
by proxy, at any meeting of security holders of or with respect to any action of
security holders of any other corporation in which this Corporation may hold
securities and otherwise to exercise any and all rights and powers which this
Corporation may possess by reason of its ownership of securities in such other
corporation.
SECTION 5.10.DELEGATION. For any reason that the Board of Directors may
deem sufficient, the Board of Directors may, except where otherwise provided by
statute, delegate the powers or duties of any officer to any other person, and
may authorize any officer to delegate specified duties of such office to any
other person. Any such delegation or authorization by the Board shall be
effected from time to time by resolution of the Board of Directors.
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Article 6
CAPITAL STOCK
SECTION 6.1.CERTIFICATES OF STOCK. The certificates for shares of the
capital stock of the Corporation shall be in such form, not inconsistent with
that required by law and the Articles of Incorporation of the Corporation, as
shall be approved by the Board of Directors. Every holder of stock represented
by certificates shall be entitled to have a certificate signed by or in the name
of the Corporation by the Chairman of the Board, the President or a Vice
President and the Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer of the Corporation representing the number of shares (and,
if the stock of the Corporation shall be divided into classes or series,
certifying the class and series of such shares) owned by such shareholder which
are registered in certified form; provided, however, that any of or all the
signatures on the certificate may be facsimile. The stock record books and the
blank stock certificate books shall be kept by the Secretary or at the office of
such transfer agent or transfer agents as the Board of Directors may from time
to time determine. In case any officer, transfer agent or registrar who shall
have signed or whose facsimile signature or signatures shall have been placed
upon any such certificate or certificates shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued by the
Corporation, such certificate may nevertheless be issued by the Corporation with
the same effect as if such person were such officer, transfer agent or registrar
at the date of issue. The stock certificates shall be consecutively numbered and
shall be entered in the books of the Corporation as they are issued and shall
exhibit the holder's name and number of shares.
SECTION 6.2.TRANSFER OF SHARES. The shares of stock of the Corporation
shall be transferable only on the books of the Corporation by the holders
thereof in person or by their duly authorized attorneys or legal representatives
upon surrender and cancellation of certificates for a like number of shares.
Upon surrender to the Corporation or a transfer agent of the Corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
SECTION 6.3.OWNERSHIP OF SHARES. The Corporation shall be entitled to
treat the holder of record of any share or shares of capital stock of the
Corporation as the holder in fact thereof and, accordingly, shall not be bound
to recognize any equitable or other claim to or interest in such share or shares
on the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of Texas.
SECTION 6.4.REGULATIONS REGARDING CERTIFICATES. The Board of Directors
shall have the power and authority to make all such rules and regulations as
they may deem expedient concerning
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the issue, transfer and registration or the replacement of certificates for
shares of capital stock of the Corporation.
SECTION 6.5.LOST OR DESTROYED CERTIFICATES. The Board of Directors may
determine the conditions upon which the Corporation may issue a new certificate
of stock in place of a certificate theretofore issued by it which is alleged to
have been lost, stolen or destroyed and may require the owner of such
certificate or such owner's legal representative to give bond, with surety
sufficient to indemnify the Corporation and each transfer agent and registrar
against any and all losses or claims which may arise by reason of the alleged
loss, theft or destruction of any such certificate or the issuance of such new
certificate in the place of the one so lost, stolen or destroyed.
Article 7
MISCELLANEOUS PROVISIONS
SECTION 7.1.FISCAL YEAR. The fiscal year of the Corporation shall begin on
the first day of January of each year.
SECTION 7.2.CORPORATE SEAL. The corporate seal shall be circular in form
and shall have inscribed thereon the name of the Corporation and the state of
its incorporation, which seal shall be in the charge of the Secretary and shall
be affixed to certificates of stock, debentures, bonds, and other documents, in
accordance with the direction of the Board of Directors or a committee thereof,
and as may be required by law; however, the Secretary may, if the Secretary
deems it expedient, have a facsimile of the corporate seal inscribed on any such
certificates of stock, debentures, bonds, contract or other documents.
Duplicates of the seal may be kept for use by any Assistant Secretary.
SECTION 7.3.NOTICE AND WAIVER OF NOTICE. Whenever any notice is required
to be given by law, the Articles of Incorporation of the Corporation or under
the provisions of these Bylaws, said notice shall be deemed to be sufficient if
given (i) by telegraphic, cable or wireless transmission (including by telecopy
or facsimile transmission) or (ii) by deposit of the same in a post office box
or by delivery to an overnight courier service company in a sealed prepaid
wrapper addressed to the person entitled thereto at such person's post office
address, as it appears on the records of the Corporation, and such notice shall
be deemed to have been given on the day of such transmission or mailing or
delivery to courier, as the case may be.
Whenever notice is required to be given by law, the Articles of
Incorporation of the Corporation or under any of the provisions of these Bylaws,
a written waiver thereof, signed by the person entitled to notice, whether
before or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person, including without limitation a director, at a meeting
shall constitute a waiver of notice of such meeting, except when the person
attends a meeting for the
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<PAGE>
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the shareholders, directors, or members of a
committee of directors need be specified in any written waiver of notice unless
so required by the Articles of Incorporation of the Corporation or these Bylaws.
SECTION 7.4.FACSIMILE SIGNATURES. In addition to the provisions for the
use of facsimile signatures elsewhere specifically authorized in these Bylaws,
facsimile signatures of any officer or officers of the Corporation may be used
whenever and as authorized by the Board of Directors.
SECTION 7.5.RELIANCE UPON BOOKS, REPORTS AND RECORDS. A member of the
Board of Directors, or a member of any committee designated by the Board of
Directors, shall, in the performance of such person's duties, be protected to
the fullest extent permitted by law in relying upon the records of the
Corporation and upon information, opinion, reports or statements presented to
the Corporation.
SECTION 7.6.APPLICATION OF BYLAWS. In the event that any provisions of
these Bylaws is or may be in conflict with any law of the United States, of the
State of Texas or of any other governmental body or power having jurisdiction
over this Corporation, or over the subject matter to which such provision of
these Bylaws applies, or may apply, such provision of these Bylaws shall be
inoperative to the extent only that the operation thereof unavoidably conflicts
with such law, and shall in all other respects be in full force and effect.
Article 8
INDEMNIFICATION OF OFFICERS AND DIRECTORS
SECTION 8.1.INDEMNIFICATION. As permitted by Section G of Article 2.02-1
of the Texas Business Corporation Act or any successor statute (the
"Indemnification Article"), the Corporation hereby:
(a) makes mandatory the indemnification permitted under Section B of
the Indemnification Article as contemplated by Section G thereof;
(b) makes mandatory its payment or reimbursement of the reasonable
expenses incurred by a former or present director who was, is, or is threatened
to be made a named defendant or respondent in a proceeding upon such director's
compliance with the requirements of Section K of the Indemnification Article;
and
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<PAGE>
(c) extends the mandatory indemnification referred to in Section
8.1(a) above and the mandatory payment or reimbursement of expenses referred to
in Section 8.1(b) above (i) to all former or present officers of the Corporation
and (ii) to all persons who are or were serving at the request of the
Corporation as a director, officer, partner or trustee of another foreign or
domestic corporation, partnership, joint venture, trust or employee benefit
plan, to the same extent that the Corporation is obligated to indemnify and pay
or reimburse expenses to directors.
SECTION 8.2.NONEXCLUSIVITY. The indemnification provided by this Article
shall not be deemed exclusive of any other rights to which the person
indemnified may be entitled under any bylaw, agreement, authorization of
shareholders or disinterested directors or otherwise, both as to action in such
person's official capacity and as to action in another capacity while holding
such office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall enure to the benefit of such person's heirs
and legal representatives.
SECTION 8.3.INSURANCE. The Corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee, or agent of the Corporation or who is or was serving at the request of
the Corporation as a director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another business, foreign, domestic or
non-profit corporation, partnership, joint venture, sole proprietorship, trust
or other enterprise or employee benefit plan, against any liability asserted
against such person and incurred by such person in such a capacity or arising
out of such person's status as such a person, whether or not the Corporation
would have the power to indemnify such person against that liability under the
provisions of this Article or the Texas Business Corporation Act.
SECTION 8.4.WITNESSES. Notwithstanding any other provision of this
Article, the Corporation shall pay or reimburse expenses incurred by any
director, officer, employee or agent in connection with such person's appearance
as a witness or other participation in a proceeding at a time when such person
is not a named defendant or respondent in such proceeding.
Article 9
AMENDMENTS
SECTION 9.1.AMENDMENTS. The Board of Directors shall have the power to
adopt, amend and repeal from time to time Bylaws of the Corporation. The
shareholders of the Corporation shall not have the power to adopt, amend or
repeal the Bylaws of the Corporation.
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EXHIBIT 10.1
PROSPERITY BANCSHARES, INC.
STOCK OPTION PLAN
SECTION 1. PURPOSE OF THE PLAN. The purpose of the Prosperity Bancshares,
Inc. Stock Option Plan, ("Plan") is to encourage ownership of common stock,
$1.00 par value ("Common Stock"), of Prosperity Bancshares, Inc., a Texas
corporation (the "Company"), by the executive officers and key employees of the
Company and its Affiliates (as defined below) and to provide increased incentive
for such officers and employees to render services and to exert maximum effort
for the success of the Company's business. In addition, the Company expects that
the Plan will further strengthen the identification of the executive officers
and key employees with the stockholders. Certain options to be granted under
this Plan are intended to qualify as Incentive Stock Options ("ISOs") pursuant
to Section 422 of the Internal Revenue Code of 1986, as amended ("Code"), while
other options granted under this Plan will be nonqualified options which are not
intended to qualify as ISOs ("Nonqualified Options"), either or both as provided
in the agreements evidencing the options as provided in Section 6 hereof. As
used in this Plan, the term "Affiliates" means any "parent corporation" of the
Company and any "subsidiary corporation" of the Company within the meaning of
Code Sections 424(e) and (f), respectively.
SECTION 2. ADMINISTRATION OF THE PLAN.
(a) COMPOSITION OF THE ADMINISTRATION COMMITTEE. The Plan shall be
administered by the Board of Directors of the Company (the "Board") or
any committee appointed by the Board to administer the Plan. The Board in
its capacity as the administrator of the Plan or any committee appointed
by the Board to administer the Plan shall both be referred to herein as
the "Committee".
(b) COMMITTEE ACTION. The Committee shall hold its meetings at such
times and places as it may determine. A majority of its members shall
constitute a quorum, and all determinations of the Committee shall be
made by not less than a majority of its members. Any decision or
determination reduced to writing and signed by a majority of the members
shall be fully as effective as if it had been made by a majority vote of
its members at a meeting duly called and held. The Committee may
designate the Secretary of the Company or other Company employees to
assist the Committee in the administration of the Plan, and may grant
authority to such persons to execute award agreements or other documents
on behalf of the Committee and the Company. Any duly constituted
committee of the Board satisfying the qualifications of this Section 2
may be appointed as the Committee.
(c) COMMITTEE EXPENSES. All expenses and liabilities incurred by the
Committee in the administration of the Plan shall be borne by the
Company. The Committee may employ attorneys, consultants, accountants or
other persons.
SECTION 3. STOCK RESERVED FOR THE PLAN. Subject to adjustment as provided
in Section 6 hereof, the aggregate number of shares of Common Stock that may be
optioned under the Plan is 85,000. The shares subject to the Plan shall consist
of authorized but unissued shares of Common
<PAGE>
Stock and such number of shares shall be and is hereby reserved for sale for
such purpose. Any of such shares which may remain unsold and which are not
subject to outstanding options at the termination of the Plan shall cease to be
reserved for the purpose of the Plan, but until termination of the Plan or the
termination of the last of the options granted under the Plan, whichever last
occurs, the Company shall at all times reserve a sufficient number of shares to
meet the requirements of the Plan. Should any option expire or be cancelled
prior to its exercise in full, the shares theretofore subject to such option may
again be made subject to an option under the Plan.
SECTION 4. ELIGIBILITY. The persons eligible to participate in the Plan
as a recipient of options ("Optionee") shall include only executive officers and
key employees of the Company or its Affiliates at the time the option is
granted. An executive officer or key employee who has been granted an option
hereunder may be granted an additional option or options, if the Committee shall
so determine.
SECTION 5. GRANT OF OPTIONS.
(a) COMMITTEE DISCRETION. The Committee shall have sole and absolute
discretionary authority (i) to determine, authorize, and designate those
persons pursuant to this Plan who are to receive options under the Plan,
(ii) to determine the number of shares of Common Stock to be covered by
such options and the terms thereof, and (iii) to determine the type of
option granted: ISO, Nonqualified Option or a combination of ISO and
Nonqualified Options. The Committee shall thereupon grant options in
accordance with such determinations as evidenced by a written option
agreement. Subject to the express provisions of the Plan, the Committee
shall have discretionary authority to prescribe, amend and rescind rules
and regulations relating to the Plan, to interpret the Plan, to prescribe
the terms of the option agreements (which need not be identical), to
amend the terms of the option agreements (provided that no amendment
shall impair the rights of an Optionee, without the Optionee's consent)
and to make all other determinations deemed necessary or advisable for
the administration of the Plan.
(b) STOCKHOLDER APPROVAL. The Plan shall be approved by the holders
of a majority of the outstanding shares of Common Stock.
(c) LIMITATION ON INCENTIVE STOCK OPTIONS. The aggregate fair market
value (determined in accordance with Section 6(b) of this Plan at the
time the option is granted) of the Common Stock with respect to which
ISOs may be exercisable for the first time by any Optionee during any
calendar year under all such plans of the Company and its Affiliates
shall not exceed $100,000.
SECTION 6. TERMS AND CONDITIONS. Each option granted under the Plan shall
be evidenced by an agreement, in a form approved by the Committee, which shall
be subject to the following express terms and conditions and to such other terms
and conditions as the Committee may deem appropriate.
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<PAGE>
(a) OPTION PERIOD. The Committee shall promptly notify the Optionee
of the option grant and a written agreement shall promptly be executed
and delivered by and on behalf of the Company and the Optionee, provided
that the option grant shall expire if a written agreement is not signed
by said Optionee (or his agent or attorney) and returned to the Company
within 60 days from date of receipt by the Optionee of such agreement.
The date of grant shall be the date the option is actually granted by the
Committee, even though the written agreement may be executed and
delivered by the Company and the Optionee after that date. Each option
agreement shall specify the period for which the option thereunder is
granted (which in no event shall exceed ten years from the date of grant)
and shall provide that the option shall expire at the end of such period.
If the original term of an option is less than ten years from the date of
grant, the option may be amended prior to its expiration, with the
approval of the Committee and the Optionee, to extend the term so that
the term as amended is not more than ten years from the date of grant.
However, in the case of an ISO granted to an individual who, at the time
of grant, owns stock possessing more than 10 percent of the total
combined voting power of all classes of stock of the Company or its
Affiliate ("Ten Percent Stockholder"), such period shall not exceed five
years from the date of grant.
(b) OPTION PRICE. The purchase price of each share of Common Stock
subject to a Nonqualified Option under this Plan shall be the "Book
Value" of a share of Common Stock as of a date to be determined by the
Committee. "Book Value" shall mean the total net worth of the Company
(i.e., stockholders equity) divided by the number of shares outstanding.
The purchase price of each share of Common Stock subject to an ISO shall
be determined by the Committee at the time the option is granted and
shall not be less than 100% of the fair market value of a share of Common
Stock on the date the option is granted, as determined by the Committee.
In the case of ISOs granted to a Ten Percent Stockholder, the exercise
price shall not be less than 110% of the fair market value of a share of
Common Stock on the date the option is granted.
For all purposes under this Plan, the determination of the fair
market value of a share of Common Stock on a particular date shall be
made by the Committee in such manner as it deems appropriate.
(c) EXERCISE PERIOD. The Committee may provide in the option
agreement that an option may be exercised in whole, immediately, or is to
be exercisable in increments. However, no portion of any option may be
exercisable by an Optionee prior to the approval of this Plan by the
shareholders of the Company.
(d) PROCEDURE FOR EXERCISE. Options shall be exercised by the
delivery of written notice to the Secretary of the Company setting forth
the number of shares with respect to which the option is being exercised.
Such notice shall be accompanied by cash or cashier's check, bank draft,
postal or express money order payable to the order of the Company, or
Common Stock theretofore owned by such Optionee (or any
combination of cash and Common Stock). Notice may also be delivered by
fax or telecopy provided that the
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<PAGE>
purchase price of such shares is delivered to the Company via wire
transfer on the same day the fax is received by the Company. The notice
shall specify the address to which the certificates for such shares are
to be mailed. An Optionee shall be deemed to be a stockholder with
respect to shares covered by an option on the date the Company receives
such written notice and such option payment. As promptly as practicable
after receipt of such written notification and payment, the Company shall
deliver to the Optionee certificates for the number of shares with
respect to which such option has been so exercised, issued in the
Optionee's name or such other name as Optionee directs; provided,
however, that such delivery shall be deemed effected for all purposes
when a stock transfer agent of the Company shall have deposited such
certificates in the United States mail, addressed to the Optionee at the
address specified pursuant to this Section 6(d).
(e) TERMINATION OF EMPLOYMENT. If an Optionee to whom an option is
granted ceases to be employed by the Company for any reason other than
death or disability, any option which is exercisable on the date of such
termination of employment may be exercised during a period beginning on
such date and ending at the time set forth in the option agreement;
provided, however, that if an Optionee's employment is terminated because
of the Optionee's theft or embezzlement from the Company, disclosure of
trade secrets of the Company or the commission of a willful, felonious
act while in the employment of the Company (such reasons shall
hereinafter be collectively referred to as "for cause"), then any option
or unexercised portion thereof granted to said Optionee shall expire upon
such termination of employment. Notwithstanding the foregoing, no ISO may
be exercised later than three months after an employee's termination of
employment for any reason other than death or disability.
(f) DISABILITY OR DEATH OF OPTIONEE. In the event the Optionee dies
or is determined under this Plan to be disabled while the Optionee is
employed by the Company, the options previously granted to the Optionee
may be exercised (whether or not exercisable on the date of death or the
determination of disability) at any time and from time to time, within a
period beginning on the date of such determination of disability or death
and ending at the time set forth in the option agreement, by the
Optionee, the guardian of the Optionee's estate, the executor or
administrator of the Optionee's estate or by the person or persons to
whom the Optionee's rights under the option shall pass by will or the
laws of descent and distribution, but in no event may the option be
exercised after its expiration under the terms of the option agreement.
Notwithstanding the foregoing, no ISO may be exercised later than one
year after the determination of disability or death. An Optionee shall be
deemed to be disabled if, in the opinion of a physician selected by the
Committee, the Optionee is incapable of performing services for the
Company of the kind the Optionee was performing at the time the
disability occurred by reason of any medically determinable physical or
mental impairment which can be expected to result in death or to be of
long, continued and indefinite duration. The date of determination of
disability for purposes hereof shall be the date of such determination by
such physician.
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<PAGE>
(g) ASSIGNABILITY. An option shall not be assignable or otherwise
transferable except by will or by the laws of descent and distribution or
the rules thereunder. During the lifetime of an Optionee, an option shall
be exercisable only by him.
(h) INCENTIVE STOCK OPTIONS. Each option agreement may contain such
terms and provisions as the Committee may determine to be necessary or
desirable in order to qualify under the Code an option designated as an
incentive stock option.
(i) NO RIGHTS AS STOCKHOLDER. No Optionee shall have any rights as a
stockholder with respect to shares covered by an option until the option
is exercised by the written notice and accompanied by payment as provided
in clause (d) above.
(j) EXTRAORDINARY CORPORATE TRANSACTIONS. The existence of
outstanding options shall not affect in any way the right or power of the
Company or its shareholders to make or authorize any or all adjustments,
recapitalizations, reorganizations, exchanges, or other changes in the
Company's capital structure or its business, or any merger or
consolidation of the Company, or any issuance of Common Stock or other
securities or subscription rights thereto, or any issuance of bonds,
debentures, preferred or prior preference stock ahead of or affecting the
Common Stock or the rights thereof, or the dissolution or liquidation of
the Company, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding, whether of a similar
character or otherwise. If the Company recapitalizes or otherwise changes
its capital structure, or merges, consolidates, sells all of its assets
or dissolves (each of the foregoing a "Fundamental Change"), then
thereafter upon any exercise of an option theretofore granted the
Optionee shall be entitled to purchase under such option, in lieu of the
number of shares of Common Stock as to which option shall then be
exercisable, the number and class of shares of stock and securities to
which the Optionee would have been entitled pursuant to the terms of the
Fundamental Change if, immediately prior to such Fundamental Change, the
Optionee had been the holder of record of the number of shares of Common
Stock as to which such option is then exercisable. If (i) the Company
shall not be the surviving entity in any merger or consolidation (or
survives only as a subsidiary of another entity), (ii) the Company sells
all or substantially all of its assets to any other person or entity
(other than a wholly-owned subsidiary), (iii) any person or entity
(including a "group" as contemplated by Section 13(d)(3) of the Exchange
Act) acquires or gains ownership or control of (including, without
limitation, power to vote) more than 50% of the outstanding shares of
Common Stock, (iv) the Company is to be dissolved and liquidated, or (v)
as a result of or in connection with a contested election of directors,
the persons who were directors of the Company before such election shall
cease to constitute a majority of the Board (each such event in clauses
(i) through (v) above is referred to herein as a "Corporate Change"), all
of an Optionee's options shall immediately become fully vested and
exercisable.
(k) CHANGES IN CAPITAL STRUCTURE. If the outstanding shares of
Common Stock or other securities of the Company, or both, for which the
option is then exercisable shall at any time be changed or exchanged by
declaration of a stock dividend, stock split, combination
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<PAGE>
of shares or recapitalization, the number and kind of shares of Common
Stock or other securities which are subject to this Plan or subject to
any options theretofore granted, and the exercise prices, shall be
appropriately and equitably adjusted so as to maintain the proportionate
number of shares or other securities without changing the aggregate
exercise price.
(l) ACCELERATION OF OPTIONS. Except as hereinbefore expressly
provided, (i) the issuance by the Company of shares of stock of any class
of securities convertible into shares of stock of any class, for cash,
property, labor or services, upon direct sale, upon the exercise of
rights or warrants to subscribe therefor, or upon conversion of shares or
obligations of the Company convertible into such shares or other
securities, (ii) the payment of a dividend in property other than Common
Stock, or (iii) the occurrence of any similar transaction, and in any
case whether or not for fair value, shall not affect, and no adjustment
by reason thereof shall be made with respect to, the number of shares of
Common Stock subject to options theretofore granted or the purchase price
per share, unless the Committee shall determine in its sole discretion
that an adjustment is necessary to provide equitable treatment to
Optionee. Notwithstanding anything to the contrary contained in this
Plan, the Committee may in its sole discretion accelerate the time at
which any option may be exercised, including, but not limited to, upon
the occurrence of the events specified in this Section 6.
SECTION 7. AMENDMENTS OR TERMINATION. The Board may amend, alter or
discontinue the Plan, but no amendment or alteration shall be made which would
impair the rights of any Optionee, without his consent, under any option
theretofore granted, or which, without the approval of the stockholders, would:
(i) except as is provided in Section 6(k) of the Plan, increase the total number
of shares reserved for the purposes of the Plan, (ii) change the class of
persons eligible to participate in the Plan as provided in Section 4 of the
Plan, (iii) extend the applicable maximum option period provided for in Section
6(a) of the Plan, (iv) extend the expiration date of this Plan set forth in
Section 13 of the Plan, (v) except as provided in Section 6(k) of the Plan,
decrease to any extent the option price of any option granted under the Plan or
(vi) withdraw the administration of the Plan from the Committee.
SECTION 8. COMPLIANCE WITH OTHER LAWS AND REGULATIONS. The Plan, the
grant and exercise of options thereunder, and the obligation of the Company to
sell and deliver shares under such options, shall be subject to all applicable
federal and state laws, rules and regulations and to such approvals by any
governmental or regulatory agency as may be required. The Company shall not be
required to issue or deliver any certificates for shares of Common Stock prior
to the completion of any registration or qualification of such shares under any
federal or state law or issuance of any ruling or regulation of any government
body which the Company shall, in its sole discretion, determine to be necessary
or advisable. Any adjustments provided for in subparagraphs 6(j), (k) and (l)
shall be subject to any shareholder action required by Texas corporate law.
SECTION 9. PURCHASE FOR INVESTMENT. Unless the options and shares of
Common Stock covered by this Plan have been registered under the Securities Act
of 1933, as amended, or the Company has determined that such registration is
unnecessary, each person exercising an option
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<PAGE>
under this Plan may be required by the Company to give a representation in
writing that he is acquiring such shares for his own account for investment and
not with a view to, or for sale in connection with, the distribution of any part
thereof.
SECTION 10. TAXES.
(a) The Company may make such provisions as it may deem appropriate
for the withholding of any taxes which it determines is required in
connection with any options granted under this Plan.
(b) Notwithstanding the terms of Paragraph 10(a), any Optionee may
pay all or any portion of the taxes required to be withheld by the
Company or paid by him or her in connection with the exercise of a
Nonqualified Option by electing to have the Company withhold shares of
Common Stock, or by delivering previously owned shares of Common Stock.
An Optionee must make the foregoing election on or before the date that
the amount of tax to be withheld is determined ("Tax Date"). All such
elections are irrevocable and subject to disapproval by the Committee.
Elections by Optionees who are subject to the short-swing profits
recapture provisions of Section 16(b) of the Exchange Act ("Covered
Optionee") are subject to the following additional restrictions: (i) such
election may not be made within six months of the grant of an option,
provided that this limitation shall not apply in the event of death or
disability, and (ii) such election must be made either six months or more
prior to the Tax Date or in a window period which shall commence on the
third business day following the Company's release of a quarterly or
annual summary statement of sales and earnings and ending on the twelfth
business day following such release. Where the Tax Date in respect of an
option is deferred until six months after exercise and the Covered
Optionee elects share withholding, the full amount of shares of Common
Stock will be issued or transferred to him upon exercise of the option,
but he shall be unconditionally obligated to tender back to the Company
the number of shares necessary to discharge the Company's withholding
obligation or his estimated tax obligation on the Tax Date.
SECTION 11. REPLACEMENT OF OPTIONS. The Committee from time to time may
permit an Optionee under this Plan to surrender for cancellation any unexercised
outstanding option and receive from the Company in exchange an option for such
number of shares of Common Stock as may be designated by the Committee. The
Committee may, with the consent of the person entitled to exercise any
outstanding option, amend such option, including reducing the exercise price of
any option to not less than the fair market value of the Common Stock at the
time of the amendment and extending the term thereof.
SECTION 12. NO RIGHT TO COMPANY EMPLOYMENT. Optionees shall be considered
to be in the employment of the Company as long as they remain employees of the
Company or an Affiliate. Any questions as to whether and when there has been a
termination of such employment and the cause of such termination shall be
determined by the Committee, and its determination shall be final. Nothing
contained herein shall be construed as conferring upon the Optionee the right to
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<PAGE>
continue in the employ of the Company, nor shall anything contained herein be
construed or interpreted to limit the "employment at will" relationship between
the Optionee and the Company.
SECTION 13. LIABILITY OF COMPANY. The Company and any Affiliate which is
in existence or hereafter comes into existence shall not be liable to an
Optionee or other persons as to:
(a) THE NON-ISSUANCE OF SHARES. The non-issuance or sale of shares
as to which the Company has been unable to obtain from any regulatory
body having jurisdiction the authority deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any shares hereunder; and
(b) TAX CONSEQUENCES. Any tax consequence expected, but not
realized, by any Optionee or other person due to the exercise of any
option granted hereunder.
SECTION 14. EFFECTIVENESS AND EXPIRATION OF PLAN. The Plan shall be
effective on the date the Board adopts the Plan. The Plan shall expire ten years
after the date the Board approves the Plan and thereafter no option shall be
granted pursuant to the Plan.
SECTION 15. NON-EXCLUSIVITY OF THE PLAN. Neither the adoption by the
Board nor the submission for approval of this Plan to the shareholders of the
Company shall be construed as creating any limitations on the power of the Board
to adopt such other incentive arrangements as it may deem desirable, including
without limitation, the granting of restricted stock or stock options otherwise
than under this Plan, and such arrangements may be either generally applicable
or applicable only in specific cases.
SECTION 16. GOVERNING LAW. This Plan and any agreements hereunder shall
be interpreted and construed in accordance with the laws of the State of Texas
and applicable federal law.
IN WITNESS WHEREOF, and as conclusive evidence of the adoption of the
foregoing by directors of the Company, Prosperity Bancshares, Inc., has caused
these presents to be duly executed in its name and behalf by its proper officers
thereunto duly authorized as of this ____ day of ______________. 199__.
PROSPERITY BANCSHARES, INC.
By:_________________________________
ATTEST:
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EXHIBIT 10.2
PROSPERITY BANCSHARES, INC.
1998 STOCK INCENTIVE PLAN
I. PURPOSE
The purpose of the PROSPERITY BANCSHARES, INC. 1998 STOCK INCENTIVE PLAN
(the "PLAN") is to provide a means through which PROSPERITY BANCSHARES, INC., a
Texas corporation (the "COMPANY"), and its subsidiaries, may attract able
persons to enter the employ of the Company and to provide a means whereby those
employees upon whom the responsibilities of the successful administration and
management of the Company rest, and whose present and potential contributions to
the welfare of the Company are of importance, can acquire and maintain stock
ownership, thereby strengthening their concern for the welfare of the Company
and their desire to remain in its employ. A further purpose of the Plan is to
provide employees, directors and other individuals with additional incentive and
reward opportunities designed to enhance the profitable growth of the Company.
Accordingly, the Plan provides for granting Incentive Stock Options,
Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock Awards,
Performance Awards, Phantom Stock Awards, or any combination of the foregoing,
as is best suited to the circumstances of the particular Holder as provided
herein.
II. DEFINITIONS
The following definitions shall be applicable throughout the Plan unless
specifically modified by any paragraph:
(a) "AFFILIATES" means any "parent corporation" of the Company and any
"subsidiary" of the Company within the meaning of Code Sections 424(e) and (f),
respectively.
(b) "AWARD" means, individually or collectively, any Option, Restricted
Stock Award, Phantom Stock Award, Performance Award or Stock Appreciation Right.
(c) "BOARD" means the Board of Directors of the Company.
(d) "CHANGE OF CONTROL" means the occurrence of any of the following
events: (i) the Company shall not be the surviving entity in any merger,
consolidation or other reorganization (or survives only as a subsidiary of an
entity other than a previously wholly-owned subsidiary of the Company), (ii) the
Company's subsidiary bank is merged or consolidated into, or otherwise acquired
by, an entity other than a wholly-owned subsidiary of the Company, (iii) the
Company sells, leases or exchanges all or substantially all of its assets to any
other person or entity (other than a
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wholly-owned subsidiary of the Company), (iv) the Company is to be dissolved and
liquidated, (v) any person or entity, including a "group" as contemplated by
Section 13(d)(3) of the 1934 Act, acquires or gains ownership or control
(including, without limitation, power to vote or control the voting) of more
than 50% of the outstanding shares of the Company's voting stock (based upon
voting power), or (vi) as a result of or in connection with a contested election
of directors, the persons who were directors of the Company before such election
shall cease to constitute a majority of the Board.
(e) "CHANGE OF CONTROL VALUE" shall mean (i) the per share price offered
to shareholders of the Company in any such merger, consolidation,
reorganization, sale of assets or dissolution transaction, (ii) the price per
share offered to shareholders of the Company in any tender offer or exchange
offer whereby a Change of Control takes place, or (iii) if such Change of
Control occurs other than pursuant to a tender or exchange offer, the Fair
Market Value per share of the shares into which Awards are exercisable, as
determined by the Committee, whichever is applicable. In the event that the
consideration offered to shareholders of the Company consists of anything other
than cash, the Committee shall determine the fair cash equivalent of the portion
of the consideration offered which is other than cash.
(f) "CODE" means the Internal Revenue Code of 1986, as amended. Reference
in the Plan to any section of the Code shall be deemed to include any amendments
or successor provisions to any section and any regulations under such section.
(g) "COMMITTEE" means the Compensation Committee of the Board which shall
be (i) constituted so as to permit the Plan to comply with Rule 16b-3 and (ii)
constituted solely of "outside directors," within the meaning of section 162(m)
of the Code and applicable interpretive authority thereunder.
(h) "COMPANY" means Prosperity Bancshares, Inc. and any of its
Affiliates.
(i) "DIRECTOR" means an individual elected to the Board by the
shareholders of the Company or by the Board under applicable corporate law who
is serving on the Board on the date the Plan is adopted by the Board or is
elected to the Board after such date.
(j) An "EMPLOYEE" means any person (including an officer or a Director) in
an employment relationship with the Company or any parent or subsidiary
corporation (as defined in section 424 of the Code).
(k) "1934 ACT" means the Securities Exchange Act of 1934, as amended.
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(l) "FAIR MARKET VALUE" means, as of any specified date, the mean of the
high and low sales prices of the Stock (i) reported by the any interdealer
quotation system on which the Stock is quoted on that date or (ii) if the Stock
is listed on a national stock exchange, reported on the stock exchange composite
tape on that date; or, in either case, if no prices are reported on that date,
on the last preceding date on which such prices of the Stock are so reported. If
the Stock is traded over the counter at the time a determination of its fair
market value is required to be made hereunder, its fair market value shall be
deemed to be equal to the average between the reported high and low or closing
bid and asked prices of Stock on the most recent date on which Stock was
publicly traded. In the event Stock is not publicly traded at the time a
determination of its value is required to be made hereunder, the determination
of its fair market value shall be made by the Committee in such manner as it
deems appropriate.
(m) "HOLDER" means an employee, director or other individual who has been
granted an Award.
(n) "INCENTIVE STOCK OPTION" means an incentive stock option within the
meaning of section 422(b) of the Code, commonly known as "qualified" stock
options.
(o) "NONQUALIFIED STOCK OPTION" means an option granted under Paragraph
VII of the Plan to purchase Stock which does not constitute an Incentive Stock
Option.
(p) "OPTION" means an Award granted under Paragraph VII of the Plan and
includes both Incentive Stock Options to purchase Stock and Nonqualified Stock
Options to purchase Stock.
(q) "OPTION AGREEMENT" means a written agreement between the Company and a
Holder with respect to an Option.
(r) "PERFORMANCE AWARD" means an Award granted under Paragraph X of the
Plan.
(s) "PERFORMANCE AWARD AGREEMENT" means a written agreement between the
Company and a Holder with respect to a Performance Award.
(t) "PHANTOM STOCK AWARD" means an Award granted under Paragraph XI of the
Plan.
(u) "PHANTOM STOCK AWARD AGREEMENT" means a written agreement between the
Company and a Holder with respect to a Phantom Stock Award.
(v) "PLAN" means the Prosperity Bancshares, Inc. 1998 Stock Incentive
Plan, as amended from time to time.
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(w) "RESTRICTED STOCK AGREEMENT" means a written agreement between the
Company and a Holder with respect to a Restricted Stock Award.
(x) "RESTRICTED STOCK AWARD" means an Award granted under Paragraph IX of
the Plan.
(y) "RULE 16B-3" means SEC Rule 16b-3 promulgated under the 1934 Act, as
such may be amended from time to time, and any successor rule, regulation or
statute fulfilling the same or a similar function.
(z) "SPREAD" means, in the case of a Stock Appreciation Right, an amount
equal to the excess, if any, of the Fair Market Value of a share of Stock on the
date such right is exercised over the exercise price of such Stock Appreciation
Right.
(aa) "STOCK" means the common stock, $1.00 par value, of the Company.
(bb) "STOCK APPRECIATION RIGHT" means an Award granted under Paragraph
VIII of the Plan.
(cc) "STOCK APPRECIATION RIGHTS AGREEMENT" means a written agreement
between the Company and a Holder with respect to an Award of Stock Appreciation
Rights.
III. EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan shall be effective upon the date of its adoption by the Board,
provided that the Plan is approved by the shareholders of the Company within
twelve months thereafter. No further Awards may be granted under the Plan after
the expiration of ten years from the date of its adoption by the Board. The Plan
shall remain in effect until all Awards granted under the Plan have been
satisfied or expired.
IV. ADMINISTRATION
(a) COMMITTEE. The Plan shall be administered by the Committee.
(b) POWERS. Subject to the provisions of the Plan, the Committee shall
have sole authority, in its discretion, to recommend to the Board of Directors
of the Company which employees, directors or other individuals shall receive an
Award, the time or times when such Award shall be made, whether an Incentive
Stock Option, Nonqualified Option or Stock Appreciation Right shall be granted,
the number of shares of Stock which may be issued under each Option, Stock
Appreciation Right or Restricted Stock Award, and the value of each Performance
Award and
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Phantom Stock Award. In making such recommendations the Committee may take into
account the nature of the services rendered by the respective employees,
directors or other individuals, their present and potential contributions to the
Company's success and such other factors as the Committee in its discretion
shall deem relevant. All final decisions regarding the granting of Awards shall
be made by the Board of Directors of the Company.
(c) ADDITIONAL POWERS. The Committee shall have such additional powers as
are delegated to it by the other provisions of the Plan. Subject to the express
provisions of the Plan, the Committee is authorized to construe the Plan and the
respective agreements executed thereunder, to prescribe such rules and
regulations relating to the Plan as it may deem advisable to carry out the Plan,
and to determine the terms, restrictions and provisions of each Award, including
such terms, restrictions and provisions as shall be requisite in the judgment of
the Committee to cause designated Options to qualify as Incentive Stock Options,
and to make all other determinations necessary or advisable for administering
the Plan. The Committee may correct any defect or supply any omission or
reconcile any inconsistency in any agreement relating to an Award in the manner
and to the extent it shall deem expedient to carry it into effect. All final
determinations on the matters referred to in this Article IV shall be made by
the Board of Directors of the Company.
V. GRANT OF OPTIONS, STOCK APPRECIATION RIGHTS,
RESTRICTED STOCK AWARDS, PERFORMANCE AWARDS
AND PHANTOM STOCK AWARDS; SHARES SUBJECT TO THE PLAN
(a) STOCK GRANT AND AWARD LIMITS. The Committee may from time to time
grant Awards to one or more employees, directors or other individuals determined
by it to be eligible for participation in the Plan in accordance with the
provisions of Paragraph VI. Subject to Paragraph XII, the aggregate number of
shares of Stock that may be issued under the Plan shall not exceed 460,000
shares. Shares of Stock shall be deemed to have been issued under the Plan only
to the extent actually issued and delivered pursuant to an Award. To the extent
that an Award lapses or the rights of its Holder terminate or the Award is paid
in cash, any shares of Stock subject to such Award shall again be available for
the grant of an Award. To the extent that an Award lapses or the rights of its
Holder terminate, any shares of Stock subject to such Award shall again be
available for the grant of an Award. Separate stock certificates shall be issued
by the Company for those shares acquired pursuant the exercise of an Incentive
Stock Option and for those shares acquired pursuant to the exercise of a
Nonqualified Stock Option.
(b) STOCK OFFERED. The stock to be offered pursuant to the grant of an
Award may be authorized but unissued Stock or Stock previously issued and
outstanding and reacquired by the Company.
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VI. ELIGIBILITY
Awards may be granted to employees of the Company, directors of the
Company or other individuals whose contributions to the welfare of the Company
are of importance. An Award may be granted on more than one occasion to the same
person, and, subject to the limitations set forth in the Plan, such Award may
include an Incentive Stock Option or a Nonqualified Stock Option, a Stock
Appreciation Right, a Restricted Stock Award, a Performance Award, a Phantom
Stock Award or any combination thereof.
VII. STOCK OPTIONS
(a) OPTION PERIOD. The term of each Option shall be as specified by the
Committee at the date of grant.
(b) LIMITATIONS ON EXERCISE OF OPTION. An Option shall be exercisable in
whole or in such installments and at such times as determined by the Committee.
(c) SPECIAL LIMITATIONS ON INCENTIVE STOCK OPTIONS. To the extent that the
aggregate Fair Market Value (determined at the time the respective Incentive
Stock Option is granted) of Stock with respect to which Incentive Stock Options
are exercisable for the first time by an individual during any calendar year
under all incentive stock option plans of the Company and its parent and
subsidiary corporations exceeds $100,000, such Incentive Stock Options shall be
treated as Nonqualified Stock Options as determined by the Committee. The
Committee shall determine, in accordance with applicable provisions of the Code,
Treasury Regulations and other administrative pronouncements, which of an
optionee's Incentive Stock Options will not constitute Incentive Stock Options
because of such limitation and shall notify the optionee of such determination
as soon as practicable after such determination. No Incentive Stock Option shall
be granted to an individual if, at the time the Option is granted, such
individual owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or of its parent or subsidiary
corporation, within the meaning of section 422(b)(6) of the Code, unless (i) at
the time such Option is granted the option price is at least 110% of the Fair
Market Value of the Stock subject to the Option and (ii) such Option by its
terms is not exercisable after the expiration of five years from the date of
grant.
(d) OPTION AGREEMENT. Each Option shall be evidenced by an Option
Agreement in such form and containing such provisions not inconsistent with the
provisions of the Plan as the Committee from time to time shall approve,
including, without limitation, provisions to qualify an Incentive Stock Option
under section 422 of the Code. An Option Agreement may provide for the payment
of the option price, in whole or in part, by the delivery of a number of shares
of Stock (plus
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cash if necessary) having a Fair Market Value equal to such option price. Each
Option Agreement shall provide that the Option may not be exercised earlier than
six months from the date of grant and shall specify the effect of termination of
employment on the exercisability of the Option. Moreover, an Option Agreement
may provide for a "cashless exercise" of the Option by establishing procedures
whereby the Holder, by a properly-executed written notice, directs (i) an
immediate market sale or margin loan respecting all or a part of the shares of
Stock to which he is entitled upon exercise pursuant to an extension of credit
by the Company to the Holder of the option price, (ii) the delivery of the
shares of Stock from the Company directly to a brokerage firm and (iii) the
delivery of the option price from the sale or margin loan proceeds from the
brokerage firm directly to the Company. Such Option Agreement may also include,
without limitation, provisions relating to (i) vesting of Options, subject to
the provisions hereof accelerating such vesting on a Change of Control, (ii) tax
matters (including provisions (y) permitting the delivery of additional shares
of Stock or the withholding of shares of Stock from those acquired upon exercise
to satisfy federal or state income tax withholding requirements and (z) dealing
with any other applicable employee wage withholding requirements), and (iii) any
other matters not inconsistent with the terms and provisions of this Plan that
the Committee shall in its sole discretion determine. The terms and conditions
of the respective Option Agreements need not be identical.
(e) OPTION PRICE AND PAYMENT. The price at which a share of Stock may be
purchased upon exercise of an Option shall be determined by the Committee, but
(i) such purchase price shall not be less than the Fair Market Value of Stock
subject to an Incentive Stock Option on the date the Incentive Stock Option is
granted and (ii) such purchase price shall be subject to adjustment as provided
in Paragraph XII. The Option or portion thereof may be exercised by delivery of
an irrevocable notice of exercise to the Company. The purchase price of the
Option or portion thereof shall be paid in full in the manner prescribed by the
Committee.
(f) SHAREHOLDER RIGHTS AND PRIVILEGES. The Holder shall be entitled to all
the privileges and rights of a shareholder only with respect to such shares of
Stock as have been purchased under the Option and for which certificates of
stock have been registered in the Holder's name.
(g) OPTIONS AND RIGHTS IN SUBSTITUTION FOR STOCK OPTIONS GRANTED BY OTHER
CORPORATIONS. Options and Stock Appreciation Rights may be granted under the
Plan from time to time in substitution for stock options held by individuals
employed by corporations who become employees as a result of a merger or
consolidation of the employing corporation with the Company or any subsidiary,
or the acquisition by the Company or a subsidiary of the assets of the employing
corporation, or the acquisition by the Company or a subsidiary of stock of the
employing corporation with the result that such employing corporation becomes a
subsidiary.
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VIII. STOCK APPRECIATION RIGHTS
(a) STOCK APPRECIATION RIGHTS. A Stock Appreciation Right is the right to
receive an amount equal to the Spread with respect to a share of Stock upon the
exercise of such Stock Appreciation Right. Stock Appreciation Rights may be
granted in connection with the grant of an Option, in which case the Option
Agreement will provide that exercise of Stock Appreciation Rights will result in
the surrender of the right to purchase the shares under the Option as to which
the Stock Appreciation Rights were exercised. Alternatively, Stock Appreciation
Rights may be granted independently of Options in which case each Award of Stock
Appreciation Rights shall be evidenced by a Stock Appreciation Rights Agreement
which shall contain such terms and conditions as may be approved by the
Committee. The Spread with respect to a Stock Appreciation Right may be payable
either in cash, shares of Stock with a Fair Market Value equal to the Spread or
in a combination of cash and shares of Stock. With respect to Stock Appreciation
Rights that are subject to Section 16 of the 1934 Act, however, the Committee
shall, except as provided in Paragraph XII(c), retain sole discretion (i) to
determine the form in which payment of the Stock Appreciation Right will be made
(I.E., cash, securities or any combination thereof) or (ii) to approve an
election by a Holder to receive cash in full or partial settlement of Stock
Appreciation Rights. Each Stock Appreciation Rights Agreement shall provide that
the Stock Appreciation Rights may not be exercised earlier than six months from
the date of grant and shall specify the effect of termination of employment on
the exercisability of the Stock Appreciation Rights.
(b) OTHER TERMS AND CONDITIONS. At the time of such Award, the Committee,
may in its sole discretion, prescribe additional terms, conditions or
restrictions relating to Stock Appreciation Rights, including, but not limited
to rules pertaining to termination of employment (by retirement, disability,
death or otherwise) of a Holder prior to the expiration of such Stock
Appreciation Rights. Such additional terms, conditions or restrictions shall be
set forth in the Stock Appreciation Rights Agreement made in conjunction with
the Award. Such Stock Appreciation Rights Agreements may also include, without
limitation, provisions relating to (i) vesting of Awards, subject to the
provisions hereof accelerating vesting on a Change of Control,(ii) tax matters
(including provisions covering applicable wage withholding requirements), and
(iii) any other matters not inconsistent with the terms and provisions of this
Plan, that the Committee shall in its sole discretion determine. The terms and
conditions of the respective Stock Appreciation Rights Agreements need not be
identical.
(c) EXERCISE PRICE. The exercise price of each Stock Appreciation Right
shall be determined by the Committee, but such exercise price (i) shall not be
less than the Fair Market Value of a share of Stock on the date the Stock
Appreciation Right is granted (or such greater exercise price as may be required
if such Stock Appreciation Right is granted in connection with an Incentive
Stock Option that must have an exercise price equal to 110% of the Fair Market
Value of the Stock on the
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date of grant pursuant to Paragraph VII(c)), and (ii) shall be subject to
adjustment as provided in Paragraph XII.
(d) EXERCISE PERIOD. The term of each Stock Appreciation Right shall be as
specified by the Committee at the date of grant.
(e) LIMITATIONS ON EXERCISE OF STOCK APPRECIATION RIGHT. A Stock
Appreciation Right shall be exercisable in whole or in such installments and at
such times as determined by the Committee.
IX. RESTRICTED STOCK AWARDS
(a) FORFEITURE RESTRICTIONS TO BE ESTABLISHED BY THE COMMITTEE. Shares of
Stock that are the subject of a Restricted Stock Award shall be subject to
restrictions on disposition by the Holder and an obligation of the Holder to
forfeit and surrender the shares to the Company under certain circumstances (the
"FORFEITURE RESTRICTIONS"). The Forfeiture Restrictions shall be determined by
the Committee in its sole discretion, and the Committee may provide that the
Forfeiture Restrictions shall lapse upon (i) the attainment of targets
established by the Committee that are based on (1) the price of a share of
Stock, (2) the Company's earnings per share, (3) the Company's revenue, (4) the
revenue of a business unit of the Company designated by the Committee, (5) the
return on shareholders' equity achieved by the Company, or (6) the Company's
pre-tax cash flow from operations, (ii) the Holder's continued employment with
the Company for a specified period of time, or (iii) a combination of any two or
more of the factors listed in clauses (i) and (ii) of this sentence. Each
Restricted Stock Award may have different Forfeiture Restrictions, in the
discretion of the Committee. The Forfeiture Restrictions applicable to a
particular Restricted Stock Award shall not be changed except as permitted by
Paragraph IX(b) or Paragraph XII.
(b) OTHER TERMS AND CONDITIONS. Stock awarded pursuant to a Restricted
Stock Award shall be represented by a stock certificate registered in the name
of the Holder of such Restricted Stock Award. The Holder shall have the right to
receive dividends with respect to Stock subject to a Restricted Stock Award, to
vote Stock subject thereto and to enjoy all other shareholder rights, except
that (i) the Holder shall not be entitled to delivery of the stock certificate
until the Forfeiture Restrictions shall have expired, (ii) the Company shall
retain custody of the Stock until the Forfeiture Restrictions shall have
expired, (iii) the Holder may not sell, transfer, pledge, exchange, hypothecate
or otherwise dispose of the Stock until the Forfeiture Restrictions shall have
expired, and (iv) a breach of the terms and conditions established by the
Committee pursuant to the Restricted Stock Agreement, shall cause a forfeiture
of the Restricted Stock Award. At the time of such Award, the Committee may, in
its sole discretion, prescribe additional terms, conditions or restrictions
relating to Restricted Stock Awards, including, but not limited to, rules
pertaining to the termination of
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employment (by retirement, disability, death or otherwise) of a Holder prior to
expiration of the Forfeiture Restrictions. Such additional terms, conditions or
restrictions shall be set forth in a Restricted Stock Agreement made in
conjunction with the Award. Such Restricted Stock Agreement may also include,
without limitation, provisions relating to (i) subject to the provisions hereof
accelerating vesting on a Change of Control, vesting of Awards, (ii) tax matters
(including provisions (y) covering any applicable employee wage withholding
requirements and (z) prohibiting an election by the Holder under section 83(b)
of the Code), and (iii) any other matters not inconsistent with the terms and
provisions of this Plan that the Committee shall in its sole discretion
determine. The terms and conditions of the respective Restricted Stock
Agreements need not be identical.
(c) PAYMENT FOR RESTRICTED STOCK. The Committee shall determine the amount
and form of any payment for Stock received pursuant to a Restricted Stock Award,
provided that in the absence of such a determination, a Holder shall not be
required to make any payment for Stock received pursuant to a Restricted Stock
Award, except to the extent otherwise required by law.
(d) AGREEMENTS. At the time any Award is made under this Paragraph IX, the
Company and the Holder shall enter into a Restricted Stock Agreement setting
forth each of the matters as the Committee may determine to be appropriate. The
terms and provisions of the respective Restricted Stock Agreements need not be
identical.
X. PERFORMANCE AWARDS
(a) PERFORMANCE PERIOD. The Committee shall establish, with respect to and
at the time of each Performance Award, a performance period over which the
performance of the Holder shall be measured.
(b) PERFORMANCE AWARDS. Each Performance Award shall have a maximum value
established by the Committee at the time of such Award.
(c) PERFORMANCE MEASURES. A Performance Award shall be awarded to an
employee, director or other individual contingent upon future performance of the
employee, director or other individual, the Company or any subsidiary, division
or department thereof by or in which is he employed during the performance
period. The Committee shall establish the performance measures applicable to
such performance prior to the beginning of the performance period but subject to
such later revisions as the Committee shall deem appropriate to reflect
significant, unforeseen events or changes.
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(d) AWARDS CRITERIA. In determining the value of Performance Awards, the
Committee shall take into account a Holder's responsibility level,
contributions, performance, potential, other Awards and such other
considerations as it deems appropriate.
(e) PAYMENT. Following the end of the performance period, the Holder of a
Performance Award shall be entitled to receive payment of an amount, not
exceeding the maximum value of the Performance Award, based on the achievement
of the performance measures for such performance period, as determined by the
Committee. Payment of a Performance Award may be made in cash, Stock or a
combination thereof, as determined by the Committee. Payment shall be made in a
lump sum or in installments as prescribed by the Committee. Any payment to be
made in Stock shall be based on the Fair Market Value of the Stock on the
payment date. If a payment of cash is to be made on a deferred basis, the
Committee shall establish whether interest shall be credited, the rate thereof
and any other terms and conditions applicable thereto.
(f) TERMINATION OF EMPLOYMENT. A Performance Award shall terminate if the
Holder does not remain continuously in the employ of the Company at all times
during the applicable performance period, except as may be determined by the
Committee or as may otherwise be provided in the Award at the time granted.
(g) AGREEMENTS. At the time any Award is made under this Paragraph X, the
Company and the Holder shall enter into a Performance Award Agreement setting
forth each of the matters contemplated hereby, and, in addition such matters as
are set forth in Paragraph IX(b) as the Committee may determine to be
appropriate. The terms and provisions of the respective agreements need not be
identical.
XI. PHANTOM STOCK AWARDS
(a) PHANTOM STOCK AWARDS. Phantom Stock Awards are rights to receive
shares of Stock (or cash in an amount equal to the Fair Market Value thereof),
or rights to receive an amount equal to any appreciation in the Fair Market
Value of Stock (or portion thereof) over a specified period of time, which vest
over a period of time or upon the occurrence of an event (including without
limitation a Change of Control) as established by the Committee, without payment
of any amounts by the Holder thereof (except to the extent otherwise required by
law) or satisfaction of any performance criteria or objectives. Each Phantom
Stock Award shall have a maximum value established by the Committee at the time
of such Award.
(b) AWARD PERIOD. The Committee shall establish, with respect to and at
the time of each Phantom Stock Award, a period over which or the event upon
which the Award shall vest with respect to the Holder.
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(c) AWARDS CRITERIA. In determining the value of Phantom Stock Awards, the
Committee shall take into account a Holder's responsibility level,
contributions, performance, potential, other Awards and such other
considerations as it deems appropriate.
(d) PAYMENT. Following the end of the vesting period for a Phantom Stock
Award, the Holder of a Phantom Stock Award shall be entitled to receive payment
of an amount, not exceeding the maximum value of the Phantom Stock Award, based
on the then vested value of the Award. Payment of a Phantom Stock Award may be
made in cash, Stock or a combination thereof as determine by the Committee.
Payment shall be made in a lump sum or in installments as prescribed by the
Committee in its sole discretion. Any payment to be made in Stock shall be based
on the Fair Market Value of the Stock on the payment date. Cash dividend
equivalents may be paid during or after the vesting period with respect to a
Phantom Stock Award, as determined by the Committee. If a payment of cash is to
be made on a deferred basis, the Committee shall establish whether interest
shall be credited, the rate thereof and any other terms and conditions
applicable thereto.
(e) TERMINATION OF EMPLOYMENT. A Phantom Stock Award shall terminate if
the Holder does not remain continuously in the employ of the Company at all
times during the applicable vesting period, except as may be otherwise
determined by the Committee or as set forth in the Award at the time of grant.
(f) AGREEMENTS. At the time any Award is made under this Paragraph XI, the
Company and the Holder shall enter into a Phantom Stock Award Agreement setting
forth each of the matters contemplated hereby and, in addition such matters as
are set forth in Paragraph IX(b) as the Committee may determine to be
appropriate. The terms and provisions of the respective agreements need not be
identical.
XII. RECAPITALIZATION OR REORGANIZATION
(a) The shares with respect to which Awards may be granted are shares of
Stock as presently constituted, but if, and whenever, prior to the expiration of
an Award theretofore granted, the Company shall effect a subdivision or
consolidation by the Company, the number of shares of Stock with respect to
which such Award may thereafter be exercised or satisfied, as applicable, (i) in
the event of an increase in the number of outstanding shares shall be
proportionately increased, and the purchase price per share shall be
proportionately reduced, and (ii) in the event of a reduction in the number of
outstanding shares shall be proportionately reduced, and the purchase price per
share shall be proportionately increased.
(b) If the Company recapitalizes or otherwise changes its capital
structure, thereafter upon any exercise or satisfaction, as applicable, of an
Award theretofore granted the Holder shall be
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entitled to (or entitled to purchase, if applicable) under such Award, in lieu
of the number of shares of Stock then covered by such Award, the number and
class of shares of stock and securities to which the Holder would have been
entitled pursuant to the terms of the recapitalization if, immediately prior to
such recapitalization, the Holder had been the holder of record of the number of
shares of Stock then covered by such Award.
(c) In the event of a Change of Control, all outstanding Awards shall
immediately vest and become exercisable or satisfiable, as applicable. The
Committee, in its discretion, may determine that upon the occurrence of a Change
of Control, each Award other than an Option outstanding hereunder shall
terminate within a specified number of days after notice to the Holder, and such
Holder shall receive, with respect to each share of Stock subject to such Award,
cash in an amount equal to the excess, if any, of the Change of Control Value.
Further, in the event of a Change of Control, the Committee, in its discretion
shall act to effect one or more of the following alternatives with respect to
outstanding Options, which may vary among individual Holders and which may vary
among Options held by any individual Holder: (i) determine a limited period of
time on or before a specified date (before or after such Change of Control)
after which specified date all unexercised Options and all rights of Holders
thereunder shall terminate, (2) require the mandatory surrender to the Company
by selected Holders of some or all of the outstanding Options held by such
Holders (irrespective of whether such Options are then exercisable under the
provisions of the Plan) as of a date, before or after such Change of Control,
specified by the Committee, in which event the Committee shall thereupon cancel
such Options and the Company shall pay to each Holder an amount of cash per
share equal to the excess, if any, of the Change of Control Value of the shares
subject to such Option over the exercise price(s) under such Options for such
shares, (3) make such adjustments to Options then outstanding as the Committee
deems appropriate to reflect such Change of Control (provided, however, that the
Committee may determine in its sole discretion that no adjustment is necessary
to Options then outstanding) or (4) provide that thereafter upon any exercise of
an Option theretofore granted the Holder shall be entitled to purchase under
such Option, in lieu of the number of shares of Stock then covered by such
Option the number and class of shares of stock or other securities or property
(including, without limitation, cash) to which the Holder would have been
entitled pursuant to the terms of the agreement of merger, consolidation or sale
of assets and dissolution if, immediately prior to such merger, consolidation or
sale of assets and dissolution the Holder has been the holder of record of the
number of shares of Stock then covered by such Option. The provisions contained
in this paragraph shall be inapplicable to an Award granted within six (6)
months before the occurrence of a Change of Control if the Holder of such Award
is subject to the reporting requirements of Section 16(a) of the 1934 Act. The
provisions contained in this paragraph shall not terminate any rights of the
Holder to further payments pursuant to any other agreement with the Company
following a Change of Control.
-13-
<PAGE>
(d) In the event of changes in the outstanding Stock by reason of
recapitalization, reorganizations, mergers, consolidations, combinations,
exchanges or other relevant changes in capitalization occurring after the date
of the grant of any Award and not otherwise provided for by this Paragraph XII,
any outstanding Awards and any agreements evidencing such Awards shall be
subject to adjustment by the Committee at its discretion as to the number and
price of shares of Stock or other consideration subject to such Awards. In the
event of any such change in the outstanding Stock, the aggregate number of
shares available under the Plan may be appropriately adjusted by the Committee,
whose determination shall be conclusive.
(e) The existence of the Plan and the Awards granted hereunder shall not
affect in any way the right or power of the Board or the shareholders of the
Company to make or authorize any adjustment, recapitalization, reorganization or
other change in the Company's capital structure or its business, any merger or
consolidation of the Company, any issue of debt or equity securities ahead of or
affecting Stock or the rights thereof, the dissolution or liquidation of the
Company or any sale, lease, exchange or other disposition of all or any part of
its assets or business or any other corporate act or proceeding.
(f) Any adjustment provided for in Subparagraphs (a), (b), (c) or (d)
above shall be subject to any required shareholder action.
(g) Except as hereinbefore expressly provided, the issuance by the Company
of shares of stock of any class or securities convertible into shares of stock
of any class, for cash, property, labor or services, upon direct sale, upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares of obligations of the Company convertible into such shares or other
securities, and in any case whether or not for fair value, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number of
shares of Stock subject to Awards theretofore granted or the purchase price per
share, if applicable.
XIII. AMENDMENT AND TERMINATION OF THE PLAN
The Board in its discretion may terminate the Plan at any time with
respect to any shares for which Awards have not theretofore been granted. The
Board shall have the right to alter or amend the Plan or any part thereof from
time to time; provided that no change in any Award theretofore granted may be
made which would impair the rights of the Holder without the consent of the
Holder (unless such change is required in order to cause the benefits under the
Plan to qualify as performance-based compensation within the meaning of section
162(m) of the Code and applicable interpretive authority thereunder), and
provided, further, that the Board may not, without approval of the shareholders,
amend the Plan:
-14-
<PAGE>
(a) to increase the maximum number of shares which may be issued on
exercise or surrender of an Award, except as provided in Paragraph XII;
(b) to change the Option price;
(c) to change the employees, directors or other individuals eligible to
receive Awards or materially increase the benefits accruing to employees under
the Plan;
(d) to extend the maximum period during which Awards may be granted under
the Plan;
(e) to modify materially the requirements as to eligibility for
participation in the Plan; or
(f) to decrease any authority granted to the Committee hereunder in
contravention of Rule 16b-3.
XIV. MISCELLANEOUS
(a) NO RIGHT TO AN AWARD. Neither the adoption of the Plan by the Company
nor any action of the Board or the Committee shall be deemed to give an
employee, director or any other individual any right to be granted an Award to
purchase Stock, a right to a Stock Appreciation Right, a Restricted Stock Award,
a Performance Award or a Phantom Stock Award or any of the rights hereunder
except as may be evidenced by an Award or by an Option Agreement, Stock
Appreciation Rights Agreement, Restricted Stock Agreement, Performance Award
Agreement or Phantom Stock Award Agreement on behalf of the Company, and then
only to the extent and on the terms and conditions expressly set forth therein.
The Plan shall be unfunded. The Company shall not be required to establish any
special or separate fund or to make any other segregation of funds or assets to
assure the payment of any Award.
(b) NO EMPLOYMENT RIGHTS CONFERRED. Nothing contained in the Plan shall
(i) confer upon any employee, director or any other individual any right with
respect to continuation of employment with the Company or any subsidiary or (ii)
interfere in any way with the right of the Company or any subsidiary to
terminate his or her employment at any time.
(c) OTHER LAWS; WITHHOLDING. The Company shall not be obligated to issue
any Stock pursuant to any Award granted under the Plan at any time when the
shares covered by such Award have not been registered under the Securities Act
of 1933, as amended, and such other state and federal laws, rules or regulations
as the Company or the Committee deems applicable and, in the opinion of legal
counsel for the Company, there is no exemption from the registration
requirements
-15-
<PAGE>
of such laws, rules or regulations available for the issuance and sale of such
shares. No fractional shares of Stock shall be delivered, nor shall any cash in
lieu of fractional shares be paid. The Company shall have the right to deduct in
connection with all Awards any taxes required by law to be withheld and to
require any payments required to enable it to satisfy its withholding
obligations.
(d) NO RESTRICTION ON CORPORATE ACTION. Nothing contained in the Plan
shall be construed to prevent the Company or any subsidiary from taking any
corporate action which is deemed by the Company or such subsidiary to be
appropriate or in its best interest, whether or not such action would have an
adverse effect on the Plan or any Award made under the Plan. No employee,
director, beneficiary or other person shall have any claim against the Company
or any subsidiary as a result of any such action.
(e) RESTRICTIONS ON TRANSFER. An Award shall not be transferable otherwise
than by will or the laws of descent and distribution or pursuant to a "qualified
domestic relations order" as defined by the Code or Title I of the Employee
Retirement Income Security Act of 1974, as amended, or the rules thereunder, and
shall be exercisable during the Holder's lifetime only by such Holder or the
Holder's guardian or legal representative.
(f) RULE 16B-3. It is intended that the Plan and any grant of an Award
made to a person subject to Section 16 of the 1934 Act meet all of the
requirements of Rule 16b-3. If any provision of the Plan or any such Award would
disqualify the Plan or such Award under, or would otherwise not comply with,
Rule 16b-3, such provision or Award shall be construed or deemed amended to
conform to Rule 16b-3.
(g) SECTION 162(M). If the Plan is subject to 162(m) of the Code, it is
intended that the Plan comply fully with and meet all the requirements of
Section 162(m) of the Code so that Options and Stock Appreciation Rights granted
hereunder and, if determined by the Committee, Restricted Stock Awards, shall
constitute "performance-based" compensation within the meaning of such section.
If any provision of the Plan would disqualify the Plan or would not otherwise
permit the Plan to comply with Section 162(m) as so intended, such provision
shall be construed or deemed amended to conform to the requirements or
provisions of Section 162(m); provided that no such construction or amendment
shall have an adverse effect on the economic value to a Holder of any Award
previously granted hereunder.
(h) GOVERNING LAW. This Plan shall be construed in accordance with the
laws of the State of Texas.
-16-
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is by and among FIRST
PROSPERITY BANK, a Texas banking association (the "Bank"), and DAVID ZALMAN, an
individual residing in El Campo, Wharton County, Texas (the "Employee"),
effective as of January 1, 1998 (the "Effective Date").
WITNESSETH:
In consideration of the mutual covenants and agreements contained in
this Agreement, the Parties agree as follows:
1 . EMPLOYMENT. On the terms and subject to the conditions set forth in
this Agreement, the Bank hereby employs Employee, and engages the services of
the Employee to serve as President of the Bank, and Employee hereby accepts
employment with the Bank according to the terms set forth in this Agreement.
2. DUTIES. Employee is hereby employed and shall work at the location of
the Bank or at such other place or places as may be directed by the Bank. The
Employee shall have the position (including status, offices, titles and
reporting requirements), authority, duties, and responsibilities usually
associated with the president of a bank having assets similar in nature and
value to the assets of the Bank.
3. TERM. The term of this Agreement shall be as follows:
3.1 TERM. The term ("Term") of this Agreement shall commence on the
date hereof and continue for a period of three years.
3.2 EXTENSIONS. At the conclusion of each anniversary of the
execution date of this Agreement or any extensions thereof, the Term of this
Agreement shall automatically be extended for an additional year, unless this
Agreement is terminated in accordance with Section 7 hereof.
4. COMPENSATION AND BENEFITS. The compensation and other benefits payable
to Employee under this Agreement shall constitute the full consideration to be
paid to Employee for all services to be rendered by Employee to the Bank.
<PAGE>
4.1 BASE SALARY. During the first year the Term ofthis Agreement,
the Bank shall pay Employee a base salary ("Base Salary") of $185,000 per annum,
commencing on the date of execution of this Agreement. The Employee's Base
Salary shall be payable in accordance with the Bank's customary policies,
subject to payroll and withholding deductions as may be required by law and
other deductions applied generally to employees of the Bank for insurance or
other employee benefit plans.
4.2 ANNUAL REVIEW. The Employee's Base Salary shall be reviewed
annually by the Board of Directors of Prosperity Bancshares, Inc., the parent of
the Bank and recommendations shall be submitted to the board of Directors
subject to approval by the Board of Prosperity and the Bank and the Base Salary
may be increased from time to time upon the approval of both Boards.
4.3 REIMBURSEMENT OF EXPENSES. Employee shall be reimbursed for any
and all reasonable costs and expenses incurred by Employee in performance of his
services and duties as specified in this Agreement or incurred by Employee on
behalf of, or in furtherance of the business of, the Bank, including, but not
limited to business expenses incurred in connection with travel and
entertaimnent; provided, however, that Employee shall submit to the Bank
supporting receipts and information satisfactory to the Bank with respect to
such reasonable costs and expenses. The Employee shall also be provided with the
use of an automobile of Employee's selection with a purchase cost not exceeding
$45,000, and the Bank will reimburse all operating expenses incurred by Employee
for use of such automobile in carrying out Employee's duties for the Bank. Upon
termination of this Agreement, Employee shall be entitled to Purchase the
automobile from the Bank by payment of the NADA trade-in value of such
automobile.
4.4 BENEFITS. During the term of employee's employment, he shall be
entitled (i) to receive health insurance benefits with the same coverages and
deductibles as are currently in effect with respect to Employee and his spouse
(subject to the availability of such benefits at a reasonable cost), (ii) to
participate in the Bank's other benefit plans to such extent as determined by
the Board of Directors of the Bank, (iii) to participate in the Bank's other
policies, including vacation and sick leave.
5. CONFLICTS OF INTERESTS; COVENANT NOT TO COMPETE.
5. 1 Employee shall, during the term of this Agreement, devote his
time, attention, energies and business efforts to his duties as an employee of
the Bank and to the business of the Bank. Employee shall not, during the term of
this Agreement, directly or indirectly, for and on behalf of himself or any
person, firm, partnership, corporation or other legal entity, own, manage,
operate, control, invest in, make loans on advances to, guarantee the
obligations of or participate in the ownership or management or operations of or
be employed by or otherwise engage in the operation of any business that is in
competition in any manner whatsoever with the business of the Bank.
<PAGE>
6. CONFIDENTIAL INFORMATION.
6. 1 As used herein, "Confidential Information" means all technical
and business information (including financial statements and related books and
records, personnel records, customer lists, arrangements with customers and
suppliers, manuals and reports) of the Bank and its affiliates which is of a
confidential and/or proprietary character and which is either developed by
Employee (alone or with others) or to which Employee has had access during his
employment. Employee shall, both during and after his employment with the Bank,
protect and maintain the con fidential and/or proprietary character of all
Confidential Information. Employee shall not, during or after termination of his
employment, directly or indirectly, use (for himself or another) or disclose any
Confidential Information, for so long as it shall remain proprietary or
protectible as confidential, except as may be necessary for the performance of
his duties under this Agreement.
7. TERMINATION.
7. 1 TERMINATION OF AGREEMENT. Except as may otherwise be provided
herein, this Agreement may terminate prior to the end of the Term upon the
occurrence of:
(a) Thirty (30) days after written notice of termination is given by
either party to the other; or
(b) Employees's death or, at the Bank's option, upon Employee's
becoming Disabled (as defined in Section 8.3 hereof).
Any notice of termination given by Employee to the Bank under Section 7. 1 (a)
above shall specify whether such termination is made with or without Good
Reason-Change in Control (as defined in Section 8.5 hereof). Any notice of
termination given by the Bank to Employee under Section 7.1(a) above shall
specify whether such termination is with or without Cause (as defined in Section
8.4 hereof.
8. OBLIGATIONS OF THE BANK UPON TERMINATION.
8.1 CAUSE AND OTHER THAN FOR GOOD REASON-CHANGE IN CONTROL. If the
Bank terminates this Agreement with Cause (as defined in Section 8.4) pursuant
to Section 7. 1 (a) above, or if Employee terminates this Agreement without Good
Reason-Change in Control pursuant to Section 7.1(a) hereof, this Agreement shall
terminate without further obligations to Employee, other than those obligations
owing or accrued to, vested in, or earned by Employee through the date of
termination, including, but not limited to:
(a) to the extent not theretofore paid, Employee's Base Salary
in effect at the time of such termination through the date of
termination; and
<PAGE>
(b) in the case of compensation previously deferred by
Employee, all amounts previously deferred (together with any accrued
interest thereon) and not yet paid by the Bank and any accrued
vacation pay not yet paid by the Bank; and
(c) all other amounts or benefits owing or accrued to, vested
in, earned by Employee through the date of termination under the
then existing or applicable plans, programs, arrangements, and
policies of Bank.
The aggregate amount of such obligations owing or accrued to, vested in, or
earned by Employee through the date of termination shall be paid by the Bank to
Employee in cash in one lump sum within thirty (30) days after the date of
termination.
8.2 GOOD REASON-CHANGE IN CONTROL; OTHER THAN FOR CAUSE BEFORE OR
AFTER A CHANGE IN CONTROL. If Employee terminates this Agreement with Good
Reason-Change in Control Pursuant to Section 7.1(a) hereof, or if the Bank
terminates this Agreement without Cause before or after the occurrence of a
Change in Control pursuant to Section 7.1(a) hereof, the Bank shall Pay to
Employee cash in one lump sum within thirty (30) days after the date of
termination the aggregate of the following amounts (the "Change in Control-Lump
Sum Payment"):
(i) to the extent not theretofore paid, Employee's Base
Salary at the annual rate in effect at the time of such
termination through the date of termination; and
(ii) to the extent not theretofore paid, any bonus
through the date of termination; and
(iii) in the case of compensation previously deferred by
Employee, all amounts previously deferred (together with any
accrued interest thereon) and not yet paid by the Bank, and
any accrued vacation pay not yet paid by the Bank; and
(iv) all other amounts or benefits owing or accrued to,
vested in, or earned by Employee through the date of
termination under the then existing or applicable plans,
programs, arrangements, and policies of the Bank; and
(v) an amount equal to three (3) times the Employee's
Base Salary in effect at the time of such termination. In no
event shall Employee be entitled to invoke this provision more
than once under the terms of this entire contract.
<PAGE>
8.3 DEATH OR DISABILITIES. If Employee's employment is terminated
under Section 7.l(b) hereof by reason of employee's death or Disability, the
Bank shall pay to Employee's legal representatives cash in one lump sum within
thirty (30) days after the date of employee's death or Disability the full
amount of the obligations owing or accrued to, vested in, or earned by Employee
through the date of Employee's death or disability, but not including the
remaining unearned portion of the contract, without approval of both Boards.
Anything in this Agreement to the contrary notwithstanding, the Employee's legal
representatives or beneficialness shall be entitled to receive benefits provided
under the then existing or applicable plans, programs, or arrangements and
policies of the Bank relating to death or disability. As used herein, "Disabled"
shall mean total disability as determined pursuant to the Bank's long term
disability Plan or, if no such plan shall be in effect, by the Board of
Directors of the Bank in accordance with their reasonable business judgment and
the normal personnel practices of the Bank.
8.4 CAUSE. As used in this Agreement, the term "Cause" means (i)
willful misconduct by Employee, (ii) the gross neglect by Employee of his duties
as an employee, officer or director of the Bank which continues for more than
thirty (30) days after written notice from the Bank to Employee specifically
identifying the gross negligence of Employee and directing Employee to
discontinue same, (iii) the commission by Employee of an act, other than an act
taken in good faith within the course and scope of Employee's employment, which
is directly detrimental to the Bank and which act exposes the Bank to material
liability, (iv) the Employee having been indicted for or convicted of any felony
or other crime involving moral turpitude, or (v) current illegal use of
narcotics, illegal drugs or controlled substances by Employee, or the current
use of alcohol by the Employee to an extent which materially impairs the
performance of Employee's duties.
8.5 GOOD REASON-CHANGE IN CONTROL. As used in this Agreement, the
term "Good Reason-Change in Control" means after the occurrence of a Change in
Control (as defined in Section 8.6) and a determination by Employee that any one
or more of the following
events has occurred:
(a) the assignment by the Bank to Employee of duties that are
inconsistent with the position of President at the time of such
assigmnent, or the removal by the Bank from Employee of those duties
usually appertaining to the position of President at the time of such
removal; or
(b) a change by the Bank, without Employee's prior written consent,
in Employee's responsibilities to the Bank as such responsibilities
existed at the time of the occurrence of such Change in Control (or as
such responsibilities may thereafter exist from time to time as a result
of changes in such responsibilities made with Employee's prior written
consent); or
(c) the failure of the Bank to continue to provide Employee with
office space, related facilities and support personnel (including, but not
limited to, administrative and secretarial assistance) that are both
commensurate with the position of President and Employee's
responsibilities to and position with the Bank at the time of the
occurrence of such Change in Control and not materially dissimilar to the
office space, related facilities and support personnel provided to other
key executive officers of the Bank; or
<PAGE>
(d) a reduction by the Bank in the amount of Employee's Base Salary
specified in Section 4.1(a) (or as subsequently increased) and as in
effect at the time of the occurrence of such Change in Conbol, or a
failure of the Bank to pay such Base Salary to the Employee at the time
and in the manner specified in Section 4.1 (a) of this Agreement; or
(e) the relocation, without Employee's prior written consent, of the
Bank's principal executive offices to a location outside the county in
which such offices are located at the time of the occurrence of such
Change in Control; or
(f) the failure of the Bank to obtain the assumption by any
successor to the Bank of the obligations imposed upon the Bank under this
Agreement, as required by Section l5 of this Agreement; or
(g) the employment of Employee under this Agreement is terminated by
the Bank without Cause; or
(h) the Bank notifies Employee of the Bank's intention not to
observe or perform one or more of the obligations ofthe Bank under this
Agreement; or
(i) the Bank breaches any provision of this Agreement.
8.6 CHANGE IN CONTROL. As used herein, the term "Change in Control"
shall mean the occurrence with respect to First Prosperity Bancshares, Inc.
("Bancshares") or the Bank of any of the following events: (a) the acquisition
of all or substantially all of the assets of Bancshares or the Bank, or (b)
Bancshares or the Bank is acquired Pursuant to a merger, consolidation or other
corporate reorganization.
9. NOTICES. Any notice under this Agreement must be in writing and may be
given by certified or registered mail, postage prepaid, addressed to the party
or parties to be notified with return receipt requested, or by delivering the
notice in person. For purposes of notice, the address of Employee or any
administrator, executor or legal representative of Employee or his estate, as
the case may be, shall be the last address of the Employee on the records of the
Bank. The address of the Bank shall be its Principal business address.
10. CONTROLLING LAW. This Agreement shall be governed by the laws of the
State of Texas.
11 . ENTIRE AGREEMENT. This Agreement contains the entire agreement of the
parties and may only be amended in writing signed by both parties; provided,
that no amendment to this Agreement shall be effective unless authorized by
resolution of the Board of Directors and signed on behalf of the Bank by a duly
authorized officer of the Bank other than Employee.
<PAGE>
12. REMEDIES, MODIFICATION AND SEPARABILITY. Employee and the Bank agree
that Employee's breach of Sections 5 and 6 of this Agreement will result in
irreparable harm to the Bank, that no adequate remedy at law is available, and
that the Bank shall be entitled to injunctive relief; however, nothing herein
shall prevent the Bank from pursuing any other remedies at law or at equity
available to the Bank. Should a court of competent jurisdiction declare any of
the covenants set forth in Sections 5 or 6 unenforceable, the court shall be
empowered to modify or reform such covenants so as to provide relief reasonably
necessary to protect the interests of the Bank and Employee and to award
injunctive relief, or damages, or both, to which the Bank may be entitled. If
any provision of this Agreement is declared by a court of last resort to be
invalid, the Bank and Employee agree that such declaration shall not affect the
validity of the other provisions ofthis Agreement. If any provision of this
Agreement is capable to two constructions, one of which would render the
provision void and the other of which would render the provision valid, then the
provision shall have the construction which renders it valid.
13. PRESERVATION OF BUSINESS: FIDUCIARY RESPONSIBILITY. Employee shall use
his best efforts to preserve the business and organization of the Bank, to keep
available to the Bank the services of its present employees and to preserve the
business relations of the Bank with suppliers, distributors, customers and
others. Employee shall not commit any act which would injure the Bank. Employee
shall observe and fulfill proper standards of fiduciary responsibility attendant
upon his Office.
14. ASSIGNMENTS. This Agreement is personal to Employee and without the
prior written consent of the Bank shall not be assignable by Employee other than
by will or the laws of descent and distribution. This Agreement shall inure to
the benefit of and be enforceable by Employee's legal representatives and heirs.
This Agreement shall inure to the benefit of and be binding upon the Bank and
its successors and assigns. The Bank shall require any corporation, entity,
individual or other person who is the successor (whether direct or indirect, by
purchase, merger, consolidation, reorganization, or otherwise) to all or
substantially all of the business or assets of the Bank to expressly assume and
agree to perform, by a written agreement in form and substance satisfactory to
Employee, all of the obligations of the Bank under this Agreement. As used in
this Agreement, the term "Bank" shall mean the Bank as hereinbefore defined and
any successor to its business and/or assets as aforesaid which assumes and
agrees to perform this Agreement by operation of law, written agreement, or
otherwise.
15. WAIVER OF BREACH. The waiver by the Bank of a breach of any provision
of this Agreement by Employee shall not operate or be construed as a waiver by
the Bank of any subsequent breach of Employee.
16. REVOCATION OF PREVIOUS EMPLOYMENT AGREEMENT. Any and all previous
employment agreements existing between the Bank and Employee are revoked and
canceled.
<PAGE>
17. HEADINGS. The section headings in this Agreement are for convenience
of reference and shall not be used in the interpretation or construction of this
Agreement.
18. ATTORNEY'S FEES. In the event Bank or Employee breaches any term or
provision of this Agreement and the other party employs an attorney or attorneys
to enforce the terms of this Agreement, then the breaching or defaulting party
agrees to pay the other party the reasonable attorney's fees and costs incurred
to enforce this Agreement.
19. EXECUTION. This Agreement may be executed in multiple counterparts
each of which shall be deemed an original and all of which shall constitute one
instrument.
Employee acknowledges that he has read this Agreement and understands that
signing this Agreement is a condition of employment.
IN WITNESS WHEREOF, this Agreement is executed as of the _____ day of
- -----------,
1998.
"EMPLOYEE" "BANK"
FIRST PROSPERITY BANCSHARES, INC.
____________________________________
DAVID ZALMAN BY:_________________________________
TRACY RUDOLPH, DIRECTOR
BY:_________________________________
DAVID ZALMAN, DIRECTOR
BY:_________________________________
HARRY BAYNE, DIRECTOR
BY:_________________________________
JIM BOULIGNY, DIRECTOR
<PAGE>
BY:_________________________________
J. T. HERIN, DIRECTOR
BY:_________________________________
CHARLES SLAVIK, DIRECTOR
BY:_________________________________
HARRISON STAFFORD, DIRECTOR
BY:_________________________________
ROBERT STEELHAMMER, DIRECTOR
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is by and among FIRST
PROSPERITY BANK, a Texas banking association (the "Bank"), and TRACY T. RUDOLPH,
an individual residing in Houston, Harris County, Texas (the "Employee"),
effective as of January 1, 1998 (the "Effective Date").
WITNESSETH:
In consideration of the mutual covenants and agreements contained in this
Agreement, the Parties agree as follows:
1 . EMPLOYMENT. On the terms and subject to the conditions set forth in
this Agreement, the Bank hereby employs Employee, and engages the services of
the Employee to serve as Chairman of the Board of the Bank, and Employee hereby
accepts employment with the Bank according to the terms set forth in this
Agreement.
2. DUTIES. Employee is hereby employed and shall work at the location of
the Bank or at such other place or places as may be directed by the Bank. The
Employee shall have the position (including status, offices, titles and
reporting requirements), authority, duties, and responsibilities usually
associated with the chairman of the board of a bank having assets similar in
nature and value to the assets of the Bank.
3. TERM. The term of this Agreement shall be as follows:
3.1 TERM. The term ("Term") of this Agreement shall commence on the
date hereof and continue for a period of three years.
3.2 EXTENSIONS. At the conclusion of each anniversary of the
execution date of this Agreement or any extensions thereof, the Term of this
Agreement shall automatically be extended for an additional year, unless this
Agreement is terminated in accordance with Section 7 hereof.
4. COMPENSATION AND BENEFITS. The compensation and other benefits payable
to Employee under this Agreement shall constitute the full consideration to be
paid to Employee for all services to be rendered by Employee to the Bank.
<PAGE>
4.1 BASE SALARY. During the first year the Term of this Agreement,
the Bank shall pay Employee a base salary ("Base Salary") of $225,000 per annum,
commencing on the date of execution of this Agreement. The Employee's Base
Salary shall be payable in accordance with the Bank's customary policies,
subject to payroll and withholding deductions as may be required by law and
other deductions applied generally to employees of the Bank for insurance or
other employee benefit plans.
4.2 ANNUAL REVIEW. The Employee's Base Salary shall be reviewed
annually by the Board of Directors of Prosperity Bancshares, Inc., the parent of
the Bank and recommendations shall be submitted to the board of Directors
subject to approval by the Board of Prosperity and the Bank and the Base Salary
may be increased from time to time upon the approval of both Boards.
4.3 REIMBURSEMENT OF EXPENSES. Employee shall be reimbursed for any
and all reasonable costs and expenses incurred by Employee in performance of his
services and duties as specified in this Agreement or incurred by Employee on
behalf of, or in furtherance of the business of, the Bank, including, but not
limited to business expenses incurred in connection with travel and
entertainment; provided, however, that Employee shall submit to the Bank
supporting receipts and information satisfactory to the Bank with respect to
such reasonable costs and expenses. The Employee shall also be provided with the
use of an automobile of Employee's selection with a purchase cost not exceeding
$45,000, and the Bank will reimburse all operating expenses incurred by Employee
for use of such automobile in carrying out Employee's duties for the Bank. Upon
termination of this Agreement, Employee shall be entitled to Purchase the
automobile from the Bank by payment of the NADA trade-in value of such
automobile.
4.4 BENEFITS. During the term of employee's employment, he shall be
entitled (i) to receive health insurance benefits with the same coverages and
deductibles as are currently in effect with respect to Employee and his spouse
(subject to the availability of such benefits at a reasonable cost), (ii) to
participate in the Bank's other benefit plans to such extent as determined by
the Board of Directors of the Bank, (iii) to participate in the Bank's other
policies, including vacation and sick leave.
5. CONFLICTS OF INTERESTS; COVENANT NOT TO COMPETE.
5. 1 Employee shall, during the term of this Agreement, devote his
time, attention, energies and business efforts to his duties as an employee of
the Bank and to the business of the Bank. Employee shall not, during the term of
this Agreement, directly or indirectly, for and on behalf of himself or any
person, firm, partnership, corporation or other legal entity, own, manage,
operate, control, invest in, make loans on advances to, guarantee the
obligations of or participate in the ownership or management or operations of or
be employed by or otherwise engage in the operation of any business that is in
competition in any manner whatsoever with the business of the Bank.
<PAGE>
6. CONFIDENTIAL INFORMATION.
6. 1 As used herein, "Confidential Information" means all technical
and business information (including financial statements and related books and
records, personnel records, customer lists, arrangements with customers and
suppliers, manuals and reports) of the Bank and its affiliates which is of a
confidential and/or proprietary character and which is either developed by
Employee (alone or with others) or to which Employee has had access during his
employment. Employee shall, both during and after his employment with the Bank,
protect and maintain the confidential and/or proprietary character of all
Confidential Information. Employee shall not, during or after termination of his
employment, directly or indirectly, use (for himself or another) or disclose any
Confidential Information, for so long as it shall remain proprietary or
protectible as confidential, except as may be necessary for the performance of
his duties under this Agreement.
7. TERMINATION.
7. 1 TERMINATION OF AGREEMENT. Except as may otherwise be provided
herein, this Agreement may terminate prior to the end of the Term upon the
occurrence of:
(a) Thirty (30) days after written notice of termination is given by
either party to the other; or
(b) Employees's death or, at the Bank's option, upon Employee's
becoming Disabled (as defined in Section 8.3 hereof).
Any notice of termination given by Employee to the Bank under Section 7. 1 (a)
above shall specify whether such termination is made with or without Good
Reason-Change in Control (as defined in Section 8.5 hereof). Any notice of
termination given by the Bank to Employee under Section 7.1(a) above shall
specify whether such termination is with or without Cause (as defined in Section
8.4 hereof.
8. OBLIGATIONS OF THE BANK UPON TERMINATION.
8.1 CAUSE AND OTHER THAN FOR GOOD REASON-CHANGE IN CONTROL. If the
Bank terminates this Agreement with Cause (as defined in Section 8.4) pursuant
to Section 7. 1 (a) above, or if Employee terminates this Agreement without Good
Reason-Change in Control pursuant to Section 7.1(a) hereof, this Agreement shall
terminate without further obligations to Employee, other than those obligations
owing or accrued to, vested in, or earned by Employee through the date of
termination, including, but not limited to:
(a) to the extent not theretofore paid, Employee's Base Salary
in effect at the time of such termination through the date of
termination; and
(b) in the case of compensation previously deferred by
Employee, all amounts previously deferred (together with any accrued
interest thereon) and not yet paid by the Bank and any accrued
vacation pay not yet paid by the Bank; and
<PAGE>
(c) all other amounts or benefits owing or accrued to, vested
in, earned by Employee through the date of termination under the
then existing or applicable plans, programs, arrangements, and
policies of Bank.
The aggregate amount of such obligations owing or accrued to, vested in, or
earned by Employee through the date of termination shall be paid by the Bank to
Employee in cash in one lump sum within thirty (30) days after the date of
termination.
8.2 GOOD REASON-CHANGE IN CONTROL; OTHER THAN FOR CAUSE BEFORE OR
AFTER A CHANGE IN CONTROL. If Employee terminates this Agreement with Good
Reason-Change in Control Pursuant to Section 7.1(a) hereof, or if the Bank
terminates this Agreement without Cause before or after the occurrence of a
Change in Control pursuant to Section 7.1(a) hereof, the Bank shall Pay to
Employee cash in one lump sum within thirty (30) days after the date of
termination the aggregate of the following amounts (the "Change in Control-Lump
Sum Payment"):
(i) to the extent not theretofore paid, Employee's Base
Salary at the annual rate in effect at the time of such
termination through the date of termination; and
(ii) to the extent not theretofore paid, any bonus
through the date of termination; and
(iii) in the case of compensation previously deferred by
Employee, all amounts previously deferred (together with any
accrued interest thereon) and not yet paid by the Bank, and
any accrued vacation pay not yet paid by the Bank; and
(iv) all other amounts or benefits owing or accrued to,
vested in, or earned by Employee through the date of
termination under the then existing or applicable plans,
programs, arrangements, and policies of the Bank; and
(v) an amount equal to three (3) times the Employee's
Base Salary in effect at the time of such termination. In no
event shall Employee be entitled to invoke this provision more
than once under the terms of this entire contract.
<PAGE>
8.3 DEATH OR DISABILITIES. If Employee's employment is terminated
under Section 7.1(b) hereof by reason of employee's death or Disability, the
Bank shall pay to Employee's legal representatives cash in one lump sum within
thirty (30) days after the date of employee's death or Disability the full
amount of the obligations owing or accrued to, vested in, or earned by Employee
through the date of Employee's death or disability, but not including the
remaining unearned portion of the contract, without approval of both Boards.
Anything in this Agreement to the contrary notwithstanding, the Employee's legal
representatives or beneficialness shall be entitled to receive benefits provided
under the then existing or applicable plans, programs, or arrangements and
policies of the Bank relating to death or disability. As used herein, "Disabled"
shall mean total disability as determined pursuant to the Bank's long term
disability Plan or, if no such plan shall be in effect, by the Board of
Directors of the Bank in accordance with their reasonable business judgment and
the normal personnel practices of the Bank.
8.4 CAUSE. As used in this Agreement, the term "Cause" means (i)
willful misconduct by Employee, (ii) the gross neglect by Employee of his duties
as an employee, officer or director of the Bank which continues for more than
thirty (30) days after written notice from the Bank to Employee specifically
identifying the gross negligence of Employee and directing Employee to
discontinue same, (iii) the commission by Employee of an act, other than an act
taken in good faith within the course and scope of Employee's employment, which
is directly detrimental to the Bank and which act exposes the Bank to material
liability, (iv) the Employee having been indicted for or convicted of any felony
or other crime involving moral turpitude, or (v) current illegal use of
narcotics, illegal drugs or controlled substances by Employee, or the current
use of alcohol by the Employee to an extent which materially impairs the
performance of Employee's duties.
8.5 GOOD REASON-CHANGE IN CONTROL. As used in this Agreement, the
term "Good Reason-Change in Control" means after the occurrence of a Change in
Control (as defined in Section 8.6) and a determination by Employee that any one
or more of the following events has occurred:
(a) the assignment by the Bank to Employee of duties that are
inconsistent with the position of Chairman of the Board at the time of
such assigmnent, or the removal by the Bank from Employee of those duties
usually appertaining to the position of Chairman of the Board at the time
of such removal; or
(b) a change by the Bank, without Employee's prior written consent,
in Employee's responsibilities to the Bank as such responsibilities
existed at the time of the occurrence of such Change in Control (or as
such responsibilities may thereafter exist from time to time as a result
of changes in such responsibilities made with Employee's prior written
consent); or
(c) the failure of the Bank to continue to provide Employee with
office space, related facilities and support personnel (including, but not
limited to, administrative and secretarial assistance) that are both
commensurate with the position of Chairman of the Board and Employee's
responsibilities to and position with the Bank at the time of the
occurrence of such Change in Control and not materially dissimilar to the
office space, related facilities and support personnel provided to other
key executive officers of the Bank; or
<PAGE>
(d) a reduction by the Bank in the amount of Employee's Base Salary
specified in Section 4.l(a) (or as subsequently increased) and as in
effect at the time of the occurrence of such Change in Conbol, or a
failure of the Bank to pay such Base Salary to the Employee at the time
and in the manner specified in Section 4. 1 (a) of this Agreement; or
(e) the relocation, without Employee's prior written consent, of the
Bank's principal executive offices to a location outside the county in
which such offices are located at the time of the occurrence of such
Change in Control; or
(f) the failure of the Bank to obtain the assumption by any
successor to the Bank of the obligations imposed upon the Bank under this
Agreement, as required by Section 15 of this Agreement; or
(g) the employment of Employee under this Agreement is terminated by
the Bank without Cause; or
(h) the Bank notifies Employee of the Bank's intention not to
observe or perform one or more of the obligations ofthe Bank under this
Agreement; or
(i) the Bank breaches any provision of this Agreement.
8.6 CHANGE IN CONTROL. As used herein, the term "Change in Control"
shall mean the occurrence with respect to First Prosperity Bancshares, Inc.
("Bancshares") or the Bank of any of the following events: (a) the acquisition
of all or substantially all of the assets of Bancshares or the Bank, or (b)
Bancshares or the Bank is acquired Pursuant to a merger, consolidation or other
corporate reorganization.
9. NOTICES. Any notice under this Agreement must be in writing and may be
given by certified or registered mail, postage prepaid, addressed to the party
or parties to be notified with return receipt requested, or by delivering the
notice in person. For purposes of notice, the address of Employee or any
administrator, executor or legal representative of Employee or his estate, as
the case may be, shall be the last address of the Employee on the records of the
Bank. The address of the Bank shall be its Principal business address.
10. CONTROLLING LAW. This Agreement shall be governed by the laws of the
State of Texas.
11 . ENTIRE AGREEMENT. This Agreement contains the entire agreement of the
parties and may only be amended in writing signed by both parties; provided,
that no amendment to this Agreement shall be effective unless authorized by
resolution of the Board of Directors and signed on behalf of the Bank by a duly
authorized officer of the Bank other than Employee.
<PAGE>
12. REMEDIES, MODIFICATION AND SEPARABILITY. Employee and the Bank agree
that Employee's breach of Sections 5 and 6 of this Agreement will result in
irreparable harm to the Bank, that no adequate remedy at law is available, and
that the Bank shall be entitled to injunctive relief; however, nothing herein
shall prevent the Bank from pursuing any other remedies at law or at equity
available to the Bank. Should a court of competent jurisdiction declare any of
the covenants set forth in Sections 5 or 6 unenforceable, the court shall be
empowered to modify or reform such covenants so as to provide relief reasonably
necessary to protect the interests of the Bank and Employee and to award
injunctive relief, or damages, or both, to which the Bank may be entitled. If
any provision of this Agreement is declared by a court of last resort to be
invalid, the Bank and Employee agree that such declaration shall not affect the
validity of the other provisions ofthis Agreement. If any provision of this
Agreement is capable to two constructions, one of which would render the
provision void and the other of which would render the provision valid, then the
provision shall have the construction which renders it valid.
13. PRESERVATION OF BUSINESS: FIDUCIARY RESPONSIBILITY. Employee shall use
his best efforts to preserve the business and organization of the Bank, to keep
available to the Bank the services of its present employees and to preserve the
business relations of the Bank with suppliers, distributors, customers and
others. Employee shall not commit any act which would injure the Bank. Employee
shall observe and fulfill proper standards of fiduciary responsibility attendant
upon his Office.
14. ASSIGNMENTS. This Agreement is personal to Employee and without the
prior written consent of the Bank shall not be assignable by Employee other than
by will or the laws of descent and distribution. This Agreement shall inure to
the benefit of and be enforceable by Employee's legal representatives and heirs.
This Agreement shall inure to the benefit of and be binding upon the Bank and
its successors and assigns. The Bank shall require any corporation, entity,
individual or other person who is the successor (whether direct or indirect, by
purchase, merger, consolidation, reorganization, or otherwise) to all or
substantially all of the business or assets of the Bank to expressly assume and
agree to perform, by a written agreement in form and substance satisfactory to
Employee, all of the obligations of the Bank under this Agreement. As used in
this Agreement, the term "Bank" shall mean the Bank as hereinbefore defined and
any successor to its business and/or assets as aforesaid which assumes and
agrees to perform this Agreement by operation of law, written agreement, or
otherwise.
15. WAIVER OF BREACH. The waiver by the Bank of a breach of any provision
of this Agreement by Employee shall not operate or be construed as a waiver by
the Bank of any subsequent breach of Employee.
<PAGE>
16. REVOCATION OF PREVIOUS EMPLOYMENT AGREEMENT. Any and all previous
employment agreements existing between the Bank and Employee are revoked and
cancelled.
17. HEADINGS. The section headings in this Agreement are for
convenience of reference and shall not be used in the interpretation or
construction of this Agreement.
18. ATTORNEY'S FEES. In the event Bank or Employee breaches any term or
provision of this Agreement and the other party employs an attorney or attorneys
to enforce the terms of this Agreement, then the breaching or defaulting party
agrees to pay the other party the reasonable attorney's fees and costs incurred
to enforce this Agreement.
19. EXECUTION. This Agreement may be executed in multiple counterparts
each of which shall be deemed an original and all of which shall constitute one
instrument.
Employee acknowledges that he has read this Agreement and understands that
signing this Agreement is a condition of employment.
IN WITNESS WHEREOF, this Agreement is executed as of the _____ day of
___________, 1998.
"EMPLOYEE" "BANK"
FIRST PROSPERITY BANCSHARES, INC.
___________________________________ BY:_________________________________
TRACY T. RUDOLPH TRACY RUDOLPH, DIRECTOR
BY:_________________________________
DAVID ZALMAN, DIRECTOR
BY:_________________________________
HARRY BAYNE, DIRECTOR
BY:_________________________________
JIM BOULIGNY, DIRECTOR
BY:_________________________________
J. T. HERIN, DIRECTOR
BY:_________________________________
CHARLES SLAVIK, DIRECTOR
BY:_________________________________
HARRISON STAFFORD, DIRECTOR
BY:_________________________________
ROBERT STEELHAMMER, DIRECTOR
EXHIBIT 10.4
------------------------------------------------
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
PROSPERITY BANCSHARES, INC.,
FIRST PROSPERITY BANK
AND
UNION STATE BANK
DATED AS OF JUNE 5, 1998
------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
INTRODUCTION...........................................................1
I. THE MERGERS........................................................2
Section 1.1.Initial Merger.......................................2
Section 1.2.Articles of Association, Bylaws and Facilities
of First Surviving Bank..............................2
Section 1.3.Effect of Initial Merger.............................2
Section 1.4.Liabilities of the First Surviving Bank..............3
Section 1.5.Final Merger.........................................3
Section 1.6.Articles of Association, Bylaws and Facilities of
Continuing Bank......................................3
Section 1.7.Effect of Final Merger...............................3
Section 1.8.Liabilities of Continuing Bank.......................4
Section 1.9.Merger Consideration.................................4
Section 1.10.Adjustment to Merger Consideration..................4
Section 1.11.Dissenting Shares...................................5
Section 1.12.Exchange of Shares..................................5
Section 1.13.Ratification by Shareholders........................6
II. REPRESENTATIONS AND WARRANTIES OF UNION...........................6
Section 2.1.Organization.........................................7
Section 2.2.Capitalization.......................................7
Section 2.3.Approvals; Authority.................................7
Section 2.4.Investments..........................................8
Section 2.5.Financial Statements.................................8
Section 2.6.Title................................................8
Section 2.7.Environmental Laws...................................9
Section 2.8.Litigation and Other Proceedings....................10
Section 2.9.Taxes...............................................10
Section 2.10.Contracts..........................................10
Section 2.11.Insurance..........................................11
Section 2.12.No Conflict With Other Instruments.................11
Section 2.13.Laws...............................................12
Section 2.14.Conduct............................................12
Section 2.15.Allowance for Credit Losses........................13
Section 2.16.Employment Relations...............................13
Section 2.17.ERISA..............................................13
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<PAGE>
Section 2.18.Deferred Compensation Arrangements.................14
Section 2.19.List of Loans......................................14
Section 2.20.Absence of Changes.................................14
Section 2.21.Brokers and Finders................................14
Section 2.22.Absence of Property Taxes and Liens................15
Section 2.23.Community Reinvestment Act.........................15
Section 2.24.Fair Housing Act, Home Mortgage Disclosure Act and
Equal Credit Opportunity Act.......................15
Section 2.25.Usury Laws and Other Consumer Compliance Laws......15
Section 2.26.Bank Secrecy Act...................................15
Section 2.27.Zoning and Related Laws............................16
Section 2.28.Year 2000 Compliance...............................16
Section 2.29.Securities Laws....................................16
Section 2.30.Regulatory Approvals...............................16
Section 2.31.Shareholders' List.................................16
III. REPRESENTATIONS AND WARRANTIES OF BANCSHARES AND FPB ...........16
Section 3.1.Organization........................................16
Section 3.2.Approvals; Authority................................17
Section 3.3.No Conflict With Other Instruments..................17
Section 3.4.Litigation and Other Proceedings....................17
Section 3.5.Ability to Pay Merger Consideration.................18
Section 3.6.Regulatory Approvals...............................18
Section 3.7.Year 2000 Compliance................................18
Section 3.8.Community Reinvestment Act..........................18
IV. COVENANTS OF UNION...............................................18
Section 4.1.Shareholder Approval and Best Efforts...............18
Section 4.2.Operations..........................................19
Section 4.3.Access to Properties and Records....................20
Section 4.4.Information for Regulatory Applications.............20
Section 4.5.Attendance at Certain Union Meetings................20
Section 4.6.Standstill Provision................................21
Section 4.7.Proxies.............................................21
Section 4.8.Termination of Data Processing Contracts............21
V. COVENANTS OF BANCSHARES...........................................22
Section 5.1.Best Efforts........................................22
Section 5.2.Information for Applications and Proxy Solicitation.22
Section 5.3.Employee Benefit Plans..............................23
Section 5.4.Confidentiality.....................................23
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<PAGE>
Section 5.5.Applications........................................23
Section 5.6.Additional Capital..................................23
VI. CLOSING..........................................................24
Section 6.1.Closing.............................................24
Section 6.2.Effective Time......................................24
VII. TERMINATION.....................................................25
Section 7.1.Termination.........................................25
Section 7.2.Effect of Termination...............................26
VIII. CONDITIONS TO OBLIGATIONS OF BANCSHARES AND FPB................26
Section 8.1.Compliance with Representations and Covenants.......26
Section 8.2.Material Adverse Change.............................27
Section 8.3.Legal Opinion.......................................27
Section 8.4.Releases............................................27
Section 8.5.Dissenters' Rights..................................27
Section 8.6.Employment Agreements...............................27
IX. CONDITIONS TO OBLIGATIONS OF UNION...............................27
Section 9.1.Compliance with Representations and Covenants.......27
Section 9.2.Material Adverse Change.............................28
Section 9.3.Legal Opinion.......................................28
Section 9.4.Releases............................................28
X. CONDITIONS TO RESPECTIVE OBLIGATIONS OF
BANCSHARES, FPB AND UNION.......................................28
Section 10.1.Government Approvals...............................28
Section 10.2.Shareholder Approval...............................29
XI. MISCELLANEOUS....................................................29
Section 11.1.Non-Survival of Representations and Warranties.....29
Section 11.2.Amendments.........................................29
Section 11.3.Expenses...........................................29
Section 11.4.Notices............................................30
Section 11.5.Controlling Law....................................31
Section 11.6.Headings...........................................31
Section 11.7.Modifications or Waiver............................31
Section 11.8.Severability.......................................31
Section 11.9.Assignment.........................................31
Section 11.10.Consolidation of Agreements.......................31
Section 11.11.Counterparts......................................31
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<PAGE>
Section 11.12.Binding on Successors.............................32
Section 11.13.Gender............................................32
Section 11.14.Disclosures.......................................32
Section 11.15.Publicity.........................................32
Section 11.16.Entire Agreement..................................32
SCHEDULE 2.1 TO THE AGREEMENT:
Organization - Union............................................34
SCHEDULE 2.2 TO THE AGREEMENT:
Capitalization - Union..........................................35
SCHEDULE 2.4 TO THE AGREEMENT:
Investments - Union.............................................36
SCHEDULE 2.5 TO THE AGREEMENT:
Financial Statements - Union....................................37
SCHEDULE 2.6 TO THE AGREEMENT:
Title - Union...................................................38
SCHEDULE 2.7 TO THE AGREEMENT:
Environmental Laws - Union......................................39
SCHEDULE 2.8 TO THE AGREEMENT:
Litigation and Other Proceedings - Union........................40
SCHEDULE 2.9 TO THE AGREEMENT:
Taxes - Union...................................................41
SCHEDULE 2.10 TO THE AGREEMENT:
Contracts - Union...............................................42
SCHEDULE 2.11 TO THE AGREEMENT:
Insurance Policies - Union......................................43
SCHEDULE 2.13 TO THE AGREEMENT:
Compliance with Laws - Union....................................44
SCHEDULE 2.14 TO THE AGREEMENT:
Conduct - Union.................................................45
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<PAGE>
SCHEDULE 2.16 TO THE AGREEMENT:
Employment Relations - Union....................................46
SCHEDULE 2.18 TO THE AGREEMENT:
Deferred Compensation Arrangements - Union......................47
SCHEDULE 2.19 TO THE AGREEMENT:
List of Loans - Union...........................................48
SCHEDULE 2.20 TO THE AGREEMENT:
Absence of Changes - Union......................................49
SCHEDULE 2.21 TO THE AGREEMENT:
Brokers' and Finders' Fees - Union..............................50
SCHEDULE 2.22 TO THE AGREEMENT:
Absence of Property Taxes and Liens - Union.....................51
SCHEDULE 3.4 TO THE AGREEMENT:
Litigation - Bancshares.........................................52
SCHEDULE 4.7 TO THE AGREEMENT:
Proxies.........................................................53
SCHEDULE 8.3 TO THE AGREEMENT:
Legal Opinion to be Delivered by Union..........................54
SCHEDULE 9.3 TO THE AGREEMENT:
Legal Opinion to be Delivered by Bancshares.....................56
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<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization ("Agreement") dated as of June
5, 1998, is by and among Prosperity Bancshares, Inc., a Texas corporation
("Bancshares"), First Prosperity Bank, a Texas banking association ("FPB") and
Union State Bank, East Bernard, a Texas banking association ("Union").
WHEREAS, Union desires to affiliate with Bancshares and FPB, and
Bancshares and FPB desire to affiliate with Union in the manner provided in this
Agreement; and
WHEREAS, Bancshares, FPB and Union believe that the acquisition of Union
by Bancshares in the manner provided by, and subject to the terms and conditions
set forth in, this Agreement and all exhibits, schedules and supplements hereto
is desirable and in the best interests of their respective shareholders; and
WHEREAS, the respective Boards of Directors of Bancshares, FPB and Union
have approved this Agreement and the transactions proposed herein substantially
on the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of such premises and the mutual
representations, warranties, covenants and agreements contained herein, the
parties agree as set forth below.
INTRODUCTION
Following the execution of this Agreement by Bancshares, FPB and Union,
Bancshares will charter and organize as a wholly-owned subsidiary an interim
Texas banking association ("New Bank") solely for the purpose of consummating
the merger transactions described herein. This Agreement provides for (i) the
merger of New Bank with and into Union with Union as the survivor (the "Initial
Merger"), all pursuant to this Agreement and a Plan of Merger by and between New
Bank and Union, a copy of which is attached hereto as Exhibit "A" and all of the
terms of which are incorporated by reference for all purposes and, immediately
thereafter, (ii) the merger of New Bank with and into FPB with FPB as the
survivor (the "Final Merger"), all pursuant to this Agreement and a Plan of
Merger by and between Union and FPB, a copy of which is attached hereto as
Exhibit "B" and all of the terms of which are incorporated by reference for all
purposes. The Initial Merger and the Final Merger shall sometimes be referred to
collectively as the "Mergers." In connection with the Initial Merger, Bancshares
will acquire all of the issued and outstanding shares of common stock, $10.00
par value, of Union ("Union Common Stock") for an aggregate consideration as set
forth in this Agreement.
<PAGE>
I. THE MERGERS
Section 1.1.INITIAL MERGER. New Bank shall be merged into Union (the
resulting bank being herein referred to as the "First Surviving Bank") as of the
effective time of the Initial Merger under the charter and Articles of
Association of Union, as determined by the Texas Department of Banking ("Banking
Department"), and each of the outstanding shares of common stock of New Bank
shall and without any action on the part of Bancshares be canceled and be
converted into shares of common stock of the First Surviving Bank. The shares of
common stock of the First Surviving Bank into which such New Bank common stock
is converted shall represent ownership of 100% of the issued and outstanding
capital stock of the First Surviving Bank, all of which shall be owned by
Bancshares.
Section 1.2.ARTICLES OF ASSOCIATION, BYLAWS AND FACILITIES OF FIRST
SURVIVING BANK. At the effective time of the Initial Merger and until thereafter
amended in accordance with applicable law, the Articles of Association of the
First Surviving Bank shall be the Articles of Association of Union as in effect
at the effective time of the Initial Merger. Until altered, amended or repealed
as provided therein and in the Articles of Association of the First Surviving
Bank, the Bylaws of the First Surviving Bank shall be the Bylaws of Union as in
effect at the effective time of the Initial Merger. The main office of the First
Surviving Bank shall be the main office of Union as of the effective time of the
Initial Merger, and all corporate acts, plans, policies, contracts, approvals
and authorizations of Union and New Bank and their respective shareholders,
boards of directors, committees elected or appointed thereby, officers and
agents, which were valid and effective immediately prior to the effective time
of the Initial Merger, shall be taken for all purposes as the acts, plans,
policies, contracts, approvals and authorization of the First Surviving Bank and
shall be as effective and binding thereon as the same were with respect to Union
and New Bank respectively, as of the effective time of the Initial Merger.
Section 1.3.EFFECT OF INITIAL MERGER. At the effective time of the Initial
Merger, the corporate existence of Union and New Bank shall be consolidated and
continued in the First Surviving Bank, and the First Surviving Bank shall be
deemed to be a continuation in entity and identity of Union and New Bank. All
rights, franchises and interests of Union and New Bank, respectively, in and to
any type of property and choses in action shall be transferred to and vested in
the First Surviving Bank by virtue of the Initial Merger without any deed or
other transfer. First Surviving Bank, without any order or other action on the
part of any court or otherwise, shall hold and enjoy all rights of property,
franchises and interest, including appointments, designations and nominations,
and all other rights and interests as trustee, executor, administrator, transfer
agent or registrar of stocks and bonds, guardian of estates, assignee, receiver
and committee of estates and lunatics, and in every other fiduciary capacity, in
the same manner and to the same extent as such rights, franchises and interests
were held or enjoyed by Union and New Bank, respectively, as of the effective
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<PAGE>
time of the Initial Merger. As of the effective time of the Initial Merger, the
directors and officers of New Bank shall become the directors and officers of
First Surviving Bank.
Section 1.4.LIABILITIES OF THE FIRST SURVIVING BANK. At the effective time
of the Initial Merger, the First Surviving Bank shall be liable for all
liabilities of Union and New Bank. All deposits, debts, liabilities and
obligations of Union and of New Bank, respectively, accrued, absolute,
contingent or otherwise, and whether or not reflected or reserved against on
balance sheets, books of account or records of Union or New Bank, as the case
may be, shall be those of the First Surviving Bank and shall not be released or
impaired by the Initial Merger. All rights of creditors and other obligees and
all liens on property of either Union or New Bank shall be preserved unimpaired.
Section 1.5.FINAL MERGER. Immediately after the effective time of the
Initial Merger, the First Surviving Bank shall be merged with and into FPB
(which, as the receiving association, is hereinafter referred to as "Continuing
Bank" whenever reference is made to it at or after the Effective Time (as
defined in Section 6.2 of this Agreement)) under the charter and Articles of
Association of FPB pursuant to the provisions of, and with the effect provided
in the Section 32.301 of the Texas Finance Code.
Section 1.6.ARTICLES OF ASSOCIATION, BYLAWS AND FACILITIES OF CONTINUING
BANK. At the Effective Time and until thereafter amended in accordance with
applicable law, the Articles of Association of Continuing Bank shall be the
Articles of Association of FPB as in effect at the Effective Time. Until
altered, amended or repealed as therein provided and in the Articles of
Association of Continuing Bank, the Bylaws of Continuing Bank shall be the
Bylaws of FPB as in effect at the Effective Time. Unless and until changed by
the Board of Directors of Continuing Bank, the main office of Continuing Bank
shall be the main office of FPB as of the Effective Time. The established
offices and facilities of the First Surviving Bank immediately prior to the
Final Merger shall become established offices and facilities of the Continuing
Bank. Until thereafter changed in accordance with law or the Articles of
Association or Bylaws of Continuing Bank, all corporate acts, plans, policies,
contracts, approvals and authorizations of the First Surviving Bank and FPB and
their respective shareholders, boards of directors, committees elected or
appointed thereby, officers and agents, which were valid and effective
immediately prior to the Effective Time, shall be taken for all purposes as the
acts, plans, policies, contracts, approvals and authorizations of Continuing
Bank and shall be as effective and binding thereon as the same were with respect
to the First Surviving Bank and FPB, respectively, as of the Effective Time.
Section 1.7.EFFECT OF FINAL MERGER. At the Effective Time, the corporate
existence of the First Surviving Bank and FPB shall, as provided in the
provisions of law heretofore mentioned, be consolidated and continued in
Continuing Bank, and Continuing Bank shall be deemed to be a continuation in
entity and identity of the First Surviving Bank and FPB. All rights, franchises
and interests of the First Surviving Bank and FPB, respectively, in and
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to any type of property and choses in action shall be transferred to and vested
in Continuing Bank by virtue of such Final Merger without any deed or other
transfer. Continuing Bank, without any order or other action on the part of any
court or otherwise, shall hold and enjoy all rights of property, franchises and
interest, including appointments, designations and nominations, and all other
rights and interests as trustee, executor, administrator, transfer agent or
registrar of stocks and bonds, guardian of estates, assignee, receiver and
committee of estates and lunatics, and in every other fiduciary capacity, in the
same manner and to the same extent as such rights, franchises, and interests
were held or enjoyed by First Surviving Bank and FPB, respectively, as of the
Effective Time. At the Effective Time, the directors and officers of FPB shall
become the directors and officers of the Continuing Bank; provided, however,
that within 90 days after the Effective Time, a holder of Union Common Stock
immediately prior to the Effective Time will be elected as a director of
Continuing Bank.
Section 1.8.LIABILITIES OF CONTINUING BANK. At the Effective Time of the
Final Merger, Continuing Bank shall be liable for all liabilities of the First
Surviving Bank and FPB. All deposits, debts, liabilities, obligations and
contracts of the First Surviving Bank and of FPB, 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 First Surviving Bank or FPB, as the case may be, shall be those
of Continuing Bank and shall not be released or impaired by the Mergers. All
rights of creditors and other obligees and all liens on property of either the
First Surviving Bank or FPB shall be preserved unimpaired subsequent to the
Mergers.
Section 1.9. MERGER CONSIDERATION. Shares of Union Common Stock issued and
outstanding immediately prior to the Effective Time, other than Dissenting
Shares (as defined in Section 1.11 of the Agreement), shall, by virtue of the
Initial Merger and without any action on the part of the holder thereof, be
converted into and represent the right to receive aggregate consideration in the
form of cash equal to $17,600,000.00, as subject to adjustment pursuant to this
Agreement (the "Merger Consideration"), or approximately $251.43 for each of the
70,000 shares of Union Common Stock issued and outstanding at the Effective
Time, payable to the holders of record such shares of Union Common Stock,
without interest thereon, upon surrender of the certificate representing such
shares.
Section 1.10. ADJUSTMENT TO MERGER CONSIDERATION. In the event the Closing
(as defined in Section 6.1) does not occur on or before one hundred fifty (150)
calendar days from the date this Agreement is executed and Union's failure to
fulfill any material obligation under this Agreement has not been the cause of,
or resulted in, the failure of the Mergers to become effective on or before such
date, then the Merger Consideration will increase by $2,612.00 per day for each
day between the end of such one hundred fifty (150) day period and the Closing
Date (as defined in Section 6.2).
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Section 1.11. DISSENTING SHARES. Each share of Union Common Stock issued
and outstanding immediately prior to the Effective Time, the holder of which has
not voted in favor of the Mergers and who has delivered a written demand for
payment of the fair value of such shares within the time and in the manner
provided in Article 5.12 of the Texas Business Corporation Act ("TBCA"), is
referred to herein as a "Dissenting Share." Dissenting Shares shall not be
converted into or represent the right to receive the Merger Consideration
pursuant to Section 1.9 of this Agreement unless and until such holder shall
have failed to perfect or shall have effectively withdrawn or lost his right to
appraisal and payment under the TBCA. If any such holder shall have so failed to
perfect or shall have effectively withdrawn or lost such right, such holder's
Dissenting Shares shall thereupon be deemed to have been converted into and to
have become exchangeable for, at the Effective Time, the right to receive the
Merger Consideration without any interest thereon. As set forth in Section 8.5
of this Agreement, if the holders of more than 10% of the Union Common Stock
shall have exercised their dissenters' rights, Bancshares shall have no
obligation to consummate the Mergers.
Section 1.12. EXCHANGE OF SHARES.
(a) Bancshares shall deposit or cause to be deposited in trust with
FPB (the "Exchange Agent") prior to the Effective Time cash in an aggregate
amount sufficient to make the cash payments pursuant to Section 1.9 hereof and
to make the appropriate cash payments, if any, to holders of Dissenting Shares
pursuant to Section 1.11 hereof (such amounts being hereinafter referred to as
the "Exchange Fund"). The Exchange Agent shall promptly make the payments of the
Merger Consideration out of the Exchange Fund upon surrender of such shares.
Payments to holders of Dissenting Shares shall be made as required by the TBCA.
The Exchange Fund shall not be used for any other purpose, except as provided in
this Agreement.
(b) At least 20 days prior to the Effective Time, the Exchange Agent
shall mail to each record holder of an outstanding certificate or certificates
which represent shares of Union Common Stock (the "Certificates"), a form letter
of transmittal which will specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon proper delivery of the
Certificates to the Exchange Agent and contain instructions for use in effecting
the surrender of the Certificates for payment therefor. At and after the Closing
(as defined herein) and upon surrender to the Exchange Agent of a Certificate,
together with such letter of transmittal duly executed, the holder of such
Certificate shall be entitled to receive in exchange therefor the amount of cash
provided in Section 1.9 hereof in the manner described herein, and such
Certificate shall forthwith be canceled. Payment will be made at Closing for
shares of Union Common Stock if Certificates and a properly completed letter of
transmittal with respect to such shares are received by the Exchange Agent at
least five days prior to Closing. Payment will be made for all other shares of
Union Common Stock within five days after the Exchange Agent's receipt of the
Certificates and
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a properly completed letter of transmittal. No interest will be paid or accrued
on the cash payable upon surrender of the Certificates. If payment of cash is to
be made to a person other than the person in whose name the Certificate
surrendered is registered, it shall be a condition of payment that the
Certificate so surrendered shall be properly endorsed or otherwise in proper
form for transfer and that the person requesting such payment shall pay any
transfer or other taxes required by reason of the payment to a person other than
the registered holder of the Certificate surrendered or established to the
satisfaction of Bancshares that such tax has been paid or is not applicable.
Until surrendered in accordance with the provisions of this Section 1.12, each
Certificate (other than Certificates representing Dissenting Shares) shall
represent for all purposes the right to receive the Merger Consideration without
any interest thereon.
(c) After the Effective Time, the stock transfer ledger of Union
shall be closed and there shall be no transfers on the stock transfer books of
Union of the shares of Union Common Stock which were outstanding immediately
prior to such time of filing. If, after the Effective Time, Certificates are
presented to Bancshares, they shall be promptly presented to the Exchange Agent
and exchanged as provided in this Section 1.12.
(d) Any portion of the Exchange Fund (including the proceeds of any
investments thereof) that remains unclaimed by the shareholders of Union for six
months after the Effective Time shall be paid to Bancshares, and the holders of
shares of Union Common Stock not theretofore presented to the Exchange Agent
shall look to Bancshares only, and not the Exchange Agent, for the payment of
any Merger Consideration in respect of such shares.
Section 1.13. RATIFICATION BY SHAREHOLDERS. This Agreement shall be
submitted to the shareholders of Union in accordance with applicable provisions
of law and the respective Articles of Association and Bylaws of Union. Union and
Bancshares shall proceed expeditiously and cooperate fully in the procurement of
any other consents and approvals and the taking of any other actions in
satisfaction of all other requirements prescribed by law or otherwise necessary
for consummation of the Mergers on the terms herein provided, including, without
limitation, the preparation and submission of all necessary filings, requests
for waivers and certificates with the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"), the Federal Deposit Insurance Corporation
("FDIC") and the Banking Department.
II. REPRESENTATIONS AND WARRANTIES OF UNION
Union represents and warrants to Bancshares and FPB that each of the
statements made in this Article II are true and correct in all material
respects. Union agrees that, at the Closing, it shall provide Bancshares with
supplemental Schedules reflecting any changes in
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the information contained in the Schedules which have occurred in the period
from the date of delivery of such Schedules to the date of Closing.
Section 2.1. ORGANIZATION. Union is a Texas banking association duly
organized, validly existing and in good standing under the laws of the State of
Texas. Union has full power and authority (including all licenses, franchises,
permits and other governmental authorizations which are legally required) to
own, lease and operate its properties, to engage in the business and activities
now conducted by it and to enter into this Agreement. Union (i) is duly
authorized to conduct a general banking business, embracing all usual deposit
functions of commercial banks as well as commercial, industrial and real estate
loans, installment credits, collections and safe deposit facilities subject to
the supervision of the FDIC and Banking Department; and (ii) is an insured bank
as defined in the Federal Deposit Insurance Act. Union does not conduct any
trust activities. True and complete copies of the Articles of Association and
Bylaws of Union, as amended to date, have been delivered or made available to
Bancshares. Except as otherwise disclosed in Schedule 2.1 to this Agreement,
Union (a) does not have any subsidiaries or affiliates, (b) is not a general
partner or material owner in any joint venture, general partnership, limited
partnership, trust or other non-corporate entity, and (c) does not know of any
arrangement pursuant to which the stock of any corporation is or has been held
in trust (whether express, constructive, resulting or otherwise) for the benefit
of all shareholders of Union.
Section 2.2. CAPITALIZATION. The authorized capital stock of Union
consists of 70,000 shares of Union Common Stock, 70,000 of which are issued and
outstanding. All of the issued and outstanding shares of Union Common Stock are
validly issued, fully paid and nonassessable, and have not been issued in
violation of the preemptive rights of any person or in violation of any
applicable federal or state laws. Except as disclosed in Schedule 2.2, there are
no existing options, warrants, calls, convertible securities or commitments of
any kind obligating Union to issue any authorized and unissued Union Common
Stock nor does Union have any outstanding commitment or obligation to
repurchase, reacquire or redeem any of its outstanding capital stock. Except as
disclosed in Schedule 2.2 to this Agreement, there are no voting trusts, voting
agreements, buy-sell agreements or other similar arrangements affecting the
Union Common Stock.
Section 2.3. APPROVALS; AUTHORITY. The Board of Directors has approved
this Agreement and the transactions contemplated herein subject to the approval
thereof by the shareholders of Union as required by law, and, other than
shareholder approval, no further corporate proceedings of Union are needed to
execute and deliver this Agreement and consummate the Mergers. This Agreement
has been duly executed and delivered by Union and, is a duly authorized, valid,
legally binding agreement of Union enforceable against Union in accordance with
its terms, subject to the effect of bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to creditors' rights generally and
general equitable principles.
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Section 2.4. INVESTMENTS. Union has furnished to Bancshares, as Schedule
2.4 of this Agreement, a complete list, as of March 31, 1998, of all securities,
including municipal bonds, owned by Union (the "Securities Portfolio"). All
securities listed in Schedule 2.4 are owned by Union (i) of record, except those
held in bearer form, and (ii) beneficially, free and clear of all mortgages,
liens, pledges and encumbrances, except as noted in Schedule 2.4. Schedule 2.4
also discloses any entities in which the ownership interest of Union equals 5%
or more of the issued and outstanding voting securities of the issuer thereof.
There are no voting trusts or other agreements or understandings with respect to
the voting of the securities listed in Schedule 2.4.
Section 2.5. FINANCIAL STATEMENTS. Union has furnished or made available
to Bancshares true and complete copies of Union's audited balance sheet as of
December 31, 1997, 1996 and 1995, and the related statements of income and
statements of cash flow for the years then ended, together with the notes
thereto. Union has also delivered to Bancshares a true and correct copy of the
Consolidated Reports of Condition and Income ("Call Reports") filed by Union as
of and for the year ended December 31, 1997 and as of the three months ended
March 31, 1998. The audited financial information and Call Reports referred to
in this Section 2.5 are collectively referred to in this Article II as the
"Union Financial Statements." The Union Financial Statements fairly present the
financial position of Union and the results of its operations at the dates and
for the periods indicated in conformity with generally accepted accounting
principles applied on a consistent basis, except for the Call Reports which are
in compliance with regulatory accounting principles. Except as set forth on
Schedule 2.5 to this Agreement, as of the dates of the Union Financial
Statements referred to above, Union did not have any liabilities, fixed or
contingent, which are material and are not fully shown or provided for in such
Union Financial Statements or otherwise disclosed in this Agreement, or in any
of the documents delivered to Bancshares. Except as set forth in Schedule 2.20
to this Agreement, since December 31, 1997, there have been no material changes
in the financial condition, assets, liabilities or business of Union, other than
changes in the ordinary course of business, which individually or in the
aggregate have materially and adversely affected the financial condition,
results of operations or business of Union.
Section 2.6. TITLE. True and complete copies of all deeds and leases and
title insurance policies, if any, for all real property owned or leased by Union
and all mortgages, deeds of trust and security agreements to which such property
is subject are attached on Schedule 2.6 of this Agreement. Union has good and
indefeasible title to all of its assets and properties including, without
limitation, land and improvements thereon, and all personal and intangible
properties reflected in the Union Financial Statements or acquired subsequent
thereto, subject to no liens, mortgages, security interests, encumbrances or
charges of any kind except (a) defects, irregularities in title and encumbrances
set forth in the public record of the applicable county, (b) as noted in the
Union Financial Statements or as set forth in Schedule 2.6, (c) statutory liens
not yet delinquent, (d) minor defects and irregularities in title and
encumbrances which do not materially impair the use thereof for the purposes for
which
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they are held, and (e) those assets and properties disposed of for fair value in
the ordinary course of business since the dates of the Union Financial
Statements. Except as set forth in Schedule 2.6 to this Agreement, Union does
not own securities of or other interest in any other commercial bank.
Section 2.7. ENVIRONMENTAL LAWS. Union is in compliance with all terms and
conditions of all applicable federal and state Environmental Laws (as defined
below) and permits thereunder. Except as set forth on Schedule 2.7 of this
Agreement, (a) Union has not received notice of any violation of any
Environmental Laws or generated, stored, or disposed of any materials designated
as Hazardous Materials (as defined below) under the Environmental Laws, and is
not subject to any claim or lien under any Environmental Laws; (b) during the
term of ownership by Union no real estate currently owned, operated, or leased
(including any property acquired by foreclosure or deeded in lieu thereof) by
Union, or owned, operated or leased by Union within the ten years preceding the
date of this Agreement, has been designated as requiring any environmental
cleanup or response action to comply with Environmental Laws, or has been the
site of release of any Hazardous Materials; (c) to the knowledge of Union, no
asbestos was used in the construction of any portion of Union's facilities; and
(d) to the knowledge of Union, no real property currently owned by Union is, or
has been, an industrial site or landfill. Bancshares and its consultants, agents
and representatives shall have the right to inspect Union's assets for the
purpose of conducting asbestos and other environmental surveys.
"Environmental Laws," for purposes of this Section 2.7, includes, but is
not limited to, any federal, state or local statute, law, rule, regulation,
ordinance, code, policy or rule of common law now in effect and in each case as
amended to date and any judicial or administrative interpretation thereof,
including any judicial or administrative order, consent decree, or judgment,
relating to the environment, human health or safety, or Hazardous Materials,
including without limitation the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 U.S.C. ss.ss. 9601, ET
SEQ.; The Hazardous Materials Transaction Act, as amended, 49 U.S.C. ss.ss.
1801, ET SEQ.; the Resource Conservation and Recovery Act of 1976, as amended,
42 U.S.C. ss.ss. 6901, ET SEQ.; the Federal Water Pollution Control Act, as
amended, 33 U.S.C. ss.ss. 1201, ET SEQ.; the Toxic Substances Control Act, 15
U.S.C. ss.ss. 2601, ET SEQ.; the Clean Air Act, 42 U.S.C. ss.ss. 7401, ET SEQ.;
and the Safe Drinking Water Act, 42 U.S.C. ss.ss. 3808, ET SEQ.
"Hazardous Materials," for purposes of this Section 2.7, includes, but is
not limited to, (a) any petroleum or petroleum products, natural gas, or natural
gas products, radioactive materials, asbestos, urea formaldehyde foam
insulation, transformers or other equipment that contains dielectric fluid
containing levels of polychlorinated biphenyls (PCBs), and radon gas; (b) any
chemicals, materials, waste or substances defined as or included in the
definition of "hazardous substances," "hazardous wastes," "hazardous materials,"
"extremely hazardous wastes," "restricted hazardous wastes," toxic substances,"
"toxic pollutants," "contaminants,"
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or "pollutants," or words of similar import, under any Environmental Laws; and
(c) any other chemical, material, waste or substance which is in any way
regulated by any federal, state or local government authority, agency or
instrumentality, including mixtures thereof with other materials, and including
any regulated building materials such as asbestos and lead.
Section 2.8. LITIGATION AND OTHER PROCEEDINGS. Except as otherwise noted
on Schedule 2.8 hereto, there are no legal, quasi-judicial, regulatory or
administrative proceedings of any kind or nature now pending or, to the
knowledge of Union, threatened before any court or administrative body in any
manner against Union, or any of its properties or capital stock, which might
have a material adverse effect on Union, its financial condition, assets,
operations or earnings or the transactions proposed by this Agreement. Union
does not know of any basis on which any litigation or proceeding could be
brought which could have a materially adverse effect on the financial condition
of Union or which could question the validity of any action taken or to be taken
in connection with this Agreement and the transactions contemplated hereby.
Union is not in default with respect to any judgment, order, writ, injunction,
decree, award, rule or regulation of any court, arbitrator or govern mental
agency or instrumentality.
Section 2.9. TAXES. Except as otherwise noted in Schedule 2.9 hereto,
Union has filed with the appropriate federal, state and local governmental
agencies all tax returns and reports required to be filed, and has paid all
taxes and assessments shown or claimed to be due. Union has not executed or
filed with the Internal Revenue Service any agreement extending the period for
assessment and collection of any federal tax, nor is Union a party to any action
or proceeding by any governmental authority for assessment or collection of
taxes, nor has any claim for assessment or collection of taxes been asserted
against Union. Union has not waived any statute of limitations with respect to
any tax or other assessment or levy, and all such taxes and other assessments
and levies which Union is required by law to withhold or to collect have been
duly withheld and collected and have been paid over to the proper governmental
agency, domestic and foreign, or segregated and set aside for such payment and,
if so segregated and set aside will be so paid by Union, as required by law.
True and complete copies of the federal income tax returns of Union as
filed with the Internal Revenue Service for the years ended December 31, 1997,
December 31, 1996, and December 31, 1995, have been delivered or made available
to Bancshares.
Section 2.10. CONTRACTS. Except as otherwise noted on Schedule 2.10
hereto, Union is not a party to or bound by any (a) employment contract or
severance arrangement (including without limitation any collective bargaining
contract or union agreement or agreement with an independent consultant) which
is not terminable by Union on less than sixty (60) days' notice without payment
of any amount on account of such termination; (b) bonus, stock option, deferred
compensation or profit-sharing, pension or retirement plan or other employee
benefit arrangement; (c) material lease or license with respect to any
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property, real or personal, whether as landlord, tenant, licensor or licensee;
(d) contract or commitment for capital expenditures; (e) material contract or
commitment made in the ordinary course of business for the purchase of materials
or supplies or for the performance of services over a period of more than one
hundred twenty (120) days from the date of this Agreement; (f) contract or
option to purchase or sell any real or personal property other than in the
ordinary course of business; (g) contract, agreement or letter with respect to
the management or operations of Union imposed by any bank regulatory authority
having supervisory jurisdiction over Union; (h) agreement, contract or indenture
related to the borrowing by Union of money other than those entered into in the
ordinary course of business; (i) guaranty of any obligation for the borrowing of
money, excluding endorsements made for collection, repurchase or resell
agreements, letters of credit and guaranties made in the ordinary course of
business; (j) agreement with or extension of credit to any executive officer or
director of Union or holder of more than ten percent (10%) of the issued and
outstanding Union Common Stock, or any affiliate of such person, which is not on
substantially the same terms (including, without limitation, in the case of
lending transactions, interest rates and collateral) as, and following credit
underwriting practices that are not less stringent than, those prevailing at the
time for comparable transactions with unrelated parties or which involve more
than the normal risk of collectibility or other unfavorable features; or (k)
material contracts, other than the foregoing, not made in the ordinary course of
business and not otherwise disclosed in this Agreement, in any schedule attached
hereto or in any document delivered or referred to or described in writing by
Union to Bancshares. Union has in all material respects performed all material
obligations required to be performed by it to date and is not in default under,
and no event has occurred which, with the lapse of time or action by a third
party could result in default under, any material indenture, mortgage, contract,
lease or other agreement to which Union is a party or by which Union bound or
under any provision of its Articles of Association or Bylaws.
Section 2.11. INSURANCE. A true and complete list of all insurance
policies owned or held by or on behalf of Union (other than credit-life
policies), including policy numbers, retention levels, insurance carriers, and
effective and termination dates, is set forth in Schedule 2.11 to this
Agreement. In the judgment of the Board of Directors of Union, such insurance
policies are adequate for the business conducted by Union in respect of amounts,
types and risks insured.
Section 2.12. NO CONFLICT WITH OTHER INSTRUMENTS. Neither the execution
and delivery of this Agreement nor the consummation of the Mergers contemplated
hereby, subject to obtaining all required shareholder consents, will conflict
with or result in a breach of any provision of Union's Articles of Association
or Bylaws. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby, subject to obtaining all required
shareholder and regulatory approvals, will not violate any provision of, or
constitute a default under, any law, or any order, writ, injunction or decree of
any court or other governmental agency, or any contract, agreement or instrument
to which Union is
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a party or by which either is bound or constitute an event which, with the lapse
of time or action by a third party, could result in any default under any of the
foregoing or result in the creation of any lien, charge or encumbrance upon the
assets or properties of Union.
Section 2.13. LAWS. Except as otherwise noted in Schedule 2.13 hereto,
Union is in material compliance with all applicable federal, state and local
laws, rules, regulations and orders applicable to them. Except for approvals by
regulatory authorities having jurisdiction over Union, no prior consent,
approval or authorization of, or declaration, filing or registrations with, any
person or regulatory authority is required of Union in connection with the
execution, delivery and performance by Union of this Agreement and the
transactions contemplated hereby or the resulting change of control of Union
except for certain instruments necessary to consummate the Mergers contemplated
hereby. Union has filed all reports, registrations and statements, together with
any amendments required to be made thereto, that are required to be filed with
the FDIC, Banking Department or any other regulatory authority having
jurisdiction over Union, and such reports, registrations and statements are, to
the best knowledge of Union, true and correct in all material respects.
Section 2.14. CONDUCT. Except as otherwise noted in Schedule 2.14 hereto,
since December 31, 1997, Union has not (a) issued or sold any of its capital
stock or corporate debt obligations; (b) declared or set aside or paid any
dividend or made any other distribution in respect of or, directly or
indirectly, purchased, redeemed or otherwise acquired any shares of Union Common
Stock; (c) incurred any obligations or liabilities (fixed or contingent), except
obligations or liabilities incurred in the ordinary course of business, or
mortgaged, pledged or subjected any of its assets to a lien or encumbrance
(other than in the ordinary course of business and other than statutory liens
not yet delinquent); (d) discharged or satisfied any lien or encumbrance or paid
any obligation or liability (fixed or contingent), other than accruals, accounts
and notes payable included in the Union Financial Statements, accruals, accounts
and notes payable incurred since December 31, 1997 in the ordinary course of
business and accruals, accounts and notes payable incurred in connection with
the transactions contemplated by this Agreement; (e) sold, exchanged or
otherwise disposed of any of its capital assets other than in the ordinary
course of business; (f) made any general or individual wage or salary increase
(including increases in directors' or consultants' fees) other than in
accordance with past practices, paid any bonus, granted or paid any perquisites
such as automobile allowance, club membership or dues or other similar benefits,
or instituted any employee welfare, retirement or similar plan or arrangement;
(g) suffered any physical damage, destruction or casualty loss, whether or not
covered by insurance, materially and adversely affecting its business, property
or assets; (h) made any or acquiesced with any change in accounting methods,
principles and practices except as may be required by GAAP; (i) excluding loan
commitments made and certificates of deposit issued, entered into any contract,
agreement or commitment which obligates Union for an amount in excess of $10,000
over the term of any such contract, agreement or commitment; or (j) except in
the ordinary course of business, entered or agreed to enter into any agreement
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or arrangement granting any preferential rights to purchase any of its assets,
properties or rights or requiring the consent of any party to the transfer and
assignment of any such assets, properties or rights.
Section 2.15. ALLOWANCE FOR CREDIT LOSSES. The allowance for credit losses
of Union has been calculated in accordance with generally accepted accounting
principles as applied to banking institutions and in accordance with all
applicable rules and regulations. To the knowledge of Union, the allowance for
credit losses shown on Union's Call Report of March 31, 1998 is substantially
adequate in all material respects to provide for all losses, net of recoveries
relating to loans previously charged off, on loans outstanding as of March 31,
1998. At the Effective Time, no material facts relevant to the adequacy of the
allowance for credit losses as of that date shall have been withheld from
Bancshares. Except as disclosed in writing to Bancshares by Union on or before
the date of the Agreement, there are no loans of Union that have been classified
by bank examiners on Union's most recent examination report as "Other Assets
Especially Mentioned," "Substandard," "Doubtful" or "Loss."
Section 2.16. EMPLOYMENT RELATIONS. The relations of Union with its
employees are satisfactory, and Union has not received any notice of any
controversies with, or organizational efforts or other pending actions by,
representatives of its employees. Union has materially complied with all laws
relating to the employment of labor with respect to its employees, including any
provisions thereof relating to wages, hours, collective bargaining and the
payment of workman's compensation insurance and social security and similar
taxes, and, except as disclosed in Schedule 2.16 hereto, no person has asserted
that Union is liable for any arrearages of wages, workman's compensation
insurance premiums or any taxes or penalties for failure to comply with any of
the foregoing.
Section 2.17. ERISA. The employee pension benefits plans and welfare
benefit plans (referred to collectively herein as the "Plans") in effect at
Union (all of which are included in Schedule 2.10 hereto) have all been operated
in all material respects in compliance with ERISA since ERISA became applicable
with respect thereto. None of the Plans nor any of their respective related
trusts have been terminated (except the termination of any Plan which is in
compliance with the requirements of ERISA and which will not result in any
additional liability to Union), and there has been no "reportable event," as
that term is defined in Section 4043 of ERISA, required to be reported since the
effective date of ERISA which has not been reported, and none of such Plans nor
their respective related trusts have incurred any "accumulated funding
deficiency," as such term is defined in Section 302 of ERISA (whether or not
waived), since the effective date of ERISA. The Plans are the only employee
pension benefit plans covering employees of Union. Union will not have any
material liabilities with respect to employee pension benefits, whether vested
or unvested as of the Closing, for any of its employees other than under the
Plans, and as of the date hereof the actuarial present value of Plan assets of
each Plan is not less (and as of
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the Closing of the Merger such present value will not be less) than the present
value of all benefits payable or to be payable thereunder.
Section 2.18. DEFERRED COMPENSATION ARRANGEMENTS. The schedule attached as
Schedule 2.18 contains a full description of all deferred compensation
arrangements of Union, if any, including the terms under which the cash value of
any life insurance purchased in connection with any such arrangement can be
realized.
Section 2.19. LIST OF LOANS. Schedule 2.19 to this Agreement sets forth a
true and complete list, as of March 31, 1998, of all loans (individually, a
"Loan" and collectively, the "Loans") of Union, showing for each such Loan the
outstanding principal balance due, before reduction for any discount. All
currently outstanding Loans, including any current extensions of any Loan, were
solicited, originated and currently exist in material compliance with all
applicable requirements of federal and state law and regulations promulgated
thereunder. To the knowledge of Union, the Loans are adequately documented and
each note evidencing a Loan or credit agreement or security instrument related
to a Loan constitutes a valid and binding obligation of the obligor thereunder,
enforceable in accordance with the terms thereof, except where the failure
thereof, individually or in the aggregate, would not have a material adverse
effect on the condition (financial or otherwise), operations or prospects of
Union. There are no oral modifications or amendments or additional agreements
related to the Loans that are not reflected in Union's records, and no claim of
defense as to the enforcement of any Loan has been asserted, and Union is not
aware of any acts or omissions that would give rise to any claim or right of
rescission, set off, counterclaim or defense, except where such claim would not
have, either individually or in the aggregate, a material adverse effect on the
condition (financial or otherwise), operations or prospects of Union.
Section 2.20. ABSENCE OF CHANGES. Since December 31, 1997, except as
disclosed in Schedule 2.20 to this Agreement, there has not been any material
adverse change in the financial condition, business or operations of Union;
provided, however, that a material adverse change will not include a change with
respect to, or effect on, Union resulting from a change in law, rule,
regulations or GAAP or from any other matter affecting federally-insured
depository institutions generally (including without limitation, their holding
companies), including, without limitation, changes in general economic
conditions and changes in prevailing interest or deposit rates; provided, any
such change does not impact Union more adversely than other similarly situated
financial institution. Since December 31, 1997, the business of Union has been
conducted only in the ordinary course consistent with prior practices.
Section 2.21. BROKERS AND FINDERS. Except for the engagement of The Bank
Advisory Group, Inc., Austin, Texas ("BAGI") and other than as set forth on
Schedule 2.21 of this Agreement, neither Union nor any of its officers,
directors or employees have
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employed any broker or finder or incurred any liability for any brokerage fees,
commissions or finders' fees in connection with the Mergers contemplated herein.
Section 2.22. ABSENCE OF PROPERTY TAXES AND LIENS. All property taxes due
under the applicable provisions of the Texas Tax Code have been paid by either
Union or the shareholders of Union, and no liens imposed or authorized by the
Texas Tax Code exist on the shares of Union Common Stock, except as otherwise
disclosed in Schedule 2.22 to this Agreement.
Section 2.23. COMMUNITY REINVESTMENT ACT. Union is in material compliance
with the Community Reinvestment Act (12 U.S.C. ss. 2901 ET SEQ.) and all
regulations promulgated thereunder, and Union has supplied Bancshares with
copies of Union's current CRA Statement, all support papers therefor, all
letters and written comments received by Union since January 1, 1995 pertaining
thereto and any responses by Union to such comments. Union has a rating of
"satisfactory" as of its most recent CRA compliance examination and knows of no
reason why it would not receive a rating of "satisfactory" or better pursuant to
its next CRA compliance examination or why the FDIC or any other governmental
entity may seek to restrain, delay or prohibit the transactions contemplated
hereby as a result of any act or omission of Union under the CRA.
Section 2.24. FAIR HOUSING ACT, HOME MORTGAGE DISCLOSURE ACT AND EQUAL
CREDIT OPPORTUNITY ACT. Union is in material compliance with the Fair Housing
Act (42 U.S.C. ss. 3601 ET SEQ.), the Home Mortgage Disclosure Act (12 U.S.C.
ss. 2801 ET SEQ. and the Equal Credit Opportunity Act (15 U.S.C. ss. 1691 ET
SEQ.) and all regulations promulgated thereunder. Union has not received any
notices of any violation of said acts or any of the regulations promulgated
thereunder, nor does Union have any notice of, or knowledge of, any threatened
administrative inquiry, proceeding or investigation with respect to Union 's
compliance with said acts.
Section 2.25. USURY LAWS AND OTHER CONSUMER COMPLIANCE LAWS. All loans of
Union have been made substantially in accordance with all applicable statutes
and regulatory requirements at the time of such loan or any renewal thereof,
including without limitation, the Texas usury statutes as they are currently
interpreted, Regulation Z (12 C.F.R. ss. 226 ET SEQ.) issued by the Board of
Governors of the Federal Reserve System, the Federal Consumer Credit Protection
Act (15 U.S.C. ss. 1601 ET SEQ.), the Texas Consumer Credit Code (Tex. Rev. Civ.
Stat. Ann. art. 5069-2.01, ET SEQ.) and all statutes governing the operation of
national banks located in Texas. Each loan on the books of Union was made in the
ordinary course of Union's business.
Section 2.26. BANK SECRECY ACT. Union is in material compliance with the
Bank Secrecy Act (12 U.S.C. ss.ss. 1730(d) and 1829(b)) and all regulations
promulgated thereunder, and Union has properly certified all foreign deposit
accounts and has made all necessary tax
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withholdings on all of its deposit accounts; furthermore, Union has timely and
properly filed and maintained all requisite Currency Transaction Reports and
other related forms, including, but not limited to, any requisite Custom Reports
required by any agency of the United States Treasury Department, including but
not limited to the Internal Revenue Service.
Section 2.27. ZONING AND RELATED LAWS. All real property owned by Union
and the use thereof materially complies with all applicable laws, ordinances,
regulations, orders or requirements, including without limitation, building,
zoning and other laws.
Section 2.28. YEAR 2000 COMPLIANCE. Union has received a rating of
"satisfactory" as of its most recent Year 2000 compliance examination. Union has
no reason to believe the FDIC or any other governmental entity may seek to
restrain, delay or prohibit the transactions contemplated hereby as a result of
any act or omission of Union regarding Year 2000 compliance.
Section 2.29. SECURITIES LAWS. Union and its officers, employees and
agents are now, and at all times in the past have been, in full compliance with
all applicable federal and state securities laws and any regulations promulgated
thereunder. Union and its officers, employees and agents have complied with, and
currently hold, all necessary licenses and permits required under any federal or
state securities law or regulation to conduct any securities activities in which
Union or its officers, employees, or agents are now engaged or have been engaged
in the past.
Section 2.30. REGULATORY APPROVALS. Union has no reason to believe that it
will not be able to obtain all requisite regulatory approvals on the part of
Union necessary to consummate the Mergers as set forth in this Agreement.
Section 2.31. SHAREHOLDERS' LIST. Union has provided or made available to
Bancshares as of a date within ten (10) days of the date of this Agreement a
list of the holders of shares of Union Common Stock containing for Union's
shareholders the names, addresses and number of shares held of record, which
shareholders' list is in all respects accurate as of such date and will be
updated prior to Closing.
III. REPRESENTATIONS AND WARRANTIES OF BANCSHARES AND FPB
Bancshares and FPB represent and warrant to Union that the statements
contained in this Article III are true and correct in all material respects as
follows:
Section 3.1. ORGANIZATION. Bancshares is a corporation duly organized,
validly existing and in good standing under the laws of the State of Texas and a
bank holding company duly registered under the Bank Holding Company Act of 1956,
as amended ("BHC
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Act"), subject to all laws, rules and regulations applicable to bank holding
companies. Prosperity Bancshares of Delaware, Inc. ("Delaware-Company") is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and a bank holding company duly registered under the
BHC Act subject to all laws, rules and regulations applicable to bank holding
companies. Bancshares owns 100% of the issued and outstanding common stock of
Delaware-Company and, indirectly through Delaware- Company, 100% of the issued
and outstanding capital stock of FPB. FPB is a Texas banking association duly
organized, validly existing and in good standing under the laws of the State of
Texas. FPB is an insured bank as defined in the Federal Deposit Insurance Act.
Bancshares and FPB have full power and authority (including all licenses,
franchises, permits and other governmental authorizations which are legally
required) to own their properties, to engage in the business and activities now
conducted by them and to enter into this Agreement.
Section 3.2. APPROVALS; AUTHORITY. The Boards of Directors of Bancshares
and FPB have approved this Agreement and the transactions contemplated herein
subject to the approval thereof by the shareholders of FPB and New Bank as
required by law, and, other than such shareholder approvals, no further
corporate proceedings of Bancshares or FPB are needed to execute and deliver
this Agreement and consummate the Mergers. This Agreement has been duly executed
and delivered by Bancshares and FPB and is a duly authorized, valid, legally
binding agreement of Bancshares and FPB enforceable against Bancshares and FPB
in accordance with its terms, subject to the effect of bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to creditors' rights
generally and general equitable principles.
Section 3.3. NO CONFLICT WITH OTHER INSTRUMENTS. Neither the execution and
delivery of this Agreement nor the consummation of the Mergers contemplated
thereby, subject to obtaining all required shareholder consents, will conflict
with or result in a breach of any provision of any Articles of Incorporation of
Bancshares, or its Bylaws. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, subject to obtaining all
required shareholder and regulatory approvals, will not violate any provision
of, or constitute a default under, any law, or any order, writ, injunction or
decree of any court or other governmental agency, or any contract, agreement or
instrument to which Bancshares is a party or by which it is bound or constitute
an event which, with the lapse of time or action by a third party, could result
in any default under any of the foregoing or result in the creation of any lien,
charge or encumbrance upon the assets or properties of Bancshares, or upon the
stock of Bancshares.
Section 3.4. LITIGATION AND OTHER PROCEEDINGS. Except as otherwise noted
on Schedule 3.4 hereto, there are no legal, quasi-judicial or administrative
proceedings of any kind or nature now pending or, to the knowledge of
Bancshares, threatened before any court or administrative body in any manner
against Bancshares, or any of its properties or capital
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stock, which might have a material adverse effect on Bancshares, its financial
condition, assets, operations or earnings or the transactions proposed by this
Agreement. Bancshares knows of no basis on which any litigation or proceeding
could be brought which could have a materially adverse effect on the financial
condition of Bancshares or which could question the validity of any action taken
or to be taken in connection with this Agreement and the transactions
contemplated hereby. Bancshares is not in default with respect to any judgment,
order, writ, injunction, decree, award, rule or regulation of any court,
arbitrator or govern mental agency or instrumentality.
Section 3.5. ABILITY TO PAY MERGER CONSIDERATION. Bancshares has available
through loan commitments or internal funds cash in the amount of the Merger
Consideration to be paid in cash to shareholders of Union as set forth in
Section 1.9 hereof.
Section 3.6. REGULATORY APPROVALS. Bancshares has no reason to believe
that it will not be able to obtain all requisite regulatory approvals on the
part of Bancshares and FPB necessary to consummate the transactions set forth in
this Agreement.
Section 3.7. YEAR 2000 COMPLIANCE. FPB has not yet received a rating for
its recent Year 2000 compliance examination but knows of no reason why it would
not receive a rating of "satisfactory" or better pursuant to its recent Year
2000 compliance examination. FPB has no reason to believe the FDIC or any other
governmental entity may seek to restrain, delay or prohibit the transactions
contemplated hereby as a result of any act or omission of FPB regarding Year
2000 compliance.
Section 3.8. COMMUNITY REINVESTMENT ACT. FPB is in material compliance
with the Community Reinvestment Act (12 U.S.C. ss. 2901 ET SEQ.) and all
regulations promulgated thereunder. FPB has a rating of "satisfactory" as of its
most recent CRA compliance examination and knows of no reason why it would not
receive a rating of "satisfactory" or better pursuant to its next CRA compliance
examination or why the FDIC or any other governmental entity may seek to
restrain, delay or prohibit the transactions contemplated hereby as a result of
any act or omission of FPB under the CRA.
IV. COVENANTS OF UNION
Union covenants and agrees with Bancshares and FPB as follows:
Section 4.1. SHAREHOLDER APPROVAL AND BEST EFFORTS. Union will, as soon as
practicable following acceptance of Bancshares' regulatory applications for
processing, present for the approval of its shareholders this Agreement and the
transactions contemplated hereby. Union will take all reasonable action to
arrange for a meeting of its shareholders for the purpose of considering the
Agreement and, if the transaction is approved by such shareholders, to aid and
assist in the consummation of the Mergers, and will use its best
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efforts to take or cause to be taken all other actions necessary, proper or
advisable to consummate the transactions contemplated by this Agreement,
including such actions as Bancshares reasonably considers necessary, proper or
advisable in connection with filing applications and registration statements
with, or obtaining approvals from, all regulatory authorities having
jurisdiction over the transactions contemplated by this Agreement.
Section 4.2. OPERATIONS. From and after the date of this Agreement to the
Effective Time, Union agrees to (a) conduct its business in substantially the
same manner as it has been conducted since December 31, 1997 and in accordance
with prudent business and banking practices, (b) maintain and keep its
properties in as good repair and condition as at present, except for
deterioration due to ordinary wear and tear and damage due to casualty, (c)
maintain in full force and effect insurance comparable in amount and scope of
coverage to that currently maintained for Union, (d) make no alteration in the
manner of maintaining its books, accounts or records, or in the accounting
practices relating to its business, properties or assets except as required by
GAAP, (e) perform all of its material obligations under contracts, leases and
documents relating to or affecting its assets, properties and business, except
such obligations as Union may in good faith reasonably dispute, (f) maintain and
preserve its corporate existence, business organization, assets, licenses,
permits, authorizations and business opportunities intact, use its best efforts
to retain its present employees and maintain all relationships with depositors
and customers of Union, (g) comply with and perform all obligations and duties
imposed upon Union by all federal, state and local laws, and all rules,
regulations and orders imposed by federal, state or local governmental
authorities, (h) notify Bancshares promptly upon commencement of any compliance,
safety and soundness or other type of examination conducted by the FDIC, Banking
Department or any other agency having supervisory authority over Union or in the
event of any actual or threatened litigation, (i) promptly give written notice
to Bancshares upon obtaining knowledge of any event or fact that would cause any
of the representations or warranties of Union contained in this Agreement to be
untrue or misleading in any material respect, and (j) use its best efforts to
continue to solicit deposits, maintain deposits and operate its deposit
gathering procedures consistent with existing practices.
Union will not, without the prior written consent of Bancshares, (i)
permit any amendment or change to be made in Articles of Association or Bylaws
of Union except as directed by Bancshares as set forth in (i) above, (ii) take
any action described or do any of the things listed in Section 2.14 hereof
except with respect to Section 2.14(g), (iii) enter into or amend any contract,
agreement or other instrument of any of the types listed in Section 2.10 hereof,
(iv) excluding deposits and certificates of deposit, undertake any additional
borrowings in excess of ninety (90) days, (v) sell any investment securities,
(vi) purchase any investment securities other than United States Treasury
obligations or obligations of any United States governmental agency with
maturities of more than two (2) years, (vii) modify any outstanding loan, make
any new loan, or acquire any loan participation, unless such modification, new
loan or participation is made in the ordinary course of business, consistent
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with existing practice, (viii) commit to or make any extension of credit to any
borrower or his or its related interests in an amount which, when combined with
all other loans to such borrower and his or its related interests, would exceed
an aggregate of $250,000, or (ix) agree to settle all or part of any litigation
matters, provided that with respect to sections (iv), (v), (vi), (vii), (viii)
and (ix) written consent of Bancshares shall not be unreasonably withheld and
shall be provided within five days of submission.
Section 4.3. ACCESS TO PROPERTIES AND RECORDS. To the extent permitted by
applicable law, Union will afford the executive officers and authorized
representatives (including legal counsel, accountants and consultants) of
Bancshares full access to the properties, books and records of Union in order
that Bancshares may have full opportunity to make such reasonable investigation
as it shall desire to make of the affairs of Union, and the officers of Union
will furnish Bancshares with such additional financial and operating data and
other information as to the business and properties of Union as Bancshares
shall, from time to time, reasonably request. As soon as practicable after they
become available, Union will deliver or make available to Bancshares all
unaudited quarterly financial statements prepared for the internal use of
management of Union and all Call Reports filed by Union with the appropriate
federal regulatory authority after the date of this Agreement. All such
financial statements shall be prepared in accordance with generally accepted
accounting principles applied on a consistent basis with previous accounting
periods. In the event of the termination of this Agreement, Bancshares will
return to Union all documents and other information obtained pursuant hereto and
will keep confidential any information obtained pursuant to this Agreement.
Section 4.4. INFORMATION FOR REGULATORY APPLICATIONS. To the extent
permitted by law, Union will furnish Bancshares with all information concerning
Union required for inclusion in any application, filing, statement or document
to be made or filed by Bancshares or Union with any federal or state regulatory
or supervisory authority in connection with the transactions contemplated by
this Agreement during the pendency of this Agreement. Union represents and
warrants that all information so furnished for such applications and filings
shall, to the best of its knowledge, be true and correct in all material
respects without omission of any material fact required to be stated to make the
information not misleading. Union agrees at any time, upon the request of
Bancshares, to furnish to Bancshares a written letter or statement confirming
the accuracy of the information with respect to Union contained in any report or
other application or statement referred to in Sections 4.1 or 4.4 of this
Agreement, and confirming that the information with respect to Union contained
in such document or draft was furnished by Union expressly for use therein or,
if such is not the case, indicating the inaccuracies contained in such document
or indicating the information not furnished by Union expressly for use therein.
Section 4.5. ATTENDANCE AT CERTAIN UNION MEETINGS. In order to facilitate
the continuing interaction of Bancshares with Union, and in order to keep
Bancshares fully
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advised of all ongoing activities of Union, Union agrees to allow Bancshares to
designate two representatives, any one of whom will be allowed to attend as an
invited guest and fully monitor all regular and called meetings of the board of
directors and loan and discount and asset liability management committees of
Union (including, but not limited to, meetings of the officers' loan committee
of Union). Union shall promptly give Bancshares prior notice by telephone of all
called meetings. Such representative shall have no right to vote and may be
excluded from sessions of the board of directors or loan or investment committee
during which there is being discussed (a) matters involving this Agreement, (b)
information or material which Union is required or obligated to maintain as
confidential under applicable laws or regulations or policies or procedures of
Union, or (c) pending or threatened litigation or investigations if, in the
opinion of counsel to Union, the presence of such representative would or might
adversely affect the confidential nature of or any privilege relating to any
matters to be discussed. No attendance by representatives of Bancshares at board
meetings under this Section 4.5 or knowledge gained or deemed to have been
gained by virtue of such attendance will affect any of the representations and
warranties of Union made in this Agreement. Bancshares agrees that, until the
Closing, it and its representatives will hold in strict confidence all
information so obtained from Union and, if the transactions provided for herein
are not consummated, Bancshares will, upon request of Union, return or cause to
be returned to Union all written information and documents obtained from Union
concerning Union then in its possession.
Section 4.6. STANDSTILL PROVISION. So long as this Agreement is in effect,
neither Union nor any of its directors or officers shall entertain, solicit or
encourage any inquiries, or provide any information to or negotiate with any
other party any proposal which could reasonably be expected to lead to the
merger, consolidation, acquisition, or sale of all or substantially all of the
assets or any shares of capital stock of Union. Union agrees to notify
Bancshares immediately of any such unsolicited acquisition proposals and provide
reasonable detail as to the identity of the proposed acquiror and the nature of
the proposed transaction.
Section 4.7. PROXIES. Union acknowledges that the persons listed in
Schedule 4.7 have agreed to vote their shares of Union Common Stock in favor of
this Agreement and the transactions contemplated hereby, subject to required
regulatory approvals, pursuant to a Voting Agreement substantially in the form
of Exhibit "C" to this Agreement which has been executed as of the date of this
Agreement.
Section 4.8. TERMINATION OF DATA PROCESSING CONTRACTS. Union will timely
take any and all actions necessary, including but not limited to notifying
appropriate parties, to ensure that its current data processing contracts will
not renew.
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V. COVENANTS OF BANCSHARES AND FPB
Bancshares and FPB covenant and agree with Union as follows:
Section 5.1. BEST EFFORTS. Bancshares and FPB will take all reasonable
action to aid and assist in the consummation of the Mergers and the transactions
contemplated hereby, and will use their best efforts to take or cause to be
taken all other actions necessary, proper or advisable to consummate the
transactions contemplated by this Agreement, including such actions which are
necessary, proper or advisable in connection with filing applications with, or
obtaining approvals from, all regulatory authorities having jurisdiction over
the transac tions contemplated by this Agreement.
Section 5.2. INFORMATION FOR APPLICATIONS AND PROXY SOLICITATION. To the
extent permitted by law, Bancshares and FPB will furnish Union with all
information concerning Bancshares and FPB required for inclusion in (a) any
application, statement or document to be made or filed by Union with any federal
or state regulatory or supervisory authority in connection with the transactions
contemplated by this Agreement during the pendency of this Agreement and (b) any
proxy materials to be furnished to the shareholders of Union in connection with
their consideration of the Mergers. Bancshares and FPB represent and warrant
that all information so furnished for such statements and applications shall, to
the best of their knowledge, be true and correct in all material respects
without omission of any material fact required to be stated to make the
information not misleading. Bancshares and FPB will indemnify and hold harmless
Union from and against any and all losses, claims, damages, expenses or
liabilities to which Union may become subject under applicable laws, rules and
regulations and will reimburse Union for any legal or other expenses reasonably
incurred by Union in connection with investigating or defending any actions
whether or not resulting in liability, insofar as such losses, claims, damages,
expenses, liabilities or actions arise out of or are based on any untrue
statement or alleged untrue statement of a material fact contained in any such
application or proxy materials or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein,
or necessary in order to make the statements therein not misleading, but only
insofar as such statement or omission was made in reliance upon and in
conformity with information expressly furnished by Bancshares expressly for use
therein. Bancshares and FPB agree, upon the request of Union, to furnish to
Union a written letter or statement confirming to the best of its knowledge the
accuracy of the information with respect to Bancshares and FPB contained in any
report or other application or statement referred to in Sections 5.1 or 5.2 of
this Agreement, and confirming that the information with respect to Bancshares
and FPB contained in such document or draft was furnished expressly for use
therein or, if such is not the case, indicating the inaccuracies contained in
such document or indicating the information not furnished by Bancshares or FPB
expressly for use therein.
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Section 5.3. EMPLOYEE BENEFIT PLANS. Bancshares agrees that the employees
of Union who are bona fide participants in any of Union's health and welfare
plans will be entitled to participate in all employee health and welfare plans
maintained for employees of Bancshares in accordance with the terms of such
plans. Former employees of Union who are terminated after Closing will receive
severance under Bancshares' severance policy. All employees of Union retained by
Bancshares will receive credit for their prior service with Union with respect
to such plans and severance. Bancshares agrees that Union may agree to pay a
bonus to employees/officers of Union at Closing if such employee/officer stays
until the Closing ("Retention Bonus"); provided, however, that the aggregate
amount of such Retention Bonuses may not exceed $50,000, and provided that
Bancshares shall approve all Retention Bonus agreements when the aggregate value
of all Retention Bonus agreements exceeds $25,000. Bancshares shall not
unreasonably withhold approval of the Retention Bonus agreements. Union shall
promptly notify Bancshares by telephone of all offers of a Retention Bonus. If
Union becomes aware that an officer at the Vice President level or above is
considering terminating employment with Union, Union shall promptly notify
Bancshares.
Section 5.4. CONFIDENTIALITY. Neither Bancshares nor FPB shall, before or
after the consummation or termination of this Agreement, directly or indirectly
disclose any confidential information acquired from Union to any person, firm,
corporation, association or other entity for any reason or purpose whatsoever,
other than in connection with the regulatory notice and application process or,
after termination of this Agreement pursuant to Section 7.1 hereof, use such
information for their own purposes or for the benefit of any person, firm,
corporation, association, or other entity under any circumstances.
Section 5.5. APPLICATIONS. Bancshares and FPB will file all necessary
regulatory notices and applications not later than the 30th day after the
execution of this Agreement and will provide Union with a copy of the
non-confidential portions of notices, applications, statements or correspondence
submitted to or received from regulatory authorities in connection with the
Mergers.
Section 5.6. ADDITIONAL CAPITAL. If the Federal Reserve Board refuses to
approve the Mergers on the basis that Bancshares will not have a 5% leverage
ratio, 6% Tier 1 capital to risk-weighted assets ratio and a 10% total capital
to risk-weighted assets ratio ("Capital Conditions"), then Bancshares shall
raise additional capital such that it would satisfy the Capital Conditions on a
pro forma basis. If Bancshares does not raise sufficient capital to satisfy the
Capital Conditions and cannot otherwise obtain approval from the Federal Reserve
Board, then Bancshares will pay Union cash in an amount equal to $250,000.00
("Fee"). The payment of the Fee shall be in lieu of Union seeking any other
relief or damages to which it is otherwise entitled pursuant to this Agreement.
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VI. CLOSING
Section 6.1. CLOSING. Subject to the other provisions of this Section VI,
on a mutually acceptable date ("Closing Date") as soon as practicable within a
fifteen-day period commencing with the latest of the following dates:
(a) the receipt of shareholder approval and the last approval from
any requisite regulatory or supervisory authority and the expiration of any
statutory or regulatory waiting period which is necessary to effect the Mergers;
or
(b) if the transactions contemplated by this Agreement are being
contested in any legal proceeding and Bancshares or Union, pursuant to Section
10.1 herein, have elected to contest the same, then the date that such
proceeding has been brought to a conclusion favorable, in the judgment of each
of Bancshares and Union, to the consummation of the transactions contemplated
herein, or such prior date as each of Bancshares and Union shall elect whether
or not such proceeding has been brought to a conclusion.
A meeting ("Closing") will take place at which the parties to this
Agreement will exchange certificates, opinions, letters and other documents in
order to determine whether any condition exists which would permit the parties
hereto to terminate this Agreement. If no such condition then exists or if no
party elects to exercise any right it may have to terminate this Agreement, then
and thereupon the appropriate parties shall execute such documents and
instruments as may be necessary or appropriate to effect the transactions
contemplated by this Agreement.
The Closing shall take place at the offices of Bracewell & Patterson,
L.L.P. in Houston, Texas, or at such other place to which the parties hereto may
mutually agree.
Section 6.2. EFFECTIVE TIME. Subject to the terms and upon satisfaction of
all requirements of law and the conditions specified in this Agreement
including, among other conditions, the receipt of any requisite approvals of the
shareholders of Union and the regulatory approvals of the Federal Reserve Board,
FDIC, Banking Department and any other federal or state regulatory agency whose
approval must be received in order to consummate the Mergers, the Initial Merger
shall become effective, and the effective time of the Initial Merger shall
occur, at the date and time specified in the certificate approving the Initial
Merger to be issued by the Banking Department, and the Final Merger shall become
effective, and the effective time of the Final Merger shall occur, at the date
and time specified in the certificate approving the Merger to be issued by the
Banking Department ("Effective Time"). It is anticipated by Bancshares and Union
that the effective time of the Initial Merger will occur immediately prior to
the Effective Time and that the Closing and the Effective Time will occur on the
same day.
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VII. TERMINATION
Section 7.1. TERMINATION.
(a) This Agreement may be terminated by action of the Board of
Directors of Bancshares or Union at any time prior to the Effective Time if:
(i) any court of competent jurisdiction in the United States
or other United States (federal or state) governmental body shall
have issued an order, decree or ruling or taken any other action
restraining, enjoining or otherwise prohibiting the Mergers and such
order, decree, ruling or other action shall have been final and
non-appealable;
(ii) any of the transactions contemplated by this Agreement
are disapproved by any regulatory authority or other person whose
approval is required to consummate any of such transactions; or
(iii) the Mergers shall not have become effective on or before
January 1, 1999, the two hundred and tenth (210) day following the
date of this Agreement, or such later date as shall have been
approved in writing by the Boards of Directors of Bancshares and
Union; provided, however, that the right to terminate under this
Section 7.1(a)(iii) shall not be available to any party whose
failure to fulfill any material obligation under this Agreement has
been the cause of, or has resulted in, the failure of the Mergers to
become effective on or before such date.
(b) This Agreement may be terminated at any time prior to the
Effective Time by the Board of Directors of Union if (i) Bancshares shall fail
to comply in any material respect with any of its covenants or agreements
contained in this Agreement, or if any of the representations or warranties of
Bancshares contained herein shall be inaccurate in any material respect or (ii)
there shall have been any change after December 31, 1997 in the assets,
properties, business or financial condition of Bancshares which individually or
in the aggregate have materially and adversely affected the ability of
Bancshares to pay the Merger Consideration set forth in Section 1.9 hereof. In
the event the Board of Directors of Union desires to terminate this Agreement as
provided above, such Board of Directors must notify Bancshares in writing of its
intent to terminate stating the reason therefor. Bancshares shall have fifteen
days from the receipt of such notice to cure the alleged breach or inaccuracy,
subject to the approval of Union (which approval shall not be unreasonably
delayed or withheld).
(c) This Agreement may be terminated any time prior to the Effective
Time by action of the Board of Directors of Bancshares if (i) Union shall fail
to comply in
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<PAGE>
any material respect with any of its covenants or agreements contained in this
Agreement, or if any of the representations or warranties of Union contained
herein shall be inaccurate in any material respect, (ii) there shall have been
any change after December 31, 1997, in the assets, properties, business or
financial condition of Union which individually or in the aggregate have
materially and adversely affected the financial condition, results of operation
or business of Union, or (iii) the Board of Directors of Bancshares reasonably
concludes, after consulting with counsel, that Bancshares will be unable to
obtain any regulatory approval required in order to consummate the Mergers or
any such approval is accompanied by terms or conditions unacceptable to
Bancshares; provided, however, that a Federal Reserve Board requirement of a 5%
leverage ratio, 6% Tier 1 capital to risk weighted assets ratio and 10% total
capital to risk weighted assets ratio will not be deemed an unacceptable
condition to Bancshares. In the event the Board of Directors of Bancshares
desires to terminate this Agreement because of an alleged breach, inaccuracy or
change as provided in (i) or (ii) above, the Board of Directors must notify
Union in writing of its intent to terminate stating the cause therefor. Union
shall have fifteen days from the receipt of such notice to cure the alleged
breach, inaccuracy or change, subject to the approval of Bancshares (which
approval shall not be unreasonably delayed or withheld).
(d) This Agreement may be terminated at any time prior to the
Effective Time with the mutual written consent of Bancshares and Union and the
approval of such action by their respective Boards of Directors.
Section 7.2. EFFECT OF TERMINATION. In the event of termination of this
Agreement and the abandonment of the Mergers without breach by any party hereto,
this Agreement shall become void and have no effect, without any liability on
the part of any party or its directors, officers or shareholders. Nothing
contained in this Section 7.2 shall relieve any party hereto of any liability
for a breach of this Agreement.
VIII. CONDITIONS TO OBLIGATIONS OF BANCSHARES AND FPB
The obligations of Bancshares and FPB under this Agreement are subject to
the satisfaction, at or prior to the Closing Date of the following conditions,
which may be waived by Bancshares in its sole discretion:
Section 8.1. COMPLIANCE WITH REPRESENTATIONS AND COVENANTS. The
representations and warranties made by Union in this Agreement must have been
true in all material respects when made and shall be true in all material
respects as of the Closing Date with the same force and effect as if such
representations and warranties were made at and as of the Closing Date, and
Union shall have performed or complied with all covenants and conditions
required by this Agreement to be performed and complied with prior to or at the
Closing. Bancshares shall have been furnished with a certificate, executed by an
appropriate repre sentative of Union and dated as of the Closing Date, to the
foregoing effect.
-26-
<PAGE>
Section 8.2. MATERIAL ADVERSE CHANGE. Prior to the Closing Date, there
shall not have occurred any material adverse change in the financial condition,
business or operations of Union, nor shall any event have occurred which, with
the lapse of time, will cause or create any material adverse change in the
financial condition, business or operations of Union in the reasonable judgment
of the Board of Directors of Bancshares; provided, however, that a material
adverse change will not include a change with respect to, or effect on, Union
resulting from a change in law, rule, regulation or GAAP or from any other
matter affecting federally-insured depository institutions generally (including
without limitation, their holding companies), including, without limitation,
changes in general economic conditions and changes in prevailing interest or
deposit rates; provided, any such change does not impact Union more adversely
than other similarly situated financial institution. Bancshares shall have
received a certificate to the foregoing effect executed by an appropriate
representative of Union and dated as of the Closing Date.
Section 8.3. LEGAL OPINION. Bancshares shall have received an opinion of
counsel to Union, dated as of the Closing Date, in form and substance
satisfactory to counsel for Bancshares, to the effect set forth in Schedule 8.3
hereof.
Section 8.4. RELEASES. Union shall have used its best efforts to have the
directors and officers of Union deliver to Bancshares an instrument in the form
of Exhibit "D" attached hereto dated the Effective Time releasing Bancshares and
FPB from any and all claims of such directors (except as to their deposits and
accounts and any rights of indemnification pursuant to Union's Articles of
Association). The directors of Union shall have delivered to Bancshares their
respective resignations.
Section 8.5. DISSENTERS' RIGHTS. The holders of no more than 10% of the
issued and outstanding Union Common Stock shall have demanded or shall be
entitled to demand payment of the fair value of their shares as dissenting
shareholders.
Section 8.6. EMPLOYMENT AGREEMENTS. FPB shall have offered employment
agreements substantially in the form of Exhibits "E" and "F" to A. Schlick
Boettcher and Clem W. "Buck" Boettcher, respectively.
IX. CONDITIONS TO OBLIGATIONS OF UNION
The obligations of Union under this Agreement are subject to the
satisfaction, at or prior to the Closing Date, of the following conditions,
which may be waived by Union in its sole discretion:
Section 9.1. COMPLIANCE WITH REPRESENTATIONS AND COVENANTS. The
representations and warranties made by Bancshares and FPB in this Agreement must
have been true in all materials respects when made and shall be true in all
material respects as of the Closing Date
-27-
<PAGE>
with the same force and effect as if such representations and warranties were
made at and as of the Closing Date, and Bancshares and FPB shall have performed
and complied in all material respects with all covenants and conditions required
by this Agreement to be performed or complied with by Bancshares and FPB prior
to or at the Closing. Union shall be furnished with a certificate, executed by
appropriate representatives of Bancshares and FPB and dated as of the Closing
Date, to the foregoing effect.
Section 9.2. MATERIAL ADVERSE CHANGE. Prior to the Closing Date, there
shall not have occurred any material adverse change in the financial condition,
business or operations of Bancshares, nor shall any event have occurred which,
with the lapse of time, will cause or create any material adverse change in the
financial condition, business or operations of Bancshares, which would
materially and adversely affect the ability of Bancshares to pay the Merger
Consideration set forth in Section 1.9; provided, however, that a material
adverse change will not include a change with respect to, or effect on, Union
resulting from a change in law, rule, regulation or GAAP or from any other
matter affecting federally-insured depository institutions generally (including
without limitation, their holding companies), including, without limitation,
changes in general economic conditions and changes in prevailing interest or
deposit rates; provided, any such change does not impact Union more adversely
than other similarly situated financial institution..
Section 9.3. LEGAL OPINION. Union shall have received an opinion of
counsel to Bancshares, dated as of the Closing Date and in form and substance
satisfactory to counsel for Union, to the effect set forth in Schedule 9.3
hereof.
Section 9.4. RELEASES. Union shall have delivered to the directors and
officers of Union who delivered releases to Union pursuant to Section 8.4. an
instrument in the form of Exhibit "G" attached hereto dated the Effective Time
releasing the directors from any and all claims of Union (except as to
indebtedness and other contractual liabilities); provided, however, that such
releases shall not release an action against such directors by Bancshares or FPB
in connection with the transactions contemplated by this Agreement.
X. CONDITIONS TO RESPECTIVE OBLIGATIONS OF
BANCSHARES, FPB AND UNION
The respective obligations of Bancshares, FPB and Union under this
Agreement are subject to the satisfaction of the following conditions which may
be waived by Bancshares, FPB and Union, respectively, in their sole discretion:
Section 10.1. GOVERNMENT APPROVALS. Bancshares, FPB and Union shall have
received the approval, or waiver of approval, of the transactions contemplated
by this Agreement from all necessary governmental agencies and authorities,
including the Federal Reserve Board and any other regulatory agency whose
approval must be received in order
-28-
<PAGE>
to consummate the Mergers, which approvals shall not impose any restrictions on
the operations of the Continuing Bank which are unacceptable to Bancshares, and
such approvals and the transactions contemplated hereby shall not have been
contested by any federal or state governmental authority or any third party
(except shareholders asserting dissenters' rights) by formal proceeding. It is
understood that, if any such contest is brought by formal proceeding, Bancshares
or Union may, but shall not be obligated to, answer and defend such contest or
otherwise pursue the Mergers over such objection.
Section 10.2. SHAREHOLDER APPROVAL. The shareholders of Union shall have
approved this Agreement and the transactions contemplated by this Agreement and
the holders of no more than 10% of the Union Common Stock shall have exercised
their dissenters' rights in accordance with the applicable laws, rules and
regulations as provided in Section 1.11 of this Agreement.
XI. MISCELLANEOUS
Section 11.1. NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties of Bancshares, FPB and Union contained in this
Agreement shall terminate at the Closing Time. The sole remedy prior to Closing
for a misrepresentation that was not a knowing misrepresentation shall be the
option to terminate this Agreement.
Section 11.2. AMENDMENTS. This Agreement may be amended only by a writing
signed by Bancshares, FPB and Union at any time prior to the Closing Time with
respect to any of the terms contained herein; provided, however, that the Merger
Consideration to be received by the shareholders of Union pursuant to this
Agreement shall not be decreased subsequent to the approval of the transactions
contemplated by the Agreement without the further approval by such shareholders.
Section 11.3. EXPENSES. Whether or not the transactions provided for
herein are consummated, each party to this Agreement will pay its respective
expenses incurred in connection with the preparation and performance of its
obligations under this Agreement. Similarly, each party agrees to indemnify the
other parties against any cost, expense or liability (including reasonable
attorneys' fees) in respect of any claim made by any party for a broker's or
finder's fee in connection with this transaction other than one based on
communications between the party and the claimant seeking indemnification.
Except for the engagement of BAGI by Union, Bancshares and Union represent and
warrant to each other that neither of them, nor any of their agents, employees
or representatives, has incurred any liability for any commissions or brokerage
fees in connection with this transaction. Union shall be responsible for all
fees to BAGI in connection with the Mergers and Union will indemnify and hold
harmless Bancshares and FPB for any fees and expenses to BAGI that are incurred
in connection with the Mergers.
-29-
<PAGE>
Section 11.4. NOTICES. Except as explicitly provided herein, any notice
given hereunder shall be in writing and shall be delivered in person or mailed
by first class mail, postage prepaid or sent by facsimile, courier or personal
delivery to the parties at the following addresses unless by such notice a
different address shall have been designated:
If to Bancshares and FPB:
Prosperity Bancshares, Inc
1301 N. Mechanic
El Campo, Texas 77437
Attention: Mr. David Zalman
With a copy to:
Bracewell & Patterson, L.L.P.
711 Louisiana Street, Suite 2900
Houston, Texas 77002-2781
Attention: Mr. William T. Luedke IV
If to Union:
Union State Bank
700 Church Street
East Bernard, Texas 77435
Attention: Mr. A. Schlick Boettcher
With a copy to:
Jenkins & Gilchrist
1445 Ross Avenue, Suite 3200
Dallas, Texas 75202
Attention: Mr. Charles Greef
All notices sent by mail as provided above shall be deemed delivered five (5)
days after deposit in the mail. All notices sent by facsimile or courier as
provided above shall be deemed delivered one day after being sent. All other
notices shall be deemed delivered when actually received. Any party to this
Agreement may change its address for the giving of notice specified above by
giving notice as herein provided.
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<PAGE>
Section 11.5. CONTROLLING LAW. All questions concerning the validity,
operation and interpretation of this Agreement and the performance of the
obligations imposed upon the parties hereunder shall be governed by the laws of
the State of Texas and, to the extent applicable, by the laws of the United
States of America.
Section 11.6. HEADINGS. The headings and titles to the sections of this
Agreement are inserted for convenience only and shall not be deemed a part
hereof or affect the construction or interpretation of any provision hereof.
Section 11.7. MODIFICATIONS OR WAIVER. No termination, cancellation,
modification, amendment, deletion, addition or other change in this Agreement,
or any provision hereof, or waiver of any right or remedy herein provided, shall
be effective for any purpose unless specifically set forth in a writing signed
by the party or parties to be bound thereby. The waiver of any right or remedy
in respect to any occurrence or event on one occasion shall not be deemed a
waiver of such right or remedy in respect to such occurrence or event on any
other occasion.
Section 11.8. SEVERABILITY. Any provision hereof prohibited by or unlawful
or unenforceable under any applicable law or any jurisdiction shall as to such
jurisdiction be ineffective, without affecting any other provision of this
Agreement, or shall be deemed to be severed or modified to conform with such
law, and the remaining provisions of this Agreement shall remain in force,
provided that the purpose of the Agreement can be effected. To the fullest
extent, however, that the provisions of such applicable law may be waived, they
are hereby waived, to the end that this Agreement be deemed to be a valid and
binding agreement enforceable in accordance with its terms.
Section 11.9. ASSIGNMENT. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns, but shall not be assigned by any party without the prior written
consent of the other parties.
Section 11.10. CONSOLIDATION OF AGREEMENTS. All understandings and
agreements heretofore made between the parties hereto are merged in this
Agreement which (together with any agreements executed by the parties hereto
contemporaneously with or subsequent to the execution of this Agreement) shall
be the sole expression of the agreement of the parties respecting the Mergers.
Section 11.11. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which shall
be deemed to constitute one and the same instrument.
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<PAGE>
Section 11.12. BINDING ON SUCCESSORS. Except as otherwise provided herein,
this Agreement shall be binding upon, and shall inure to the benefit of, the
parties and their respective heirs, executors, trustees, administrators,
guardians, successors and assigns.
Section 11.13. GENDER. Any pronoun used herein shall refer to any gender,
either masculine, feminine or neuter, as the context requires.
Section 11.14. DISCLOSURES. Any disclosure made in any document delivered
pursuant to this Agreement or referred to or described in writing in any section
of this Agreement or any schedule attached hereto shall be deemed to be
disclosure for purposes of any section herein or schedule hereto.
Section 11.15. PUBLICITY. Subject to written advice of counsel with
respect to legal requirements relating to public disclosure of matters related
to the transactions contemplated by this Agreement, the timing and content of
any announcements, press releases or other public statements (whether written or
oral) concerning this Agreement or the Mergers will occur upon, and be
determined by, the mutual consent of Bancshares and Union; provided, however,
that this shall not include notices required to be published pursuant to the
regulatory application process.
Section 11.16. ENTIRE AGREEMENT. This Agreement contains the entire
agreement among Bancshares, FPB and Union with respect to the Mergers.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first above written.
PROSPERITY BANCSHARES, INC.
By:_________________________________
ATTEST:
By:_____________________
FIRST PROSPERITY BANK
By:_________________________________
ATTEST:
By:_____________________
UNION STATE BANK
By:_________________________________
ATTEST:
By:_____________________
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SCHEDULE 2.1 TO THE AGREEMENT:
ORGANIZATION - UNION
None.
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<PAGE>
SCHEDULE 2.2 TO THE AGREEMENT:
CAPITALIZATION - UNION
None.
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<PAGE>
SCHEDULE 2.4 TO THE AGREEMENT:
INVESTMENTS - UNION
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<PAGE>
SCHEDULE 2.5 TO THE AGREEMENT:
FINANCIAL STATEMENTS - UNION
None.
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<PAGE>
SCHEDULE 2.6 TO THE AGREEMENT:
TITLE - UNION
-38-
<PAGE>
SCHEDULE 2.7 TO THE AGREEMENT:
ENVIRONMENTAL LAWS - UNION
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<PAGE>
SCHEDULE 2.8 TO THE AGREEMENT:
LITIGATION AND OTHER PROCEEDINGS - UNION
None.
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<PAGE>
SCHEDULE 2.9 TO THE AGREEMENT:
TAXES - UNION
None.
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<PAGE>
SCHEDULE 2.10 TO THE AGREEMENT:
CONTRACTS - UNION
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<PAGE>
SCHEDULE 2.11 TO THE AGREEMENT:
INSURANCE POLICIES - UNION
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<PAGE>
SCHEDULE 2.13 TO THE AGREEMENT:
COMPLIANCE WITH LAWS - UNION
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<PAGE>
SCHEDULE 2.14 TO THE AGREEMENT:
CONDUCT - UNION
-45-
<PAGE>
SCHEDULE 2.16 TO THE AGREEMENT:
EMPLOYMENT RELATIONS - UNION
None.
-46-
<PAGE>
SCHEDULE 2.18 TO THE AGREEMENT:
DEFERRED COMPENSATION ARRANGEMENTS - UNION
None.
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<PAGE>
SCHEDULE 2.19 TO THE AGREEMENT:
LIST OF LOANS - UNION
-48-
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SCHEDULE 2.20 TO THE AGREEMENT:
ABSENCE OF CHANGES - UNION
None.
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SCHEDULE 2.21 TO THE AGREEMENT:
BROKERS' AND FINDERS' FEES - UNION
None.
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<PAGE>
SCHEDULE 2.22 TO THE AGREEMENT:
ABSENCE OF PROPERTY TAXES AND LIENS - UNION
None.
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<PAGE>
SCHEDULE 3.4 TO THE AGREEMENT:
LITIGATION - BANCSHARES
None.
-52-
<PAGE>
SCHEDULE 4.7 TO THE AGREEMENT:
PROXIES
-53-
<PAGE>
SCHEDULE 8.3 TO THE AGREEMENT:
LEGAL OPINION TO BE DELIVERED BY UNION
The legal opinion of counsel for Union which is called for by Section 8.3 of the
Agreement shall be to the following effect:
(a) Union is a Texas banking association duly organized, validly
existing and in good standing under the laws of the State of Texas,
and has full power and authority to carry on and engage in the
business and activities now conducted by it and to enter into this
Agreement.
(b) The authorized capital stock of Union consists of 70,000 shares of
Common Stock, $10.00 par value. As of the date hereof, 70,000 shares
of Union Common Stock were issued and outstanding. All of the shares
which are issued and outstanding are validly issued, fully paid and
have not been issued in violation of the preemptive rights of any
person. There are no existing options, warrants, calls, convertible
securities or commitments of any kind enabling Union to issue any
authorized and unissued Union Common Stock nor does Union have any
commitment or obligation to repurchase, reacquire or redeem any of
its outstanding capital stock.
(c) The Board of Directors of Union has approved the Agreement and the
transactions contemplated thereby. All necessary corporate
proceedings, including all appropriate and legal actions by
shareholders of Union to approve and authorize the transactions set
forth in the Agreement, have been taken. This Agreement has been
duly executed and delivered by Union and is a binding agreement of
Union enforceable against Union in accordance with its terms.
(d) Except as otherwise noted in the Agreement, there are no legal,
quasi-judicial or administrative proceedings of any kind or nature
now pending or, to the knowledge of counsel to Union, threatened
before any court or administrative body in any manner against Union
or any of their properties or capital stock which would have a
material adverse effect on
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<PAGE>
Union, its financial condition, assets, operations or earnings or
the transactions proposed by the Agreement. Union is not in default
with respect to any judgment, order, writ, injunction, decree,
award, rule or regulation of any court, arbitrator or governmental
agency or instrumentality.
(e) The execution and delivery of the Agreement and the consummation of
the transactions contemplated thereby will not, to the best
knowledge of counsel to Union, violate any provision of, or
constitute a default under, any law, or any order, writ, injunction
or decree of any court or other governmental agency, or any material
contract, agreement or instrument to which Union is a party or by
which it is bound or constitute an event which with the lapse of
time or action by a third party could result in any default under
any of the foregoing or result in the creation of any lien, charge
or encumbrance upon the assets or properties of Union or upon the
Union Common Stock.
Such opinion shall also cover such other matters incident to the transactions
contemplated by the Agreement as Bancshares may reasonably request. As to
questions of fact material to their opinion, such counsel may rely upon
certificates of officers of Union. Such opinion may contain such qualifications,
exceptions and explanations as are satisfactory in form and substance to
Bancshares.
-55-
<PAGE>
SCHEDULE 9.3 TO THE AGREEMENT:
LEGAL OPINION TO BE DELIVERED BY BANCSHARES
The legal opinion of counsel for Bancshares which is called for by Section 9.3
of the Agreement shall be to the following effect:
(a) Bancshares is a corporation duly organized, validly existing and in
good standing under the laws of the State of Texas, and has full
power and authority (including all licenses, franchises, permits and
other governmental authorizations which are legally required) to own
its properties, to engage in the business and activities now
conducted by it and to enter into this Agreement.
(b) FPB is a banking association duly organized, validly existing and in good
standing under the laws of the State of Texas, and has full power and
authority (including all licenses, franchises, permits and other
governmental authorizations which are legally required) to own its
properties, to engage in the business and activities now conducted by it
and to enter into this Agreement.
(c) The Board of Directors of Bancshares and FPB and the shareholder of FPB
have approved the Agreement and the transactions contemplated thereby. The
Agreement has been duly executed and delivered by Bancshares and FPB and
is a binding agreement of Bancshares and FPB enforceable against
Bancshares and FPB in accordance with its terms.
(d) The execution and delivery of the Agreement and the consummation of the
transactions contemplated thereby, will not, to the best knowledge of
counsel to Bancshares, violate any provision of, or constitute a default
under, any law, or any order, writ, injunction or decree of any court or
other governmental agency, or any material contract, agreement or
instrument to which either Bancshares or FPB is a party or by which they
are bound or constitute an event which with the lapse of time or action by
a third party could result in any default under any of the foregoing or
result in the creation of any lien, charge or encumbrance upon of the
assets or properties of Bancshares or FPB or upon the stock of Bancshares
or FPB.
-56-
<PAGE>
(e) Except as disclosed in the Agreement and except for such consents,
approvals, authorizations, actions or filings as have already been
obtained or made, no consent, approval, authorization, action or filing
with any court, governmental agency or public body is required in
connection with the execution, delivery and performance by Bancshares or
FPB of the Agreement.
Such opinion shall also cover such other matters incident to the transactions
contemplated by the Agreement as Union may reasonably request. As to questions
of fact material to their opinion, such counsel may rely upon certificates of
officers of Bancshares and FPB. Such opinion may contain such qualifications,
exceptions and explanations as are satisfactory in form and substance to Union.
-57-
EXHIBIT 21
SUBSIDIARIES OF PROSPERITY BANCSHARES, INC.
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION
Prosperity Holdings, Inc. Delaware
First Prosperity Bank Texas
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Prosperity Bancshares,
Inc. on Form S-1 of our report dated January 23, 1998 (except for Note 23 as to
which the date is September 10, 1998), appearing in the Prospectus, which is
part of this Registration Statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Houston, Texas
September 11, 1998
EXHIBIT 23.2
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to the inclusion in this Registration Statement of Prosperity
Bancshares, Inc. on Form S-1 of our report dated January 23, 1998, on our audits
of the financial statements of Union State Bank.
/s/ HARPER & PEARSON COMPANY
Houston, Texas
September 11, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 17,372,158
<INT-BEARING-DEPOSITS> 198,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 38,612,395
<INVESTMENTS-CARRYING> 129,256,453
<INVESTMENTS-MARKET> 129,774,737
<LOANS> 120,577,987
<ALLOWANCE> (1,015,576)
<TOTAL-ASSETS> 320,143,082
<DEPOSITS> 291,516,912
<SHORT-TERM> 2,800,000
<LIABILITIES-OTHER> 1,008,573
<LONG-TERM> 0
0
0
<COMMON> 3,993,884
<OTHER-SE> 20,823,713
<TOTAL-LIABILITIES-AND-EQUITY> 320,143,082
<INTEREST-LOAN> 10,205,405
<INTEREST-INVEST> 9,555,125
<INTEREST-OTHER> 209,142
<INTEREST-TOTAL> 19,969,672
<INTEREST-DEPOSIT> 8,858,172
<INTEREST-EXPENSE> 9,059,844
<INTEREST-INCOME-NET> 10,909,828
<LOAN-LOSSES> 189,970
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,835,534
<INCOME-PRETAX> 5,148,362
<INCOME-PRE-EXTRAORDINARY> 5,148,362
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,562,172
<EPS-PRIMARY> 0.94
<EPS-DILUTED> 0.92
<YIELD-ACTUAL> 7.16
<LOANS-NON> 0
<LOANS-PAST> 88,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 922,833
<CHARGE-OFFS> (130,086)
<RECOVERIES> 32,859
<ALLOWANCE-CLOSE> 1,015,576
<ALLOWANCE-DOMESTIC> 1,015,576
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 865,000
</TABLE>
