<PAGE>
As filed with the Securities and Exchange Commission on September 21, 2000
Registration No.
Registration No.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Form SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------
Paradigm Bancorporation, Inc. Paradigm Capital Trust II
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C> <C> <C> <C>
Texas 6712 76-0522891 Delaware 6712
(State or (Primary Standard (I.R.S. Employer (State or jurisdiction of (Primary Standard
jurisdiction Industrial Classification Identification No.) incorporation Industrial Classification
of Code Number) or organization) Code Number)
incorporation
or
organization)
<S> <C>
Texas To Be
(State or Applied For
jurisdiction (I.R.S. Employer
of Identification No.)
incorporation
or
organization)
</TABLE>
2828 FM 1960 E. 2828 FM 1960 E.
Houston, Texas 77073 Houston, Texas 77073
(281) 443-6036 (281) 443-6036
(Address and telephone number of (Address and telephone number of
principal executive offices) principal executive offices)
Peter E. Fisher
Chief Executive Officer
2828 FM 1960 E.
Houston, Texas 77073
(281) 443-6036
(Name, address, and telephone number of agent for service)
Copies to:
William T. Luedke IV, Esq. Hebert H. Davis, Esq.
Bracewell & Patterson, L.L.P. Rothgerber Johnson & Lyons LLP
2900 South Tower Pennzoil Place 1200 17th Street, Suite 3000
Houston, Texas 77002-2781 Denver, Colorado 80202-5839
(713) 223-2900 (303) 623-9000
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
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
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed Proposed
Title of each class of Dollar Amount maximum maximum Amount of
securities to be to be offering price aggregate registration
registered registered per unit offering price fee(1)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Floating Rate Cumulative
Preferred Securities of
Paradigm Capital Trust
II..................... $10,000,000 $10.00 $10,000,000 $2,640
------------------------------------------------------------------------------------
Floating Rate Cumulative
Junior Subordinated
Debentures of Paradigm
Bancorporation, Inc.... (2)
------------------------------------------------------------------------------------
Guarantee of Trust
Preferred Securities... (3)
------------------------------------------------------------------------------------
</TABLE>
(1) The registration fee is calculated in accordance with Rule 457(a), (i) and
(n).
(2) The Debentures will be purchased by Paradigm Capital Trust II with the
proceeds from the sale of the Trust Preferred Securities. Such securities
may later be distributed for no additional consideration to the holders of
the Trust Preferred Securities of Paradigm Capital Trust II upon its
dissolution.
(3) This Registration Statement is deemed to cover the Debentures of Paradigm
Bancorporation, Inc., the rights of holders of Debentures of Paradigm
Bancorporation, Inc. under the Indenture, and the rights of holders of the
Trust Preferred Securities under the Trust Agreement, the Guarantee and
the Expense Agreement entered into by Paradigm Bancorporation, Inc.
---------------
The registrants hereby amend this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrants
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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
1,000,000 Floating Rate Cumulative Trust Preferred Securities
PARADIGM CAPITAL TRUST II
Floating Rate Cumulative Trust Preferred Securities
(Liquidation Amount $10 per Trust Preferred Security)
fully, irrevocably and unconditionally guaranteed by
PARADIGM BANCORPORATION, INC.
The trust preferred securities represent undivided beneficial interests in
the assets of Paradigm Capital Trust II. The trust will invest the proceeds of
this offering of trust preferred securities in the floating rate junior
subordinated debentures of Paradigm Bancorporation, Inc.
For each of the trust preferred securities that you own, you are entitled to
receive quarterly cumulative cash distributions at a floating rate of 3.75%
over the three month London interbank offered rate from payments on the
debentures. Payment of distributions may be deferred at any time for up to 20
consecutive quarters. The trust preferred securities are effectively
subordinated to all senior and subordinated indebtedness of Paradigm
Bancorporation, Inc. and its subsidiaries. The debentures mature and the trust
preferred securities must be redeemed on , 2030. The trust may redeem the
trust preferred securities, at a redemption price of $10 per trust preferred
security plus accumulated and unpaid distributions, at any time on or after
, 2005, or earlier under certain circumstances.
The trust preferred securities will be quoted on the OTC Bulletin Board under
the trading symbol "PARBP."
Investing in the trust preferred securities involves risks which are
described in the "Risk Factors" section beginning on page 10.
These securities are not savings accounts, deposits or obligations of any
bank and are not insured by the Federal Deposit Insurance Corporation or any
other governmental agency.
<TABLE>
<CAPTION>
Per Trust
Preferred
Security Total
--------- -----------
<S> <C> <C>
Public offering price................................... $10.00 $10,000,000
Underwriting fees to be paid by Paradigm Bancorporation,
Inc.................................................... $ 0.35 $ 350,000
Proceeds to the trust................................... $10.00 $10,000,000
</TABLE>
The underwriters have entered into a firm commitment underwriting agreement
with Paradigm Bancorporation, Inc. and Paradigm Capital Trust II, which means
that all of the trust preferred securities will be purchased by the
underwriters, if any are.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
HOEFER & ARNETT SAMCO
Incorporated Capital Markets
, 2000
<PAGE>
[Map of banking offices to be inserted]
PARADIGM MAP APPEARS HERE
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary............................... 4
Summary Consolidated Financial Data... 8
Risk Factors.......................... 10
Forward-looking Information........... 15
Use of Proceeds....................... 17
Accounting Treatment.................. 17
Capitalization........................ 18
Unaudited Pro Forma Combined Statement
of Income............................ 19
Selected Consolidated Financial Data.. 20
Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................... 22
The Company........................... 48
Management............................ 52
Interests of Management and Others in
Certain Transactions................. 56
</TABLE>
<TABLE>
<S> <C>
Beneficial Ownership of Common Stock
by Management and Principal
Shareholders....................... 57
Supervision and Regulation.......... 58
Description of the Trust............ 65
Description of the Trust Preferred
Securities......................... 66
Description of the Debentures....... 78
Book-entry Issuance................. 87
Description of the Guarantee........ 89
Relationship among the Trust
Preferred Securities, the
Debentures and the Guarantee....... 91
Federal Income Tax Consequences..... 93
ERISA Considerations................ 96
Underwriting........................ 97
Legal Matters....................... 98
Experts............................. 98
Where You Can Find Information...... 99
Index to Financial Statements....... F-1
</TABLE>
You should not rely on any information not contained in this prospectus. We
have not, and our underwriters have not, authorized any person to provide you
with information different from or inconsistent with that contained in this
prospectus. We are not, and our underwriters are not, making an offer to sell
these securities in any jurisdictions where the offer or sale is not permitted.
You should assume that the information appearing in this prospectus is
accurate as of the date on the front cover of this prospectus only.
3
<PAGE>
SUMMARY
The items in the following summary are described in more detail later in
this prospectus. Therefore, you should also read the more detailed information
set forth in this prospectus and in our financial statements. We were a
Subchapter S Corporation for federal income tax purposes from January 1, 1998
until December 1, 1999. During this time, we were not generally subject to a
company level tax for federal income tax purposes. Unless otherwise indicated,
our financial information for this period that is contained in this prospectus
has not been revised to reflect an estimated federal income tax.
Paradigm Bancorporation, Inc.
We are a financial holding company headquartered in Houston, Texas. We
provide commercial and retail banking services through the community banking
offices of two subsidiary banks--Woodcreek Bank, a Texas banking association
headquartered in Houston, Texas, and Dayton State Bank, a Texas banking
association headquartered in Dayton. We were formed as a bank holding company
for Woodcreek in 1996. Woodcreek has seven community banking offices, six of
which are located in the greater Houston metropolitan area with one located in
Dayton. We acquired Dayton State on December 10, 1999. In addition to its main
office in Dayton, Dayton State has community banking offices in Mont Belvieu
and Winnie, Texas. We elected to become a financial holding company in 2000. We
plan to merge Dayton State and Woodcreek in the near future. At June 30, 2000,
we had total assets of $204.0 million, loans of $124.2 million, deposits of
$179.7 million and shareholders' equity of $16.1 million.
We offer a variety of traditional loan and deposit products to our
customers, which consist primarily of small and medium-sized businesses and
individual consumers. For businesses, we provide 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. We offer consumers automobile loans, home
mortgage loans, debit cards, cash management services and Internet banking. We
provide all of our customers with a full complement of traditional deposit
products.
We have grown through a combination of internal growth, acquiring two
existing community banks and opening new banking centers. As a result of these
additions and internal growth, our assets have increased from $93.4 million at
December 31, 1997 to $204.0 million at June 30, 2000. During that same period,
loans increased from $38.0 million to $124.2 million, deposits increased from
$86.2 million to $179.7 million and shareholders equity increased from $5.0
million to $16.1 million. A substantial portion of our recent growth results
from our acquisition of Dayton State.
Along with steady asset growth, our financial performance has historically
been characterized by consistent core earnings and low net charge-offs. The
diverse economic nature of the local markets that we serve provide us with a
varied customer base and allows us to spread our lending risks among different
industries.
We believe that our combination of responsive community banking, skilled and
experienced executive officers and ability to provide the variety of products
and services of a regional financial holding company, give us a competitive
advantage in our market area and excellent growth opportunities through
acquisitions, new branch locations and additional business development.
Our executive offices are located at 2828 FM 1960 E., Houston, Texas 77073
and our telephone number is (281) 443-6036.
4
<PAGE>
Business Strategy
Our business strategy primarily focuses on the following:
. Commitment to community relationship banking
. Expanding market share through internal growth and a disciplined
expansion and acquisition strategy
. Maintaining conservative lending with low net charge-offs.
Paradigm Capital Trust II
The trust, which is the issuer of the trust preferred securities, is a
Delaware business trust. Upon issuance of the trust preferred securities
offered by this prospectus, the purchasers in this offering will own all of the
issued and outstanding trust preferred securities of the trust. In exchange for
our capital contribution to the trust, we will own all of the common securities
of the trust. The trust exists for the sole purposes of:
. issuing the trust preferred securities to the public for cash;
. issuing the common securities to us;
. investing the proceeds from the sale of the trust preferred and common
securities in an equivalent amount of floating rate junior subordinated
debentures due , 2030 issued by us; and
. engaging in other activities that are incidental to those listed above.
The trust's address is 2828 FM 1960 E., Houston, Texas 77073 and its
telephone number is (281) 443-6036.
The Offering
Trust preferred securities
issuer..................... Paradigm Capital Trust II
Securities that are being The trust is offering 1,000,000 trust preferred
offered.................... securities, which represent undivided beneficial
interests in the assets of the trust. Those
assets will consist solely of the debentures and
interest paid on the debentures.
The trust will sell the trust preferred
securities to the public for cash. The trust will
use the proceeds from the sale of the trust
preferred securities to buy debentures from us.
Offering price.............. $10 per trust preferred security.
Payment of distributions.... If you purchase the trust preferred securities,
you will be entitled to receive cumulative cash
distributions at a floating rate. Distributions
will accumulate from the date the trust issues
the trust preferred securities and will be paid
quarterly. The interest rate on the trust
preferred securities will be a floating rate of
3.75% over the three-month London interbank
offered rate, adjusted quarterly.
We and the trust have the
option to defer payments... The trust will rely solely on payments made by us
on the debentures to pay distributions on the
trust preferred securities. If
5
<PAGE>
no event of default under the indenture has
occurred and is continuing, we may, at one or
more times, defer interest payments on the
debentures for up to 20 consecutive quarters, but
not beyond , 2030. If we defer interest
payments on the debentures:
. the trust will also defer distributions on the
trust preferred securities;
. distributions you are entitled to will
accumulate; and
. these accumulated distributions will accumulate
additional distributions at a floating rate of
3.75% over the three-month London interbank
offered rate, adjusted quarterly.
At the end of any deferral period, we will pay to
the trust all accrued and unpaid amounts owing on
the debentures. The trust will then pay all
accumulated and unpaid distributions to you.
Maturity.................... The debentures will mature and the trust
preferred securities must be redeemed on ,
2030. We have the option, however, to shorten the
maturity date to a date not earlier than ,
2005.
Redemption of the trust
preferred securities is
possible................... The trust must redeem the trust preferred
securities when the debentures are paid at
maturity or upon any earlier redemption of the
debentures. We may redeem all or part of the
debentures on or after , 2005. In addition,
we may redeem, at any time, all of the debentures
if:
. the interest we pay on the debentures is no
longer deductible by us for federal tax
purposes or the trust becomes subject to
federal income tax;
. there is a change in the Investment Company Act
of 1940 that requires the trust to register
under that law; or
. there is a change in the capital adequacy
guidelines of the Federal Reserve that reduces
the amount of trust preferred securities that
may be counted as Tier 1 capital.
If the trust preferred securities are redeemed by
the trust, you will receive the liquidation
amount of $10 per trust preferred security plus
any accumulated and unpaid distributions to the
date of redemption.
How the securities will
rank in right of payment... Our obligations under the trust preferred
securities, debentures and guarantee are
unsecured and will rank as follows with regard to
right of payment:
. the trust will pay distributions on the trust
preferred securities and the common securities
pro rata. However, if we default
6
<PAGE>
with respect to the debentures, then no
distributions on the common securities will be
paid until all accumulated and unpaid
distributions on the trust preferred securities
have been paid;
. our obligations under the debentures and the
guarantee will rank junior in priority to our
existing and future senior and other
subordinated indebtedness; and
. because we are a holding company, the
debentures and the guarantee will effectively
be subordinated to all existing and future
liabilities of our subsidiaries.
We may distribute the
debentures directly to
you........................ We may, at any time, dissolve the trust and
distribute the debentures to you in exchange for
your trust preferred securities. If we distribute
the debentures, we will use our best efforts to
list the debentures on the OTC Bulletin Board or
comparable automated quotation system.
Our guarantee of payment.... We guarantee that the trust will use its assets
to pay the distributions on the trust preferred
securities. However, the guarantee does not apply
when the trust does not have sufficient funds to
make the payments. In this event, your remedy is
to initiate a legal proceeding directly against
us for enforcement of payments under the
debentures.
Voting rights of the trust
preferred securities....... Except in limited circumstances, holders of the
trust preferred securities will have no voting
rights.
OTC Bulletin Board symbol... "PARBP"
Book-entry.................. The trust preferred securities will be
represented by a global security that will be
deposited with and registered in the name of The
Depository Trust Company or its nominee.
Therefore, you will not receive a certificate for
the trust preferred securities.
Use of proceeds............. The trust will use the net proceeds from the sale
of the trust preferred securities to purchase the
floating rate junior subordinated debentures
issued by us. We expect to use the net proceeds
from the sale of the floating rate subordinated
debentures to redeem our $5.125 million in
outstanding 10.375% subordinated debentures and
for general corporate purposes including
potential acquisitions.
7
<PAGE>
PARADIGM BANCORPORATION, INC.
SUMMARY CONSOLIDATED FINANCIAL DATA
We are providing the following financial information to aid you in your
financial analysis of us and our ability to pay the principal and interest on
the debentures. This information is only a summary and you should read it in
conjunction with "Selected Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our Consolidated Financial Statements and the Notes thereto included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
As of and for the
Six Months Ended As of and for the Years
June 30, Ended December 31,
-------------------- ---------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Interest income......... $ 7,588 $ 3,466 $ 7,813 $ 6,324 $ 4,758
Interest expense........ 2,336 1,139 2,597 2,387 1,871
-------- -------- -------- -------- -------
Net interest income..... 5,252 2,327 5,216 3,937 2,887
Provision for credit
losses................. 270 90 309 76 40
-------- -------- -------- -------- -------
Net interest income
after provision for
credit losses.......... 4,982 2,237 4,907 3,861 2,847
Noninterest income...... 1,672 860 2,278 1,407 1,125
Noninterest expense..... 5,028 2,492 5,357 4,151 2,672
-------- -------- -------- -------- -------
Earnings before taxes... 1,626 605 1,828 1,117 1,300
Provision for income tax
expense................ 544 --(1) 104(1) --(1) 330
-------- -------- -------- -------- -------
Net earnings............ $ 1,082 $ 605(1) $ 1,724(1) $ 1,117(1) $ 970
======== ======== ======== ======== =======
Per Share Data:
Basic and diluted
earnings per share..... $ 0.46 $ 0.40 $ 1.16(1) $ 0.74(1) $ 0.75
Book value.............. 6.78 5.16 6.42 5.01 3.89
Tangible book value(2).. 5.15 4.68 4.77 4.51 3.28
Cash dividends.......... 0.10 0.23 0.48 0.14 0.26
Dividend payout ratio... 21.9% 57.0% 41.3%(1) 18.7%(1) 34.8%
Weighted average shares
outstanding (basic and
diluted)............... 2,375 1,500 1,576 1,472 1,499
Shares outstanding at
end of period.......... 2,375 1,500 2,375 1,500 1,287
Balance Sheet Data:
Total assets............ $203,966 $108,033 $210,847 $104,975 $93,387
Securities.............. 48,479 25,471 51,596 24,511 22,211
Loans................... 124,235 62,188 111,244 49,368 37,958
Allowance for credit
losses................. 829(3) 217 679(3) 113 247
Goodwill................ 3,876 728 3,928 755 794
Total deposits.......... 179,686 98,306 182,042 96,802 86,189
Borrowings and notes
payable................ 50 1,305 11,778 -- --
Trust preferred
securities............. 5,125 -- 5,125 -- --
Total shareholders'
equity................. 16,102 7,747 15,248 7,525 5,006
Performance Ratios(4):
Return on average
assets................. 1.56% 1.15% 1.57% 1.16% 1.35%
Return on average
equity................. 20.74 16.13 21.27 16.36 15.64%
Net interest margin..... 5.90 5.05 5.27 4.82 4.67%
Efficiency ratio(5)..... 71.04 81.02 70.59 79.26 67.60%
Asset Quality Ratios(6):
Nonperforming assets to
total loans and other
real estate............ 1.72% 1.19% 0.91% 0.70% 2.60%
Net loan charge-offs to
average loans.......... 0.10 -- 0.17 0.47 0.08%
Allowance for credit
losses to total loans.. 0.67(3) 0.35 0.61(3) 0.23 0.65%
Allowance for credit
losses to nonperforming
loans(7)............... 51.62(3) 48.54 129.33(3) 100.00 94.63%
Debt Coverage and
Earnings to Fixed
Charges Ratios
Debt coverage ratio(8).. 3.63x 1.16x 1.80x 1.07x 1.25x
Excluding deposit
interest(9)............ 14.11x 97.77x 48.98x 98.17x 138.57x
Including deposit
interest(9)............ 1.62x 1.52x 1.70x 1.46x 1.69x
Capital Ratios(6):
Leverage ratio.......... 8.80% 6.53% 8.00% 6.45% 6.26%
Average shareholders'
equity to average total
assets................. 7.56 7.14 7.40 7.11 8.61
Tier 1 risk-based
capital ratio.......... 13.09 10.07 12.82 11.64 12.07
Total risk-based capital
ratio.................. 13.70 10.38 13.35 11.84 12.58
</TABLE>
8
<PAGE>
(1) For the federal income tax years beginning after December 31, 1997 and
until December 1, 1999, Paradigm has been taxed under Subchapter S of the
Internal Revenue Code. Consequently, Paradigm made no provision for income
tax in 1998 and the first eleven months of 1999. Based upon Paradigm's
federal income tax bracket, if it were taxed as a C corporation, the
provision for income tax would have been approximately $150,000 for the six
months ended June 30, 1999, and $548,000, and $277,000 for the years ended
December 31, 1999 and 1998, respectively, which would have resulted in net
earnings of $455,000 for the six months ended June 30, 1999 and $1.3
million and $840,000 for the years ended December 31, 1999 and 1998,
respectively.
(2) Calculated by dividing total assets, less total liabilities and goodwill,
by shares outstanding at end of period.
(3) Does not include funds held in escrow from the purchase price for the
acquisition of Dayton State as a reserve for the performance of certain
loans held by Dayton State. At June 30, 2000, this amount was approximately
$524,000.
(4) All interim periods have been annualized for the calculation of ratios.
(5) Calculated by dividing total noninterest expense, excluding securities
losses and goodwill amortization, by net interest income plus noninterest
income.
(6) Based on balances at period end, except net loan charge-offs (recoveries)
to average loans and average shareholders' equity to average total assets.
(7) Nonperforming loans consist of nonaccrual loans and restructured loans.
(8) Represents the ratio of the interest payable on the subordinated debentures
to our cash available to service such interest payments based on the
current three month LIBOR plus 3.75%. The available cash includes our
earnings before taxes and the interest payments made on the currently
outstanding debentures, which debentures will be redeemed upon consummation
of this offering.
(9) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of earnings before income taxes plus interest and one-
third of rental expense. Fixed charges, excluding interest on deposits,
consist of interest on indebtedness and one-third of rental expense (which
is deemed representative of the interest factor). Fixed charges, including
interest on deposits, consist of the foregoing items plus interest on
deposits. On a pro forma basis assuming this offering is fully subscribed
and the existing subordinated debentures are retired, the ratio of earnings
to fixed charges including deposit interest for the six months ended June
30, 2000 and the year ended December 31, 1999 would have been 1.57x and
1.52x, respectively.
9
<PAGE>
Risk Factors
An investment in the trust preferred securities involves a number of risks.
You should carefully read and consider the following factors in evaluating us,
our business and the trust, in addition to the other information in this
prospectus, before you purchase the trust preferred securities offered by this
prospectus.
Because the trust will rely on the payments it receives on the debentures to
fund all payments on the trust preferred securities, and because the trust may
distribute the debentures in exchange for the trust preferred securities, you
are making an investment decision that relates to the debentures as well as the
trust preferred securities. You should carefully review the information in this
prospectus about the trust preferred securities, the debentures and the
guarantee.
Risks Related to an Investment in these Trust Preferred Securities
Payments on the trust preferred securities depend on our ability to make timely
payments on the debentures
The trust will depend solely on our payments on the debentures to pay
distributions and the liquidation amount on the trust preferred securities. If
we default on our obligation to pay the principal or interest on the
debentures, the trust will not have sufficient funds to pay distributions or
the liquidation amount on the trust preferred securities. In that case, you
will not be able to rely on the guarantee for payment of these amounts because
the guarantee only applies if the trust has sufficient funds to make
distributions on or to pay the liquidation amount of the trust preferred
securities. Instead, you or the property trustee will have to initiate a direct
action against us to enforce the property trustee's rights under the indenture
relating to the debentures.
If the banks are unable to pay sufficient dividends to us, then we likely will
be unable to make payments on the debentures, thereby leaving insufficient
funds for the trust to make payments to you on the trust preferred securities
We are a holding company and substantially all of our assets are held by our
subsidiary banks. Our ability to make payments on the debentures when due will
depend primarily on available cash resources at the holding company and
dividends from the banks. Dividend payments from the banks are subject to
regulatory limitations, generally based on capital levels and current and
retained earnings, imposed by the various regulatory agencies with authority
over the banks. The ability of the banks to pay dividends is also subject to
their profitability, financial condition and capital expenditures and other
cash flow requirements. We cannot assure you that the banks will be able to pay
dividends in the future.
The holders of our senior indebtedness will be paid before we make payments
under the debentures or the guarantee
Our obligations under the debentures and the guarantee are unsecured and
will rank junior in priority of payment to our existing and future senior and
subordinated indebtedness and senior to our capital stock. At June 30, 2000, we
had approximately $5.125 million of senior and subordinated indebtedness. We
plan to eliminate this debt with the proceeds of this offering. Nonetheless, we
may incur additional indebtedness in the future. The issuance of the debentures
and the trust preferred securities does not limit our ability to incur
additional indebtedness, including indebtedness that ranks senior or equal in
priority of payment to the debentures or the guarantee.
Because we are a holding company, the creditors of the banks will also have
priority over you in any distribution of assets in liquidation, reorganization
or otherwise. Accordingly, the debentures and the guarantee will be effectively
subordinated to all existing and future liabilities of the banks, and you
should look only to our assets for payments on the trust preferred securities
and the debentures.
10
<PAGE>
You will not receive timely distributions on the trust preferred securities if
we elect to defer payments on the debentures
We may, at one or more times, defer interest payments on the debentures for
up to 20 consecutive quarters. If we defer interest payments on the debentures,
the trust will defer distributions on the trust preferred securities during any
deferral period. Your distributions will continue to accrue and the interest on
the unpaid distributions will compound quarterly.
If we elect to defer interest payments, you will have to include interest in
your taxable income before you receive the distribution
Although you will not receive cash distributions during a deferral period,
you will be required to recognize as income for federal income tax purposes the
interest income that accrues on your proportionate share of the debentures held
by the trust. As a result, you must include this income in your gross income
for federal income tax purposes before you receive the distribution. You will
also not receive the cash related to any accrued and unpaid interest from the
trust if you dispose of the trust preferred securities before the end of any
deferral period.
The price of the trust preferred securities may not reflect unpaid interest and
you may suffer adverse tax consequences or a loss if you sell them while the
interest remains unpaid
If we exercise our right to defer interest payments on the debentures, the
price at which you could sell the trust preferred securities may decline
because the price may not reflect the value of any accrued but unpaid interest.
Accordingly, if you dispose of the trust preferred securities during an
interest deferral period, you may not receive the same return on investment as
someone who continues to hold the trust preferred securities.
During a deferral period, your tax basis in the trust preferred securities
will increase by the amount of accrued but unpaid distributions. If you sell
the trust preferred securities during a deferral period, your increased tax
basis will decrease the amount of any capital gain or increase the amount of
any capital loss you might have otherwise recognized on the sale. Except in
certain limited circumstances, a capital loss may not be used to offset
ordinary income. Accordingly, as a result of the deferral of distributions, you
may have additional ordinary income, a related tax liability, and if you sell
the trust preferred securities, a capital loss that can only be used to offset
a capital gain.
We may redeem the debentures at any time on or after , 2005 or within 90
days following the occurrence of a tax, Investment Company Act or regulatory
event
Under the following circumstances, and subject to Federal Reserve approval,
if required, we may redeem the debentures before their stated maturity:
. in whole or in part, at any time on or after , 2005; or
. in whole, but not in part, within 90 days after certain occurrences at
any time during the life of the trust. These occurrences include adverse
tax, Investment Company Act or bank regulatory developments.
You should assume that we will exercise our redemption option if we are able
to obtain capital at a lower cost than we must pay on the debentures or if it
is otherwise in our interest to redeem the debentures. If the debentures are
redeemed, the trust must redeem trust preferred securities having an aggregate
liquidation amount equal to the aggregate principal amount of debentures
redeemed, and if you reinvest your principal in another instrument you may not
be able to earn a return that is as high as you were earning on the trust
preferred securities prior to the redemption.
11
<PAGE>
The trust can distribute the debentures to you in exchange for the trust
preferred securities which may affect the price and result in a taxable event
We may dissolve the trust at any time. After satisfying its liabilities to
its creditors, the trust may distribute the debentures to you in exchange for
the trust preferred securities. We will not dissolve the trust without the
prior approval of the Federal Reserve, if then required. There is no current
public market for the debentures, and although we will use our best efforts to
have the debentures quoted on the OTC Bulletin Board if the debentures are
distributed to you, there is no guarantee that a public market will develop,
and we cannot predict the market prices for the debentures that may be
distributed. Accordingly, the debentures that you receive upon a distribution,
or the trust preferred securities you hold pending such a distribution, may
trade at a discount to the price that you paid to purchase the trust preferred
securities.
Under current federal income tax law and interpretations, a distribution of
the debentures should not be a taxable event to holders of the trust preferred
securities.
The limited covenants we made in the indenture and the trust agreement will not
necessarily protect your investment
The indenture governing the debentures and the trust agreement governing the
trust do not require us to maintain any financial ratios or specified levels of
net worth, revenues, income, cash flow or liquidity and, except during deferral
periods, do not restrict our ability to pay dividends on our common stock. As a
result, those governing documents will not protect your investment in the event
we experience significant adverse changes in our financial condition or results
of operations. In addition, neither the indenture nor the trust agreement
limits our ability or the ability of our subsidiaries to incur additional
indebtedness. You should not consider the covenants contained in these
governing documents as a significant factor in evaluating whether we will be
able to comply with our obligations under the debenture or the guarantee.
An active trading market for the trust preferred securities or the debentures
is unlikely to develop
There is currently no public market for the trust preferred securities. The
trust preferred securities have been approved for quotation on the OTC Bulletin
Board under the symbol "PARBP". The underwriters have advised us that they
intend to make a market in the trust preferred securities as long as the volume
of trading activity in the trust preferred securities 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 trust preferred securities will be
able to resell their shares at or above the offering price. Making a market
involves maintaining bid and asked quotations for the trust preferred
securities 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 trust
preferred securities at any given time, which presence is dependent upon the
individual decisions of investors over which neither we nor any market maker
has any control. If an active trading market does not develop, the market price
and liquidity of the trust preferred securities will be adversely affected.
Even if an active public market does develop, there is no guarantee that the
market price for the trust preferred securities will equal or exceed the price
you pay for the trust preferred securities.
You must rely on the property trustee to enforce your rights if there is an
event of default under the indenture
You may not be able to directly enforce your rights against us if an event
of default under the indenture occurs. If an event of default under the
indenture occurs and is continuing, this event will also be an event of default
under the trust agreement. In that case, you must rely on the enforcement by
the property trustee of its rights as holder of the debentures against us. If
the property trustee does not enforce its rights following an
12
<PAGE>
event of default you may, to the extent permitted by applicable law, take
action directly against us to enforce the property trustee's rights. If the
event of default occurs because we did not pay interest or principal on the
debentures, or if we default under the guarantee, you may proceed directly
against us. You will not be able to exercise directly any other remedies
available to the holders of the debentures unless the property trustee fails to
do so.
The trust preferred securities are not FDIC insured
Neither the Federal Deposit Insurance Corporation nor any other governmental
agency has insured the trust preferred securities.
Risks Related to an Investment in Paradigm Bancorporation, Inc.
We may have difficulty managing our growth
As part of our general strategy, we may acquire financial institutions and
branches of financial institutions that we believe provide a strategic fit with
our business, such as our recent acquisition of Dayton State and may continue
to grow internally. To the extent that we grow, we cannot assure you that we
will be able to adequately and profitably manage such growth. Our ability to
successfully integrate acquired financial institutions and branches of
financial institutions into our operations and our ability to manage internal
growth depends on our ability to:
. monitor operations;
. control costs;
. maintain positive customer relations;
. maintain regulatory compliance; and
. attract, assimilate and retain qualified personnel.
If we fail to successfully manage internal growth and integrate an acquired
financial institution's or branch's operations with our operations, we may
experience interruptions or difficulties in our business which may have a
material adverse impact on our business, financial condition or results of
operations, as well as affect our ability to operate the banks consistent with
safe and sound banking practices. Successful growth management could be more
expensive than anticipated.
Some of the other risks involved with acquisitions in general, including the
acquisition of Dayton State, include
. changes in results of operations or cash flows;
. unforeseen liabilities related to the acquired company or arising from
the acquisition;
. exposure to potential asset quality issues of the acquired company;
. adverse personnel relations;
. diversion of management time and attention;
. loss of customers; and
. deterioration in local economic conditions.
Changes in interest rates may adversely affect our results of operations
Our earnings are significantly dependent on our net interest income. Net
interest income is the difference between the interest income we earn on loans,
investments and other interest-earning assets and the interest
13
<PAGE>
expense we pay on deposits and other interest-bearing liabilities. Therefore,
any change in general market interest rates, such as a change in the monetary
policy of the Federal Reserve, can have a significant effect on our net
interest income. Our assets and liabilities may react differently to changes in
overall market rates or conditions because there may be mismatches between the
repricing or maturity characteristics of the assets and liabilities. As a
result, an increase or decrease in market interest rates could have an adverse
impact on our net interest margin and results of operations.
We cannot guarantee that any of our executive officers or key employees will be
employed with us in the future
Our success is dependent upon the continued service and skills of senior
management, such as Peter E. Fisher, our President and Chief Executive Officer,
Jay W. Porter, the President of Woodcreek, and James A. Woodall, Jr., the
President of Dayton State. Although we currently have employment/retention
agreements with Messrs. Fisher, Porter and Woodall, we cannot guarantee that
they will continue to be employed with us in the future. The loss of services
of any of these key personnel could have a negative impact on our business
because of their skills, years of industry experience and the difficulty of
promptly finding qualified replacement personnel.
We operate in a highly competitive market
Our earnings depend upon our ability to compete in our highly competitive
market areas. We compete with financial institutions and certain nonfinancial
entities that provide similar products and services. Recently enacted Federal
legislation eased burdens previously imposed on banks, securities firms,
insurance companies, credit unions and other financial service providers. As a
result, it is easier for such firms to directly compete with us. Many of our
competitors have greater financial strength, marketing capability and name
recognition than we do, and operate on a statewide or nationwide basis. In
addition, recent developments in technology and mass marketing have permitted
larger companies to market loans and other products and services more
aggressively to our small business customers. Such advantages may enable our
competitors to realize greater economies of scale and operating efficiencies
than we can. Further, some of our nonbank competitors are not subject to the
same extensive regulations that govern us and the banks.
Our business is concentrated in Southeast Texas, and a downturn in the Texas
economy may adversely affect our business
Substantially all of our business is located in Southeast Texas, and as a
result, our financial condition, results of operations and cash flows are
subject to changes in the economic condition of that area. Since the late
1980s, the Southeast Texas economy has diversified from the energy industry
into non-energy related industries. As a result, a downturn in the energy
industry is not expected to have the same impact that it did in the 1980s.
Nevertheless, a prolonged period of economic recession or other adverse
economic conditions in Texas or Southeast Texas could result in an increase in
nonpayment of loans and a decrease in collateral value, causing operating
losses, impairing liquidity and eroding capital. Conditions in the Texas and
Southeast Texas economies could deteriorate in the future, and such a
deterioration could have a material adverse effect on our financial condition
or results of operations.
Our executive officers and directors can significantly influence all matters
which require a vote of our shareholders
Our executive officers and directors beneficially own 58% of our outstanding
shares of common stock. Accordingly, these executive officers and directors
influence, to a significant extent, the outcome of all matters required to be
submitted to our shareholders for approval, including decisions relating to the
election of directors, the determination of day-to-day corporate and management
policies and other significant corporate transactions. See "Management" and
"Principal Shareholders."
14
<PAGE>
If our allowance for credit losses is not adequate to cover actual losses, our
earnings could decrease
Our policy is to maintain our allowance for credit losses at a level
adequate to absorb any inherent losses in our loan portfolio. However, our
actual loan loss could increase significantly due to changes in economic and
other conditions that are generally beyond our control. For example, a debtor
of Dayton State recently filed Chapter 11 bankruptcy. This debtor owed Dayton
State a total of $825,000 as of August 31, 2000. Management is unable to
determine the likelihood or amount of material loss from this contingency,
although management estimates its maximum exposure is $350,000. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition". Management's estimates used in determining
the allowance are based on our historical loan loss experience, industry
diversification of the commercial loan portfolio, the amount of nonperforming
loans and related collateral, volume, growth and composition of the loan
portfolio, current economic conditions that may affect the borrower's ability
to pay and the value of collateral, the evaluation of our loan portfolio
through our internal loan review process and other relevant factors. These
estimates are inherently subjective and their accuracy depends on the outcome
of future events. Ultimate losses may differ from current estimates. As a
result, such losses could exceed our current allowance estimates. We can
provide no assurance that our allowance is sufficient to cover actual credit
losses should such losses be realized.
In addition, federal and state regulators, as an integral part of their
respective supervisory functions, periodically review our allowance for credit
losses. Such regulatory agencies may require us to increase our provision for
credit losses or to recognize further loan charge-offs, based upon judgments
different from those of management. Any increase in our allowance required by
these regulatory agencies could have a negative effect on our results of
operations and financial condition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Financial Condition--
Allowance for Credit Losses."
We have a continuing need for technological change
The banking industry is undergoing rapid technological changes with frequent
introductions of new technology-driven products and services. In addition to
better serving customers, the effective use of technology increases efficiency
and enables financial institutions to reduce costs. Our future success will
depend in part upon our ability to address the needs of our customers by using
technology to provide products and services that will satisfy customer demands
for convenience as well as create additional efficiencies in our operations.
Many of our competitors have substantially greater resources to invest in
technological improvements. We cannot assure you that we will be able to
effectively implement new technology-driven products and services or be
successful in marketing such products and services to our customers.
We are subject to extensive governmental regulation
As a financial holding company, we and the banks operate in a highly
regulated environment and are subject to supervision and examination by various
federal and state regulatory agencies.
Federal and state laws and regulatory restrictions limit the manner in which
we and the banks may conduct business and obtain financing. We cannot predict
the nature, timing or effect of any changes in such laws and regulations.
Changes in applicable laws and regulations could adversely affect our business
or results of operations.
Forward-Looking Information
Statements and financial discussion and analysis contained in this
prospectus that are not historical facts are forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements describe our future plans,
strategies and expectations, are based on assumptions and involve a number of
risks and uncertainties, many of which are beyond our control.
15
<PAGE>
Some of the important factors that could cause actual results to differ
materially from the forward-looking statements include, without limitation:
. changes in interest rates and market prices, which could reduce our net
interest margins, asset valuations and expense expectations;
. changes in the levels of loan prepayments and the resulting effects on
the value of our loan portfolio;
. changes in local economic and business conditions which adversely affect
our customers and their ability to transact profitable business with us,
including the ability of our borrowers to repay their loans according to
their terms or a change in the value of the related collateral;
. increased competition for deposits and loans adversely affecting rates
and terms;
. our ability to identify suitable future acquisition candidates;
. the timing, impact and other uncertainties of our future acquisitions,
including our success or failure in the integration of their operations,
and our ability to enter new markets successfully and capitalize on
growth opportunities;
. increased credit risk in our assets and increased operating risk caused
by a material change in commercial, consumer and/or real estate loans as
a percentage of the total loan portfolio;
. the failure of assumptions underlying the establishment of and
provisions made to the allowance for credit losses;
. changes in the availability of funds resulting in increased costs or
reduced liquidity;
. increased asset levels and changes in the composition of assets and the
resulting impact on our capital levels and regulatory capital ratios;
. our ability to acquire, operate and maintain effective and cost
efficient systems without incurring unexpectedly difficult or expensive
but necessary technological changes;
. the loss of senior management or operating personnel and the potential
inability to hire qualified personnel at reasonable compensation levels;
. changes in statutes and government regulations or their interpretations
applicable to bank holding companies and our present and future banking
and other subsidiaries, including changes in tax requirements and tax
rates; and
. other factors discussed in the "Risk Factors" section of this
prospectus.
We undertake no obligation to publicly update or otherwise revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions,
the events discussed in any forward-looking statements in this prospectus might
not occur.
16
<PAGE>
USE OF PROCEEDS
The trust will invest all the proceeds from the sale of the trust preferred
securities in the debentures. We will use the net proceeds we receive from the
sale of the debentures, which we estimate to be approximately $9.45 million
after deducting the underwriters' fee of approximately $350,000 and expenses of
approximately $200,000, to redeem all $5.125 million of our outstanding 10.375%
subordinated debentures underlying the trust preferred securities held by a
third party. The remainder of the net proceeds will be used for general
corporate purposes, including potential acquisitions. The proceeds from the
prior sale of our outstanding trust preferred securities were used to fund a
portion of the purchase price of Dayton State.
ACCOUNTING TREATMENT
The trust will be treated, for financial reporting purposes, as our
subsidiary and, accordingly, the accounts of the trust will be included in our
consolidated financial statements. The trust preferred securities will be
presented as a separate line item in our consolidated balance sheet under the
caption "Company Obligated Mandatorily Redeemable Trust Preferred Securities of
Subsidiary Trust," and appropriate disclosures about the trust preferred
securities, the guarantee and the debentures will be included in the notes to
consolidated financial statements. For financial reporting purposes, we will
record distributions payable on the trust preferred securities as non-interest
expense related to minority interest in our Consolidated Statements of Income.
Our future reports filed under the Securities Exchange Act of 1934, as
amended, will include a footnote to the consolidated financial statements
stating that:
. the trust is wholly-owned;
. the sole assets of the trust are the debentures and specifying the
debentures' principal amount, interest rate and maturity date; and
. our obligations described in this prospectus, in the aggregate,
constitute a full, irrevocable and unconditional guarantee on a
subordinated basis by us of the obligations of the trust under the trust
preferred securities.
17
<PAGE>
CAPITALIZATION
The following table sets forth our indebtedness and capitalization as of
June 30, 2000, on a historical basis and as adjusted for the offering and the
application of the estimated net proceeds. This data should be read in
conjunction with the "Selected Consolidated Financial Data" and the
consolidated financial statements and notes thereto, included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
June 30, 2000
--------------------
As Adjusted
for the
Actual Offering
------- -----------
(Dollars in
thousands)
<S> <C> <C>
Indebtedness:
Short-term borrowings.................................... $ 50 $ 50
======= =======
Company obligated mandatorily redeemable trust preferred
securities of subsidiary trust.......................... $ 5,125 $10,000
======= =======
Shareholders' equity:
Preferred Stock, $1.00 par value; 10,000,000 shares
authorized; one share issued and outstanding(1)......... $ -- $ --
Common Stock, $1.00 par value; 25,000,000 shares
authorized; 2,375,000 shares issued and outstanding..... 2,375 2,375
Capital surplus.......................................... 10,793 10,793
Retained earnings........................................ 3,125 3,125
Accumulated other comprehensive income................... (191) (191)
------- -------
Total shareholders' equity........................... $16,102 $16,102
======= =======
Capital(2):
Dollar basis:
Total risk-based capital............................... $18,372 $23,247
Tier 1 risk-based capital.............................. 17,543 19,018
Leverage capital....................................... 17,543 19,018
Percentage basis:
Total risk-based capital............................... 13.70% 17.34%
Tier 1 risk-based capital.............................. 13.09% 14.19%
Leverage capital (to adjusted total assets)............ 8.80% 9.32%
Debt coverage and earnings to fixed charges ratios:
Debt coverage ratio.................................... 6.18x 3.63x
Excluding deposit interest............................. 14.11x 8.22x
Including deposit interest............................. 1.62x 1.57x
</TABLE>
--------
(1) There is one share of preferred stock outstanding with a liquidation value
of $10.00.
(2) Federal Reserve guidelines for calculation of Tier 1 capital limit the
aggregate amount of trust preferred securities, including securities
similar to the trust preferred securities, which can be included in Tier 1
capital to 25% of total core capital elements. As of June 30, 2000, after
giving effect to the redemption of the $5.125 million of outstanding trust
preferred securities, which will occur upon consummation of the offering,
$6.6 million of the aggregate amount of trust preferred securities would
have qualified as Tier 1 capital, and the remaining amount would have
qualified as Tier 2 capital. Any future increases in other elements of our
Tier 1 capital, including retained earnings, will allow us to include
greater portions of the trust preferred securities in Tier 1 capital.
18
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
The following unaudited pro forma combined statement of income for the year
ended December 31, 1999 combines our historical consolidated statements of
income with the historical statements of income of Dayton State and is intended
to give you a better picture of what the companies might have earned as a
combined entity. The pro forma income statement assumes that the Dayton State
acquisition was consummated at January 1, 1999. The companies may have
performed differently if they had been combined.
The unaudited pro forma statement of income is presented for illustrative
purposes only. You should not rely on the pro forma information as being
indicative of the results of future operations of the combined entity or of the
actual results that would have been achieved had the acquisition been
consummated as of the dates indicated above.
<TABLE>
<CAPTION>
Pro Forma
Adjustments Pro
Dayton ----------------- Forma
Paradigm(1) State(2) Debits Credits Combined
----------- -------- ------ ------- --------
(Dollars in thousands, except per share
data)
<S> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans.. $5,329 $4,023 $9,352
Interest on securities...... 1,692 1,735 3,427
Interest on federal funds
sold....................... 195 338 533
------ ------ ------
Total interest income..... 7,216 6,096 13,312
Interest expense:
Interest on deposits and
other borrowings........... 2,419 1,841 4,260
Net interest income........... 4,797 4,255 9,052
Provision for credit
losses..................... 289 100 389
------ ------ ------
Net interest income after
provision for credit losses.. 4,508 4,155 8,663
Noninterest income:
Customer service fees....... 1,807 1,142 2,949
Other noninterest income.... 319 64 383
------ ------ ------
Total noninterest income.. 2,126 1,206 3,332
Noninterest expense:
Salaries and employee
benefits................... 2,610 2,288 4,898
Net occupancy expense....... 715 258 100 (a) 1,073
Other noninterest expense... 1,687 1,422 635 (b) 3,744
------ ------ --- ------
Total noninterest
expense.................. 5,012 3,968 735 9,715
------ ------ --- ------
Income before federal income
taxes........................ 1,622 1,393 2,280
Provision for federal income
taxes...................... 36 436 316 (c) 788
------ ------ ------
Net income................ $1,586 $ 952 $1,492
====== ====== === ======
Basic and diluted earnings per
share:
Net income per share........ $ 1.01 $ 0.63
Average shares outstanding
(in thousands)............. 1,576 2,375
Adjustment for 1999 income
tax.......................... $ 512
Net income adjusted for
1999 income tax.......... $1,074
Net income per share
adjusted for 1999 income
tax...................... $ 0.68
</TABLE>
--------
(1) Represents data for Paradigm for the 12 months ended December 31, 1999
including one month of data for Dayton State.
(2) Represents data for Dayton State for the 11 months ended November 30, 1999.
(a) This adjustment represents the added depreciation expense which would have
been incurred as a result of writing up the assets of Dayton State.
(b) This adjustment represents $487,000 of interest that would have been paid
on the debentures supporting the $5.125 million of trust preferred
securities and the additional goodwill amortization of $148,000.
(c) This adjustment represents the additional income tax expense at the
effective rate of 34% as if Paradigm had been a C corporation the entire
year, less the benefit attributable to the additional interest and
depreciation expense.
19
<PAGE>
PARADIGM BANCORPORATION, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for, and as of the end
of, each of the years in the two-year period ended December 31, 1999 are
derived from our consolidated financial statements. The consolidated financial
statements as of December 31, 1999 and 1998 and for each of the years in the
two-year period ended December 31, 1999, and the report thereon of Harper and
Pearson Company, P.C., are included elsewhere in this prospectus. The
consolidated financial data as of and for each of the six months ended June 30,
2000 and 1999 are derived from unaudited consolidated financial statements
included elsewhere in this prospectus, and, in the opinion of management,
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly our financial position and results of operations as
of such dates and for such periods. The results of operations for past periods
and for the six months ended June 30, 2000 are not necessarily indicative of
the results of operations that may be expected for the year ended December 31,
2000, or for any future periods.
<TABLE>
<CAPTION>
As of and for the
Six Months Ended As of and for the Years
June 30, Ended December 31,
-------------------- ---------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- -------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Interest income......... $ 7,588 $ 3,466 $ 7,813 $ 6,325 $ 4,758
Interest expense........ 2,336 1,138 2,597 2,385 1,871
-------- -------- -------- -------- -------
Net interest income.... 5,252 2,328 5,216 3,940 2,887
Provision for credit
losses................. 270 90 309 76 40
-------- -------- -------- -------- -------
Net interest income
after provision for
credit losses......... 4,982 2,238 4,907 3,864 2,847
Noninterest income...... 1,672 860 2,278 1,446 1,125
Noninterest expense..... 5,028 2,493 5,357 4,193 2,672
-------- -------- -------- -------- -------
Earnings before taxes.. 1,626 605 1,828 1,117 1,300
Provision for income tax
expense................ 544 --(1) 104(1) --(1) 330
-------- -------- -------- -------- -------
Net earnings........... $ 1,082 $ 605(1) $ 1,724(1) $ 1,117(1) $ 970
======== ======== ======== ======== =======
Per Share Data:
Basic earnings per
share.................. $ 0.72 $ 0.40 $ 1.16(1) $ 0.74(1) $ 0.75
Book value.............. 6.78 5.16 6.42 5.01 3.89
Tangible book value(2).. 5.15 4.68 4.77 4.51 3.28
Cash dividends.......... 0.10 0.23 0.48 0.14 0.26
Dividend payout ratio... 21.9% 57.0% 41.3%(1) 18.7%(1) 34.8%
Weighted average shares
outstanding (basic).... 2,375 1,500 1,576 1,472 1,499
Weighted average shares
outstanding (diluted).. 2,375 1,500 1,576 1,472 1,499
Shares outstanding at
end of period.......... 2,375 1,500 2,375 1,500 1,287
Balance Sheet Data:
Total assets............ $203,966 $108,033 $210,847 $104,975 $93,387
Securities.............. 48,479 25,471 51,596 24,511 22,211
Loans................... 124,235 62,188 111,244 49,368 37,958
Allowance for credit
losses................. 829(3) 217 679(3) 113 247
Goodwill................ 3,876 728 3,928 755 794
Total deposits.......... 179,686 98,306 182,042 96,802 86,189
Borrowings and notes
payable................ 50 1,305 11,778 -- --
Trust preferred
securities............. 5,125 -- 5,125 -- --
Total shareholders'
equity................. 16,102 7,747 15,248 7,524 5,006
Average Balance Sheet
Data:
Total assets............ $207,407 $105,942 $116,104 $ 96,075 $72,110
Securities.............. 54,313 26,049 25,028 19,353 22,090
Loans................... 117,325 54,742 62,483 43,411 29,625
Allowance for credit
losses................. 755(3) 149 426(3) 202 164
Total deposits.......... 180,864 97,631 105,408 88,348 65,495
Total shareholders'
equity................. 15,675 7,566 8,593 6,828 6,202
Performance Ratios(4):
Return on average
assets................. 1.56% 1.15% 1.57% 1.16% 1.35%
Return on average
equity................. 20.74 16.13 21.27 16.36 15.64
Net interest margin..... 5.90 5.05 5.27 4.82 4.67
Efficiency ratio(5)..... 71.04 81.02 70.59 79.26 67.60
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
As of and for the As of and for the
Six Months Ended Years Ended December
June 30, 31,
-------------------- ------------------------
2000 1999 1999 1998 1997
-------- -------- ------ ------ ------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Asset Quality Ratios(6):
Nonperforming assets to total
loans and other real estate.. 1.72% 1.19% 0.91% 0.70% 2.60%
Net loan charge-offs to
average loans................ 0.10 -- 0.17 0.47 0.08
Allowance for credit losses to
total loans.................. 0.67(3) 0.35 0.61(3) 0.23 0.65
Allowance for credit losses to
nonperforming loans(7)....... 51.62(3) 48.54 129.33(3) 100.00 94.63
Debt Coverage and Earnings to
Fixed Charges Ratios
Debt coverage ratio(8)........ 3.63x 1.16x 1.80x 1.07x 1.25x
Excluding deposit
interest(9).................. 14.11x 97.77x 48.98x 98.17x 138.57x
Including deposit
interest(9).................. 1.62x 1.52x 1.70x 1.46x 1.69x
Capital Ratios (Company)(6):
Leverage ratio................ 8.80% 6.53% 8.00% 6.45% 6.26%
Average shareholders' equity
to average total assets...... 7.56 7.14 7.40 7.11 8.61
Tier 1 risk-based capital
ratio........................ 13.09 10.07 12.82 11.64 12.07
Total risk-based capital
ratio........................ 13.70 10.38 13.35 11.84 12.58
</TABLE>
--------
(1) For the federal income tax years beginning after December 31, 1997 and
until December 1, 1999, Paradigm has been taxed under Subchapter S of the
Internal Revenue Code. Consequently, there is no provision for income tax
in 1998 and the first eleven months of 1999. Based upon Paradigm's federal
income tax bracket if it were taxed as a C corporation, the provision for
income tax would have been approximately $150,000 for the six months ended
June 30, 1999, and $548,000 and $277,000 for the years ended December 31,
1999 and 1998, respectively, which would have resulted in net earnings of
$455,000 for the six months ended June 30, 1999 and $1.3 million and
$840,000 for the years ended December 31, 1999 and 1998, respectively.
(2) Calculated by dividing total assets, less total liabilities and goodwill,
by shares outstanding at end of period.
(3) Does not include funds held in escrow from the purchase price for the
acquisition of Dayton State as a reserve for the performance of certain
loans held by Dayton State. At June 30, 2000, this amount was approximately
$524,000.
(4) All interim periods have been annualized for the calculation of ratios.
(5) Calculated by dividing total noninterest expense, excluding securities
losses and goodwill amortization, by net interest income plus noninterest
income.
(6) Based on balances at period end, except net loan charge-offs (recoveries)
to average loans and average shareholders' equity to average total assets.
(7) Nonperforming loans consist of nonaccrual loans and restructured loans.
(8) Represents the ratio of the interest payable on the subordinated debentures
to our cash available to service such interest payments based on the
current three month LIBOR plus 3.75%. The available cash includes our
earnings before taxes and the interest payments made on the currently
outstanding debentures, which debentures will be redeemed upon consummation
of this offering.
(9) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of earnings before income taxes plus interest and one-
third of rental expense. Fixed charges, excluding interest on deposits,
consist of interest on indebtedness and one-third of rental expense (which
is deemed representative of the interest factor). Fixed charges, including
interest on deposits, consist of the foregoing items plus interest on
deposits. On a pro forma basis assuming this offering is fully subscribed
and the existing subordinated debentures are retired, the ratio of earning
to fixed charges including deposit interest for the six months ended June
30, 2000 and the year ended December 31, 1999 would have been 1.57x and
1.52x, respectively.
21
<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 analyzes the major elements of our balance sheets and statements of
income. This section should be read in conjunction with our financial
statements and accompanying notes and other detailed information appearing
elsewhere in this prospectus.
For the Six Months Ended June 30, 2000 and 1999
Overview
We elected to be taxed under Subchapter S of the Internal Revenue Code for
the tax year beginning January 1, 1998 and terminated our Subchapter S election
on December 1, 1999. If we had been a Subchapter C corporation for the six
months ended June 30, 1999, given our municipal bond portfolio and based on
effective tax rates in prior years, our effective tax rate would have been
approximately 24.8%. Accordingly, certain information as noted herein has been
adjusted to reflect this tax rate.
Earnings increased for the six month period ended June 30, 2000 due to an
increase in loan volume and the acquisition of Dayton State in the fourth
quarter of 1999, which was accounted for under the purchase method of
accounting. For the six months ended June 30, 2000 our net income was $1.1
million ($0.46 per common share on a basic and diluted basis) compared with an
income tax adjusted $455,000 ($0.30 per common share on a basic and diluted
basis) for the same period in 1999, an increase of $625,000, or 137.4%. We
estimate that approximately 30% of this increase was attributable to internal
growth. We posted returns on average common equity of 13.81% and 12.02%
(adjusted for an income tax) and returns on average assets of 1.04% and 0.86%
(adjusted for an income tax) for the six months ended June 30, 2000 and 1999,
respectively.
Earnings growth was the result of, among other things, the acquisition of
Dayton State. We were able to generate internal loan growth through our
"Financial Center President" approach to branching, in which each branch is
administered by a Financial Center President with knowledge of the local
community. In 1999, we completed the acquisition of Dayton State, while
continuing to focus on asset generation through the Financial Center
Presidents.
Total assets were $204.0 million at June 30, 2000 compared with $210.8
million at December 31, 1999. Total loans increased to $124.2 million at June
30, 2000 from $111.2 million at December 31, 1999, an increase of $13.0
million, or 11.7%. Nonperforming loans were $1.6 million at June 30, 2000
compared with $525,000 at December 31, 1999. Our allowance for credit losses
was $829,000 at June 30, 2000. Total deposits were $179.6 million at June 30,
2000 compared with $182.0 million at December 31, 1999, a decrease of $2.4
million, or 1.3%. Shareholders' equity increased $854,000, or 5.6%, to $16.1
million at June 30, 2000 compared with $15.2 million at December 31, 1999. A
substantial portion of the increase in assets and earnings is due to our
acquisition of Dayton State, which had total assets of $92 million at the time
of the acquisition.
Results of Operations
Net Interest Income
Net interest income is 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 our earnings. Interest
rate fluctuations and changes in the amount and type of earning assets and
liabilities combine to affect net interest income. Our net interest income is
affected by changes in the amount and mix of interest-earning assets and
interest-bearing liabilities, referred to as a volume change. It is also
affected by changes in yields earned on interest-earning assets and rates paid
on interest-bearing deposits and other borrowed funds, referred to as a rate
change.
22
<PAGE>
Net interest income increased $3.0 million, or 130.4% to $5.3 million for
the six months ended June 30, 2000 from $2.3 million for the same period in
1999. This increase was primarily due to the acquisition of Dayton State and
higher average interest-earning assets and higher average loans. The net
interest margin on a tax-equivalent basis increased to 6.01% from 5.26% for the
same periods, due to a $85.3 million increase in average interest earning
assets and a 100 basis point increase in the yield on interest earning assets.
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 noninterest-earning assets.
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------
2000 1999
---------------------------- ----------------------------
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate(4) Balance Paid Rate(4)
----------- -------- ------- ----------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans.................. $117,325 $5,756 9.81% $ 54,742 $2,422 8.92%
Securities(1).......... 54,313 1,642 6.05 35,277 976 5.58
Federal funds sold and
other temporary
investments........... 6,544 190 5.81 2,887 68 4.75
-------- ------ -------- ------
Total interest-earning
assets................ 178,182 7,588 8.52% 92,906 3,466 7.52%
------ ------
Less allowance for
credit losses......... (755) (149)
-------- --------
Total interest-earning
assets, net of
allowance............. 177,427 92,757
Noninterest-earning
assets................. 29,980 13,185
-------- --------
Total assets........... $207,407 $105,942
======== ========
Liabilities and
shareholders' equity
Interest-bearing
liabilities:
Interest-bearing
demand deposits....... $ 17,617 $ 142 1.60% $ 6,753 $ 36 1.08%
Savings and money
market accounts....... 42,702 764 3.56 24,552 358 2.94
Certificates of
deposit............... 54,324 1,416 5.21 32,107 743 4.66
Federal funds
purchased and other
borrowings............ 457 14 6.13 74 2 5.45
-------- ------ -------- ------
Total interest-
bearing
liabilities......... 115,100 2,336 4.06% 63,486 1,139 3.62%
-------- ------ -------- ------
Noninterest-bearing
liabilities:
Noninterest-bearing
demand deposits....... 66,221 34,219
Other liabilities...... 5,286 671
-------- --------
Total liabilities.... 186,607 98,376
-------- --------
Company obligated
mandatorily redeemable
trust preferred
securities............. 5,125 --
Shareholders' equity.... 15,675 7,566
-------- --------
Total liabilities and
shareholders'
equity.............. $207,407 $105,942
======== ========
Net interest rate
spread................. 4.46% 3.90%
Net interest income and
margin(2).............. $5,252 5.90% $2,327 5.05%
====== ======
Net interest income and
margin (tax-equivalent
basis)(3).............. $5,354 6.01% $2,423 5.26%
====== ======
</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) To make pretax 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%.
(4) Annualized.
23
<PAGE>
The following table 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 identifies the change related to outstanding
balances (volume) and the change due to interest rate fluctuations (rate) for
the periods indicated. For purposes of this table, changes attributable to both
rate and volume which cannot be segregated have been allocated to rate.
<TABLE>
<CAPTION>
Six Months Ended
June 30, 2000 vs.
1999
------------------
Increase
(Decrease)
Due to
-----------
Volume Rate Total
------ ---- ------
(Dollars in
thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans....................................................... $3,077 $257 $3,334
Securities.................................................. 583 83 666
Federal funds sold and other temporary investments.......... 106 16 122
------ ---- ------
Total increase in interest income......................... $3,766 $356 $4,122
====== ==== ======
Interest-bearing liabilities:
Interest-bearing demand deposits............................ $ 88 $ 18 $ 106
Savings and money market accounts........................... 330 76 406
Certificates of deposit..................................... 585 88 673
Federal funds purchased and other borrowings................ 12 -- 12
------ ---- ------
Total increase in interest expense........................ 1,015 182 1,197
------ ---- ------
Increase in net interest income............................. $2,751 $174 $2,925
====== ==== ======
</TABLE>
Provision for Credit Losses
Our provision for credit losses is established through charges to income to
bring the total allowance for credit losses to a level deemed appropriate by
our management based on such factors as our historical loan loss experience,
industry diversification of our commercial loan portfolio, the amount of
nonperforming loans and related collateral, the volume, growth and composition
of our loan portfolio, current economic conditions that may affect the
borrower's ability to pay and the value of collateral, the evaluation of our
loan portfolio through our internal loan review process and other relevant
factors. The provision for credit losses for the six months ended June 30, 2000
increased to $270,000 from $90,000 for the same period in 1999. The $180,000
increase was primarily due to the increase in loans from the acquisition of
Dayton State. The remaining increase is due to loan growth at Woodcreek. We may
increase our provision for credit losses based on management's assessment of
the potential outcome of debtor bankruptcy at Dayton State which is discussed
under "--Nonperforming Assets."
Noninterest Income
Our primary sources of noninterest income are service charges on deposit
accounts and other banking service fees. Noninterest income increased $812,000,
or 94.4%, to $1.7 million for the six month period ended June 30, 2000 from
$860,000 for the same period in 1999. The increase in noninterest income was
principally due to the acquisition of Dayton State.
24
<PAGE>
The following table presents, for the periods indicated, the major
categories of noninterest income:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
2000 1999
--------- --------
(Dollars in
thousands)
<S> <C> <C>
Service charges on deposit accounts....................... $ 1,630 $ 632
Other noninterest income.................................. 42 228
--------- -------
Total noninterest income................................ $ 1,672 $ 860
========= =======
</TABLE>
Noninterest Expense
Noninterest expense totaled $5.0 million for the six months ended June 30,
2000, an increase of $2.5 million, or 100.0%, from $2.5 million for the same
period in 1999. The increase primarily reflected additional expenses resulting
from the acquisition of Dayton State.
The following table presents, for the periods indicated, the major
categories of noninterest expense:
<TABLE>
<CAPTION>
Six Months
Ended
June 30,
-------------
2000 1999
------ ------
(Dollars in
thousands)
<S> <C> <C>
Salaries and employee benefits............................... $2,454 $1,223
Non-staff expenses:
Net bank premises expenses................................. 380 171
Equipment rentals, depreciation and maintenance............ 371 194
Professional fees.......................................... 512 657
Goodwill amortization...................................... 110 27
Minority interest (trust preferred)........................ 263 --
Other...................................................... 938 221
------ ------
Total noninterest expense................................ $5,028 $2,493
====== ======
</TABLE>
Salaries and employee benefits for the six month period ended June 30, 2000
totaled $2.5 million, an increase of $1.2 million, or 100.7%, from $1.2 million
for the six month period ending June 30, 1999. The change was due primarily to
an increase in the number of employees due to the acquisition of Dayton State
and normal annual employee salary increases.
Non-staff expenses increased $1.3 million, or 100.0%, to $2.6 million for
the six month period ended June 30, 2000 from $1.3 million for the same period
in 1999. The increase was principally due to the acquisition of Dayton State
and the payment of minority interest expense on company obligated mandatorily
redeemable trust preferred securities of a subsidiary trust.
Income Taxes
Income tax expense includes the regular federal income tax at the effective
rate. The amount of federal income tax expense is influenced by the amount of
taxable income, the amount of tax-exempt income, the amount of nondeductible
interest expense and the amount of other nondeductible expenses. Income tax
expense increased to $544,000 for the six months ended June 30, 2000 from zero
for the same period in 1999. We terminated our Subchapter S Corporation status
in December 1999. Since we were taxed under Subchapter S of the Internal
Revenue Code during the first six months of 1999, there was no federal or state
income tax in the first six months of 1999. Had we been taxed under Chapter C
of the Internal Revenue Code in the first half of 1999, as we were in 2000, the
federal income tax expense would have been approximately $150,000 for the
25
<PAGE>
first six months of 1999 and the effective tax rate would have been
approximately 24.8%. The actual effective tax rates in the first six months of
2000 and 1999 were 33.5% and zero, respectively.
Impact of Inflation
The effects of inflation on the local economy and on our operating results
have been relatively modest for the past several years. Since substantially all
of our 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. We try to control the impact of interest rate
fluctuations by managing the relationship between our interest rate sensitive
assets and liabilities. See "--Financial Condition--Interest Rate Sensitivity
and Liquidity."
Financial Condition
Loan Portfolio
Total loans were $124.2 million at June 30, 2000, an increase of $13.0
million, or 11.69%, from $111.2 million at December 31, 1999. Real estate loans
increased $8.4 million and consumer loans increased $7.0 million. Period end
loans comprised 69.7% of average earning assets at June 30, 2000 compared with
112.0% at December 31, 1999. The ratio of period end loans to average assets
was greater at December 31, 1999 due to the acquisition of Dayton State on
December 10, 1999.
The following table summarizes our loan portfolio by type of loan as of June
30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
December 31,
June 30, 2000 1999
---------------- ----------------
Amount Percent Amount Percent
-------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial and industrial............... $ 29,308 23.25% $ 31,798 28.23%
Real estate:
Construction and land development..... 11,525 9.14 10,365 9.20
1-4 family residential................ 16,881 13.39 15,922 14.13
Home equity/junior liens.............. 686 0.54 627 0.56
Commercial mortgages.................. 30,355 24.08 23,143 20.54
Farmland.............................. 2,932 2.33 3,881 3.45
Multifamily residential............... 1,659 1.32 1,703 1.51
Agriculture............................. 7,701 6.11 7,270 6.45
Consumer................................ 25,005 19.84 17,939 15.93
-------- ------ -------- ------
Total loans(1)...................... $126,052 100.00% $112,648 100.00%
======== ====== ======== ======
</TABLE>
--------
(1) Includes unearned income of $1.8 million for June 30, 2000 and $1.4 million
for December 31, 1999.
Our lending focus is on commercial mortgages, small and medium-sized
business and consumer loans. We offer 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, is 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 us and are typically on a balloon structure.
Loans from $150,000 to $300,000 are evaluated and acted upon by the Officers
Loan Committee, which meets weekly. Loans above that amount must be approved by
the Directors Loan Committee, which also meets weekly.
26
<PAGE>
Generally, our commercial loans are made in our primary market area and are
underwritten on the basis of the borrower's ability to service such debt from
income. We usually take as collateral a lien on any available real estate,
equipment or other assets owned by the borrower and obtain a personal guaranty
of the borrower. Working capital loans are primarily collateralized by short-
term assets whereas term loans are usually collateralized by long-term assets.
A portion of our lending activity is the origination of one to four-family
residential mortgage loans collateralized by owner-occupied properties located
in our market areas. We offer a variety of mortgage loan products which
generally are amortized over 5 to 25 years, with maturities typically not
exceeding five years. Loans collateralized by one to four-family residential
real estate generally have been originated in amounts of no more than 85% of
appraised value or have mortgage insurance. We require mortgage title insurance
and hazard insurance.
We make commercial mortgage loans to finance the purchase of real property
which generally consists of real estate with completed structures. Our
commercial mortgage loans are secured by first liens on real estate, typically
have variable interest rates and amortize over a 10 to 15 year period, with
maturities of 3 to 5 years. In underwriting commercial mortgage loans, we
consider 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.
We make 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. We conduct
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 our construction lending activities. In
keeping with the community-oriented nature of our customer base, we provide
construction and permanent financing for churches located in our market area.
Consumer loans made by us include direct "A" credit automobile loans,
recreational vehicle loans, boat loans, home improvement loans, personal loans
(collateralized and uncollateralized) and deposit account collateralized loans.
The terms of these loans typically range from 12 to 120 months and vary based
upon the nature of collateral and size of loan.
The contractual maturity ranges of the commercial, industrial, construction
and land development loan portfolios and the amount of such loans with
predetermined interest rates and floating rates in each maturity range as of
June 30, 2000 are summarized in the following table:
<TABLE>
<CAPTION>
June 30, 2000
------------------------------
After
One
One Through After
Year or Five Five
Less Years Years Total
------- ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial, industrial, construction and
land development.......................... $33,674 $6,030 $1,129 $40,833
======= ====== ====== =======
Loans with a predetermined interest rate... $ 8,143 $6,030 $1,129 $15,302
Loans with a floating interest rate........ 25,531 -- -- 25,531
------- ------ ------ -------
Total.................................... $33,674 $6,030 $1,129 $40,833
======= ====== ====== =======
</TABLE>
We have 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
Disclosures. Under SFAS No. 114, as amended, a loan is considered impaired
based on current information and events, if it is probable that we will be
unable to collect the scheduled
27
<PAGE>
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 either the
present value of expected future cash flows discounted at the loan's effective
interest rate or the loan's observable market price or 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 effect on our financial statements.
Nonperforming Assets
We follow several procedures to help us maintain the overall quality of our
loan portfolio. We have established underwriting guidelines for our officers
and we monitor our delinquency levels for any adverse trends. Additionally, we
hire a third party to perform a loan review at the banks to increase the
consistency of asset quality. There can be no assurance, however, that our loan
portfolio will not become subject to increasing pressures from deteriorating
borrower credit due to general economic conditions.
We record 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. We require 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 for possible write-
downs or appropriate additions to the allowance for loan losses. We usually
place a loan on non-accrual status and cease 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. We generally charge-off loans
before attaining non-accrual status. As of June 30, 2000, non-performing assets
were $2.1 million.
In September 2000, a significant debtor to Dayton State filed a Chapter 11
bankruptcy petition. This debtor owed Dayton State a total of $825,000 on two
loans outstanding at August 31, 2000. Of the outstanding balances on these
loans, $429,000 was collateralized by real estate with an estimated market
value of $560,000. The remaining balance was further collateralized by accounts
receivable, which may or may not help reduce the outstanding loan balances. The
potential loss on this contingency is further mitigated by the specific escrow
reserve of $45,000 for these loans from the purchase price of Dayton State.
Management is unable to determine the likelihood or amount of material loss
from this contingency. Management estimates that the possible loss could range
from zero to $350,000, depending on the results of the bankruptcy proceedings
and the realizable value of the collateral on the loan.
The following table presents information regarding non-performing assets at
the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
(Dollars in
thousands)
<S> <C> <C>
Nonaccrual loans..................................... $1,532 $ 473
90 days or more past due............................. 74 52
Other real estate.................................... 534 542
------ ------
Total nonperforming assets......................... $2,140 $1,067
====== ======
Nonperforming assets to total loans and other real
estate.............................................. 1.72% 0.91%
</TABLE>
The increase in nonaccrual loans for the six months ended June 30, 2000 is
primarily the result of two loans to one borrower that were transferred to
nonaccrual status. These loans are currently subject to the bankruptcy
proceeding discussed above.
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 our loan portfolio. Based on an evaluation of the loan
portfolio, management
28
<PAGE>
presents a monthly review of the allowance for credit losses to each 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 our
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 our loan
portfolio by the loan review function and the annual examination of our
financial statements by our independent auditors. Charge-offs are made when
loans are deemed to be uncollectible.
We follow a loan review program to evaluate the credit risk in the loan
portfolio. Through the loan review process, we maintain 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, we maintain a separate "watch list" which further aids us 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 as compared with those of a
satisfactory credit. We review these loans to assist in assessing the adequacy
of the allowance for credit losses.
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. We establish specific
allowances for loans which we believe require reserves greater than those
allocated according to their classification or delinquent status. An
unallocated allowance is also established based on our historical charge-off
experience. We then charge to operations a provision for loan losses to
maintain the allowance for credit losses at an adequate level determined by the
foregoing methodology.
For the six months ended June 30, 2000, net charge-offs totaled $120,000, or
0.10%, of average loans outstanding for the period, compared with no net
charge-offs for the six months ended June 30, 1999. During the six months ended
June 30, 2000, we recorded a provision for credit and overdraft losses of
$270,000 compared with $104,000 for the same period in 1999. At June 30, 2000,
the allowance totaled $829,000, or 0.67% of total loans, compared with
$217,000, or 0.35% of total loans, at June 30, 1999.
In connection with the acquisition of Dayton State, we withheld
approximately $524,000 of the purchase price as a reserve for the performance
of 29 specified loans. A specific amount of the aggregate reserve is allocated
to each loan. This reserve is held in escrow in an account at Dayton State.
Pursuant to the escrow agreement, semiannual disbursements of the reserve are
made to the former shareholders of Dayton State only if a specific loan is
paid-off or it is deemed satisfactory by us. The escrow arrangement will
terminate about December 10, 2001, two years from the closing date. At that
time, funds remaining in the escrow account will be transferred to Dayton
State's loan loss reserve. As of June 30, 2000, there have been no
disbursements from the escrow account.
29
<PAGE>
The following table presents, for the periods indicated, an analysis of the
allowance for credit losses and other related data:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------
2000 1999
-------- -------
(Dollars in
thousands)
<S> <C> <C>
Average loans outstanding................................. $117,325 $54,742
======== =======
Gross loans outstanding at end of period.................. $124,235 $62,188
======== =======
Allowance for credit losses at beginning of period........ $ 679 $ 113
Provision for credit losses............................... 270 104
Charge-offs:
Commercial and industrial............................... 31 1
Real estate and agricultural............................ -- --
Consumer................................................ 156 3
Recoveries:
Commercial and industrial............................... (13) --
Real estate and agricultural............................ (2) --
Consumer................................................ (52) (4)
-------- -------
Net charge-offs........................................... 120 --
-------- -------
Allowance for credit losses at end of period.............. $ 829 $ 217
======== =======
Ratio of allowance to end of period loans................. 0.67% 0.35%
Ratio of net charge-offs to average loans................. 0.10 --
Ratio of allowance to end of period
nonperforming loans...................................... 51.62 48.54
</TABLE>
The following table shows the allocation of the allowance for credit losses
among various categories of loans and certain other information at June 30,
2000. 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, 2000
-----------------
Percent of
Loans to
Total
Amount Loans
------ ----------
(Dollars in
thousands)
<S> <C> <C>
Balance of allowance for credit losses applicable to:
Commercial and industrial............................... $276 23.25%
Real estate............................................. 298 50.80
Agriculture............................................. 38 6.11
Consumer................................................ 102 19.84
Unallocated............................................. 115 --
---- ------
Total allowance for credit losses..................... $829 100.00%
==== ======
</TABLE>
When management can identify specific loans or categories of loans requiring
specific amounts of reserve, allocations are assigned to those categories.
Federal and state bank regulators also require that a bank maintain a reserve
that is sufficient to absorb an estimated amount of unidentified potential
losses based on management's perception of economic conditions, loan portfolio
growth, historical charge-off experience and exposure concentrations. Our
recent rate of charge-offs is low due in part to an extremely beneficial
economic environment. Our management, along with a number of economists, has
perceived during the past year an
30
<PAGE>
increasing instability in the national and Southeast Texas economies and a
worldwide economic slowdown that could contribute to job losses and otherwise
adversely affect a broad variety of business sectors. In addition, as we have
grown, our aggregate loan portfolio has increased. By virtue of our increased
capital levels, we are able to make larger loans, thereby increasing the
possibility of one bad loan having a larger adverse impact. Accordingly,
management believes that the maintenance of an unallocated reserve in the
current amount is prudent and consistent with regulatory requirements.
We believe that the allowance for credit losses at June 30, 2000 is adequate
to cover losses inherent in the portfolio as of such date. There can be no
assurance, however, that we will not sustain losses in future periods which
could be substantial in relation to the size of the allowance at June 30, 2000.
For example, a debtor of Dayton State recently filed Chapter 11 bankruptcy.
This debtor owed Dayton State a total of $825,000 as of August 31, 2000.
Management is unable to determine the likelihood or amount of material loss
from this contingency, although management estimates its maximum exposure is
$350,000. See "--Nonperforming Assets".
Securities
We use our securities portfolio both as a source of income and as a source
of liquidity. At June 30, 2000, investment securities totaled $48.5 million, a
decrease of $2.8 million, or 5.5%, from $51.3 million at December 31, 1999. At
June 30, 2000, securities represented 23.8% of total assets compared with 24.3%
of total assets at December 31, 1999.
The following table presents the amortized cost and fair value of securities
classified as available-for-sale at June 30, 2000.
<TABLE>
<CAPTION>
June 30, 2000
---------------------------------------
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............................. $ 3,738 $-- $ 37 $ 3,701
Mortgage-backed securities............ 16,927 46 181 16,792
States and political subdivisions..... 8,259 2 121 8,140
Other................................. 50 -- -- 50
------- --- ---- -------
Total............................... $28,974 $48 $339 $28,683
======= === ==== =======
</TABLE>
The following table presents the amortized cost and fair value of securities
classified as held-to-maturity at June 30, 2000:
<TABLE>
<CAPTION>
June 30, 2000
---------------------------------------
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............................. $16,001 $-- $575 $15,426
Mortgage-backed securities............ 855 -- 9 846
States and political subdivisions..... 2,940 3 55 2,888
------- --- ---- -------
Total............................... $19,796 $ 3 $639 $19,160
======= === ==== =======
</TABLE>
Mortgage-backed securities are securities which pool real estate mortgages
and which 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.
31
<PAGE>
At June 30, 2000, 22.2% of the mortgage-backed securities we held had
contractual final maturities of more than ten years with a weighted average
life of 6.4 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 and their weighted average yields (available-for-sale securities are
not adjusted for unrealized gains or losses):
<TABLE>
<CAPTION>
June 30, 2000
---------------------------------------------------------------------------
After One
Year but After Five Years
Within One Within Five but Within Ten After Ten
Year Years Years Years Total
------------ ------------- ----------------- ------------ -------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------- ----- --------- ------- ------ ----- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government agencies.... $ -- --% $18,024 5.90% $ 1,715 6.83% $ -- --% $19,739 6.07%
Mortgage-backed
securities............. 3,015 6.49 6,260 7.10 4,556 7.16 3,953 7.21 17,784 7.04
States and political
subdivisions........... 727 6.07 3,738 6.89 5,747 6.98 985 7.53 11,197 6.94
------ ---- ------- ---- --------- ------ ------ ---- ------- ----
Total (1).............. $3,742 6.41% $28,022 6.30% $ 12,018 7.03% $4,938 7.27% $48,720 6.62%
====== ==== ======= ==== ========= ====== ====== ==== ======= ====
</TABLE>
--------
(1) Table does not include $50,000 of Texas Independent Bank Stock.
The tax-exempt states and political subdivisions are not calculated on a
tax-equivalent basis. On a tax- equivalent basis, the yield on states and
political subdivisions would have been 10.51% at June 30, 2000.
We have adopted SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities. At the date of purchase, we are required to classify debt
and equity securities into one of three categories: held-to-maturity, trading
or available-for-sale. At each reporting date, the appropriateness of the
classification is reassessed. Investments in debt securities are classified as
held-to-maturity and measured at amortized cost in the financial statements
only if management has the positive intent and ability to hold those securities
to maturity. Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading and measured at fair
value in the financial statements with unrealized gains and losses included in
earnings. Investments not classified as either held-to-maturity or trading are
classified as available-for-sale and measured at fair value in the financial
statements with unrealized gains and losses reported, net of tax, in a separate
component of shareholders' equity until realized.
Deposits
We offer a variety of deposit accounts with a wide range of interest rates
and terms. Our deposits consist of demand, savings, money market and time
accounts. We rely primarily on competitive pricing policies and customer
service to attract and retain these deposits. We do not have or accept any
brokered deposits.
Total deposits at June 30, 2000 were $179.7 million compared with $182.0
million at December 31, 1999, a decrease of $2.3 million, or 1.3%. At June 30,
2000 noninterest-bearing deposits accounted for approximately 37.6% of total
deposits compared with 35.7% of total deposits at December 31, 1999. Interest-
bearing deposits totaled $112.0 million, or 62.5%, of total deposits at June
30, 2000 compared with $117.0 million, or 64.3%, of total deposits at December
31, 1999.
32
<PAGE>
The average balances and weighted average rates paid on deposits for the
period ended June 30, 2000, are presented below:
<TABLE>
<CAPTION>
Six Months
Ended
June 30, 2000
-------------
Amount Rate
-------- ----
<S> <C> <C>
Interest-bearing checking..................................... $ 17,617 1.60%
Regular savings............................................... 16,108 3.39
Money market savings.......................................... 26,594 3.69
Time deposits................................................. 54,324 5.21
--------
Total interest-bearing deposits............................. 114,643 4.05%
Noninterest-bearing deposits.................................. 66,221
--------
Total deposits.............................................. $180,864
========
</TABLE>
The following table sets forth the amount of our certificates of deposit
that were $100,000 or greater by time remaining until maturity at June 30,
2000:
<TABLE>
<CAPTION>
June 30,
2000
----------
(Dollars
in
thousands)
<S> <C>
Three months or less.............................................. $ 8,714
Over three through six months..................................... 3,847
Over six months through 12 months................................. 5,535
Over 12 months.................................................... 742
-------
Total........................................................... $18,838
=======
</TABLE>
Other Borrowings
Through our subsidiary, Paradigm Capital Trust I, we sold $5.125 million of
trust preferred securities to a third party in December 1999. We intend to use
the proceeds from this offering to redeem the debentures underlying the trust
preferred securities held by the third party. The prior sale of trust preferred
securities plus the $7.0 million in proceeds from our sale of common equity and
a dividend from Dayton State of $5.6 million funded our purchase of Dayton
State. The rate on the trust preferred securities held by the third party is
10.375%, with a maturity of thirty years. The currently outstanding trust
preferred securities are redeemable by us at any time.
Deposits are the primary source of funds for our lending and investing
activities. Occasionally, we obtain additional funds from correspondent banks.
At June 30, 2000, we had no funds borrowed from correspondent banks. During
1998, we entered into an agreement with another commercial bank to borrow up to
$5.0 million under a reducing, revolving line of credit. At June 30, 2000 we
had no borrowings under this line.
Interest Rate Sensitivity and Liquidity
Our Asset Liability and Funds Management Policy provides management with
guidelines for effective funds management, and we use a measurement system for
monitoring our net interest rate sensitivity position. We manage our
sensitivity position within established guidelines. Interest rate risk is
managed by the Asset Liability Committee ("ALCO"), composed of our senior
officers in accordance with policies approved by our 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 potential changes in interest
rates, regional economies, liquidity, business strategies and other factors.
The ALCO meets
33
<PAGE>
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. We have traditionally managed
our business to reduce our overall exposure to changes in interest rates.
In July 2000, we purchased an interest rate floor to hedge against the
effect of future declines in interest rates. This floor will help partially
offset lower interest income from our floating rate loans if the 90 day LIBOR
interest rate is below 7.0% from January 25, 2001 through July 25, 2002. In
June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities which was amended
in June 2000 by SFAS No. 138 Accounting for Certain Derivative Instruments and
Certain Hedging Activities. Paradigm will account for any derivative
instruments and hedging activities in compliance with SFAS No. 133 and 138.
Management does not expect application of these standards to have a significant
effect on its consolidated results of operations or financial position.
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. Interest rate risk is managed 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 change in interest
rates. A company is asset sensitive, or has 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 liability sensitive, or has 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 adversely affect net
interest income, while a positive GAP would tend to increase net interest
income. During a period of falling interest rates, a negative GAP would tend to
result in an increase net interest income, while a positive GAP would tend to
affect net interest income adversely.
The following table sets forth our interest rate sensitivity analysis at
June 30, 2000:
<TABLE>
<CAPTION>
Volumes Subject to Repricing Within
-------------------------------------------------
After
0-30 31-180 181-365 one
days days days year Total
------- -------- -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities................. $ 475 $ 3,525 $ 2,305 $45,575 $ 51,880
Loans...................... 60,165 8,735 8,351 48,303 125,554
------- -------- -------- ------- --------
Total interest-earning
assets.................. $60,640 $ 12,260 $ 10,656 $93,878 $177,434
======= ======== ======== ======= ========
Interest-bearing liabilities:
Demand, money market and
savings deposits.......... $57,434 $ -- $ -- $ -- $ 57,434
Certificates of deposit and
other time deposits....... 6,407 23,909 18,660 6,318 55,294
Federal funds purchased and
FHLB advances............. 50 -- -- -- 50
------- -------- -------- ------- --------
Total interest-bearing
liabilities............. $63,891 $ 23,909 $ 18,660 $ 6,318 $112,778
======= ======== ======== ======= ========
Period GAP................... $(3,251) $(11,649) $ (8,004) $87,560
Cumulative GAP............... $(3,251) $(14,900) $(22,904) $64,656
Period GAP to total assets... (1.60)% (5.72)% (3.93)% 43.01%
Cumulative GAP to total
assets...................... (1.60)% (7.32)% (11.25)% 31.76%
</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, we use an interest rate risk simulation model and shock
analysis to test the interest rate sensitivity of net interest income and the
balance sheet. Contractual maturities and repricing opportunities of loans are
incorporated in the model as are prepayment
34
<PAGE>
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 our June 30, 2000 simulation analysis, we estimate that a 200 basis
point rise in rates over the next 12 month period would have an impact of 4.4%
on our net interest income for the period, while a 200 basis point decline
would have a 6.8% impact on net interest income. In addition, we estimate that
a 200 basis point rise over the next 12 month period would cause net income to
increase $331,000 and a 200 basis point decrease over the next 12 month period
would cause net income to decrease $509,000. The results are primarily from the
behavior of demand, money market and savings deposits. We have 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 ALCO reviews our interest risk position, generally on a
quarterly basis.
Our primary component of market risk is interest rate volatility.
Fluctuations in interest rates will ultimately impact both the level of income
and expense realized on most of our 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. We are not subject to foreign
exchange or commodity price risk. We do not own any trading assets.
Our exposure to market risk is reviewed regularly. 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. Our goal is to measure the effect on net
interest income and to adjust the balance sheet to minimize the inherent risk
while maximizing income.
We apply a market value ("MV") methodology to gauge our interest rate risk
exposure as derived from its simulation model. Generally, MV is the discounted
present value of the difference between incoming cash flows on interest-earning
assets and other investments and outgoing cash flows on interest-bearing
liabilities. The application of the methodology attempts to quantify interest
rate risk by measuring the change in the MV that would result from a
theoretical 200 basis point change in market interest rates. Both market rate
increases and decreases are considered.
At June 30, 2000, we estimated that our MV would increase 3.0% over a 12-
month horizon with a 200 basis point increase in market interest rates. Our MV
at the same date would decrease 7.7% over a 12-month horizon with a 200 basis
point decrease in market rates.
Presented below, as of June 30, 2000, is an analysis of the Company's
interest rate risk as measured by changes in MV for instantaneous and sustained
parallel shifts over a 12-month horizon:
<TABLE>
<CAPTION>
Market Value as a
% of Present Value
of Assets
--------------------------
Change
in $ Change MV % Change MV
Rates (In thousands) in MV Ratio Change
------ -------------- -------- ----- ------
<S> <C> <C> <C> <C>
-200 bp $(1,998) (7.7)% 11.61% (119bp)
0 bp -- -- 12.80% --
+200 bp 785 3.0% 13.50% 70bp
</TABLE>
Management believes that the MV methodology overcomes three shortcomings of
the typical maturity GAP methodology. First, it does not use arbitrary
repricing intervals and accounts for all expected future cash flows. Second,
because the MV method projects cash flows of each financial instrument under
different interest rate environments, it can incorporate the effect of embedded
options on an institution's interest rate risk exposure. Third, it allows
interest rates on different instruments to change by varying amounts in
response to a change in market interest rates, resulting in more accurate
estimates of cash flows.
As with any method of gauging interest rate risk, however, there are certain
shortcomings inherent in the MV methodology. The model assumes interest rate
changes are instantaneous parallel shifts in the yield curve.
35
<PAGE>
In reality, rate changes are rarely instantaneous. The simplifying assumption
that short-term and long-term rates change by the same degree may also misstate
historic rate patterns, which rarely show parallel yield curve shifts. Further,
the model assumes that certain assets and liabilities of similar maturity or
repricing will react identically to changes in rates. In reality, the market
value of certain types of financial instruments may adjust in anticipation of
changes in market rates, while any adjustment in the valuation of other types
of financial instruments may lag behind the change in general market rates.
Additionally, the MV methodology does not reflect the full impact of
contractual restrictions on changes in rates for certain assets, such as
adjustable rate loans. When interest rates change, actual loan prepayments and
actual early withdrawals from certificates of deposit may deviate significantly
from the assumptions used in the model. Finally, this methodology does not
measure or reflect the impact that higher rates may have on the ability of
adjustable-rate loan clients to service their debt. All of these factors are
considered in monitoring our exposure to interest rate risk.
Capital Resources
Capital management involves providing equity to support both current and
future operations. We are subject to capital adequacy requirements imposed by
the Federal Reserve and the banks are subject to capital adequacy requirements
imposed by the FDIC and the Texas Banking Department. Both the Federal Reserve
and the FDIC have adopted risk-based capital requirements for assessing
financial 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 financial
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, with 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 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 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 the 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 banks are subject to capital adequacy guidelines of
the FDIC that are substantially similar to the Federal Reserve's guidelines.
Also pursuant to FDICIA, the FDIC has promulgated regulations setting the
levels at which insured institutions such as the banks would be considered
"well capitalized," "adequately capitalized," "undercapitalized,"
36
<PAGE>
"significantly undercapitalized" and "critically undercapitalized." Under the
FDIC's regulations, the banks are classified "well capitalized" for purposes of
prompt corrective action.
Shareholders' equity increased to $16.1 million at June 30, 2000, compared
with $15.2 million at December 31, 1999, an increase of $854,000, or 5.6%. The
increase was primarily due to net earnings of $1.1 million offset by cash
dividends paid of $237,000 for the six months ended June 30, 2000.
The following table provides a comparison of the leverage and risk-weighted
capital ratios of us and the banks as of June 30, 2000 to the minimum and well
capitalized regulatory standards:
<TABLE>
<CAPTION>
Minimum
Required To Be Well Actual
for Capital Capitalized Under Ratio at
Adequacy Prompt Corrective June 30,
Purposes Action Provisions 2000
----------- ----------------- --------
<S> <C> <C> <C>
The Company
Leverage ratio....................... 3.00%(1) N/A 8.80%
Tier 1 risk-based capital ratio...... 4.00% N/A 13.09%
Total risk-based capital ratio....... 8.00% N/A 13.70%
Woodcreek
Leverage ratio....................... 3.00%(2) 5.00% 7.12%
Tier 1 risk-based capital ratio...... 4.00% 6.00% 9.87%
Total risk-based capital ratio....... 8.00% 10.00% 10.38%
Dayton State
Leverage ratio....................... 3.00%(2) 5.00% 10.78%
Tier 1 risk-based capital ratio...... 4.00% 6.00% 17.10%
Total risk-based capital ratio....... 8.00% 10.00% 17.85%
</TABLE>
--------
(1) The Federal Reserve may require us to maintain a leverage ratio of up to
200 basis points above the required minimum.
(2) The FDIC may require the banks to maintain a leverage ratio of up to 200
basis points above the required minimum.
For the Years Ended December 31, 1999 and 1998
Overview
We elected to be taxed under Subchapter S of the Internal Revenue Code for
the tax year beginning January 1, 1998 and terminated our Subchapter S election
on December 1, 1999. If we had been a C corporation for 1999 and 1998, our
effective tax rate would have been approximately 29.9% and 24.8%, respectively,
given our municipal bond portfolio and based on effective tax rates in prior
years. Accordingly, certain information as noted herein has been adjusted to
reflect this tax rate.
Our actual pre-tax earnings in 1999 and 1998 were $1.8 million, or $1.16 per
share, and $1.1 million, or $0.74 per share, respectively. Adjusted for income
tax, our net income was $1.3 million and $840,000 for the years ended December
31, 1999 and 1998, respectively. Earnings before noninterest expense grew $1.9
million or 36.0% from December 31, 1998 to December 31, 1999.
Earnings growth was the result of, among other things, the acquisition of
Dayton State. In 1999, we completed the acquisition of Dayton State, while
continuing to focus on asset generation through the Financial Center
Presidents. Tax adjusted returns on average assets for 1999 and 1998 were 1.04%
and 0.87%, respectively. The after-tax returns on average common equity for
1999 and 1998 years were 13.81% and 12.29%, respectively. Our efficiency ratios
were 70.59% in 1999 and 79.26% in 1998.
37
<PAGE>
Consolidated assets at December 31, 1999 and 1998 were $210.8 million and
$104.9 million, respectively. Consolidated deposits at December 31, 1999 and
1998 were $182.0 million and $96.8 million, respectively. Asset and deposit
growth is primarily due to the Dayton State acquisition in 1999 and the one new
branch in 1998. Loans were $111.2 million at December 31, 1999, an increase of
$61.9 million, or 125.6%, from $49.3 million at the end of 1998. Shareholders'
equity was $15.2 million and $7.5 million at December 31, 1999 and 1998,
respectively.
Our acquisition of Dayton State in December 1999 was accounted for as a
purchase in accordance with generally accepted accounting principles.
Accordingly, our balance sheet for December 31, 1999 includes Dayton State and
our balance sheet for December 31, 1998 does not. Our statement of operations
for the year ended December 31, 1999 includes the results of operations for
Dayton State for the month of December 1999. Dayton State results are not
included in our statement of operations for 1998.
Results of Operations
Net Interest Income
Net interest income for 1999 was $5.2 million, compared with $3.9 million
for 1998, an increase of $1.3 million, or 33.3%. The improvement in net
interest income for 1999 was mainly due to an increase in total interest-
earning assets, primarily in the loan portfolio, resulting from both the
acquisition of Dayton State and the development of the "Financial Center
President" concept. During 1999, the yield on interest-earning assets fell 24
basis points from 7.75% in 1998 to 7.51% in 1999 primarily due to a decrease in
interest rates by the Federal Reserve during the second and third quarters of
1998. Total funding costs decreased 29 basis points from 4.07% in 1998 to 3.78%
in 1999 primarily due to the rate cuts orchestrated by the Federal Reserve. For
1999, the net interest margin on a tax-equivalent basis increased 34 basis
points to 5.41% from 5.06% in 1998.
38
<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 yearly average balances. Nonaccruing loans have been
included in the tables as noninterest-earning assets.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------
1999 1998
---------------------------- ----------------------------
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.................. $ 62,483 $5,723 9.16% $43,411 $4,183 9.64%
Securities (1)......... 32,647 1,860 5.70 25,217 1,435 5.69
Federal funds sold &
other temporary
investments........... 3,769 230 6.10 12,992 706 5.43
-------- ------ ------- ------
Total interest-earning
assets................ 98,899 7,813 7.51% 81,620 6,324 7.75%
------ ------
Less allowance for
credit loss........... 426 (202)
-------- -------
Total interest-earning
assets, net of
allowance............. 98,473 81,418
Noninterest-earning
assets................ 17,631 14,657
-------- -------
Total assets........... $116,104 $96,075
======== =======
Liabilities and
shareholders' equity
Interest-bearing
liabilities:
Interest-bearing demand
deposits.............. $ 7,380 $ 89 1.21% $ 6,685 $ 114 1.70%
Savings and money
market accounts....... 25,983 786 3.03 20,442 642 3.14
Certificates of
deposit............... 34,360 1,663 4.84 31,339 1,618 5.16
Federal funds purchased
and other
borrowings(2)......... 982 59 6.01 163 13 7.97
-------- ------ ------- ------
Total interest-bearing
liabilities........... 68,705 2,597 3.78% 58,629 2,387 4.07%
-------- ------ ------- ------
Noninterest-bearing
liabilities:
Noninterest-bearing
demand deposits....... 37,685 29,882
Other liabilities...... 1,121 736
-------- -------
Total liabilities...... 107,511 89,247
-------- -------
Shareholders' equity.... 8,593 6,828
-------- -------
Total liabilities and
shareholders' equity.. $116,104 $96,075
======== =======
Net interest rate
spread................. 3.73% 3.68%
Net interest income and
margin(3).............. $5,216 5.27% $3,937 4.82%
====== ======
Net interest income and
margin (tax-equivalent)
basis(4)............... $5,356 5.41% $4,133 5.06%
====== ======
</TABLE>
--------
(1) Yield is based on amortized cost and does not include any component of
unrealized gains or losses.
(2) Includes company obligated mandatorily redeemable trust preferred
securities.
(3) The net interest margin is equal to net interest income divided by average
interest-earning assets.
(4) To make pretax 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%.
39
<PAGE>
The following table 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 change related to
outstanding balances (volume) and the change due to interest rates. Changes
attributable to both rate and volume which cannot be segregated have been
allocated to rate.
<TABLE>
<CAPTION>
Years Ended
December 31,
---------------------
1999 vs 1998
---------------------
Increase
(Decrease)
Due to
-------------
Volume Rate Total
------ ----- ------
(Dollars in
thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans................................................ $1,748 $(208) $1,540
Securities........................................... 423 2 425
Federal funds sold and other temporary investments... (563) 87 (476)
------ ----- ------
Total increase in interest income.................. $1,608 $(119) $1,489
====== ===== ======
Interest-bearing liabilities:
Interest-bearing demand deposits..................... $ 8 $ (33) $ (25)
Savings and money market accounts.................... 167 (23) 144
Certificates of deposit.............................. 145 (100) 45
Federal funds purchased and other borrowings......... 49 (3) 46
------ ----- ------
Total increase (decrease) in interest expense...... 369 (159) 210
------ ----- ------
Increase in net interest income...................... $1,239 $ 40 $1,279
====== ===== ======
</TABLE>
Provision for Credit Losses
The allowance for credit losses at December 31, 1999 was $679,000,
representing 0.61% of outstanding loans. In 1998, the allowance was $113,000,
representing 0.23% of outstanding loans. The provision for credit losses
charged against earnings was $309,000 in 1999 compared with $76,000 in 1998. We
recorded a higher provision in 1999 than 1998 due to the growth in loans. Net
loans charged-off in 1999 were $106,000, compared with $206,000 in 1998.
Noninterest Income
For 1999, noninterest income totaled $2.3 million, an increase of $871,000
or 61.9% versus $1.4 million in 1998. Service charges on deposit accounts are
the largest component of noninterest income and a significant source of revenue
to us. The increase in service charges on deposit accounts and total
noninterest income from 1998 to 1999 was partly the result of the introduction
of the free checking account which generated overdraft protection fees.
The following table presents for the periods indicated the major categories
of noninterest income:
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------
1999 1998
------ ------
(Dollars in
thousands)
<S> <C> <C>
Service charges on deposit accounts........................... $1,922 $1,336
Gain on sale of securities.................................... 185 --
Other noninterest income...................................... 171 71
------ ------
Total noninterest income.................................... $2,278 $1,407
====== ======
</TABLE>
40
<PAGE>
Noninterest Expense
For 1999, noninterest expense totaled $5.4 million, an increase of $1.2
million, or 29.0%, over $4.2 million in 1998. Salaries and employee benefits
for 1999 totaled $2.7 million, an increase of $550,000, or 25.1%, over the $2.2
million for 1998. This increase was due to the acquisition of Dayton State and
the opening of the Silver Ridge Financial Center. Other operating expenses of
$2.7 million represented an increase of $656,000, or 33.5%, compared with $2.0
million in 1998. This increase was the result of the acquisition referred to
above as well as the other charges referenced herein.
The following table presents for the periods indicated the major categories
of noninterest expense:
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------
1999 1998
------ ------
(Dollars in
thousands)
<S> <C> <C>
Salaries and employee benefits................................ $2,745 $2,195
Non-staff expenses:
Net bank premises expense................................... 224 428
Equipment rentals, depreciation and maintenance............. 353 185
Goodwill amortization....................................... 67 40
Other....................................................... 1,968 1,303
------ ------
Total noninterest expense................................. $5,357 $4,151
====== ======
</TABLE>
Income Taxes
Income tax expense includes the regular federal income tax at the effective
rate. The amount of federal income tax expense is influenced by the amount of
taxable income, the amount of tax-exempt income, the amount of non-deductible
interest expense and the amount of other nondeductible expense including the
provision for loan losses. Since we elected to be taxed under Subchapter S of
the Internal Revenue Code, the statutory rate plus the income tax component of
the Texas franchise tax was zero in the first eleven months of 1999 and all of
1998. Had we been taxed under Subchapter C of the Internal Revenue Code, the
federal income tax expense would have been $548,000 for 1999 and $277,000 for
1998. The effective tax rate, had we not elected Subchapter S treatment, would
have been approximately 29.9% and 24.8% for 1999 and 1998, respectively. The
actual effective tax rates in 1999 and 1998, respectively, were 5.7% and zero.
Financial Condition
Loan Portfolio
Loans, net of unearned interest, were $111.2 million at December 31, 1999,
an increase of $61.9 million, or 125.6%, from $49.3 million at December 31,
1998. The increase was principally due to the acquisition of Dayton State
($42.1 million) and loans generated under our Financial Center President
program ($19.8 million). The loan to deposit ratios as of December 31, 1999 and
1998 were 61.1% and 51.0%, respectively. The loan to asset ratios as of
December 31, 1999 and 1998 were 52.8% and 47.1%, respectively. Commercial and
industrial loans grew 169.5% from $11.8 million from 1998 to $31.8 million at
1999. Commercial real estate loans grew 76.33% from $13.1 million to $23.1
million from 1998 to 1999. Construction and land development loans were $10.3
million at December 31, 1999, an increase of $8.4 million or 442.1% from $1.9
million at December 31, 1998. Loans to individual consumers grew to $17.9
million from $10.9 million, a 64.2% increase for the period.
41
<PAGE>
The following table summarizes for the periods indicated our loan portfolio
by type of loan:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1999 1998
---------------- ---------------
Amount Percent Amount Percent
-------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial and industrial................ $ 31,798 28.23% $11,857 23.78%
Real estate:
Construction and land development...... 10,365 9.20 1,958 3.92
1-4 family residential................. 15,922 14.13 9,827 19.72
Home equity/junior liens............... 627 0.56 531 1.06
Commercial mortgages................... 23,143 20.54 13,137 26.36
Farmland............................... 3,881 3.45 795 1.61
Multifamily residential................ 1,703 1.51 543 1.09
Agricultural............................. 7,270 6.45 258 .52
Consumer................................. 17,939 15.93 10,937 21.94
-------- ------ ------- ------
Total loans(1)....................... $112,648 100.00% $49,843 100.00%
======== ====== ======= ======
</TABLE>
--------
(1) Includes $1.4 million in unearned income for 1999 and $475,000 for 1998.
The contractual maturity ranges of the commercial, industrial, construction
and land development portfolio and the amount of such loans with predetermined
interest rates and floating rates in each maturity range as of December 31,
1999 are summarized in the following table:
<TABLE>
<CAPTION>
December 31, 1999
------------------------------
After
One
One Through After
Year Or Five Five
Less Years Years Total
------- ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial, industrial, construction and
land development.......................... $40,148 $20,739 $1,289 $62,176
======= ======= ====== =======
Loans with a predetermined interest rate... $14,505 $20,739 $1,289 $36,533
Loans with a floating interest rate........ 25,643 -- -- 25,643
------- ------- ------ -------
Total.................................... $40,148 $20,379 $1,289 $62,176
======= ======= ====== =======
</TABLE>
Nonperforming Assets
As of December 31, 1999 and 1998, nonperforming assets were $1.1 million and
$346,000, respectively. The 1999 number includes $460,000 in nonperforming
assets acquired in the Dayton State acquisition.
The following table presents information regarding nonperforming assets at
the dates indicated:
<TABLE>
<CAPTION>
December
31,
------------
1999 1998
------ ----
(Dollars in
thousands)
<S> <C> <C>
Nonaccrual loans............................................... $ 473 $113
90 days or more past due....................................... 52 --
Other real estate.............................................. 542 233
------ ----
Total nonperforming assets................................... $1,067 $346
====== ====
Nonperforming assets to total loans and other real estate...... 0.91% 0.70%
</TABLE>
42
<PAGE>
The other real estate held as of December 31, 1999, consisted of twelve
parcels of real estate, with a carrying value of $542,000.
Allowance for Credit Losses
For the year ended December 31, 1999, net charge-offs totaled $106,000, or
0.17% of average loans outstanding for the period, compared with $206,000, or
0.48% of average loans during 1998. During 1999, we recorded a provision for
credit losses of $309,000 compared with $72,000 for 1998 due to loan growth. At
December 31, 1999, the allowance totaled $679,000, or 0.61% of total loans. At
December 31, 1998, the allowance aggregated $113,000 or 0.23% of total loans.
The increase was due to the acquisition of Dayton State and management's
estimate of the appropriate allowance balance.
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,
-----------------
1999 1998
-------- -------
(Dollars in
thousands)
<S> <C> <C>
Average loans
outstanding.............. $ 62,483 $43,411
======== =======
Gross loans outstanding at
end of period............ $111,244 $49,368
======== =======
Allowance for credit
losses at beginning of
period................... $ 113 $ 165
Provision for credit
losses................... 309 76
Balance of allowance for
credit losses acquired
from
First National Bank of
Dayton................. -- 78
Dayton State Bank....... 363 --
Charge-offs:
Commercial and
industrial............. 22 198
Real estate and
agricultural........... 48 --
Consumer................ 91 25
Recoveries:
Commercial and
industrial............. (3) (14)
Real estate and
agricultural........... (48) --
Consumer................ (4) (3)
-------- -------
Net charge-offs........... 106 206
-------- -------
Allowance for credit
losses at end of period.. $ 679 $ 113
======== =======
Ratio of allowance to end
of period loans.......... 0.61% 0.23%
Ratio of net charge-offs
to average loans......... 0.17 0.48
Ratio of allowance to end
of period nonperforming
loans.................... 129.33 100.00
</TABLE>
43
<PAGE>
The following table shows the allocation of the allowance for credit losses
among loan categories 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,
-------------------------------------
1999 1998
------------------ ------------------
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......... $ 40 28.6% $ 2 24.0%
Real estate....................... 51 50.0 29 53.5
Agriculture....................... 42 6.5 -- 0.5
Consumer.......................... 67 14.9 13 22.0
Unallocated....................... 479 -- 69 --
---- ----- ---- ------
Total allowance for credit
losses......................... $679 100.0% $113 100.00%
==== ===== ==== ======
</TABLE>
Securities
At December 31, 1999, investment securities totaled $51.6 million, an
increase of $27.1 million from $24.5 million at December 31, 1998. At December
31, 1999, investment securities represented 24.4% of total assets, compared
with 23.3% of total assets at December 31, 1998. The yield on the investment
portfolio for the year ended December 31, 1999 was 5.78% compared with a yield
of 5.67% for the year ended December 31, 1998.
The following table presents 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,
---------------
1999 1998
------- -------
(Dollars in
thousands)
<S> <C> <C>
U.S. Treasury securities and obligations of
U.S. government agencies................................... $21,528 $14,106
Mortgage-backed securities.................................. 18,107 2,034
State and political subdivisions............................ 11,911 8,327
Other....................................................... 50 --
------- -------
Total..................................................... $51,596 $24,467
======= =======
</TABLE>
44
<PAGE>
The following table summarizes the contractual maturity of investment
securities. Available-for-sale securities are not adjusted for unrealized
gains or losses.
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------
After
After One Five
Year but Years but
Within Within Within After
One Year Five Years Ten Years Ten Years Total
-------- ---------- --------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government agencies...... $ 700 $16,781 $ 2,453 $ -- $19,934
Mortgage-backed
securities............... 814 4,595 13,099 694 19,202
States and political
subdivisions............. 1,027 5,062 5,583 738 12,410
Other..................... -- -- -- 50 50
------ ------- ------- ------ -------
Total................... $2,541 $26,438 $21,135 $1,482 $51,596
====== ======= ======= ====== =======
</TABLE>
The average yield for the investment securities at December 31, 1999 ranged
from 5.32% to 7.26%.
The following table summarizes the carrying value and classification of
securities as of the dates shown:
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- -------
(Dollars in
thousands)
<S> <C> <C>
Available-for-sale........................................... $29,847 $ 2,522
Held-to-maturity............................................. 21,445 21,989
------- -------
Total...................................................... $51,292 $24,511
======= =======
</TABLE>
The following table presents the amortized cost and fair value of
securities classified as available-for-sale at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
--------------------------------------- --------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gain Loss Value Cost Gain Loss Value
--------- ---------- ---------- ------- --------- ---------- ---------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasuries and
obligations of U.S.
government agencies.... $ 3,732 $-- $ (31) $ 3,701 $ 902 $ 2 $-- $ 904
Mortgage-backed
securities............. 18,107 -- (234) 17,873 136 8 -- 144
State and political
subdivisions........... 8,262 -- (39) 8,223 1,440 34 -- 1,474
Other................... 50 -- -- 50 -- -- -- --
------- --- ----- ------- ------ --- --- ------
Total.................. $30,151 $-- $(304) $29,847 $2,478 $44 $-- $2,552
======= === ===== ======= ====== === === ======
</TABLE>
The following table presents the amortized cost and fair value of
securities classified as held-to-maturity at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
--------------------------------------- ---------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gain Loss Value Cost Gain Loss Value
--------- ---------- ---------- ------- --------- ---------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasuries and
obligations of U.S.
government agencies.... $17,796 $ 3 $(462) $17,337 $13,204 $ 11 $56 $13,159
Mortgage-backed
securities............. -- -- -- -- 1,898 22 24 1,896
State and political
subdivisions........... 3,649 -- (25) 3,624 6,887 365 -- 7,252
------- --- ----- ------- ------- ---- --- -------
Total.................. $21,445 $ 3 $(487) $20,961 $21,989 $398 $80 $22,307
======= === ===== ======= ======= ==== === =======
</TABLE>
45
<PAGE>
Deposits
Deposits at December 31, 1999 were $182.0 million, an increase of 88.0% from
$96.8 million at December 31, 1998. The increase was due to internal growth and
the acquisition of Dayton State. Noninterest-bearing deposits of $64.9 million
at December 31, 1999, increased $30.6 million or 89.2% from $34.3 million at
December 31, 1998. Interest-bearing deposits at December 31, 1999 were $117.0
million, up $54.6 million, or 87.5%, from $62.4 million at December 31, 1998.
The daily average balances on deposits for each of the years ended December
31, 1999 and 1998, are presented below:
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------
1999 1998
-------- -------
(Dollars in
thousands)
<S> <C> <C>
Interest-bearing checking.................................. $ 7,380 $ 6,685
Regular savings............................................ 8,243 6,987
Money market savings....................................... 17,740 13,455
Time deposits.............................................. 34,360 31,339
-------- -------
Total interest-bearing deposits.......................... 67,723 58,466
Noninterest-bearing deposits............................... 37,685 29,882
-------- -------
Total deposits........................................... $105,408 $88,348
======== =======
</TABLE>
Average rates paid during the year ended December 31, 1999 ranged from 1.21%
to 4.84%.
The following table sets forth the amount of our certificates of deposit
that are $100,000 or greater by time remaining until maturity:
<TABLE>
<CAPTION>
December 31, 1999
-----------------
(Dollars in
thousands)
<S> <C>
Three months or less....................................... $ 5,980
Over three through six months.............................. 4,143
Over six months through 12 months.......................... 5,831
Over 12 months............................................. 820
-------
Total.................................................... $16,774
=======
</TABLE>
Other Borrowings
We sold $5.125 million of trust preferred securities to a third party in
December 1999. We plan to use the proceeds from this offering to redeem the
trust preferred securities held by the third party. The prior sale of trust
preferred securities plus the $7.0 million in proceeds from our sale of common
equity and a dividend from Dayton State of $5.6 million funded the acquisition
of Dayton State. The rate on the trust preferred securities held by the third
party is 10.375%, with a maturity of thirty years and no call protection.
Deposits are the primary source of funds for our lending and investment
activities. Occasionally, we obtain additional funds from correspondent banks.
At December 31, 1999 and 1998, we had no funds borrowed from correspondent
banks. During 1998, we entered into an agreement with another commercial bank
to borrow up to $5.0 million under a reducing, revolving line of credit. At
December 31, 1999, we had $269,000 in outstanding borrowings under this line.
46
<PAGE>
Capital Resources
Shareholders' equity increased from $7.5 million at December 31, 1998 to
$15.2 million at December 31, 1999, an increase of $7.7 million or 102.6%. This
increase was primarily the result of the $7.0 million in proceeds from the sale
of 875,000 shares of common stock through a private placement.
The following table provides a comparison of the leverage and risk-weighted
capital ratios of us and the banks as of December 31, 1999 to the minimum and
well capitalized regulatory standards:
<TABLE>
<CAPTION>
Minimum
Required for To Be Well
Capital Capitalized Under
Adequacy Prompt Corrective Actual Ratio at
Purposes Action Provisions December 31, 1999
------------ ----------------- -----------------
<S> <C> <C> <C>
The Company
Leverage ratio............... 3.00%(1) N/A 8.00%
Tier 1 risk-based capital
ratio....................... 4.00% N/A 12.82%
Total risk-based capital
ratio....................... 8.00% N/A 13.35%
Woodcreek
Leverage ratio............... 3.00%(1) 5.00% 6.76%
Tier 1 risk-based capital
ratio....................... 4.00% 6.00% 10.09%
Total risk-based capital
ratio....................... 8.00% 10.00% 10.41%
Dayton State
Leverage ratio............... 3.00%(2) 5.00% 10.88%
Tier 1 risk-based capital
ratio....................... 4.00% 6.00% 18.73%
Total risk-based capital
ratio....................... 8.00% 10.00% 19.34%
</TABLE>
--------
(1) The Federal Reserve may require us to maintain a leverage ratio of up to
200 basis points above the required minimum.
(2) The FDIC may require the banks to maintain a leverage ratio of up to 200
basis points above the required minimum.
47
<PAGE>
THE COMPANY
General
We are a financial holding company that provides commercial and retail
banking services through the community banking offices of two subsidiary
banks--Woodcreek and Dayton State, Texas banking associations headquartered in
Houston, Texas and Dayton, Texas, respectively. Woodcreek has seven community
banking offices, six of which are located in the greater Houston metropolitan
area with one located in Dayton. In addition to its main office in Dayton,
Dayton State has community banking offices in Mont Belvieu and Winnie. We were
incorporated under the laws of the State of Texas and became the parent bank
holding company of Woodcreek in 1996. We acquired Dayton State on December 10,
1999. Woodcreek was chartered in 1980 and Dayton State was chartered in 1907.
We elected to become a financial holding company in 2000. We plan to merge
Dayton State and Woodcreek in the near future. At June 30, 2000, we had total
assets of $204.0 million, loans of $124.2 million, deposits of $179.7 million
and shareholders' equity of $16.1 million.
We operate under a community banking philosophy emphasizing long-term
customer relationships based on service and convenience. We maintain a
conservative approach to lending as evidenced by our ratio of net charge-offs
to average loans of 0.10% at June 30, 2000. We invest heavily in our officers
and employees by recruiting talented officers and giving them economic
incentive in the form of stock appreciation rights and bonuses based on loan
growth. We offer a variety of traditional loan and deposit products to our
customers, which consist primarily of small and medium-sized businesses and
individual consumers.
Our growth strategy has concentrated on increasing our community banking
presence in our existing Houston market, and expanding into new markets. We
have grown through a combination of internal growth, opening new community
banking offices and acquiring two commercial banks. In addition to the
acquisition of Dayton State in 1999 and the First National Bank of Dayton in
1997, we opened four de novo full-service Financial Centers in Houston between
1991 and 1998. In August 2000, we opened a new branch in the Houston area. We
plan to open at least one more branch this year. As a result of this expansion
and internal growth, our assets increased from $93.4 million at December 31,
1997 to $204.0 million as of June 30, 2000. During that same period, loans
increased from $38.0 million to $124.2 million, deposits increased from $86.2
million to $179.7 million and shareholders' equity increased from $5.0 million
to $16.1 million.
Our primary market consists of the communities served by our six locations
in the north Houston metropolitan area, our two locations in Dayton and
branches in Mont Belvieu and Winnie. These market areas provide us with a
diverse customer base and allow us to allocate our lending risk among different
types of borrowers. Management believes that we, as a financial institution
that provides responsive community banking, skilled and experienced executive
officers and sophisticated products and services, have a competitive advantage
in our market areas and excellent growth opportunities through acquisitions,
new branch locations and additional business development.
One key component of our community banking emphasis is our Financial Center
concept, which began in 1998. Each banking location is considered a Financial
Center and is administered by a Financial Center President with knowledge of
the local community. We entrust our Financial Center Presidents with authority
and flexibility for product pricing and decision making within general
parameters established by us. We operate each Financial Center as a separate
profit center, maintaining separate data with respect to each Financial
Center's net interest income, deposit growth, loan growth and overall
profitability. Financial Center Presidents are accountable for performance in
these areas and are compensated accordingly.
Our overall business strategy focuses on:
. continuing to serve small and medium-sized businesses and consumer
customers by providing individualized, responsive, quality service
through our community banking network,
. expanding our market share by opening new Financial Centers and making
strategic acquisitions in growth areas, particularly in Houston and the
East Texas markets around Houston and
. maintaining conservative lending with low net charge-offs.
48
<PAGE>
Bank Activities
We offer a variety of traditional loan and deposit products to our
customers, which consist primarily of small and medium-sized businesses and
consumers. We tailor our products to the specific needs of customers in a given
market. At June 30, 2000, we maintained approximately 25,027 separate deposit
accounts and 4,880 separate loan accounts.
We have been an active mortgage lender, with real estate loans comprising
50.8% of our total loans as of June 30, 2000. We offer loans for automobiles
and other consumer durables, debit cards, personal computer banking and other
cash management services and Internet banking. By offering certificates of
deposit, NOW accounts, savings accounts and overdraft protection at competitive
rates, we give our depositors a full range of traditional deposit products.
We target businesses that seek aggregate loans in the $50,000 to $1.3
million range. We offer 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.
Business Strategies
Our goal is to take advantage of expansion opportunities while maintaining
individualized customer service and maximizing profitability. To do so, we will
emphasize the following strategies:
Emphasizing Community Banking. We intend to continue operating as a
community banking organization focused on meeting the specific needs of
consumers and small and medium-sized businesses in our market areas. We will
continue to provide a high degree of responsiveness and a wide variety of
banking products and services. We staff our Financial Centers with experienced
bankers with lending expertise in the specific industries found in the
community, giving them authority to make certain pricing and credit decisions,
thereby attempting to avoid the bureaucratic structure of larger banks.
Expanding Market Share Through Internal Growth and a Disciplined Acquisition
Strategy. We plan to seek opportunities, inside and outside our existing
markets, to expand by establishing new Financial Centers or by acquiring
existing banks or branches of banks. All of our acquisitions have been
accretive to earnings and have added relatively low-cost deposits to fund our
lending activities. Factors we use to evaluate expansion opportunities include
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 our efficiency ratio and the opportunity
to enhance our image and market presence.
Maintaining Conservative Lending Philosophy. We intend to maintain a
conservative lending philosophy. As we diversify and increase our lending
activities, we may face higher risks of nonpayment and increased risks in the
event of economic downturns. We intend, however, to continue to employ the
strict underwriting guidelines and comprehensive loan review process that have
contributed to our low charge-offs in the past.
Competition
The banking business is highly competitive, and our profitability depends on
our ability to compete successfully in our market areas. We compete 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 nonbank 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 we do. We have been able to compete effectively with other financial
institutions by emphasizing customer service and responsive decision-making and
by establishing long-term customer relationships and building customer loyalty
as well as by providing products and services tailored to our customers. We
expect competition from both financial and nonfinancial institutions to
continue. Recently
49
<PAGE>
enacted Federal legislation eased burdens previously imposed on banks,
securities firms, insurance companies, credit unions and other financial
service providers. As a result, it is easier for such firms to directly compete
with us.
Employees
As of June 30, 2000, we and the banks had 115 full-time equivalent
employees, 29 of whom were officers of the banks. We provide medical and
hospitalization insurance to our full-time employees. We consider our relations
with our employees to be good. Neither we nor the banks is a party to any
collective bargaining agreement.
Properties
We conduct business at ten full-service Financial Center locations. Our
corporate headquarters are located at 2828 FM 1960 E., Houston, Texas. We own
all of the buildings in which our financial centers are located other than the
Copperfield, Cy-Fair, Silver Ridge and Medical Financial Centers. The lease
terms of these four financial centers expire in one to five years, subject to
renewal option periods which may be available. The following table sets forth
specific information on each of our Financial Centers:
<TABLE>
<CAPTION>
Location Deposits at June 30, 2000
-------- -------------------------
(Dollars in thousands)
<S> <C>
Woodcreek
Aldine Financial Center.......................... $10,395
(Houston, Texas)
Copperfield Financial Center..................... --(1)
(Houston, Texas)(1)
Cy-Fair Financial Center......................... 3,559
(Houston, Texas)
Dayton Financial Center.......................... 12,043
(Dayton, Texas)
Main Financial Center............................ 66,719
(Houston, Texas)
Silver Ridge Financial Center.................... 6,179
(Houston, Texas)
Medical Financial Center......................... 4,406
(Houston, Texas)
Dayton State
Dayton Financial Center.......................... $62,716
(Dayton, Texas)
Mont Belvieu Financial Center.................... 5,903
(Mont Belvieu, Texas)
Winnie Financial Center.......................... 7,766
(Winnie, Texas)
</TABLE>
--------
(1) Opened for business on August 14, 2000.
50
<PAGE>
Legal Proceedings
We and the banks are from time to time 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 us or the
banks which, if determined adversely, would have a material effect on our
business, financial condition or results of operations, or those of the banks.
Change in Accountants
Harper & Pearson Company, P.C. was selected as our independent auditors on
November 19, 1998 following the dismissal of Wallingford, McDonald, Fox & Co.,
P.C. on November 19, 1998. The decision to change accountants was approved by
our Board of Directors.
The last report on the financial statements prepared by Wallingford,
McDonald, Fox & Co., P.C. was for the year ended December 31, 1997. In
connection with the audits of our financial statements during the year ended
December 31, 1997 and the subsequent interim period prior to their dismissal,
there were no disagreements between us and Wallingford, McDonald, Fox & Co.,
P.C. on any matters of accounting principles or practices, financial statement
disclosure or auditing scope and procedures which, if not resolved to the
satisfaction of Wallingford, McDonald, Fox & Co., P.C., would have caused
Wallingford, McDonald, Fox & Co., P.C. to make reference to the matter in their
reports.
During our fiscal year ended December 31, 1997 and the subsequent interim
period prior to the dismissal of Wallingford, McDonald, Fox & Co., P.C.,
Wallingford, McDonald, Fox & Co., P.C. did not advise us with respect to any of
the matters listed in paragraphs (a)(1)(v)(A) through (D) of Item 304 of
Regulation S-B.
In accordance with the rules of the Commission, we provided Wallingford,
McDonald, Fox & Co., P.C. a copy of the disclosures filed with the Commission
in the registration statement on Form SB-2 and requested Wallingford, McDonald,
Fox & Co., P.C. to furnish us with a letter addressed to the Commission stating
whether or not Wallingford, McDonald, Fox & Co., P.C. agreed with the
statements made by us and, if not, stating the respects in which it did not
agree. A copy of the letter is attached as Exhibit 16.1 to the registration
statement on Form SB-2.
During our fiscal year ended December 31, 1997 and the subsequent interim
period prior to the engagement of Harper & Pearson Company, P.C., neither us,
nor anyone on our behalf, consulted Harper & Pearson regarding the application
of accounting principles to a specified completed or proposed transaction or
the type of opinion that Harper & Pearson might render on our financial
statements.
51
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information with respect to our
executive officers and directors:
<TABLE>
<CAPTION>
Name Position(1) Age
---- ----------- ---
<S> <C> <C>
Dennis M. Cain........... Director; Director of Woodcreek 59
Brad Fagan(2)............ Chief Financial Officer and Director; Director 41
of Woodcreek and Dayton State
William H. Fagan,
M.D.(3)................. Secretary, Treasurer and Director; Chairman of 70
the Board of Woodcreek; Director of Dayton State
Walter G. Finger......... Director, Director of Woodcreek 40
Peter E. Fisher.......... President and Chief Executive Officer and 53
Director; Vice Chairman of Woodcreek; Director
of Dayton State
Charles J. Howard, M.D... Chairman of the Board; Director of Woodcreek and 65
Dayton State
Leah Boomer Huffmeister.. Director; Director of Woodcreek 34
Jay W. Porter, Jr........ Director, Executive Vice President and Chief 54
Credit Officer; Director and President of
Woodcreek; Director of Dayton State
James A. Woodall, Jr..... Director; Chairman of the Board, President and 56
Chief Executive Officer of Dayton State;
Director of Woodcreek
</TABLE>
--------
(1) Unless otherwise noted, position is with us.
(2) Brad Fagan is the son of Dr. William H. Fagan.
(3) Dr. Fagan is the father of Brad Fagan.
Dennis M. Cain. Mr. Cain has been a director since our formation in 1996 and
a director of Woodcreek since 1990. He has been owner and president of Dennis
Cain Physician Solutions, LLC, a physician billing service, since 1998. Prior
to this, Mr. Cain served as an executive in the physician billing industry
since 1976. Mr. Cain also serves on the board of directors of the Richey Road
Municipal Utility District. After graduating from Wichita State University, Mr.
Cain was employed in the engineering department of Cessna Aircraft Company.
Brad Fagan. Mr. Fagan became our chief financial officer and a director in
June of 2000. At the same time, he was named a director of Woodcreek and Dayton
State. Before joining us, Mr. Fagan worked for Pancho's Mexican Buffet, Inc., a
publicly-traded, multi-unit restaurant company, for about nine years, and for
the last five years served as vice president, treasurer and chief financial
officer. Mr. Fagan, a CPA with a masters degree in accounting, was previously
an accountant and auditor with PepsiCo., Inc., and with Arthur Andersen & Co.
William H. Fagan, M.D. Dr. Fagan began his banking experience in 1965 when
he joined the board of Channelview State Bank, which later changed its name to
Prime Bank. He served on that board until 1980, when he left to become an
organizing director of the Bank of Cypress Trails, which later changed its name
to Woodcreek Bank. Dr. Fagan has served continuously on the board of directors
since Woodcreek was chartered and as Chairman of the Board of Woodcreek since
1996. He has been a director since our formation in 1996. A native Houstonian,
Dr. Fagan practiced medicine in Houston for 27 years until his retirement from
active practice in 1987.
Walter G. Finger. Mr. Finger was elected as one of our directors in
September 2000 and a director of Woodcreek in February 1998. He has been an
investor in real estate and oil and gas properties since 1994. Prior to this he
served as executive vice president of Charter Bancshares, Inc. from 1986 to
1994.
52
<PAGE>
Peter E. Fisher. Mr. Fisher joined us as president in August of 1997. He was
elected vice chairman of Woodcreek in January of 1999. Prior to joining us, Mr.
Fisher was president of Charter Bank--Houston until that bank was acquired by
NationsBank. He then became executive vice president at American Bank in
Houston. Mr. Fisher is an attorney licensed to practice law in Texas and
Illinois. He is active in numerous charitable organizations and sits on the
board of trustees for the Gulf Coast Regional Blood Center. He has been one of
our directors since August of 1997.
Charles J. Howard, M.D. Dr. Howard has been our chairman since our inception
in 1996. He is a founding director of Woodcreek. Dr. Howard has served as a
director of Vail Valley Medical Center since 1985, and served as chairman from
1992 to 1996. He retired from the general practice of medicine in 1983. He is a
licensed airline transport pilot and is an active investor in numerous
aviation-related businesses, including the only fixed base operation in Aspen,
Colorado.
Leah Boomer Huffmeister. Ms. Huffmeister has been our director since 1997.
She is vice president of sales and business development for PULSE EFT
Association in Houston where she has been employed for more than ten years. Ms.
Huffmeister received a Bachelor of Business Administration from Stephen F.
Austin State University.
Jay W. Porter. Mr. Porter has been president and chief executive officer of
Woodcreek since he joined Woodcreek in 1990. In 1999, he was elected our
executive vice president and chief credit officer. He serves as one of our
directors and as a director of both banks. Previously, Mr. Porter served as
president of Allied Jetero Bank, and chief executive officer, and director of
First Interstate Jetero Bank. He began his banking career as an examiner with
the FDIC.
James A. Woodall, Jr. Mr. Woodall became one of our directors in December
1999 when we acquired Dayton State. Mr. Woodall joined Dayton State as its
president and chief executive officer in 1992. Mr. Woodall was elected chairman
of the board of Dayton State when it was acquired by us. Since joining First
City National Bank in 1972, Mr. Woodall has held various positions of
responsibility in three banks in the Houston area. Additionally, Mr. Woodall
worked for the Texas Department of Banking, supervising and restructuring
problem banks during the late 1980s and early 1990s. Mr. Woodall lives in
Dayton where he is involved in numerous civic and professional organizations,
including serving as Chairman of the Texas Bankers' Association in 1999-2000.
Directors are elected to three year terms, classified into Classes I, II and
III. Messrs. Cain, Porter and Woodall are Class I directors with terms of
office expiring on the date of our annual meeting of shareholders in 2003; Mr.
Brad Fagan, Mr. Fisher and Ms. Huffmeister are Class II directors with terms of
office expiring on the date of our annual meeting of shareholders in 2001; and
Drs. Fagan and Howard and Mr. Finger are Class III directors with terms of
office expiring on the date of our annual meeting of shareholders in 2002. Each
of our officers is elected by the Board of Directors and holds office until his
successor is duly elected and qualified or until his earlier death, resignation
or removal.
Operation of our Board of Directors
Our Board of Directors established an Audit Committee in January of 2000.
The purpose of the Audit Committee is to review the general scope of the audit
conducted by our independent auditors and matters relating to our internal
control systems. In performing its function, the Audit Committee will review
reports from our independent auditors and meet separately with representatives
of senior management. The Audit Committee is comprised of Ms. Huffmeister, Drs.
Fagan and Howard and Mr. Cain. Prior to the formation of the Audit Committee,
all matters relating to our external audit and internal control systems were
reviewed by the Board of Directors.
Employment Agreements
Messrs. Fisher, Porter and Woodall entered into employment/retention
agreements with us in 1999. The agreements are for terms of one, two and three
years for Messrs. Porter, Fisher and Woodall, respectively.
53
<PAGE>
Mr. Fagan entered into a two-year employment agreement effective in June 2000.
The employment agreements provide, among other things, that if the employee is
terminated without cause (including constructive termination) the employee
shall be entitled to receive from us a lump sum payment equal to the remaining
salary under his contract. The agreement for Mr. Porter only provides for a
lump sum payment upon a termination after a change in control.
Compensation Committee Interlocks and Insider Participation
Matters related to compensation and employee benefit matters of our
executive officers and stock options for our employees and employees of the
banks are considered and determined by our Board of Directors. However, because
such compensation matters directly affect Messrs. Fagan, Fisher, Porter and
Woodall, who serve as directors and executive officers, Messrs. Fagan, Fisher,
Porter and Woodall do not participate in such discussions or decisions.
Director Compensation
Our directors receive a $500 fee for each meeting of our Board of Directors
attended and no fees for each committee meeting attended. Directors of
Woodcreek receive a $500 fee and directors of Dayton State receive a $400 fee
for each meeting of the respective bank's Board of Directors attended and
outside directors receive a $100 fee for each committee meeting attended.
Executive Compensation
The following table provides certain summary information concerning
compensation we paid or accrued to or on behalf of our President and Chief
Executive Officer and our other two most highly compensated executive officers
for the fiscal year ended December 31, 1999:
<TABLE>
<CAPTION>
All Other
Name and Principal Position Salary Bonus Compensation
--------------------------- -------- ------- ------------
<S> <C> <C> <C>
Peter E. Fisher.............................. $145,000 $21,750 $24,528(1)
President and Chief Executive Officer of the
Company
Jay W. Porter, Jr............................ 102,967 15,039 $17,777(2)
President of Woodcreek
James A. Woodall, Jr......................... 123,000 15,000 $22,804(3)
President and Chief Executive Officer of
Dayton State
</TABLE>
--------
(1) Mr. Fisher's other compensation includes $13,440 accrued for vested Stock
Appreciation Rights (SARs) and $6,000 in board of director fees.
(2) Mr. Porter's other compensation includes $10,752 accrued for vested SARs
and $6,000 in board of director fees.
(3) Mr. Woodall's other compensation includes $10,426 in deferred compensation,
$5,918 in company-matching 401(k) contributions, and $5,800 in board of
director fees.
Stock Option Plans
Our Board of Directors and shareholders approved a stock option plan in 1999
(1999 Plan) which authorizes the issuance of up to 200,000 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. Options under
the 1999 Plan generally must be exercised within 10 years following the date of
grant or no later than three months after optionee's termination with us, if
earlier. The 1999 Plan also provides for the granting of restricted stock
awards, stock appreciation rights, performance awards and phantom stock awards.
Options to acquire 2,000 shares of Common Stock have been granted under the
1999 Plan.
54
<PAGE>
In 1998, we adopted a stock appreciation rights plan (the SAR Plan). At
December 31, 1999, we had issued 61,000 units to key employees and directors.
Each unit (SAR) is exercisable only for cash and is evidenced by a Stock
Appreciation Rights Agreement. The cash value is the fair market value of a
share of common stock as defined in the SAR Plan less the exercise price of the
unit. The units are exercisable for cash over a ten year period with 20%
vesting each year for the first five years. All outstanding units will vest and
become exercisable upon a change of control or an initial public offering (as
defined in the SAR Plan).
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation. 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. Although it does not require the fair value based method to be adopted,
a company must comply with the disclosure requirements set forth in the
statement. We have continued to apply accounting in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations, and, accordingly, provide the pro forma disclosures of net
income and earnings per share.
Stock Appreciation Right Grants During 1999
The following table sets forth certain information concerning the number and
value of stock appreciation rights granted during the year ended December 31,
1999 to the named executive officers:
<TABLE>
<CAPTION>
Potential Realizable
Fair Value at Assumed Annual
Number of % of Total Market Rates of
Securities SARs Granted Exercise Value of Stock Price Appreciation
Underlying to Employees or Base Stock at for Option Term
Name and Principal SARs in Fiscal Price Date Expiration -------------------------
Position Granted (#) Year ($/Sh) of Grant Date 5% 10% 0%
------------------ ----------- ------------ -------- -------- ---------- -- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Peter E. Fisher......... 20,000 64.5% $5.26 $8.00 10 years $155,424 $309,798 $54,800
President and Chief
Executive Officer
James A. Woodall, Jr.... 8,000 26.7% $6.42 $8.00 10 years $ 52,889 $114,640 $12,640
President and Chief
Executive Officer of
Dayton State
</TABLE>
Stock Appreciation Right Exercises and Fiscal Year End Values
The following table sets forth certain information concerning stock
appreciation rights exercised during fiscal 1999 and the number and value of
unexercised stock appreciation rights held by each of the named executives at
December 31, 1999.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money SARs at
Number of Dollar SARs at December 31, 1999 December 31, 1999
SARs Value ------------------------- -------------------------
Name Exercised Realized Exercisable Unexercisable Exercisable Unexercisable
---- --------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Peter E. Fisher B....... -- -- 4,000 26,000 $13,440 $74,960
Jay W. Porter B......... -- -- 3,200 4,800 $10,752 $16,128
James A. Woodall, Jr. .. -- -- -- 8,000 -- $12,640
</TABLE>
Benefit Plan
We have established an employee tax-deferred savings plan pursuant to
Internal Revenue Code Section 401(k) covering substantially all employees (the
401(k) Plan). Each year we determine, in our discretion, the amount of matching
contributions. We have elected to match 25% of employee contributions not to
exceed 6% of the employee's annual compensation. Total 401(k) Plan expenses
charged to our operations for 1999 and 1998 were approximately $31,000 and
$16,000, respectively.
55
<PAGE>
INTERESTS OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
Many of our directors, executive officers and principal shareholders (i.e.,
those who own 10% or more of the common stock) and their associates, which
include corporations, partnerships and other organizations in which they are
officers or partners or in which they and their immediate families have at
least a 5% interest, are our customers. During 1999, we made loans in the
ordinary course of business to many of our directors, executive officers and
principal shareholders 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 us and did
not involve more than the normal risk of collectibility or present other
unfavorable features. Loans to our directors, executive officers and principal
shareholders are subject to limitations contained in the Federal Reserve Act,
the principal effect of which is to require that extensions of credit by us to
executive officers, directors and principal shareholders satisfy the foregoing
standards. On June 30, 2000, all of such loans aggregated $1.9 million, which
was approximately 10.83% of our Tier 1 capital at such date. At June 30, 2000,
there were unfunded commitments to executive officers, directors and principal
shareholders of $1.1 million.
We expect to have transactions on a similar basis with our directors,
executive officers and principal shareholders and their associates in the
future.
56
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK BY
MANAGEMENT AND PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of September 1, 2000, by (1) our directors and
executive officers, (2) each shareholder whom we know to own beneficially 5% or
more of the common stock and (3) all of our directors and executive officers as
a group. Unless otherwise indicated, based on information furnished by such
shareholders, management believes that each person has sole voting and
dispositive power over their shares and the address of each shareholder is the
same as our address.
<TABLE>
<CAPTION>
Number of
Name Shares Percentage
---- --------- ----------
<S> <C> <C>
Principal Shareholders
Marcella Boomer..................................... 244,324(2) 10.29%
Directors and Executive Officers
Dennis M. Cain...................................... 1,000 *
Brad Fagan.......................................... 23,750 1.0%
William H. Fagan, M.D............................... 830,078(3) 34.95%
Walter G. Finger.................................... 51,875 2.18%
Peter E. Fisher..................................... 51,875 2.18%
Charles J. Howard, M.D.............................. 404,701(4) 17.04%
Leah Boomer Huffmeister............................. 15,000(5) *
Jay W. Porter, Jr................................... 5,000 *
--------- -----
Directors and Executive Officers as a Group.......... 1,383,279 58.24%
</TABLE>
--------
* Indicates ownership which does not exceed 1.0%.
(1) The percentage beneficially owned was calculated based on 2,375,000 shares
of common stock issued and outstanding.
(2) Includes 78,000 shares held of record by the James B. Boomer Trust, of
which Ms. Boomer is the Trustee, and 54,162 shares held of record by the
James B. Boomer Marital Exempt Trust, of which Ms. Boomer is the Trustee.
(3) Includes 74,530 shares held of record by Marilyn B. Fagan, the spouse of
Dr. Fagan.
(4) Includes 37,392 shares held of record by Cathryn L. Howard, the spouse of
Dr. Howard.
(5) Includes 5,000 shares held of record by Leah Boomer Huffmeister as
custodian for her minor daughter.
57
<PAGE>
SUPERVISION AND REGULATION
The supervision and regulation of financial 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 financial holding company shareholders or creditors.
The banking agencies have broad enforcement power over financial 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 we and the
banks 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. We believe that
we are in compliance in all material respects with these laws and regulations.
Paradigm Bancorporation, Inc.
We are a financial holding company registered under the Gramm-Leach-Bliley
Act, and subject to the Bank Holding Company Act of 1956 as amended (BHCA), and
therefore subject to supervision, regulation and examination by the Federal
Reserve. The BHCA and other federal laws subject financial 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 that financial 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
financial holding companies should not maintain a level of cash dividends that
undermines the financial holding company's ability to serve as a source of
strength to its banking subsidiaries.
Under Federal Reserve policy, a financial 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 policy, a holding company may not be inclined to
provide it. As discussed below, a financial holding company in certain
circumstances could be required to guarantee the capital plan of an
undercapitalized banking subsidiary.
In the event of a financial 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.
Scope of Permissible Activities. Except as provided below, we are prohibited
from acquiring a direct or indirect interest in or control of more than 5% of
the voting shares of any company which is not a bank or financial holding
company and from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks or furnishing services to its
subsidiary banks, except we may engage in and may own shares of companies
engaged in certain activities found by the Federal Reserve to be so closely
related to banking or managing and controlling banks as to be a proper incident
thereto. These activities include, among others, operating a mortgage, finance,
credit card, or factoring company; performing certain data processing
operations; providing investment and financial advice; acting as an insurance
agent for certain types of credit-related insurance; leasing personal property
on a full-payout, non-operating basis; and providing certain stock brokerage
and investment advisory services. In approving acquisitions or the addition of
activities, the Federal Reserve considers whether the acquisition or the
additional activities can reasonably be expected to produce benefits to the
public, such as greater convenience, increased competition, or gains in
efficiency, that outweigh such possible adverse effects as undue concentration
of resources, decreased or unfair competition, conflicts of interest or unsound
banking practices.
58
<PAGE>
On November 12, 1999, President Clinton signed into law the Gramm-Leach-
Bliley Act which eliminated the barriers to affiliations among banks,
securities firms, insurance companies and other financial service providers. We
elected and were approved to become a financial holding company in April of
2000. The Gramm-Leach-Bliley Act permits financial holding companies to become
financial holding companies and thereby affiliate with securities firms and
insurance companies and engage in other activities that are financial in
nature. The Gramm-Leach-Bliley Act defines "financial in nature" to include
securities underwriting, dealing and market making; sponsoring mutual funds and
investment companies; insurance underwriting and agency; merchant banking
activities; and activities that the Federal Reserve has determined to be
closely related to banking. No regulatory approval will be required for a
financial holding company to acquire a company, other than a bank or savings
association, engaged in activities that are financial in nature or incidental
to activities that are financial in nature, as determined by the Federal
Reserve.
While the Federal Reserve will serve as the umbrella regulator for financial
holding companies and has the power to examine banking organizations engaged in
new activities, regulation and supervision of activities which are financial in
nature or determined to be incidental to such financial activities will be
handled along functional lines. Accordingly, activities of subsidiaries of a
financial holding company will be regulated by the agency or authorities with
the most experience regulating that activity as it is conducted in a financial
holding company.
Safe and Sound Banking Practices. Financial holding companies are not
permitted to engage in unsafe and unsound banking practices. The Federal
Reserve's Regulation Y, for example, generally requires a holding company to
give the Federal Reserve 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 its consolidated net worth. The Federal Reserve 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 could take the position that paying
a dividend would constitute an unsafe or unsound banking practice.
The Federal Reserve has broad authority to prohibit activities of financial
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
$1.0 million for each day the activity continues.
Anti-Tying Restrictions. Financial holding companies and their affiliates
are prohibited from tying the provision of certain services, such as extensions
of credit, to other nonbanking services offered by a holding company or its
affiliates.
Capital Adequacy Requirements. The Federal Reserve has adopted a system
using risk-based capital guidelines to evaluate the capital adequacy of
financial 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, 2000, our ratio of Tier 1
capital to total risk-weighted assets was 13.09% and our ratio of total capital
to total risk-weighted assets was 13.70%.
In addition to the risk-based capital guidelines, the Federal Reserve uses a
leverage ratio as an additional tool to evaluate the capital adequacy of
financial holding companies. The leverage ratio is a company's Tier 1 capital
divided by its average total consolidated assets. Certain highly rated
financial holding companies may maintain a minimum leverage ratio of 3.0%, but
other financial holding companies are required to maintain a leverage ratio of
at least 4.0%. As of June 30, 2000, our leverage ratio was 8.80%.
59
<PAGE>
The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
certain specified criteria. 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 guidelines also
provide that banking organizations experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels, without significant
reliance on intangible assets.
Imposition of Liability for Undercapitalized Subsidiaries. Bank regulators
are required to take prompt corrective action to resolve problems associated
with insured depository institutions whose capital declines below certain
levels. In the event an institution becomes undercapitalized, it must submit a
capital restoration plan. The capital restoration plan will not be accepted by
the regulators unless each company having control of the undercapitalized
institution guarantees the subsidiary's compliance with the capital restoration
plan up to a certain specified amount. Any such guarantee from a depository
institution's holding company is entitled to a priority of payment in
bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank
is limited to the lesser of 5% of the institution's assets at the time it
became undercapitalized or the amount necessary to cause the institution to be
adequately capitalized. The bank regulators have greater power in situations
where an institution becomes significantly or critically undercapitalized or
fails to submit a capital restoration plan. For example, a financial holding
company controlling such an institution can be required to obtain prior Federal
Reserve approval of proposed dividends, or might be required to consent to a
consolidation or to divest the troubled institution or other affiliates.
Acquisitions by Financial Holding Companies. The BHCA requires every
financial holding company to obtain the prior approval of the Federal Reserve
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 financial
holding companies, the Federal Reserve is required to consider the financial
and managerial resources and future prospects of the financial 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 financial holding company unless
the Federal Reserve has been notified and has not objected to the transaction.
Under a rebuttable presumption established by the Federal Reserve, the
acquisition of 10% or more of a class of voting stock of a financial holding
company with a class of securities registered under Section 12 of the Exchange
Act would, under the circumstances set forth in the presumption, constitute
acquisition of control of us.
In addition, any entity is required to obtain the approval of the Federal
Reserve under the BHCA before acquiring 25% (5% in the case of an acquiror that
is a financial holding company) or more of our outstanding common stock, or
otherwise obtaining control or a controlling influence over us.
Woodcreek and Dayton State
The banks are Texas-chartered banking associations, the deposits of which
are insured by the Bank Insurance Fund (BIF) of the FDIC. The banks are not
members of the Federal Reserve System; therefore, the banks are subject to
supervision and regulation by the FDIC and the Texas Banking Department. Such
supervision and regulation subjects the banks to special restrictions,
requirements, potential enforcement actions and periodic examination by the
FDIC and the Texas Banking Department. Because the Federal Reserve regulates
us, as the financial holding company parent of the banks, the Federal Reserve
also has supervisory authority which directly affects the banks.
60
<PAGE>
Equivalence to National Bank Powers. The Texas Constitution, as amended in
1986, provides that a Texas-chartered bank has the same rights and privileges
that are or may be granted to national banks domiciled in Texas. To the extent
that the Texas laws and regulations may have allowed state-chartered banks to
engage in a broader range of activities than national banks, FDICIA has
operated to limit this authority. FDICIA provides that no state bank or
subsidiary thereof may engage as principal in any activity not permitted for
national banks, unless the institution complies with applicable capital
requirements and the FDIC determines that the activity poses no significant
risk to the insurance fund. In general, statutory restrictions on the
activities of banks are aimed at protecting the safety and soundness of
depository institutions.
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 banks and their nonbanking affiliates, including us and any of our
nonbanking subsidiaries, 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
our securities or obligations or the securities or obligations of any of our
nonbanking subsidiaries.
Affiliate transactions are also subject to Section 23B of the Federal
Reserve Act which generally requires that certain transactions between the
banks and their affiliates be on terms substantially the same, or at least as
favorable to the banks, 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 Federal Reserve 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 banks have provided a substantial part of our operating
funds and for the foreseeable future it is anticipated that dividends paid by
the banks to us will continue to be our principal source of operating funds.
Capital adequacy requirements serve to limit the amount of dividends that may
be paid by the banks. Under federal law, the banks cannot pay a dividend if,
after paying the dividend, the banks 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 we are a legal entity separate and distinct from our subsidiaries,
our 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 us)
or any shareholder or creditor thereof.
Examinations. The FDIC periodically examines and evaluates insured banks.
Based on 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.
61
<PAGE>
Audit Reports. Insured institutions with total assets of $500 million or
more must submit annual audit reports prepared by independent auditors to
federal and state regulators. In some instances, the audit report of the
institution's holding company can be used to satisfy this requirement. Auditors
must receive examination reports, supervisory agreements and reports of
enforcement actions. In addition, financial statements prepared in accordance
with generally accepted accounting principles, management's certifications
concerning responsibility for the financial statements, internal controls and
compliance with legal requirements designated by the FDIC, and an attestation
by the auditor regarding the statements of management relating to the internal
controls must be submitted. For institutions with total assets of more than $3
billion, independent auditors may be required to review quarterly financial
statements. FDICIA requires that independent audit committees be formed,
consisting of outside directors only. The committees of such institutions must
include members 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 banks as for us. As of June 30,
2000, Woodcreek's ratio of Tier 1 capital to total risk-weighted assets was
9.87% and its ratio of total capital to total risk-weighted assets was 10.38%.
As of June 30, 2000, Dayton State's ratio of Tier 1 capital to total risk-
weighted assets was 17.10%, and its ratio of total capital to total risk-
weighted assets was 17.85%.
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 6.0%. As of June 30, 2000,
Woodcreek's and Dayton State's ratios of Tier 1 capital to average total assets
(leverage ratio) were 7.12% and 10.78%, respectively.
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. The banks are classified as
"well capitalized" for purposes of the FDIC's prompt corrective action
regulations.
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
62
<PAGE>
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 banks must pay assessments to the FDIC
for federal deposit insurance protection. The FDIC has adopted a risk-based
assessment system as required by FDICIA. Under this system, FDIC-insured
depository institutions pay insurance premiums at rates based on their risk
classification. Institutions assigned to higher risk classifications (that is,
institutions that pose a greater risk of loss to their respective deposit
insurance funds) pay assessments at higher rates than institutions that pose a
lower risk. An institution's risk classification is assigned based on its
capital levels and the level of supervisory concern the institution poses to
the regulators. In addition, the FDIC can impose special assessments in certain
instances. The current range of BIF assessments is between zero and 0.27% of
deposits.
The FDIC established a process for raising or lowering all rates for insured
institutions semi-annually if conditions warrant a change. Under this 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 Savings Association
Insurance Fund (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.
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 us or our 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 banking institution is undercapitalized and
has no reasonable prospect of becoming adequately capitalized; fails to become
adequately capitalized when required to do so; fails to submit a timely and
acceptable capital restoration plan; or materially fails to implement an
accepted capital restoration plan. The Texas Banking Department also has broad
enforcement powers over the bank, including the power to impose orders, remove
officers and directors, impose fines and appoint supervisors and conservators.
Brokered Deposit Restrictions. Institutions that are only adequately
capitalized (as defined for purposes of the prompt corrective action rules
described above) 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.
63
<PAGE>
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 financial 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 financial holding company. An unsatisfactory record can
substantially delay or block the transaction.
Consumer Laws and Regulations. In addition to the laws and regulations
discussed herein, the banks are 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 banks must comply with the applicable
provisions of these consumer protection laws and regulations as part of its
ongoing customer relations.
Instability and Regulatory Structure
Various legislation, including proposals to overhaul the bank regulatory
system, expand the powers of banking institutions and financial 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 environment in which we and our banking
subsidiaries operate in substantial and unpredictable ways. We cannot determine
the ultimate effect that potential legislation, if enacted, or implementing
regulations with respect thereto, would have upon our financial condition or
results of operations or that of our 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 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, have a significant effect on the operating results of
financial holding companies and their subsidiaries. Among the means available
to the Federal Reserve 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 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 us and our subsidiaries cannot be
predicted.
64
<PAGE>
DESCRIPTION OF THE TRUST
The trust is a statutory business trust formed pursuant to the Delaware
Business Trust Act under a trust agreement executed by us and the trustees of
the trust, and a certificate of trust filed with the Delaware Secretary of
State. The trust agreement will be amended and restated in its entirety in the
form filed as an exhibit to the registration statement of which the prospectus
is a part, as of the date the trust preferred securities are initially issued.
The trust agreement will be qualified under the Trust Indenture Act of 1939.
Upon issuance of the trust preferred securities, the holders will own all of
the issued and outstanding trust preferred securities. We will acquire common
securities in an amount equal to at least 3% of the total capital of the trust
and will own, directly or indirectly, all of the issued and outstanding common
securities. The trust preferred securities, together with the common securities
are referred to as the trust securities). The trust exists for the purposes of:
. issuing the trust preferred securities to the public for cash;
. issuing its common securities to us in exchange for our capitalization
of the trust;
. investing the proceeds from the sale of the trust securities in an
equivalent amount of debentures; and
. engaging in other activities that are incidental to those listed above.
The rights of the holders of the trust securities are as set forth in the
trust agreement, the Delaware Business Trust Act and the Trust Indenture Act.
The trust agreement does not permit the trust to borrow money or make any
investment other than in the debentures. Other than with respect to the trust
securities, we have agreed to pay for all debts and obligations and all costs
and expenses of the trust and the offering of the trust preferred securities,
including the fees and expenses of the trustees and any income taxes, duties
and other governmental charges, and all costs and expenses related to these
charges, to which the trust may become subject, except for United States
withholding taxes that are properly withheld.
The number of trustees of the trust will initially be five. Three of the
trustees will be persons who are our employees or officers or who are
affiliated with us (the administrative trustees). The current administrative
trustees are Messrs. Fisher and Porter and Dr. Fagan. The fourth trustee will
be an institution that maintains its principal place of business in the State
of Delaware (the Delaware trustee). Initially, First Union Trust Company,
National Association, a national banking association (First Union), will act as
Delaware trustee. The fifth trustee will be a financial institution that is
unaffiliated with us and will serve as institutional trustee under the trust
agreement and as indenture trustee for the purposes of compliance with the
provisions of the Trust Indenture Act (the property trustee). Initially, First
Union will also be the property trustee. For the purpose of compliance with the
provisions of the Trust Indenture Act, First Union will also act as guarantee
trustee and indenture trustee under the guarantee agreement and the indenture.
We, as holder of all of the common securities, will have the right to appoint,
remove or replace any trustee unless an event of default under the indenture
shall have occurred and be continuing, in which case only the holders of the
trust preferred securities may remove the indenture trustee or the property
trustee. The trust has a term of approximately 31 years but may terminate
earlier as provided in the trust agreement.
The property trustee will hold the debentures for the benefit of the holders
of the trust securities and will have the power to exercise all rights, powers
and privileges under the indenture as the holder of the debentures. In
addition, the property trustee will maintain exclusive control of a segregated
noninterest-bearing property account to hold all payments made in respect of
the debentures for the benefit of the holders of the trust securities. The
property trustee will make payments of distributions and payments on
liquidation, redemption and otherwise to the holders of the trust securities
out of funds from the property account. The guarantee trustee will hold the
guarantee for the benefit of the holders of the trust preferred securities.
65
<PAGE>
DESCRIPTION OF THE TRUST PREFERRED SECURITIES
The trust preferred securities will be issued pursuant to the trust
agreement, which will be qualified as an indenture under the Trust Indenture
Act. First Union will act as property trustee for the trust preferred
securities under the trust agreement for purposes of complying with the
provisions of the Trust Indenture Act. The terms of the trust preferred
securities will include those stated in the trust agreement and those made part
of the trust agreement by the Trust Indenture Act. The following is a summary
of the material terms and provisions of the trust preferred securities and the
trust agreement. A form of the trust agreement has been filed as an exhibit to
the registration statement of which this prospectus forms a part.
General
The trust agreement authorizes the administrative trustees, on behalf of the
trust, to issue the trust securities. We will own all of the common securities
issued by the trust. The trust preferred securities will represent preferred
undivided beneficial interests in the assets of the trust, and the holders of
the trust preferred securities will be entitled to a preference upon an event
of default with respect to distributions and amounts payable on redemption or
liquidation over the common securities. The trust is not permitted to issue any
securities other than the trust securities or incur any other indebtedness.
The trust preferred securities will rank equally, and payments on the trust
preferred securities will be made proportionally, with the common securities,
except as described under "--Subordination of Common Securities" below.
The property trustee will hold legal title to the debentures in trust for
the benefit of the holders of the trust securities. We guarantee the payment of
distributions out of money held by the trust, and payments upon redemption of
the trust preferred securities or liquidation of the trust, to the extent the
trust has funds available for such distributions. The guarantee agreement does
not cover the payment of any distribution or the liquidation amount when the
trust does not have sufficient funds available to make these payments.
Distributions
Source of Distributions. The funds of the trust available for distribution
to holders of the trust preferred securities will be limited to payments made
under the debentures, which the trust will purchase with the proceeds from the
sale of the trust securities. Distributions will be paid through the property
trustee, who will hold the amounts received from our interest payments on the
debentures in the property account for the benefit of the holders of the trust
preferred securities. If we do not make interest payments on the debentures,
the property trustee will not have funds available to pay distributions on the
trust preferred securities.
Payment of Distributions. Distributions on the trust preferred securities
will be payable at a floating rate of 3.75% over the three-month London
interbank offered rate (LIBOR) of the stated liquidation amount, payable
quarterly on March 31, June 30, September 30 and December 31 of each year, to
the holders of the trust preferred securities on the relevant record dates. The
record date will be the business day immediately preceding the relevant
distribution date. The first distribution date for the trust preferred
securities will be , 2000.
Distributions will accumulate from the date of issuance, and the amount
payable for any period will be computed on the basis of a 360-day year of
twelve 30-day months. If the distribution date is not a business day, then
payment of the distributions will be made on the next day that is a business
day, without any additional interest or other payment in respect of the delay.
However, if the next business day is in the next calendar year, payment of the
distribution will be made on the immediately preceding business day. Business
day means any day other than a Saturday, a Sunday, a day on which banking
institutions in The City of New York or Wilmington, Delaware are authorized or
required by law or executive order to remain closed or a day on which the
corporate trust office of the property trustee or the indenture trustee is
closed for business.
66
<PAGE>
The interest rate for each interest period will be set on the 15th day of
the months, March, June, September and December of each year; provided, that
the initial interest rate will be set on , 2000. If the interest
reset date is not a London business day, such interest reset date will be the
next succeeding day which is a London business day. The three-month LIBOR, will
be determined as follows:
(1) On the second London business day preceding each interest reset
date, , the Calculation Agent will determine the three-month
LIBOR rate which shall be the rate for deposits in the London interbank
market in U.S. dollars having a three-month maturity commencing on the
second London business day immediately following such interest
determination date which appears on the Telerate Page 3750 as of 11:00
a.m., London time, on such interest determination date. If the three-month
LIBOR rate on such interest determination date does not appear on the
Telerate Page 3750, such three-month LIBOR rate will be determined as
described in (2) below. London business day means any day on which dealings
in deposits in U.S. dollars are transacted in the London interbank market.
(2) If the three-month LIBOR rate does not appear on the Telerate Page
3750 as specified above, the Calculation Agent will request the principal
London offices of each of four major banks in the London interbank market,
as selected by the Calculation Agent, to provide the Calculation Agent with
its offered quotation for deposits in U.S. dollars having a three-month
maturity commencing on the second London business day immediately following
such interest determination date to prime banks in the London interbank
market at approximately 11:00 a.m., London time, on such interest
determination date and in a principal amount that is representative for a
single transaction in such market at such time. If at least two such
quotations are provided, the three-month LIBOR rate on such interest
determination date will be the arithmetic mean (rounded upwards, if
necessary, to the nearest one hundred-thousandth of a percentage point,
with five or more one-millionths of one percentage point rounded upwards)
of such quotations. If fewer than two quotations are provided, the three-
month LIBOR rate determined on such interest determination date will be the
arithmetic mean (rounded upwards, if necessary, to the nearest one hundred-
thousandth of a percentage point, with five or more one-millionths of one
percentage point rounded upwards) of the rates quoted at approximately
11:00 a.m., New York City time, on such interest determination date for
loans in U.S. dollars to leading European banks, having a three-month
maturity commencing on the second London business day immediately following
such interest determination date and in a principal amount that is
representative for a single transaction in such market at such time by
three major banks in New York City selected by the Calculation Agent;
provided, however, if the banks so selected by the Calculation Agent are
not quoting as aforesaid, the three-month LIBOR rate with respect to such
interest determination date will be the three-month LIBOR rate in effect on
such interest determination date.
Extension Period
As long as no event of default under the indenture has occurred and is
continuing, we have the right to defer the payment of interest on the
debentures at any time for a period not exceeding 20 consecutive quarters.
However, no extension period may extend beyond , 2030 or end on a date other
than an interest payment date, which dates are the same as the distribution
dates. If we defer the payment of interest, quarterly distributions on the
trust preferred securities will also be deferred during any such extension
period. Any deferred distributions under the trust preferred securities will
accumulate additional amounts at a floating rate of 3.75% over the three month
London LIBOR rate compounded quarterly from the relevant distribution date. The
term distributions as used in this prospectus includes those accumulated
amounts.
During an extension period, we may not:
. declare or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of our
capital stock (other than the reclassification of any class of our
capital stock into another class of capital stock) or allow any of our
subsidiaries to do the same with respect to their capital stock (other
than the payment of dividends or distributions to us);
67
<PAGE>
. make any payment of principal, interest or premium on or repay,
repurchase or redeem any debt securities that rank equally with or
junior in interest to the debentures or allow any of our subsidiaries to
do the same;
. make any guarantee payments with respect to any other guarantee by us of
any other debt securities of any of our subsidiaries if the guarantee
ranks equally with or junior to the debentures other than payments under
the guarantee; or
. redeem, purchase or acquire less than all of the debentures or any of
the trust preferred securities.
After the termination of any extension period and the payment of all
amounts then due, we may elect to begin a new extension period, subject to the
above requirements.
We do not currently intend to exercise our right to defer distributions on
the trust preferred securities by extending the interest payment period on the
debentures.
Redemption or Exchange
The trust will redeem your trust preferred securities upon repayment of the
debentures at maturity or the earlier redemption. The trust will redeem your
trust preferred securities upon the same terms as which we redeem the
debentures.
General. Subject to the prior approval of the Federal Reserve, if required,
we may redeem the debentures prior to maturity:
. in whole at any time, or in part from time to time, on or after , 2005;
or
. in whole, but not in part, at any time within 90 days following the
occurrence of a Tax Event, an Investment Company Event or a Capital
Treatment Event as defined below.
Mandatory Redemption. Upon our repayment or redemption, in whole or in
part, of any debentures, whether on , 2030 or earlier, the property trustee
will apply the proceeds to redeem a like amount of the trust securities, upon
not less than 30 days nor more than 60 days notice, at the redemption price.
The redemption price will equal 100% of the aggregate liquidation amount of
the trust securities plus accumulated but unpaid distributions and Additional
Interest (as defined below) to the date of redemption. If less than all of the
debentures are to be repaid or redeemed on a date of redemption, then the
proceeds from such repayment or redemption will be allocated to redemption of
the trust preferred securities and the common securities proportionally.
Additional Interest means the additional amounts as may be necessary to be
paid by us in order that the amount of distributions then due and payable by
the trust on the outstanding trust securities will not be reduced as a result
of any additional taxes, duties and other governmental charges to which the
trust has become subject.
Distribution of Debentures. Upon prior approval of the Federal Reserve, if
required, we will have the right at any time to dissolve, wind-up or terminate
the trust and, after satisfaction of the liabilities of creditors of the trust
as provided by applicable law, including, without limitation, amounts due and
owing the trustees of the trust, cause the debentures to be distributed
directly to the holders of trust securities in liquidation of the trust. See
"Liquidation Distribution Upon Termination."
After the liquidation date fixed for any distribution of debentures in
exchange for trust preferred securities:
. those trust preferred securities will no longer be deemed to be
outstanding; and
. any certificates representing trust preferred securities will be deemed
to represent debentures with a principal amount equal to the liquidation
amount of those trust preferred securities, and bearing
68
<PAGE>
accrued and unpaid interest in an amount equal to the accumulated and
unpaid distributions on the trust preferred securities until the
certificates are presented to the administrative trustees or their agent
for transfer or reissuance.
There can be no assurance as to the market prices for the trust preferred
securities or the debentures that may be distributed if a dissolution and
liquidation of the trust were to occur. The trust preferred securities that an
investor may purchase, or the debentures that an investor may receive on
dissolution and liquidation of the trust, may trade at a discount to the price
that the investor paid to purchase the trust preferred securities.
Redemption upon a Tax Event, Investment Company Event or Capital Treatment
Event. If a Tax Event, an Investment Company Event or a Capital Treatment Event
(each as defined below) occurs, we have the right to redeem the debentures in
whole and thereby cause a mandatory redemption of the trust securities in whole
at the redemption price. If one of these events occurs and we do not elect to
redeem the debentures, or we elect to dissolve the trust and cause the
debentures to be distributed to holders of the trust securities, then the trust
preferred securities will remain outstanding and Additional Interest may be
payable on the debentures. See "Description of Debentures--Redemption or
Exchange."
Tax Event means the receipt by the trust and us of an opinion of counsel
experienced in such matters stating that there is more than an insubstantial
risk that:
. interest payable by us on the debentures is not, or within 90 days of
the date of the opinion will not be, deductible by us, in whole or in
part, for federal income tax purposes;
. the trust is, or will be within 90 days after the date of the opinion,
subject to federal income tax with respect to income received or accrued
on the debentures; or
. the trust is, or will be within 90 days after the date of opinion,
subject to more than an immaterial amount of other taxes, duties,
assessments or other governmental charges, as a result of any amendment
to any tax laws or regulations.
Investment Company Event means the receipt by the trust and us of an opinion
of counsel experienced in such matters to the effect that the trust is or will
be considered an investment company that is required to be registered under the
Investment Company Act, as a result of the occurrence of a change in law or
regulation or a change in interpretation or application of law or regulation.
Capital Treatment Event means the receipt by the trust and us of an opinion
of counsel experienced in such matters to the effect that there is more than an
insubstantial risk of impairment of our ability to treat the trust preferred
securities as Tier 1 capital for purposes of the current capital adequacy
guidelines of the Federal Reserve, as a result of any amendment to any laws or
any regulations.
For all of the events described above, we or the trust must request and
receive an opinion of counsel with regard to the event within a reasonable
period of time after we became aware of the possible occurrence of an event of
this kind.
Redemption Procedures
Trust preferred securities will be redeemed at the redemption price with the
applicable proceeds from our contemporaneous redemption of the debentures.
Redemptions of the trust preferred securities will be made and the redemption
price will be payable on each date of redemption only to the extent that the
trust has funds available for the payment of the redemption price. See
"Subordination of Common Securities."
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the date of redemption to each holder of trust securities to be
redeemed at its registered address. Unless we default in payment of the
redemption price on the debentures, interest will cease to accrue on the
debentures called for redemption on and after the date of redemption.
69
<PAGE>
If the trust gives notice of redemption of its trust securities, then the
property trustee, to the extent funds are available, will irrevocably deposit
with the depositary for the trust securities funds sufficient to pay the
aggregate redemption price and will give the depositary for the trust
securities irrevocable instructions and authority to pay the redemption price
to the holders upon surrender of their certificates evidencing the trust
securities. See "Book-Entry Issuance." If the trust preferred securities are no
longer in book-entry form, the property trustee, to the extent funds are
available, will deposit with the designated paying agent for such trust
preferred securities funds sufficient to pay the aggregate redemption price and
will give the paying agent irrevocable instructions and authority to pay the
redemption price to the holders upon surrender of their certificates evidencing
the trust preferred securities. Notwithstanding the foregoing, distributions
payable on or prior to the date of redemption for any trust securities called
for redemption will be payable to the holders of the trust securities on the
relevant record dates for the related distribution dates.
If notice of redemption has been given and we have deposited funds as
required, then on the date of the deposit all rights of the holders of the
trust securities called for redemption will cease, except the right to receive
the redemption price. No interest on such redemption price will accrue after
the date of redemption. The trust securities will also cease to be outstanding
on the date of the deposit. If any date fixed for redemption of trust
securities is not a business day, then payment of the redemption price payable
on that date will be made on the next day that is a business day without any
additional interest or other payment in respect of the delay. However, if the
next business day is in the next succeeding calendar year, payment of the
interest will be made on the immediately preceding business day.
If payment of the redemption price in respect of trust securities called for
redemption is improperly withheld or refused and not paid by the trust, or by
us pursuant to the guarantee, distributions on the trust securities will
continue to accumulate at the applicable rate from the date of redemption
originally established by the trust for the trust securities to the date the
redemption price is actually paid. In this case, the actual payment date will
be considered the date fixed for redemption for purposes of calculating the
redemption price. See "Description of the Guarantee."
Payment of the redemption price on the trust preferred securities and any
distribution of debentures to holders of trust preferred securities will be
made to the applicable recordholders as they appear on the register for the
trust preferred securities on the relevant record date. The record date will be
the business day immediately preceding the date of redemption or liquidation
date, as applicable.
If less than all of the trust securities are to be redeemed, then the
aggregate liquidation amount of the trust securities to be redeemed will be
allocated proportionately between the common securities and the trust preferred
securities based upon the relative liquidation amounts. The particular trust
preferred securities to be redeemed will be selected by the property trustee in
its discretion. This method may provide for the redemption of portions equal to
$10 or an integral multiple of $10 of the liquidation amount of the trust
preferred securities. The property trustee will promptly notify the registrar
for the trust preferred securities in writing of the trust preferred securities
selected for redemption and, in the case of any trust preferred securities
selected for partial redemption, the liquidation amount to be redeemed. For all
purposes of the trust agreement, unless the context otherwise requires, all
provisions relating to the redemption of trust preferred securities will relate
to the portion of the aggregate liquidation amount of trust preferred
securities which has been or is to be redeemed.
Subject to applicable law, and if we are not exercising our right to defer
interest payments on the debentures, we may, at any time, purchase outstanding
trust preferred securities.
70
<PAGE>
Subordination of Common Securities
Payment of distributions on, and the redemption price of, the trust
preferred securities and common securities will be made based on the
liquidation amount of these securities. However, if an event of default under
the indenture has occurred and is continuing, no distributions on or redemption
of the common securities will be made unless:
. payment in full in cash of all accumulated and unpaid distributions,
including Additional Interest, if any is required, on all of the
outstanding trust preferred securities for all distribution periods
terminating on or before that time;
. in the case of payment of the redemption price, payment of the full
amount of the redemption price on all of the outstanding trust preferred
securities then called for redemption, will have been made or provided
for; and
. all funds available to the property trustee will first be applied to the
payment in full in cash of all distributions on, or the redemption price
of, the trust preferred securities then due and payable.
In the case of the occurrence and continuance of any event of default under
the trust agreement resulting from an event of default under the indenture, we,
as holder of the common securities, will be deemed to have waived any right to
act with respect to that event of default under the trust agreement until the
effect of the event of default has been cured, waived or otherwise eliminated.
Until the event of default under the trust agreement has been so cured, waived
or otherwise eliminated, the property trustee will act solely on behalf of the
holders of the trust preferred securities and not on our behalf, and only the
holders of the trust preferred securities will have the right to direct the
property trustee to act on their behalf.
Liquidation Distribution Upon Termination
We will have the right at any time to dissolve, wind-up or terminate the
trust and cause the debentures to be distributed to the holders of the trust
preferred securities subject to Federal Reserve approval, if required.
In addition, the trust will automatically terminate upon expiration of its
term and will terminate earlier on the first to occur of:
. our bankruptcy, dissolution or liquidation;
. the distribution of a like amount of the debentures to the holders of
the trust securities, if we have given written direction to the property
trustee to terminate the trust;
. redemption of all of the trust preferred securities as described under
"--Redemption or Exchange--Mandatory Redemption;" or
. the entry of an order for the dissolution of the trust by a court of
competent jurisdiction.
With the exception of a redemption as described under "--Redemption or
Exchange--Mandatory Redemption," if an early termination occurs, the trust will
be liquidated by the administrative trustees as expeditiously as they determine
to be possible. After satisfaction of liabilities to creditors of the trust as
provided by applicable law, the trustees will distribute to the holders of
trust securities debentures:
. an aggregate stated principal amount equal to the aggregate stated
liquidation amount of the trust securities;
. with an interest rate identical to the distribution rate on the trust
securities; and
. with accrued and unpaid interest equal to accumulated and unpaid
distributions on the trust securities.
However, if the property trustee determines that the distribution is not
practical, then the holders will be entitled to receive a proportionate amount
of the liquidation distribution. The liquidation distribution will be the
71
<PAGE>
amount equal to the aggregate of the liquidation amount plus accumulated and
unpaid distributions to the date of payment. If the liquidation distribution
can be paid only in part because the trust has insufficient assets available to
pay in full the aggregate liquidation distribution, then the amounts payable
directly by the trust on the trust securities will be paid to us, as the holder
of the common securities, and the holders of the trust preferred securities on
a proportional basis based on liquidation amounts.
Under current United States federal income tax law and interpretations and
assuming that the trust is treated as a grantor trust, as is expected, a
distribution of the debentures should not be a taxable event to holders of the
trust preferred securities. Should there be a change in law, a change in legal
interpretation, a Tax Event or another circumstance, however, the distribution
could be a taxable event to holders of the trust preferred securities. See
"Federal Income Tax Consequences--Receipt of Debentures or Cash Upon
Liquidation of the Trust."
If we do not elect to redeem the debentures prior to maturity or to
liquidate the trust and distribute the debentures to holders of the trust
preferred securities, the trust preferred securities will remain outstanding
until the repayment of the debentures. If we elect to dissolve the trust and
thus cause the debentures to be distributed to holders of the trust preferred
securities in liquidation of the trust, we will continue to have the right to
shorten the maturity of the debentures. See "Description of the Debentures--
General."
Liquidation Value
The amount of the liquidation distribution payable on the trust preferred
securities in the event of any liquidation of the trust is $10 per trust
preferred security plus accumulated and unpaid distributions to the date of
payment, which may be in the form of a distribution of debentures having a
liquidation value and accrued interest of an equal amount. See "--Liquidation
Distribution Upon Termination."
Events of Default; Notice
Any one of the following events constitutes an event of default under the
trust agreement with respect to the trust preferred securities:
. the occurrence of an event of default under the indenture;
. a default by the trust in the payment of any distribution when it
becomes due and payable, and continuation of the default for a period of
30 days;
. a default by the trust in the payment of any redemption price of any of
the trust securities when it becomes due and payable;
. a default in the performance, or breach, in any material respect, of any
covenant or warranty of the trust in the trust agreement, other than
those defaults covered in the previous two points, and continuation of
the default or breach for a period of 60 days after there has been
given, by registered or certified mail, to the trustee(s) by the holders
of at least 25% in aggregate liquidation amount of the outstanding trust
preferred securities, a written notice specifying the default or breach
and requiring it to be remedied and stating that the notice is a "Notice
of Default" under the trust agreement; or
. the occurrence of events of bankruptcy or insolvency with respect to the
property trustee and our failure to appoint a successor property trustee
within 60 days.
Within five business days after the occurrence of any event of default
actually known to the property trustee, the property trustee will transmit
notice of the event of default to the holders of the trust preferred
securities, the administrative trustees and to us, unless the event of default
has been cured or waived. We and the administrative trustees are required to
file annually with the property trustee a certificate as to whether or not we
are each in compliance with all the conditions and covenants applicable to us
and the administrative trustee, respectively, under the trust agreement.
72
<PAGE>
If an event of default under the indenture has occurred and is continuing,
the trust preferred securities will have preference over the common securities
upon termination of the trust. The existence of an event of default under the
trust agreement does not entitle the holders of trust preferred securities to
accelerate the maturity thereof, unless the event of default is caused by the
occurrence of an event of default under the indenture and both the indenture
trustee and holders of at least 25% in principal amount of the debentures fail
to accelerate the maturity thereof.
Removal of the Trustees
Unless an event of default under the indenture has occurred and is
continuing, any trustee may be removed at any time by us. If an event of
default under the indenture has occurred and is continuing, only the holders of
a majority in liquidation amount of the outstanding trust preferred securities
may remove the property trustee or the Delaware trustee. The holders of the
trust preferred securities have no right to vote to appoint, remove or replace
the administrative trustees. These rights are vested exclusively with us as the
holder of the common securities. No resignation or removal of a trustee and no
appointment of a successor trustee will be effective until the successor
trustee accepts the appointment in accordance with the trust agreement.
Co-Trustees and Separate Property Trustee
Unless an event of default under the indenture has occurred and is
continuing, for the purpose of meeting the legal requirements of the Trust
Indenture Act or of any jurisdiction in which any part of the trust property
may at the time be located, we will have the power to appoint at any time or
times, and upon written request of the property trustee will appoint, one or
more persons or entity to act as a co-trustee, jointly with the property
trustee, of all or any part of the trust property, or as separate trustee of
any trust property. In either case, these trustees will have the powers that
may be provided in the instrument of appointment, and will have vested in them
any property, title, right or power deemed necessary or desirable, subject to
the trust agreement. If an event of default under the indenture has occurred
and is continuing, the property trustee alone will have power to make the
appointment.
Merger or Consolidation of Trustees
Generally, a successor trustee may be any person matching all of the
qualifications and eligibility standards to act as a trustee, including a
successor resulting from a merger or consolidation. However, any successor
trustee must meet all of the qualifications and eligibility standards to act as
a trustee.
Mergers, Consolidations, Amalgamations or Replacements of the Trust
The trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other person, except as
described below. The trust may, at our request, with the consent of the
administrative trustees and without the consent of the holders of the trust
preferred securities, the property trustee or the Delaware trustee, undertake a
transaction listed above if the following conditions are met:
. the successor entity either (1) expressly assumes all of the obligations
of the trust with respect to the trust preferred securities, or (2)
substitutes for the trust preferred securities other securities having
substantially the same terms as the trust preferred securities so long
as such successor securities rank the same in priority as the trust
preferred securities with respect to distributions and payments upon
liquidation, redemption and otherwise;
. we expressly appoint a trustee of the successor entity possessing
substantially the same powers and duties as the property trustee in its
capacity as the holder of the debentures;
. the successor securities are listed or will be listed upon notification
of issuance, on any national securities exchange or other organization
on which the trust preferred securities are then listed, if any;
73
<PAGE>
. the merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not adversely affect the rights, preferences and
privileges of the holders of the trust preferred securities, including
any successor securities, in any material respect;
. the successor entity has a purpose substantially identical to that of
the trust;
. prior to the merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, we have received an opinion from
independent counsel to the effect that (1) any transaction of this kind
does not adversely affect the rights, preferences and privileges of the
holders of the trust preferred securities, including any successor
securities, in any material respect, and (2) following the transaction,
neither the trust nor the successor entity will be required to register
as an investment company under the Investment Company Act; and
. we own all of the common securities of the successor entity and
guarantee the obligations of the successor entity under the successor
securities at least to the extent provided by the guarantee.
Notwithstanding the foregoing, the trust may not, except with the consent of
holders of 100% in liquidation amount of the trust preferred securities, enter
into any transaction of this kind or permit any other person to consolidate,
amalgamate, merge with or into, or replace the trust if the transaction would
cause the trust or the successor entity to be classified as other than a
grantor trust for United States federal income tax purposes.
Voting Rights; Amendment of Trust Agreement
Except as provided below and under "Description of the Guarantee--Amendments
and Assignment" and as otherwise required by the Trust Indenture Act and the
trust agreement, the holders of the trust preferred securities will have no
voting rights.
The trust agreement may be amended from time to time by us and the trustees,
without the consent of the holders of the trust preferred securities, in the
following circumstances:
. with respect to acceptance of appointment by a successor trustee;
. to cure any ambiguity, correct or supplement any provisions in the trust
agreement that may be inconsistent with any other provision, or to make
any other provisions with respect to matters or questions arising under
the trust agreement, as long as the amendment is not inconsistent with
the other provisions of the trust agreement and does have a material
adverse effect on the interests of any holder of trust securities; or
. to modify, eliminate or add to any provisions of the trust agreement if
necessary to ensure that the trust will be classified for federal income
tax purposes as a grantor trust at all times that any trust securities
are outstanding or to ensure that the trust will not be required to
register as an investment company under the Investment Company Act.
With the consent of the holders of a majority of the aggregate liquidation
amount of the outstanding trust securities, we and the trustees may amend the
trust agreement if the trustees receive an opinion of counsel to the effect
that the amendment or the exercise of any power granted to the trustees in
accordance with the amendment will not affect the trust's status as a grantor
trust for federal income tax purposes or the trust's exemption from status as
an investment company under the Investment Company Act. However, without the
consent of each holder of trust securities, the trust agreement may not be
amended to (i) change the amount or timing of any distribution on the trust
securities or otherwise adversely affect the amount of any distribution
required to be made in respect of the trust securities as of a specified date,
or (ii) restrict the right of a holder of trust securities to institute suit
for the enforcement of the payment on or after that date.
As long as the property trustee holds any debentures, the trustees will not:
. direct the time, method and place of conducting any proceeding for any
remedy available to the indenture trustee, or executing any trust or
power conferred on the property trustee with respect to the debentures;
74
<PAGE>
. waive any past default that is waivable under the indenture;
. exercise any right to rescind or annul a declaration that the principal
of all the debentures will be due and payable; or
. consent to any amendment, modification or termination of the indenture
or the debentures, where the consent is required, without obtaining the
prior approval of the holders of a majority in aggregate liquidation
amount of all outstanding trust securities. However, where a consent
under the indenture requires the consent of each holder of the affected
debentures, no consent will be given by the property trustee without the
prior consent of each holder of the trust securities.
The trustees may not revoke any action previously authorized or approved by a
vote of the holders of the trust securities except by subsequent vote of the
holders of the trust securities. The property trustee will notify each holder
of trust securities of any notice of default with respect to the debentures. In
addition to obtaining the foregoing approvals of the holders of the trust
securities, prior to taking any of the foregoing actions the trustees must
obtain an opinion of counsel experienced in these matters to the effect that
the trust will not be classified as an association taxable as a corporation for
federal income tax purposes on account of the action.
Any required approval of holders of trust securities may be given at a
meeting of holders of the trust securities convened for the purpose or pursuant
to written consent. The property trustee will cause a notice of any meeting at
which holders of the trust securities are entitled to vote, or of any matter
upon which action by written consent of the holders is to be taken, to be given
to each holder of record of trust securities.
No vote or consent of the holders of trust preferred securities will be
required for the trust to redeem and cancel its trust preferred securities in
accordance with the trust agreement.
Notwithstanding the fact that holders of trust preferred securities are
entitled to vote or consent under any of the circumstances described above, any
of the trust preferred securities that are owned by us, the trustees or any
affiliate of us or any trustee, will, for purposes of the vote or consent, be
treated as if they were not outstanding.
Global Trust Preferred Securities
The trust preferred securities will be represented by one or more global
trust preferred securities registered in the name of The Depository Trust
Company, New York, New York (DTC) or its nominee. A global trust preferred
security is a security representing interests of more than one beneficial
holder. Beneficial interests in the global trust preferred securities will be
shown on, and transfers will be effected only through, records maintained by
participants. Participants are brokers, dealers, or others with accounts with
DTC. Except as described below, trust preferred securities in definitive form
will not be issued in exchange for the global trust preferred securities. See
"Book-Entry Issuance."
No global trust preferred security may be exchanged for trust preferred
securities registered in the names of persons other than DTC or its nominee
unless:
. DTC notifies the indenture trustee that it is unwilling or unable to
continue as a depositary for the global trust preferred security and we
are unable to locate a qualified successor depositary;
. we execute and deliver to the indenture trustee a written order stating
that we elect to terminate the book-entry system through DTC; or
. there shall have occurred and be continuing an event of default under
the indenture.
Any global trust preferred security that is exchangeable for definitive
certificates shall be registered in the names as DTC shall direct. It is
expected that the instructions will be based upon directions received by DTC
with respect to ownership of beneficial interests in the global trust preferred
security. If trust preferred securities are issued in definitive form, the
trust preferred securities will be in denominations of $10 and integral
multiples of $10 and may be transferred or exchanged at the offices described
below.
75
<PAGE>
Unless and until it is exchanged in whole or in part for the individual
trust preferred securities represented thereby, a global trust preferred
security may not be transferred except as a whole by DTC to a nominee of DTC,
by a nominee of DTC to DTC or another nominee of DTC or by DTC or any nominee
to a successor depositary or any nominee of the successor.
Payments on global trust preferred securities will be made to DTC, as the
depositary for the global trust preferred securities. If the trust preferred
securities are issued in definitive form, distributions will be payable, the
transfer of the trust preferred securities will be registrable, and trust
preferred securities will be exchangeable, for trust preferred securities of
other denominations of a like aggregate liquidation amount, at the corporate
office of the property trustee, or at the offices of any paying agent or
transfer agent appointed by the administrative trustees. However, payment of
any distribution may be made at the option of the administrative trustees by
check mailed to the address of record of the persons entitled to the
distribution or by wire transfer. In addition, if the trust preferred
securities are issued in definitive form, the record dates for payment of
distributions will be the 15th day of the month in which the relevant
distribution date occurs. For a description of the terms of DTC arrangements
relating to payments, transfers, voting rights, redemptions and other notices
and other matters, see "Book-Entry Issuance."
Upon the issuance of one or more global trust preferred securities, and the
deposit of the global trust preferred security with or on behalf of DTC or its
nominee, DTC or its nominee will credit, on its book-entry registration and
transfer system, the respective aggregate liquidation amounts of the individual
trust preferred securities represented by the global trust preferred security
to the accounts of persons that have accounts with DTC. These accounts shall be
designated by the dealers, underwriters or agents with respect to the trust
preferred securities. Ownership of beneficial interests in a global trust
preferred security will be limited to persons or entities with an account with
DTC or who may hold interest through any person or entity with an account that
may hold interests through participants. With respect to interests of any
person or entity with an account with DTC, ownership of beneficial interests in
a global trust preferred security will be shown on, and the transfer of that
ownership will be effected only through, records maintained by the applicable
depositary or its nominee. With respect to persons or entities who hold
interest in a global trust preferred security through a participant, the
interest and any transfer of the interest will be shown on the participant's
records. The laws of some states require that certain purchasers of securities
take physical delivery of these securities in definitive form. These laws may
impair the ability to transfer beneficial interests in a global trust preferred
security.
So long as DTC or another depositary, or its nominee, is the registered
owner of the global trust preferred security, the depositary or the nominee, as
the case may be, will be considered the sole owner or holder of the trust
preferred securities represented by the global trust preferred security for all
purposes under the trust agreement. Except as described in this prospectus,
owners of beneficial interests in a global trust preferred security will not be
entitled to have any of the individual trust preferred securities represented
by the global trust preferred security registered in their names, will not
receive or be entitled to receive physical delivery of any the trust preferred
securities in definitive form, will not be considered the owners or holders of
the trust preferred securities under the trust agreement and will not receive
notices from the trust, the trustees or the company with respect to the trust
preferred securities.
None of us, the property trustee, any paying agent or the securities
registrar for the trust preferred securities will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests of the global trust preferred security
representing the trust preferred securities or for maintaining, supervising or
reviewing any records relating to the beneficial ownership interests.
We expect that DTC or its nominee, upon receipt of any payment of the
liquidation amount or distributions in respect of a global trust preferred
security, immediately will credit participants' accounts with payments in
amounts proportionate to their respective beneficial interest in the aggregate
liquidation amount of the global trust preferred security as shown on the
records of DTC or its nominee. We also expect that payments by participants to
owners of beneficial interests in the global trust preferred security held
through the participants will be governed by standing instructions and
customary practices, as is now the case with
76
<PAGE>
securities held for the accounts of customers in bearer form or registered in
street name. The payments will be the responsibility of the participants. See
"Book-Entry Issuance."
Payment and Paying Agency
Payments in respect of the trust preferred securities shall be made to DTC,
which shall credit the relevant accounts of participants on the applicable
distribution dates, or, if any of the trust preferred securities are not held
by DTC, the payments shall be made by check mailed to the address of the holder
as listed on the register of holders of the trust preferred securities. The
paying agent for the trust preferred securities will initially be the property
trustee and any co-paying agent chosen by the property trustee and acceptable
to us and the administrative trustees. The paying agent for the trust preferred
securities may resign as paying agent upon 30 days written notice to the
administrative trustees, the property trustee and us. If the property trustee
no longer is the paying agent for the trust preferred securities, the
administrative trustees will appoint a successor to act as paying agent. The
successor must be a bank or trust company acceptable to us and the property
trustee.
Registrar and Transfer Agent
The property trustee will act as the registrar and the transfer agent for
the trust preferred securities. Registration of transfers of trust preferred
securities will be effected without charge by or on behalf of the trust, but
upon payment of any tax or other governmental charges that may be imposed in
connection with any transfer or exchange. The trust and its registrar and
transfer agent will not be required to register or cause to be registered the
transfer of trust preferred securities after they have been called for
redemption.
Information Concerning the Property Trustee
The property trustee, until the occurrence and continuance of an event of
default under the trust agreement, undertakes to perform only the duties set
forth in the trust agreement. After an event of default under the trust
agreement, the property trustee must exercise the same degree of care and skill
as a prudent person exercises or uses in the conduct of its own affairs.
Subject to this provision, the property trustee is under no obligation to
exercise any of the powers vested in it by the trust agreement at the request
of any holder of trust preferred securities unless it is offered reasonable
indemnity against the costs, expenses and liabilities that might be incurred.
If no event of default under the trust agreement has occurred and is
continuing and the property trustee is required to decide between alternative
causes of action, construe ambiguous provisions in the trust agreement or is
unsure of the application of any provision of the trust agreement, and the
matter is not one on which holders of trust preferred securities are entitled
to vote upon, then the property trustee will take the action directed in
writing by us. If the property trustee is not so directed, then it will take
the action it deems advisable and in the best interests of the holders of the
trust securities and will have no liability except for its own bad faith,
negligence or willful misconduct.
Miscellaneous
The administrative trustees are authorized and directed to conduct the
affairs of and to operate the trust in such a way that:
. the trust will not be deemed to be an investment company required to be
registered under the Investment Company Act;
. the trust will not be classified as an association taxable as a
corporation for federal income tax purposes; and
. the debentures will be treated as our indebtedness for federal income
tax purposes.
77
<PAGE>
In this regard, we and the administrative trustees are authorized to take any
action not inconsistent with applicable law, the certificate of trust or the
trust agreement, that we and the administrative trustees determine to be
necessary or desirable for these purposes.
Holders of the trust preferred securities have no preemptive or similar
rights. The trust agreement and the trust preferred securities will be governed
by Delaware law.
DESCRIPTION OF THE DEBENTURES
Concurrently with the issuance of the trust preferred securities, the trust
will invest the proceeds from the sale of the trust securities in the
debentures issued by us. The debentures will be issued as unsecured debt under
the indenture between us and First Union, as indenture trustee. The indenture
will be qualified under the Trust Indenture Act.
The following discussion is subject to, and qualified by the indenture and
to the Trust Indenture Act. We urge prospective investors to read the form of
the indenture, which is filed as an exhibit to the registration statement of
which this prospectus forms a part.
General
The debentures will be limited in aggregate principal amount to $10,310,000,
this amount being the sum of the aggregate stated liquidation amounts of the
trust securities. The debentures will bear interest at a floating rate of 3.75%
over the three month LIBOR rate of the principal amount. The interest will be
payable quarterly on March 31, June 30, September 30 and December 31 of each
year, beginning , 2000, to the person in whose name each debenture is
registered at the close of business on the business day immediately preceding
the day interest is due. It is anticipated that, until the liquidation, if any,
of the trust, the debentures will be held in the name of the property trustee
in trust for the benefit of the holders of the trust securities.
The amount of interest payable for any period will be computed on the basis
of a 360-day year of twelve 30-day months. If any date on which interest is
payable on the debentures is not a business day, then payment of interest will
be made on the next day that is a business day without any additional interest
or other payment in respect of the delay. However, if the next business day is
in the next calendar year, payment of the interest will be made on the
immediately preceding business day. Accrued interest that is not paid on the
applicable interest payment date will bear additional interest on the amount
due at a floating rate of 3.75% over the three month LIBOR rate compounded
quarterly. The term interest, includes quarterly interest payments, interest on
quarterly interest payments not paid on the applicable interest payment date
and additional interest, as applicable.
The debentures will mature on , 2030, the stated maturity date. We may
shorten this date once at any time to any date not earlier than , 2005,
subject to the prior approval of the Federal Reserve, if required.
We will give notice to the indenture trustee and the holders of the
debentures no more than 180 days and no less than 90 days prior to the
effectiveness of any change in the stated maturity date. We will not have the
right to redeem the debentures from the trust until after , 2005, except if a
Tax Event, an Investment Company Event or a Capital Treatment Event has
occurred, or to the extent we have repurchased trust preferred securities.
The debentures will be unsecured and will rank junior to all of our senior
and subordinate indebtedness. Because we are a holding company, our right to
participate in any distribution of assets of any of our subsidiaries, upon any
subsidiary's liquidation or reorganization or otherwise, and thus the ability
of holders of the debentures to benefit indirectly from any distribution by a
subsidiary, is subject to the prior claim of
78
<PAGE>
creditors of the subsidiary, except to the extent that we may be recognized as
a creditor of the subsidiary. The debentures will, therefore, be effectively
subordinated to all existing and future liabilities of our subsidiaries, and
holders of debentures should look only to our assets for payment. The indenture
does not limit our ability to incur or issue secured or unsecured senior and
junior debt.
The indenture does not contain provisions that afford holders of the
debentures protection in the event of a highly leveraged transaction or other
similar transaction involving us, nor does it require us to maintain or achieve
any financial performance levels or to obtain or maintain any credit rating on
the debentures.
Option to Extend Interest Payment Period
As long as no event of default under the indenture has occurred and is
continuing, we have the right under the indenture to defer the payment of
interest on the debentures at any time for a period not exceeding 20
consecutive quarters. However, no extension period may extend beyond the stated
maturity of the debentures or end on a date other than a date interest is
normally due. At the end of an extension period, we must pay all interest then
accrued and unpaid, together with interest thereon at a floating rate of 3.75%
over the three month LIBOR rate compounded quarterly. During an extension
period, interest will continue to accrue and holders of debentures, or the
holders of trust preferred securities if they are then outstanding, will be
required to accrue and recognize as income for federal income tax purposes the
accrued but unpaid interest amounts in the year in which such amounts accrued.
See "Federal Income Tax Consequences--Interest Payment Period and Original
Issue Discount."
During an extension period, we may not:
. declare or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of our
capital stock, other than the reclassification of any class of our
capital stock into another class of capital stock, or allow any of our
subsidiaries to do the same with respect to their capital stock, other
than the payment of dividends or distributions to us;
. make any payment of principal, interest or premium on or repay,
repurchase or redeem any debt securities that rank equally with or
junior in interest to the debentures or allow any of our subsidiaries to
do the same;
. make any guarantee payments with respect to any other guarantee by us of
any other debt securities of any of our subsidiaries if the guarantee
ranks equally with or junior to the debentures other than payments under
the guarantee; or
. redeem, purchase or acquire less than all of the debentures or any of
the trust preferred securities.
Prior to the termination of any extension period, so long as no event of
default under the indenture is continuing, we may further defer the payment of
interest subject to the above stated requirements. Upon the termination of any
extension period and the payment of all amounts then due, we may elect to begin
a new extension period at any time.
We must give the property trustee, the administrative trustees and the
indenture trustee notice of our election of an extension period at least two
business days prior to the earlier of (1) the next date on which distributions
on the trust securities would have been payable except for the election to
begin an extension period, or (2) the date we are required to give notice of
the record date, or the date the distributions are payable, to the OTC Bulletin
Board, or other applicable self-regulatory organization, or to holders of the
trust preferred securities, but in any event at least one business day prior to
the record date.
Subject to the foregoing, there is no limitation on the number of times that
we may elect to begin an extension period.
79
<PAGE>
Interest Rate
Interest will accrue on the principal of the debentures from their original
issue date at the rate of 3.75% per annum over the three-month LIBOR, adjusted
quarterly. LIBOR is the rate that most banks charge one another for large
overnight loans of Eurodollars in the London market. Unless deferred as
described above, interest will be payable quarterly in arrears on March 31,
June 30, September 30 and December 31 of each year commencing on ,
2000, to the persons who are the record holders of the debentures at the close
of business on the 15th day of the last month of the calendar quarter. The
amount of interest payable for any period will be computed on a basis of a 360-
day year of twelve 30-day months.
The interest rate for each interest period will be set on the 15th day of
the months, March, June, September and December of each year; provided, that
the initial interest rate will be set on , 2000. If the interest
reset date is not a London business day, such interest reset date will be the
next succeeding day which is a London business day. The three-month LIBOR, will
be determined as follows:
(1) On the second London business day preceding each interest reset
date, , the Calculation Agent, will determine the three-month
LIBOR rate which shall be the rate for deposit in the London interbank
market in U.S. dollars having a three-month maturity commencing on the
second London business day immediately following such interest
determination date which appears on the Telerate Page 3750 as of 11:00
a.m., London time, on such interest determination date. If the three-month
LIBOR rate on such interest determination date does not appear on the
Telerate Page 3750, such three-month LIBOR rate will be determined as
described in (2) below. London business day means any day on which dealings
in deposits in U.S. dollars are transacted in the London interbank market.
(2) If the three-month LIBOR rate does not appear on the Telerate Page
3750, the Calculation Agent will request the principal London offices of
each of four major banks in the London interbank market, as selected by the
Calculation Agent, to provide the Calculation Agent with its offered
quotation for deposits in U.S. dollars having a three-month maturity
commencing on the second London business day immediately following such
interest determination date to prime banks in the London interbank market
at approximately 11:00 a.m., London time, on such interest determination
date and in a principal amount that is representative for a single
transaction in such market at such time. If at least two such quotations
are provided, the three-month LIBOR rate on such interest determination
date will be the arithmetic mean (rounded upwards, if necessary, to the
nearest one hundred-thousandth of a percentage point, with five or more
one-millionths of one percentage point rounded upwards) of such quotations.
If fewer than two quotations are provided, the three-month LIBOR rate
determined on such interest determination date will be the arithmetic mean
(rounded upwards, if necessary, to the nearest one hundred-thousandth of a
percentage point, with five or more one-millionths of one percentage point
rounded upwards) of the rates quoted at approximately 11:00 a.m., New York
City time, on such interest determination date for loans in U.S. dollars to
leading European banks, having a three-month maturity commencing on the
second London business day immediately following such interest
determination date and in a principal amount that is representative for a
single transaction in such market at such time by three major banks in New
York City selected by the Calculation Agent; provided, however, if the
banks so selected by the Calculation Agent are not quoting as aforesaid,
the three-month LIBOR rate with respect to such interest determination date
will be the three-month LIBOR rate in effect on such interest determination
date.
The amount of interest of each day that a debenture is outstanding will be
calculated by dividing the floating interest rate in effect for such day by 360
and multiplying the result of the principal amount of such debenture. The
amount of interest to be paid on such debenture for any interest period will be
calculated by adding the daily interest amounts for each day in such interest
period. The floating interest rate will in no event be higher than the maximum
rate permitted by the law of the State of Texas, or, if higher, the law of the
United States of America.
Absent manifest error, the Calculation Agent's determination of LIBOR and
its calculation of the applicable interest rate for each interest period will
be final and binding. Investors may obtain the interest rates
80
<PAGE>
for the current and preceding interest period by writing or calling
at the Calculation Agent at
(telephone ).
Additional Sums to be Paid as a Result of Additional Taxes
If the trust is required to pay any additional taxes, duties or other
governmental charges as a result of the occurrence of a Tax Event, we will pay
as additional amounts on the debentures any amounts which may be required so
that the net amounts received and retained by the trust after paying any
additional taxes, duties or other governmental charges will not be less than
the amounts the trust would have received had the additional taxes, duties or
other governmental charges not been imposed.
Redemption or Exchange
Subject to prior approval of the Federal Reserve, if required, we may redeem
the debentures prior to maturity:
. in whole at any time, or in part from time to time, on or after ,
2005; or
. in whole, but not in part, at any time within 90 days following the
occurrence of a Tax Event, an Investment Company Event or a Capital
Treatment Event.
In each case, we will pay a redemption price equal to the accrued and unpaid
interest on the debentures so redeemed to the date fixed for redemption, plus
100% of the principal amount of the debentures.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of debentures to be redeemed
at its registered address. Redemption of less than all outstanding debentures
shall be effected proportionately, by lot or in any other manner deemed to be
fair by the indenture trustee. Unless we default in payment of the redemption
price for the debentures, on and after the redemption date interest shall cease
to accrue on the debentures or portions thereof called for redemption.
The debentures will not be subject to any sinking fund.
Distribution Upon Liquidation
As described under "Description of the Trust Preferred Securities--
Liquidation Distribution Upon Termination," under certain circumstances and
with the Federal Reserve's approval, the debentures may be distributed to the
holders of the trust preferred securities in liquidation of the trust after
satisfaction of liabilities to creditors of the trust. If this occurs, we will
use our best efforts to have the debentures quoted on the OTC Bulletin Board or
other stock exchange or national quotation service, on which the trust
preferred securities are then listed, if any. There can be no assurance as to
the market price of any debentures that may be distributed to the holders of
trust preferred securities.
Restrictions on Payments
Upon the occurrence of any of the following events, we will not make the
payments set forth below. We are restricted from making certain payments if at
that time:
. an event of default is continuing under the indenture;
. we are in default with respect to our obligations under the guarantee;
or
. we have given notice of our election to extend an interest payment
period with respect to the debentures and the notice has not been
rescinded or the extension period is continuing.
81
<PAGE>
If any of the above events have occurred, we will not:
. declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, any of our
capital stock, other than the reclassification of any class of our
capital stock into another class of capital stock, or allow any of our
subsidiaries to do the same with respect to their capital stock, other
than the payment of dividends or distributions to us;
. make any payment of principal, interest or premium on, or repay or
repurchase or redeem any of our debt securities that rank equally with
or junior to the debentures or allow any of our subsidiaries to do the
same;
. make any guarantee payments with respect to any guarantee by us of the
debt securities of any of our subsidiaries if the guarantee ranks
equally with or junior to the debentures other than payments under the
guarantee; or
. redeem, purchase or acquire less than all of the debentures or any of
the trust preferred securities.
Subordination
Under the indenture, the debentures are subordinated and junior in right of
payment to all of our senior and subordinated debt. Upon any payment or
distribution of assets to our creditors upon any liquidation, dissolution,
winding up, reorganization, assignment for the benefit of creditors, marshaling
of assets or any bankruptcy, insolvency, debt restructuring or similar
proceedings in connection with any of our insolvency or bankruptcy proceeding,
the holders of senior and subordinated debt will first be entitled to receive
payment in full of principal, premium and interest before the holders of
debentures will be entitled to receive or retain any payment in respect of the
debentures.
In the event of the acceleration of the maturity of any debentures, the
holders of all or our senior and subordinated debt outstanding at the time of
the acceleration will also be entitled to first receive payment in full of all
amounts due, including any amounts due upon acceleration, before the holders of
the debentures will be entitled to receive or retain any payment in respect of
the principal of or interest on the debentures.
No payments of principal or interest in respect of the debentures may be
made if there has occurred and is continuing a default in any payment with
respect to any of our senior or subordinated debt or an event of default with
respect to any of our senior or subordinated debt resulting in the acceleration
of the maturity of the debentures, or if any judicial proceeding is pending
with respect to any default.
The term debt means, with respect to any entity, whether recourse is to all
or a portion of the assets of an entity and whether or not contingent:
. every obligation of the entity for money borrowed;
. every obligation of the entity evidenced by bonds, debentures, notes or
other similar instruments, including obligations incurred in connection
with the acquisition of property, assets or businesses;
. every reimbursement obligation of the entity with respect to letters of
credit, bankers' acceptances or similar facilities issued for the
account of the entity;
. every obligation of the entity issued or assumed as the deferred
purchase price of property or services, excluding trade accounts payable
or accrued liabilities arising in the ordinary course of business;
. every capital lease obligation of the entity; and
. every obligation of the type referred to in the first five points of
another person and all dividends of another person the payment of which,
in either case, the entity has guaranteed or is responsible or liable,
directly or indirectly, as obligor or otherwise.
82
<PAGE>
The term senior debt means, with respect to us, the principal of and premium
and interest, including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to us whether or not a
claim for post-petition interest is allowed in the proceeding, on debt, whether
incurred on or prior to the date of the indenture or incurred after the date.
Senior debt also includes all indebtedness, whether incurred on or prior to the
date of the indenture or thereafter incurred, for claims in respect of
derivative products such as interest and foreign exchange rate contracts,
commodity contracts and similar arrangements. However, senior debt will not be
deemed to include:
. any debt where it is provided in the instrument creating the debt that
the obligations are not superior in right of payment to the debentures
or to other debt which is equal with, or subordinated to, the
debentures;
. any of our debt that when incurred and without respect to any election
under the federal bankruptcy laws was without recourse to us;
. any debt of ours to any of our subsidiaries;
. any debt to any of our employees;
. any debt that by its terms is subordinated to trade accounts payable or
accrued liabilities arising in the ordinary course of business to the
extent that payments made to the holders of the debt by the holders of
the debentures as a result of the subordination provisions of the
indenture would be greater than they otherwise would have been as a
result of any obligation of the holders to pay amounts over to the
obligees on the trade accounts payable or accrued liabilities arising in
the ordinary course of business as a result of subordination provisions
to which the debt is subject; and
. debt which constitutes subordinated debt.
The term subordinated debt means, with respect to us, the principal of,
premium and interest, including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to us whether or not the
claim for post-petition interest is allowed in the proceeding, on debt.
Subordinated debt includes debt incurred on or prior to the date of the
indenture or thereafter incurred, which is by its terms expressly provided to
be junior and subordinate to other debt of ours, other than the debentures.
However, subordinated debt will not be deemed to include:
. any of our debt which when incurred and without respect to any election
under the federal bankruptcy laws, was without recourse to us;
. any debt of ours to any of our subsidiaries;
. any debt to any of our employees;
. any debt which by its terms is subordinated to trade accounts payable or
accrued liabilities arising in the ordinary course of business to the
extent that payments made to the holders of the debt by the holders of
the debentures as a result of the subordination provisions of the
indenture would be greater than they otherwise would have been as a
result of any obligation of the holders to pay amounts over to the
obligees on the trade accounts payable or accrued liabilities arising in
the ordinary course of business as a result of subordination provisions
to which the debt is subject;
. debt which constitutes senior debt; and
. any debt of ours under debt securities or guarantees of debt securities
initially issued to any trust, or a trustee of a trust, partnership or
other entity affiliated with us that is, directly or indirectly, a
financing vehicle of ours in connection with the issuance by that entity
of preferred securities or other securities which are intended to
qualify for Tier 1 capital treatment.
We expect from time to time to incur additional indebtedness, and there is
no limitation on the amount we may incur. At June 30, 2000, we had consolidated
senior debt and subordinated debt of approximately $5.125 million which we
intend to eliminate with the proceeds from this offering.
83
<PAGE>
Payment and Paying Agents
Generally, payment of principal of and any interest on the debentures will
be made at the office of the indenture trustee in Wilmington, Delaware.
However, we have the option to make payment of any interest by (i) check mailed
to the address of the person entitled to payment at the address listed in the
register of holders of the debentures, or (ii) transfer to an account
maintained by the person entitled thereto as specified in the register of
holders of the debentures, provided that proper transfer instructions have been
received by the regular record date. Payment of any interest on debentures will
be made to the person in whose name the debenture is registered at the close of
business on the regular record date for the interest payment, except in the
case of defaulted interest. We may at any time designate additional paying
agents for the debentures or rescind the designation of any paying agent for
the debentures. However, we will at all times be required to maintain a paying
agent in Wilmington, Delaware, and each place of payment for the debentures.
Any moneys deposited with the indenture trustee or any paying agent for the
debentures, or then held by us in trust, for the payment of the principal of or
interest on the debentures and remaining unclaimed for two years after the
principal or interest has become due and payable, will be repaid to us on May
31 of each year. If we hold any of this money in trust, then it will be
discharged from the trust to us and the holder of the debenture will thereafter
look, as a general unsecured creditor, only to us for payment.
Registrar and Transfer Agent
The indenture trustee will act as the registrar and the transfer agent for
the debentures. Debentures may be presented for registration of transfer, with
the form of transfer endorsed thereon, or a satisfactory written instrument of
transfer, duly executed, at the office of the registrar. Provided that we
maintain a transfer agent in Wilmington, Delaware, we may rescind the
designation of any transfer agent or approve a change in the location through
which any transfer agent acts. We may at any time designate additional transfer
agents with respect to the debentures.
In the event of any redemption, neither we nor the indenture trustee will be
required to (i) issue, register the transfer of or exchange debentures during a
period beginning at the opening of business 15 days before the day of selection
for redemption of debentures and ending at the close of business on the day of
mailing of the relevant notice of redemption, or (ii) transfer or exchange any
debentures so selected for redemption, except, in the case of any debentures
being redeemed in part, any portion not to be redeemed.
Modification of Indenture
We and the indenture trustee may, from time to time without the consent of
the holders of the debentures, amend, waive or supplement the indenture for
purposes which do not materially adversely affect the rights of the holders of
the debentures. Other changes may be made by us and the indenture trustee with
the consent of the holders of a majority in principal amount of the outstanding
debentures. However, without the consent of the holder of each outstanding
debenture affected by the proposed modification, no modification may:
. extend the fixed maturity of the debentures;
. reduce the principal amount or the rate or extend the time of payment of
interest; or
. reduce the percentage of principal amount of debentures required to
amend the indenture.
As long as any of the trust preferred securities remain outstanding, no
modification may be made that requires the consent of the holders of the
debentures, no termination of the indenture may occur, and no waiver of any
event of default under the indenture may be effective, without the prior
consent of the holders of a majority of the aggregate liquidation amount of the
trust preferred securities.
84
<PAGE>
Debenture Events of Default
The indenture provides that any one or more of the following described
events with respect to the debentures that has occurred and is continuing
constitutes an event of default under the indenture:
. failure for 30 days to pay any interest on the debentures when due,
subject to deferral of any due date in the case of an extension period;
. failure to pay any principal on the debentures when due whether at
maturity, upon redemption by declaration or otherwise;
. failure to observe or perform in any material respect other covenants
contained in the indenture for 90 days after written notice to us from
the indenture trustee or the holders of at least 25% in aggregate
outstanding principal amount of the debentures; or
. our bankruptcy, insolvency or reorganization or dissolution of the
trust.
The holders of a majority of the aggregate outstanding principal amount of
the debentures have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the indenture trustee.
The indenture trustee, or the holders of at least 25% in aggregate outstanding
principal amount of the debentures, may declare the principal due and payable
immediately upon an event of default under the indenture. The holders of a
majority of the outstanding principal amount of the debentures may annul the
declaration and waive the default if the default has been cured and a sum
sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration, has been deposited with the indenture trustee.
The holders may not annul the declaration and waive a default if the default is
the non-payment of the principal of the debentures which has become due solely
by the acceleration. Should the holders of the debentures fail to annul the
declaration and waive the default, the holders of at least 25% in aggregate
liquidation amount of the trust preferred securities will have this right.
If an event of default under the indenture has occurred and is continuing,
the indenture trustee will have the right to declare the principal of and the
interest on the debentures, and any other amounts payable under the indenture,
to be forthwith due and payable and to enforce its other rights as a creditor
with respect to the debentures.
We are required to file annually with the indenture trustee a certificate as
to whether or not we are in compliance with all of the conditions and covenants
applicable to us under the indenture.
Enforcement of Certain Rights by Holders of the Trust Preferred Securities
If an event of default under the indenture has occurred and is continuing
and the event is attributable to our failure to pay interest on or principal of
the debentures on the payment date on which the payment is due and payable,
then a holder of trust preferred securities may initiate a direct action
against us. In connection with a direct action, we will have a right to counter
the amount of the direct action to the extent of any payment made by us to the
holder of trust preferred securities with respect to the direct action. We may
not amend the indenture to remove the foregoing right to bring a direct action
without the prior written consent of all of the holders of the trust preferred
securities. If the right to bring a direct action is removed, the trust may
become subject to the reporting obligations under the Securities Exchange Act
of 1934.
The holders of the trust preferred securities will not be able to exercise
directly any remedies, other than those set forth in the preceding paragraph,
available to the holders of the debentures unless there has been an event of
default under the trust agreement.
85
<PAGE>
Consolidation, Merger, Sale of Assets and Other Transactions
We may not consolidate with or merge into any other entity or convey or
transfer our properties and assets substantially as an entirety to any entity,
and no entity may be consolidated with or merged into us or sell, convey,
transfer or otherwise dispose of its properties and assets substantially as an
entirety to us, unless:
. if we consolidate with or merge into another person or convey or
transfer our properties and assets substantially as an entirety to any
person, the successor person is organized under the laws of the United
States or any State or the District of Columbia, and the successor
person expressly assumes by supplemental indenture our obligations on
the debentures, or substitutes securities having substantially similar
terms;
. immediately after giving effect, no event of default under the
indenture, and no event which, after notice or lapse of time, or both,
would become an event of default under the indenture, has occurred and
is continuing; and
. other conditions as prescribed in the indenture are met.
Satisfaction and Discharge
The indenture will cease to be of further effect and we will be deemed to
have satisfied and discharged the indenture when all debentures not previously
delivered to the indenture trustee for cancellation:
. have become due and payable, or
. will become due and payable at their stated maturity within one year or
are to be called for redemption within one year, and we deposit or cause
to be deposited with the indenture trustee funds, in trust, for the
purpose and in an amount sufficient to pay and discharge the entire
indebtedness on the debentures not previously delivered to the indenture
trustee for cancellation, for the principal and interest due to the date
of the deposit or to the stated maturity or redemption date, as the case
may be.
We may still be required to provide officers' certificates, opinions of
counsel and pay fees and expenses due after these events occur.
Governing Law
The indenture and the debentures will be governed by and construed in
accordance with the laws of the State of Texas.
Information Concerning the Indenture Trustee
The indenture trustee is subject to all the duties and responsibilities
specified with respect to an indenture trustee under the Trust Indenture Act.
Subject to these provisions, the indenture trustee is under no obligation to
exercise any of the powers vested in it by the indenture at the request of any
holder of debentures, unless offered reasonable indemnity by the holder
against the costs, expenses and liabilities which might be incurred. The
indenture trustee is not required to expend or risk its own funds or otherwise
incur personal financial liability in the performance of its duties if the
indenture trustee reasonably believes that repayment or adequate indemnity is
not reasonably assured to it.
Miscellaneous
We have agreed, pursuant to the indenture, for so long as trust preferred
securities remain outstanding:
. to maintain directly or indirectly 100% ownership of the common
securities of the trust except that certain successors that are
permitted pursuant to the indenture may succeed to our ownership of the
common securities;
86
<PAGE>
. not to voluntarily terminate, wind up or liquidate the trust without
prior approval of the Federal Reserve, if required;
. to use our reasonable efforts to cause the trust (1) to remain a
business trust, except in connection with a distribution of debentures,
the redemption of all of the trust securities of the trust or mergers,
consolidations or amalgamations, each as permitted by the trust
agreement; and (2) to otherwise continue not to be treated as an
association taxable as a corporation or partnership for federal income
tax purposes; and
. to use our reasonable efforts to cause each holder of trust securities
to be treated as owning an individual beneficial interest in the
debentures.
BOOK-ENTRY ISSUANCE
General
DTC will act as securities depositary for the trust preferred securities and
may act as securities depositary for all of the debentures in the event of the
distribution of the debentures to the holders of trust preferred securities.
Except as described, the trust preferred securities will be issued only as
registered securities in the name of DTC's nominee, Cede & Co.
DTC is a limited purpose trust company organized under New York banking law,
a banking organization within the meaning of the New York banking law, a member
of the Federal Reserve System, a clearing corporation within the meaning of the
New York Uniform Commercial Code, and a clearing agency registered pursuant to
Section 17A of the Securities Exchange Act of 1934. DTC holds securities that
its participants deposit with DTC. DTC also facilitates the settlement among
participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. DTC is owned by a number of its direct participants and by the
New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the
National Association of Securities Dealers, Inc. Access to the DTC system is
also available to indirect participants, such as securities brokers and
dealers, banks and trust companies that clear through or maintain custodial
relationships with direct participants, either directly or indirectly. The
rules applicable to DTC and its participants are on file with the SEC.
Purchases of trust preferred securities within the DTC system must be made
by or through direct participants, which will receive a credit for the trust
preferred securities on DTC's records. The beneficial ownership interest of
each actual purchaser of each trust preferred security is in turn to be
recorded on the direct and indirect participant's records. Beneficial owners
will not receive written confirmation from DTC of their purchases, but
beneficial owners are expected to receive written confirmations providing
details of the transactions, as well as periodic statements of their holdings,
from the direct or indirect participants through which the beneficial owners
purchased trust preferred securities. Transfers of ownership interests in the
trust preferred securities are to be accomplished by entries made on the books
of participants acting on behalf of beneficial owners. Beneficial owners will
not receive certificates representing their ownership interest in trust
preferred securities, except if use of the book-entry system for the trust
preferred securities is discontinued.
DTC will have no knowledge of the actual beneficial owners of the trust
preferred securities; DTC's records reflect only the identity of the direct
participants to whose accounts the trust preferred securities are credited,
which may or may not be the beneficial owners. The participants will remain
responsible for keeping account of their holdings on behalf of their customers.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that we believe to be accurate, but we and the
trust assume no responsibility for the accuracy thereof.
87
<PAGE>
Neither we nor the trust have any responsibility for the performance by DTC or
its participants of their respective obligations as described in this
prospectus or under the rules and procedures governing their respective
operations.
Notices and Voting
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by direct
and indirect participants to beneficial owners will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
Redemption notices will be sent to Cede & Co. as the registered holder of
the trust preferred securities. If less than all of the trust preferred
securities are being redeemed, the amount to be redeemed will be determined in
accordance with the trust agreement.
Although voting with respect to the trust preferred securities is limited to
the holders of record of the trust preferred securities, in those instances in
which a vote is required, neither DTC nor Cede & Co. will itself consent or
vote with respect to trust preferred securities. Under its usual procedures,
DTC would mail an omnibus proxy to the property trustee as soon as possible
after the record date. The omnibus proxy assigns Cede & Co.'s consenting or
voting rights to those direct participants to whose accounts the trust
preferred securities are credited on the record date.
Distribution Funds
The property trustee will make distribution payments on the trust preferred
securities to DTC. DTC's practice is to credit direct participants' accounts on
the relevant payment date in accordance with their respective holdings shown on
DTC's records unless DTC has reason to believe that it will not receive
payments on the payment date. Payments by participants to beneficial owners
will be governed by standing instructions and customary practices and will be
the responsibility of the participant and not of DTC, the property trustee, the
trust or us, subject to any statutory or regulatory requirements as may be in
effect from time to time. Payment of distributions to DTC is the responsibility
of the property trustee, disbursement of the payments to direct participants is
the responsibility of DTC, and disbursements of the payments to the beneficial
owners is the responsibility of direct and indirect participants.
Successor Depositories and Termination of Book-Entry System
DTC may discontinue providing its services with respect to any of the trust
preferred securities at any time by giving reasonable notice to the property
trustee and to us. If no successor securities depositary is obtained,
definitive trust preferred securities representing the trust preferred
securities are required to be printed and delivered. We also have the option to
discontinue use of the system of book-entry transfers through DTC or any
successor depositary. After an event of default under the indenture, the
holders of a majority in liquidation amount of trust preferred securities may
determine to discontinue the system of book-entry transfers through DTC. In
these events, definitive certificates for the trust preferred securities will
be printed and delivered.
88
<PAGE>
DESCRIPTION OF THE GUARANTEE
The trust preferred securities guarantee agreement will be executed and
delivered by us concurrently with the issuance of the trust preferred
securities for the benefit of the holders of the trust preferred securities.
The guarantee agreement will be qualified as an indenture under the Trust
Indenture Act. First Union, the guarantee trustee, will act as trustee for
purposes of complying with the provisions of the Trust Indenture Act, and will
also hold the guarantee for the benefit of the holders of the trust preferred
securities. Prospective investors are urged to read the form of the guarantee
agreement, which has been filed as an exhibit to the registration statement of
which this prospectus forms a part.
General
We agree to pay in full on a subordinated basis, to the extent described in
the guarantee agreement, the guarantee payments to the holders of the trust
preferred securities, as and when due, regardless of any defense or
counterclaim that the trust may have or assert other than the defense of
payment.
The following payments with respect to the trust preferred securities are
called the guarantee payments and, to the extent not paid or made by the trust
and to the extent that the trust has funds available for those distributions,
will be subject to the guarantee:
. any accumulated and unpaid distributions required to be paid on the
trust preferred securities;
. with respect to any trust preferred securities called for redemption,
the redemption price; and
. upon a voluntary or involuntary dissolution, winding up or liquidation
of the trust (other than in connection with the distribution of
debentures to the holders of trust preferred securities or a redemption
of all of the trust preferred securities), the lesser of:
(a) the amount of the liquidation distribution; or
(b) the amount of assets of the trust remaining available for
distribution to holders of trust preferred securities in liquidation
of the trust.
We may satisfy our obligations to make a guarantee payment by making a direct
payment of the required amounts to the holders of the trust preferred
securities or by causing the trust to pay the amounts to the holders.
The guarantee agreement is a guarantee, on a subordinated basis, of the
guarantee payments, but the guarantee only applies to the extent the trust has
funds available for those distributions. If we do not make interest payments on
the debentures purchased by the trust, the trust will not have funds available
to make the distributions and will not pay distributions on the trust preferred
securities.
Status of the Guarantee
The guarantee constitutes our unsecured obligation that ranks junior in
right of payment to all of our senior and subordinated debt in the same manner
as the debentures. We expect to incur additional indebtedness in the future,
although we have no specific plans in this regard presently, and neither the
indenture nor the trust agreement limits the amounts of the obligations that we
may incur.
The guarantee constitutes a guarantee of payment and not of collection. If
we fail to make guarantee payments when required, holders of trust preferred
securities may institute a legal proceeding directly against us to enforce
their rights under the guarantee without first instituting a legal proceeding
against any other person or entity.
The guarantee will not be discharged except by payment of the guarantee
payments in full to the extent not paid by the trust or upon distribution of
the debentures to the holders of the trust preferred securities. Because we are
a holding company, our right to participate in any distribution of assets of
any subsidiary upon
89
<PAGE>
the subsidiary's liquidation or reorganization or otherwise is subject to the
prior claims of creditors of that subsidiary, except to the extent we may be
recognized as a creditor of that subsidiary. Our obligations under the
guarantee, therefore, will be effectively subordinated to all existing and
future liabilities of our subsidiaries, and claimants should look only to our
assets for payments under the guarantee.
Amendments and Assignment
Except with respect to any changes that do not materially adversely affect
the rights of holders of the trust preferred securities, in which case no vote
will be required, the guarantee may be amended only with the prior approval of
the holders of a majority of the aggregate liquidation amount of the
outstanding trust preferred securities.
Events of Default; Remedies
An event of default under the guarantee agreement will occur upon our
failure to make any required guarantee payments or to perform any other
obligations under the guarantee. The holders of a majority in aggregate
liquidation amount of the trust preferred securities have the right to direct
the time, method and place of conducting any proceeding for any remedy
available to the guarantee trustee in respect of the guarantee and may direct
the exercise of any power conferred upon the guarantee trustee under the
guarantee agreement.
Any holder of trust preferred securities may initiate and prosecute a legal
proceeding directly against us to enforce its rights under the guarantee
without first instituting a legal proceeding against the trust, the guarantee
trustee or any other person or entity.
We are required to provide to the guarantee trustee annually a certificate
as to whether or not we are in compliance with all of the conditions and
covenants applicable to us under the guarantee agreement.
Termination of the Guarantee
The guarantee will terminate and be of no further force and effect upon:
. full payment of the redemption price of the trust preferred securities;
. full payment of the amounts payable upon liquidation of the trust; or
. distribution of the debentures to the holders of the trust preferred
securities.
If at any time any holder of the trust preferred securities must restore
payment of any sums paid under the trust preferred securities or the guarantee,
the guarantee will continue to be effective or will be reinstated with respect
to such amounts.
Information Concerning the Guarantee Trustee
The guarantee trustee, other than during the occurrence and continuance of
our default in performance of the guarantee, undertakes to perform only those
duties as are specifically set forth in the guarantee. When an event of default
has occurred and is continuing, the guarantee trustee must exercise the same
degree of care and skill as a prudent person would exercise or use in the
conduct of his or her own affairs. Subject to those provisions, the guarantee
trustee is under no obligation to exercise any of the powers vested in it by
the guarantee at the request of any holder of any trust preferred securities
unless it is offered reasonable indemnity against the costs, expenses and
liabilities that might be incurred thereby.
Expense Agreement
We and the trust will enter into an agreement as to expenses and liabilities
whereby we agree to irrevocably and unconditionally guarantee to each person or
entity to whom the trust becomes indebted or liable, the full payment of any
costs, expenses or liabilities of the trust, other than obligations of the
trust to pay
90
<PAGE>
to the holders of the trust preferred securities or other similar interests in
the trust of the amounts due to those holders. Third party creditors of the
trust may proceed directly against us under the expense agreement, regardless
of whether they had notice of the expense agreement.
Governing Law
The guarantee will be governed by the laws of the State of Texas.
RELATIONSHIP AMONG THE TRUST PREFERRED SECURITIES, THE
DEBENTURES AND THE GUARANTEE
Full and Unconditional Guarantee
We and the trust believe that, taken together, our obligations under the
debentures, the indenture, the trust agreement, the expense agreement and the
guarantee agreement provide, in the aggregate, a full, irrevocable and
unconditional guarantee, on a subordinated basis, of payment of distributions
and other amounts due on the trust preferred securities to the extent the trust
has funds available for the payment of these amounts. No single document
standing alone or operating in conjunction with fewer than all of the other
documents constitutes a guarantee. It is only the combined operation of these
documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the obligations of the trust under the trust
preferred securities.
If and to the extent that we do not make payments on the debentures, the
trust will not pay distributions or other amounts due on the trust preferred
securities. The guarantee does not cover payment of distributions when the
trust does not have sufficient funds to pay the distributions. In this event,
the remedy of a holder of trust preferred securities is to institute a legal
proceeding directly against us for enforcement of payment of the distributions
to the holder. Our obligations under the guarantee are subordinate and junior
in right of payment to all of our other indebtedness.
Sufficiency of Payments
As long as payments of interest and other payments are made when due on the
debentures, these payments will be sufficient to cover distributions and other
payments due on the trust preferred securities, primarily because:
. the aggregate principal amount of the debentures will be equal to the
sum of the aggregate stated liquidation amount of the trust securities;
. the interest rate and interest and other payment dates on the debentures
will match the distribution rate and distribution and other payment
dates for the trust preferred securities;
. we will pay for any and all costs, expenses and liabilities of the
trust, except the obligations of the trust to pay to holders of the
trust preferred securities the amounts due to the holders pursuant to
the terms of the trust preferred securities; and
. the trust will not engage in any activity that is not consistent with
the limited purposes of the trust.
Enforcement Rights of Holders of Trust Preferred Securities
A holder of any trust preferred security may institute a legal proceeding
directly against us to enforce its rights under the guarantee without first
instituting a legal proceeding against the guarantee trustee, the trust or any
other person. A default or event of default under any of our senior or
subordinated debt would not constitute a default or event of default under the
trust agreement. In the event, however, of payment defaults under, or
acceleration of, our senior or subordinated debt, the subordination provisions
of the indenture provide that no payments may be made in respect of the
debentures until the obligations have been paid in full or any payment default
has been cured or waived. Failure to make required payments on the debentures
would constitute an event of default under the trust agreement.
91
<PAGE>
Limited Purpose of the Trust
The trust preferred securities evidence preferred undivided beneficial
interests in the assets of the trust. The trust exists for the exclusive
purposes of issuing the trust securities, investing the proceeds thereof in
debentures and engaging in only those other activities necessary, advisable or
incidental thereto. A principal difference between the rights of a holder of a
trust preferred security and the rights of a holder of a debenture is that a
holder of a debenture is entitled to receive from us the principal amount of
and interest accrued on debentures held, while a holder of trust preferred
securities is entitled to receive distributions from the trust (or from us
under the guarantee) if and to the extent the trust has funds available for the
payment of the distributions.
Rights Upon Termination
Upon any voluntary or involuntary termination, winding-up or liquidation of
the trust involving the liquidation of the debentures, the holders of the trust
preferred securities will be entitled to receive, out of assets held by the
trust, the liquidation distribution in cash. See "Description of the Trust
Preferred Securities--Liquidation Distribution Upon Termination."
Upon our voluntary or involuntary liquidation or bankruptcy, the property
trustee, as holder of the debentures, would be a subordinated creditor of ours.
Therefore, the property trustee would be subordinated in right of payment to
all of our senior and subordinated debt, but is entitled to receive payment in
full of principal and interest before any of our stockholders receive payments
or distributions. Since we are the guarantor under the guarantee and have
agreed to pay for all costs, expenses and liabilities of the trust other than
the obligations of the trust to pay to holders of the trust preferred
securities the amounts due to the holders pursuant to the terms of the trust
preferred securities, the positions of a holder of the trust preferred
securities and a holder of the debentures relative to our other creditors and
to our shareholders in the event of liquidation or bankruptcy are expected to
be substantially the same.
92
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
General
The following summary of the material federal income tax considerations that
may be relevant to the purchasers of trust preferred securities represents the
opinion of Bracewell & Patterson, L.L.P., counsel to us and the trust insofar
as it relates to matters of law and legal conclusions. The conclusions
expressed herein are based upon current provisions of the Internal Revenue Code
of 1986, regulations thereunder and current administrative rulings and court
decisions, all of which are subject to change at any time, with possible
retroactive effect. Subsequent changes may cause tax consequences to vary
substantially from the consequences described below. Furthermore, the
authorities on which the following summary is based are subject to various
interpretations, and it is therefore possible that the federal income tax
treatment of the purchase, ownership and disposition of trust preferred
securities may differ from the treatment described below. In rendering its
opinion, Bracewell & Patterson, L.L.P. has not sought a ruling from the
Internal Revenue Service as to any tax consequences, and its opinion is not
binding on the Internal Revenue Service.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting purchasers of trust preferred securities.
Moreover, the discussion generally focuses on holders of trust preferred
securities who are individual citizens or residents of the United States and
who acquire trust preferred securities on their original issue at their
offering price and hold trust preferred securities as capital assets. The
discussion has only limited application to dealers in securities, corporations,
estates, trusts or nonresident aliens and does not address all the tax
consequences that may be relevant to holders who may be subject to special tax
treatment. The following summary also does not address the tax consequences to
persons that have a functional currency other than the U.S. dollar or the tax
consequences to shareholders, partners or beneficiaries of a holder of trust
preferred securities. Further, it does not include any description of any
alternative minimum tax consequences or the tax laws of any state or local
government or of any foreign government that may be applicable to the trust
preferred securities. Accordingly, each prospective investor should consult,
and should rely exclusively on, the investor's own tax advisors in analyzing
the federal, state, local and foreign tax consequences of the purchase,
ownership or disposition of trust preferred securities.
Classification of the Debentures
In accordance with the opinion of Bracewell & Patterson, L.L.P., that
generally the debentures will be classified for federal income tax purposes as
our indebtedness under current law, and, by acceptance of a trust preferred
security, each holder covenants to treat the debentures as indebtedness and the
trust preferred securities as evidence of an indirect beneficial ownership
interest in the debentures. No assurance can be given, however, that this
position will not be challenged by the Internal Revenue Service or, if
challenged, that it will not be successful. The remainder of this discussion
assumes that the debentures will be classified for federal income tax purposes
as our indebtedness.
Classification of the Trust
With respect to the trust preferred securities, Bracewell & Patterson,
L.L.P. has rendered its opinion generally to the effect that, assuming full
compliance with the terms of the trust agreement and indenture, the trust will
be classified for federal income tax purposes as a grantor trust and not as an
association taxable as a corporation. Accordingly, for federal income tax
purposes, each holder of trust preferred securities generally will be treated
as owning an undivided beneficial interest in the debentures, and each holder
will be required to include in its gross income any interest with respect to
the debentures at the time such interest is accrued or is received, in
accordance with the holder's method of accounting. If the debentures were
determined to be subject to the original issue discount OID rules, each holder
would instead be required to include in its gross income any OID accrued with
respect to its allocable share of the debentures whether or not cash were
actually distributed to the holder.
93
<PAGE>
Interest Payment Period and Original Issue Discount
United States taxpayers including cash basis taxpayers that hold debt
instruments issued with OID must generally include such OID in income as it
accrues on a constant yield method even if there is not a corresponding receipt
of cash attributable to such income. Debt instruments such as the debentures
will generally be treated as issued with OID if the stated interest on the
instrument does not constitute qualified stated interest. Qualified stated
interest is generally any one of a series of stated interest payments on an
instrument that are unconditionally payable at least annually at a single fixed
rate. In determining whether stated interest on an instrument is
unconditionally payable and thus constitutes qualified stated interest, remote
contingencies as to the timely payment of stated interest are ignored. In the
case of the debentures, we have concluded that the likelihood of exercising our
option to defer payments of interest is remote.
If the option to defer any payment of interest was determined not to be
remote or if we actually exercise our option to defer the payment of interest,
the debentures would be treated as issued with OID at the time of issuance or
at the time of such exercise, as the case may be, and all stated interest would
thereafter be treated as OID as long as the debentures remained outstanding. In
such event, all of a United States person's taxable interest income in respect
of the debentures would constitute OID that would have to be included in income
on a constant yield method before the receipt of the cash attributable to such
income, regardless of such person's method of tax accounting, and actual
distributions of stated interest would not be reported as taxable income.
Consequently, a holder of trust preferred securities would be required to
include such OID in gross income even though we would not make any actual cash
payments during an extension period.
Because income on the trust preferred securities will constitute interest,
corporate holders of trust preferred securities will not be entitled to a
dividends-received deduction with respect to any income recognized with respect
to the trust preferred securities.
Market Discount and Acquisition Premium
Holders of trust preferred securities other than holders who purchased the
trust preferred securities upon original issuance may be considered to have
acquired their undivided interests in the debentures with market discount or
acquisition premium as these phrases are defined for federal income tax
purposes. Such holders are advised to consult their tax advisors as to the
income tax consequences of the acquisition, ownership and disposition of the
trust preferred securities.
Receipt of Debentures or Cash Upon Liquidation of the Trust
Under the circumstances described under "Description of the Trust Preferred
Securities--Redemption or Exchange" and "--Liquidation Distribution Upon
Termination," the debentures may be distributed to holders of trust preferred
securities upon a liquidation of the trust. Under current federal income tax
law, such a distribution would be treated as a nontaxable event to the holder
and would result in the holder having an aggregate tax basis in the debentures
received in the liquidation equal to the holder's aggregate tax basis in the
trust preferred securities immediately before the distribution. A holder's
holding period in debentures received in liquidation of the trust would include
the period for which the holder held the trust preferred securities.
If, however, a Tax Event occurs which results in the trust being treated as
an association taxable as a corporation, the distribution would likely
constitute a taxable event to holders of the trust preferred securities. Under
certain circumstances described herein, the debentures may be redeemed for cash
and the proceeds of the redemption distributed to holders in redemption of
their trust preferred securities. Under current law, such a redemption should,
to the extent that it constitutes a complete redemption, constitute a taxable
disposition of the redeemed trust preferred securities, and a holder for
federal income tax purposes, should recognize gain or loss as if the holder
sold the trust preferred securities for cash.
94
<PAGE>
Disposition of Trust Preferred Securities
A holder that sells trust preferred securities will recognize gain or loss
equal to the difference between the amount realized on the sale of the trust
preferred securities and the holder's adjusted tax basis in the trust preferred
securities. A holder's adjusted tax basis in the trust preferred securities
generally will be its initial purchase price increased by OID previously
includible in the holder's gross income to the date of disposition and
decreased by payments received on the trust preferred securities to the date of
disposition. A gain or loss of this kind will generally be a capital gain or
loss and will be a long-term capital gain or loss if the trust preferred
securities have been held for more than one year at the time of sale.
The trust preferred securities may trade at a price that does not accurately
reflect the value of accrued but unpaid interest with respect to the underlying
debentures. A holder that disposes of its trust preferred securities between
record dates for payments of distributions thereon will be required to include
accrued but unpaid interest on the debentures through the date of disposition
in income as ordinary income, and to add the amount to its adjusted tax basis
in its proportionate share of the underlying debentures deemed disposed of. To
the extent the selling price is less than the holder's adjusted tax basis a
holder will recognize a capital loss. The adjusted basis would include, in the
form of OID, all accrued but unpaid interest. Subject to certain limited
exceptions, capital losses cannot be applied to offset ordinary income for
federal income tax purposes.
Effect of Possible Changes in Tax Laws
Congress and the Clinton Administration have considered certain proposed tax
law changes in the past that would, among other things, generally deny
corporate issuers a deduction for interest in respect of certain debt
obligations if the debt obligations have a maximum term in excess of 15 years
and are not shown as indebtedness on the issuer's applicable consolidated
balance sheet. Other proposed tax law changes would have denied interest
deductions if the term was in excess of 20 years. Although these proposed tax
law changes have not been enacted into law, there can be no assurance that tax
law changes will not be reintroduced into future legislation which, if enacted
after the date hereof, may adversely affect the federal income tax
deductibility of interest payable on the debentures. Accordingly, there can be
no assurance that a Tax Event will not occur. A Tax Event would permit us, upon
approval of the Federal Reserve if then required, to cause a redemption of the
trust preferred securities before, as well as after, , 2005. See
"Description of the Debentures--Redemption or Exchange" and "Description of the
Trust Preferred Securities--Redemption or Exchange--Redemption upon a Tax
Event, Investment Company Event or Capital Treatment Event."
Backup Withholding and Information Reporting
The amount of qualified stated interest, or, if applicable, OID, accrued on
the trust preferred securities held of record by individual citizens or
residents of the United States, or certain trusts, estates and partnerships,
will be reported to the Internal Revenue Service on Forms 1099-INT, or, where
applicable, forms 1099-OID, which forms should be mailed to the holders by
January 31 following each calendar year. Payments made on, and proceeds from
the sale of, the trust preferred securities may be subject to a backup
withholding tax (currently at 31%) unless the holder complies with certain
identification and other requirements. Any amounts withheld under the backup
withholding rules will be allowed as a credit against the holder's federal
income tax liability, provided the required information is provided to the
Internal Revenue Service.
The federal income tax discussion set forth above is included for general
information only and may not be applicable depending upon the particular
situation of a holder of trust preferred securities. Holders of trust preferred
securities should consult their tax advisors with respect to the tax
consequences to them of the purchase, ownership and disposition of the trust
preferred securities, including the tax consequences under state, local,
foreign and other tax laws and the possible effects of changes in federal or
other tax laws.
95
<PAGE>
ERISA CONSIDERATIONS
Employee benefit plans that are subject to the Employee Retirement Income
Security Act of 1974 (ERISA), or Section 4975 of the Internal Revenue Code,
generally may purchase trust preferred securities, subject to the investing
fiduciary's determination that the investment in trust preferred securities
satisfies ERISA's fiduciary standards and other requirements applicable to
investments by the plan.
In any case, with respect to certain plans, we and/or any of our affiliates
may be considered a party in interest within the meaning of ERISA or a
disqualified person within the meaning of Section 4975 of the Internal Revenue
Code. These plans generally include plans maintained or sponsored by, or
contributed to by, any such persons with respect to which we or any of our
affiliates are a fiduciary or plans for which we or any of our affiliates
provide services. The acquisition and ownership of trust preferred securities
by a plan or by an individual retirement arrangement or other plans described
in Section 4975(e)(1) of the Internal Revenue Code with respect to which we or
any of our affiliates are considered a party in interest or a disqualified
person may constitute or result in a prohibited transaction under ERISA or
Section 4975 of the Internal Revenue Code, unless the trust preferred
securities are acquired pursuant to and in accordance with an applicable
exemption.
As a result, plans with respect to which we or any of our affiliates or any
of its affiliates is a party in interest or a disqualified person should not
acquire trust preferred securities unless the trust preferred securities are
acquired pursuant to and in accordance with an applicable exemption. Any other
plans or other entities whose assets include plan assets subject to ERISA or
Section 4975 of the Internal Revenue Code proposing to acquire trust preferred
securities should consult with their own counsel.
96
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement among us,
the trust and the underwriters listed on the table below for whom Hoefer &
Arnett, Incorporated is acting as representative, the underwriters have
severally agreed to purchase from the trust an aggregate of 1,000,000 trust
preferred securities in the amounts set forth below opposite their respective
names.
<TABLE>
<CAPTION>
Number of
trust
preferred
Underwriters securities
------------ ----------
<S> <C>
Hoefer & Arnett, Incorporated.....................................
SAMCO Capital Markets.............................................
---------
Total........................................................... 1,000,000
=========
</TABLE>
The underwriting agreement requires the underwriters to accept and pay for
all of the trust preferred securities, if any are taken. In addition, the
underwriting agreement sets forth customary conditions that must be satisfied
on the part of us and the trust before the underwriters are obligated to
purchase the trust preferred securities. These conditions include the accuracy
of specific representations and warranties and the receipt of opinions of
counsel and reports from accountants as to our status and the status of the
trust and the trust preferred securities.
The table below shows the price and proceeds on a per security and aggregate
basis:
<TABLE>
<CAPTION>
Per trust
preferred
security Total
--------- -----------
<S> <C> <C>
Public offering price................................ $10.00 $10,000,000
Underwriting fees to be paid by Paradigm
Bancorporation, Inc................................. $ 0.35 $ 350,000
Proceeds to the trust................................ $10.00 $10,000,000
</TABLE>
The proceeds the trust will receive as shown in the table above do not
reflect estimated expenses of $200,000 payable by us.
All of the proceeds to the trust will be used to purchase the debentures
from us. We have agreed to pay the underwriters a fee of 3.5% of the public
offering price per trust preferred security out of the proceeds we receive from
the sale of the debentures. A maximum of $350,000 will be paid to the
underwriters for arranging the sale of the trust preferred securities and
subsequent investment in the debentures.
The underwriters propose to offer the trust preferred securities in part
directly to the public at the initial public offering price set forth above,
and in part to securities dealers at this price less a concession not in excess
of $ per trust preferred security. The underwriters may allow, and the
dealers may reallow, a concession not in excess of $ per trust preferred
security to brokers and dealers. After the trust preferred securities are
released for sale to the public, the offering price and other selling terms may
from time to time be varied by the underwriters.
We and the trust have agreed to indemnify the several underwriters against
several liabilities, including liabilities under the Securities Act of 1933.
Generally, the indemnification provisions in the underwriting agreement provide
for full indemnification of the underwriters in actions related to the
disclosure in this prospectus unless such disclosure was provided by the
underwriters specifically for use in this prospectus.
In connection with the offering, the underwriters may purchase and sell the
trust preferred securities in the open market. These transactions may include
stabilizing transactions and purchases to cover syndicate short positions
created in connection with the offering. Stabilizing transactions consist of
bids or purchases for the purpose of preventing or retarding a decline in the
market price of the trust preferred securities; and syndicate
97
<PAGE>
short positions involve the sale by the underwriters of a greater number of
securities than they are required to purchase from us in the offering. The
underwriters also may impose a penalty bid, whereby selling concessions allowed
to syndicate members or other broker-dealers in respect of the securities sold
in the offering for their own account may be reclaimed by the syndicate if the
trust preferred securities are repurchased by the syndicate in stabilizing or
covering transactions. These activities may stabilize, maintain or otherwise
affect the market price of the trust preferred securities, which may be higher
than the price that might otherwise prevail in the open market. These
activities, if commenced, may be discontinued at any time. These transactions
may be affected in the over-the-counter market or otherwise.
LEGAL MATTERS
Certain legal matters, including matters relating to federal income tax
considerations, for us and the trust will be passed upon by Bracewell &
Patterson, L.L.P., Houston, Texas, counsel to us and the trust. Certain legal
matters will be passed upon for the underwriters by Rothgerber Johnson & Lyons
LLP. Bracewell & Patterson, L.L.P. and Rothgerber Johnson & Lyons LLP may rely
on the opinion of Richards, Layton & Finger, P.A., Wilmington, Delaware, as to
matters of Delaware law.
EXPERTS
Our consolidated financial statements as of December 31, 1999 and 1998 and
for each of the two years in the period ended December 31, 1999, included in
this prospectus, have been audited by Harper & Pearson Company, P.C.,
independent certified public accountants, as stated in their report appearing
herein, and are included in reliance upon such report given upon their
authority as experts in accounting and auditing.
The financial statements of Dayton State as of December 31, 1998 and for the
year ended December 31, 1998, included in this prospectus, have been audited by
Grant Thornton, L.L.P., independent certified public accountants, as stated in
their report appearing herein, and are included in reliance upon such report
given upon their authority as experts in accounting and auditing.
98
<PAGE>
WHERE YOU CAN FIND INFORMATION
This prospectus is a part of a Registration Statement on Form SB-2 filed by
us and the trust with the Securities and Exchange Commission under the
Securities Act, with respect to the trust preferred securities, the debentures
and the guarantee. This prospectus does not contain all the information set
forth in the registration statement, certain parts of which are omitted in
accordance with the rules and regulations of the SEC. For further information
with respect to us and the securities offered by this prospectus, reference is
made to the registration statement, including the exhibits to the registration
statement. Statements contained in this prospectus concerning the provisions of
such documents are necessarily summaries of such documents and each such
statement is qualified in its entirety by reference to the copy of the
applicable document filed with the Securities and Exchange Commission.
As a result of this offering, we will be required to file periodic reports,
proxy statements and other information with the SEC. Our filings will be
available to the public over the Internet at the SEC's web site. The address of
that site is http://www.sec.gov. You may also inspect and copy these materials
at the public reference facilities of the SEC at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, as well as at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 75 Park Place, Room 1400, New York, New York
10007. Copies of such material can be obtained at prescribed rates from the
Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information.
The trust is not currently subject to the information reporting requirements
of the Securities Exchange Act of 1934. Although the trust will become subject
to such requirements upon the effectiveness of the Registration Statement, it
is not expected that the trust will be required to file separate reports under
the Securities Exchange Act of 1934 because:
. after the offering, we will be a reporting company under the Securities
Exchange Act;
. the trust is a wholly-owned subsidiary of the company and does not have
any independent operations other than issuing the trust preferred and
common securities and purchasing the debentures of the company;
. the company has fully and unconditionally guaranteed all of the trust's
obligations with respect to the trust preferred securities through the
guarantee, the indenture, the trust agreement and the debentures; and
. the holders of the trust preferred securities may proceed directly
against the company to enforce the company's guarantees.
We have not included separate financial statements of the trust in this
prospectus. We do not consider that separate financial statements would be
material to holders of trust preferred securities because we will own all of
the trust's voting securities, the trust has no independent operations and we
guarantee the payments on the trust preferred securities to the extent
described in this prospectus.
99
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Paradigm Bancorporation, Inc.
Independent Auditor's Report............................................ F-2
Consolidated Statements of Condition as of December 31, 1999 and 1998... F-3
Consolidated Statements of Income for the Years Ended December 31, 1999
and 1998............................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1999 and 1998....................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999 and 1998.......................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Consolidated Statement of Condition as of June 30, 2000 (Unaudited)..... F-21
Consolidated Statements of Income for the Six Months Ended
June 30, 2000 and 1999 (Unaudited)..................................... F-22
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999 (Unaudited)..................................... F-23
Notes to Consolidated Financial Statements as of and for the Six Months
Ended June 30, 2000 and 1999 (Unaudited)............................... F-24
Dayton State Bank
Independent Auditor's Report............................................ F-25
Consolidated Statements of Condition as of December 31, 1999............ F-26
Consolidated Statements of Income for the Year Ended December 31, 1999.. F-27
Consolidated Statements of Changes in Stockholders' Equity for the Year
Ended December 31, 1999................................................ F-28
Consolidated Statements of Cash Flows for the Year Ended December 31,
1999................................................................... F-29
Notes to Consolidated Financial Statements.............................. F-30
Consolidated Statement of Condition as of June 30, 2000 (Unaudited)..... F-40
Consolidated Statements of Income for the Six Months Ended June 30, 2000
(Unaudited)............................................................ F-41
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
2000 (Unaudited)....................................................... F-42
Notes to Consolidated Financial Statements as of and for the Six Months
Ended June 30, 2000 (Unaudited)........................................ F-43
Dayton State Bank
Report of Independent Certified Public Accountants...................... F-44
Balance Sheets as of June 30, 1999 (unaudited) and December 31, 1998.... F-45
Statement of Earnings for the Six Months Ended June 30, 1999 (unaudited)
and the Year Ended December 31, 1998................................... F-46
Statement of Shareholders' Equity for the Six Months Ended June 30, 1999
(unaudited) and the Year Ended December 31, 1998....................... F-47
State of Cash Flows for the Six Months Ended June 30, 1999 (unaudited)
and the Year Ended December 31, 1998................................... F-48
Notes to Financial Statements........................................... F-49
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Paradigm Bancorporation, Inc.
Houston, Texas
We have audited the accompanying consolidated statements of condition of
Paradigm Bancorporation, Inc. and Subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Paradigm
Bancorporation, Inc. and Subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Harper & Pearson Company
Houston, Texas
March 24, 2000
F-2
<PAGE>
PARADIGM BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks........................... $ 20,314,386 $ 9,364,965
Federal funds sold................................ 6,225,000 6,500,000
------------ ------------
Total cash and cash equivalents................. 26,539,386 15,864,965
Interest-bearing deposits in financial
institutions..................................... 5,041,000 10,196,000
Securities available for sale..................... 29,846,651 2,522,732
Securities to be held to maturity................. 21,444,771 21,988,514
Federal Home Loan Bank stock...................... 328,600 --
Loans............................................. 111,244,178 49,367,786
Less allowance for credit losses................ (679,791) (113,420)
------------ ------------
Loans, net...................................... 110,564,387 49,254,366
Accrued interest receivable....................... 1,496,335 594,424
Goodwill, net..................................... 3,928,076 754,519
Premises and equipment, net....................... 9,957,565 3,398,767
Other real estate owned........................... 541,743 232,550
Other assets...................................... 1,158,900 162,366
------------ ------------
Total Assets.................................. $210,847,414 $104,969,203
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing............................. $ 64,953,124 $ 34,325,769
Interest-bearing savings........................ 63,677,799 30,566,874
Interest-bearing certificates of deposit........ 53,411,471 31,903,783
------------ ------------
Total Deposits................................ 182,042,394 96,796,426
Due to former shareholders...................... 6,653,151 238,660
Accrued interest payable........................ 433,344 302,667
Other liabilities............................... 1,345,747 106,787
------------ ------------
Total Liabilities............................. 190,474,636 97,444,540
------------ ------------
Commitments and Contingencies
Company obligated manditorily redeemable preferred
securities of subsidiary trust................... 5,125,000 --
------------ ------------
Stockholders' Equity
Preferred stock................................. 10 --
Common stock.................................... 2,375,000 1,500,000
Capital surplus................................. 10,793,381 4,668,381
Retained earnings............................... 2,280,423 1,311,112
Accumulated other comprehensive income (loss)... (201,036) 45,170
------------ ------------
Total Stockholders' Equity...................... 15,247,778 7,524,663
------------ ------------
Total Liabilities and Stockholders' Equity.... $210,847,414 $104,969,203
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
PARADIGM BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans............................. $5,723,185 $4,182,428
Investment securities.................................. 1,859,763 1,435,489
Federal funds sold..................................... 230,514 706,234
---------- ----------
Total Interest Income................................ 7,813,462 6,324,151
INTEREST EXPENSE
Deposits and debt...................................... 2,597,076 2,386,899
---------- ----------
NET INTEREST INCOME...................................... 5,216,386 3,937,252
PROVISION FOR CREDIT LOSSES.............................. 309,494 76,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES.... 4,906,892 3,861,252
---------- ----------
NON INTEREST INCOME
Customer service fees.................................. 1,922,360 1,335,921
Gain on sale of securities............................. 184,917 --
Other income........................................... 170,856 70,891
---------- ----------
Total Non Interest Income............................ 2,278,133 1,406,812
---------- ----------
NON INTEREST EXPENSES
Salaries and employee benefits......................... 2,744,865 2,195,232
Net occupancy expense.................................. 744,912 688,566
Outside service fees................................... 1,050,610 654,673
Equipment.............................................. 22,844 66,591
Other.................................................. 794,012 546,404
---------- ----------
Total Non Interest Expenses.......................... 5,357,243 4,151,466
---------- ----------
NET INCOME BEFORE INCOME TAX EXPENSE..................... 1,827,782 1,116,598
INCOME TAX EXPENSE
Current................................................ 103,775 --
---------- ----------
CONSOLIDATED NET INCOME.................................. $1,724,007 $1,116,598
========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
PARADIGM BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Accumulated
Other
Preferred Common Capital Retained Comprehensive
Stock Stock Surplus Earnings Income (Loss) Total
--------- ---------- ----------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance--December 31,
1997................... $-- $1,287,701 $ 3,288,438 $ 403,227 $ 51,974 $ 5,031,340
Issuance of Common
Stock.................. -- 212,299 1,379,943 -- -- 1,592,242
Consolidated Net
Income................. -- -- -- 1,116,598 -- 1,116,598
Change in Unrealized
Gain on Securities, Net
of Income Taxes
of $3,505.............. -- -- -- -- (6,804) (6,804)
-----------
Total Comprehensive
Income................. 1,109,794
Cash Dividends.......... -- -- -- (208,713) -- (208,713)
--- ---------- ----------- ---------- --------- -----------
Balance--December 31,
1998................... -- 1,500,000 4,668,381 1,311,112 45,170 7,524,663
Issuance of Preferred
Stock.................. 10 -- -- -- -- 10
Issuance of Common
Stock.................. -- 875,000 6,125,000 -- -- 7,000,000
Consolidated Net
Income................. -- -- -- 1,724,007 -- 1,724,007
Change in Unrealized
Loss on Securities, Net
of Income Taxes
of $126,833............ -- -- -- -- (246,206) (246,206)
-----------
Total Comprehensive
Income................. 1,477,801
Cash Dividends.......... -- -- -- (754,696) -- (754,696)
--- ---------- ----------- ---------- --------- -----------
Balance--December 31,
1999................... $10 $2,375,000 $10,793,381 $2,280,423 $(201,036) $15,247,778
=== ========== =========== ========== ========= ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
PARADIGM BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Consolidated net income............................. $ 1,724,007 $ 1,116,598
Adjustments to reconcile consolidated net income to
net cash provided by operating activities:
Depreciation and amortization...................... 298,579 223,499
Provision for credit losses........................ 309,494 76,000
Amortization of goodwill........................... 67,022 39,875
Net amortization/accretion on securities........... 20,791 14,454
Gain on sales of securities........................ (184,917) --
Changes in assets and liabilities:
Accrued interest receivable........................ 49,926 (75,744)
Other real estate owned............................ (38,148) 537,164
Other assets....................................... (114,163) (281,415)
Accrued interest payable........................... (40,745) 47,609
Other liabilities.................................. 776,941 (1,507,010)
----------- -----------
Net cash provided by operating activities......... 2,868,787 191,030
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities, calls and paydowns of
securities......................................... 2,737,248 11,946,033
Proceeds from sales of securities................... 6,209,692 --
Proceeds from maturities of interest-bearing
deposits in financial institutions................. 7,434,000 --
Net change in loans................................. (19,983,632) (11,618,031)
Purchase of securities.............................. (4,001,406) (14,275,000)
Purchase of Federal Home Loan Bank stock............ (328,600) --
Purchase of interest-bearing deposits in financial
institutions....................................... (2,279,000) (8,115,000)
Purchase of Dayton State Bank....................... (11,319,410) --
Cash acquired in purchase of Dayton State Bank...... 14,321,193 --
Purchases of premises and equipment, net............ (423,210) (376,818)
----------- -----------
Net cash used by investing activities............. (7,633,125) (22,438,816)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits.............................. 4,193,445 10,739,671
Issuance of common stock............................ 7,000,000 1,592,242
Issuance of preferred stock......................... 10 --
Issuance of trust preferred stock................... 5,000,000 --
Dividends paid...................................... (754,696) (208,713)
----------- -----------
Net cash provided by financing activities......... 15,438,759 12,123,200
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................... 10,674,421 (10,124,586)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....... 15,864,965 25,989,551
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR............. $26,539,386 $15,864,965
=========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
PARADIGM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE A--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES
Principles of Consolidation--The accompanying financial statements include
the accounts of Paradigm Bancorporation, Inc. (Paradigm) and its wholly owned
subsidiaries Paradigm Capital Trust I (Trust), Paradigm Delaware
Bancorporation, Inc. (Delaware), Woodcreek Bank (Woodcreek) and Dayton State
Bank (Dayton). All significant intercompany balances and activity have been
eliminated.
Nature of Operations--Paradigm through its two banks, Woodcreek and Dayton,
provides a broad line of financial products and services to small and medium-
sized businesses and to consumers through its community banking offices in
Harris, Chambers and Liberty Counties.
Acquisition of First National Bank of Dayton--In 1997, Woodcreek acquired
the First National Bank of Dayton for approximately $2,508,000. This
acquisition has been accounted for by the purchase method of accounting and
accordingly, the operating results have been included in Woodcreek's results of
operations from the date of acquisition. The excess of the consideration paid
over the fair value of the net assets acquired has been recorded as goodwill in
the approximate amount of $794,000 and is being amortized ratably over 20
years.
Acquisition of Dayton State Bank--Effective December 1, 1999, Paradigm
acquired all of the outstanding common stock of Dayton for $17,257,912. This
acquisition has been accounted for by the purchase method of accounting and
accordingly, the operating results have been included in Paradigm's results of
operations from the date of acquisition. The excess of the consideration paid
over the fair value of the net assets acquired has been recorded as goodwill in
the approximate amount of $3,233,000 and is being amortized ratably over 20
years.
To finance the Dayton purchase, Paradigm (1) sold 875,000 of its common
shares in exchange for cash in the amount of $7,000,000; (2) chartered a
wholly-owned subsidiary, Paradigm Capital Trust I to sell $5,125,000 of
preferred stock for $5,000,000, and (3) upon closing of the transaction with
the Dayton shareholders, received a $5,600,000 dividend from Dayton.
At December 31, 1999, certain of the selling Dayton shareholders had not yet
tendered their Dayton shares to Paradigm. Consequently, a liability of about
$5,989,000 is shown as due to former shareholders in the accompanying
consolidated statements of condition, to be paid to the selling Dayton
shareholders upon receipt by Paradigm of the former Dayton shareholders' shares
of common stock.
Pursuant to the terms of the acquisition agreement, Paradigm is holding in
escrow, for the benefit of the selling Dayton shareholders, about $524,000 to
be paid upon the fulfillment of certain conditions as set forth in the
agreement.
Summary of Significant Accounting and Reporting Policies--The accounting and
reporting policies of Paradigm conform to generally accepted accounting
principles (GAAP) and to the prevailing practices within the banking industry.
A summary of significant accounting policies is as follows:
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 these estimates.
F-7
<PAGE>
PARADIGM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1999 AND 1998
The determination of the adequacy of the allowance for loan losses is based
on estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. In connection with the
determination of the estimated losses on loans, management obtains independent
appraisals for significant collateral.
The Banks' loans are generally secured by specific items of collateral
including real property, consumer assets, and business assets. Although the
Banks have a diversified loan portfolio, a substantial portion of their
debtors' ability to honor their contracts is dependent on local economic
conditions.
While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans 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. Such agencies may require the Banks 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 may change materially in the near term. However,
the amount of the change that is reasonably possible cannot be estimated.
Cash and Due From Banks--The Banks are required to maintain reserves for the
purpose of facilitating the implementation of monetary policy. These reserves
may be maintained in the form of balances at the Federal Reserve Bank or by
vault cash. Reserve requirements were $735,000 at December 31, 1999.
Accordingly, cash and due from banks balances were restricted to that extent.
Investment Securities--Available-for-sale investment securities are carried
at fair value. Unrealized gains and losses are excluded from earnings and
reported as a separate component of stockholders' equity until realized.
Securities within the available-for-sale portfolio may be used as part of the
Banks' assets/liability strategy and may be sold in response to changes in
interest rate risk, prepayment risk or other similar economic factors.
Held-to-maturity investment securities are carried at cost, adjusted for the
amortization of premiums and the accretion of discounts. Management has the
positive intent and the Banks have the ability to hold these assets as long-
term investments until their estimated maturities. Under certain circumstances
(including the significant deterioration of the issuer's creditworthiness or a
significant change in tax-exempt status or statutory or regulatory
requirements), securities held to maturity may be sold or transferred to
another portfolio.
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 sale of these assets.
Loans--Loans are stated at the principal amount outstanding, net of unearned
discounts. Unearned discounts relate principally to consumer installment loans
and are amortized using a method that approximates the interest method. For
other loans, such income is recognized using the simple interest method.
Nonperforming Loans and Past-Due Loans--Included in the nonperforming and
past-due loans 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.
F-8
<PAGE>
PARADIGM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1999 AND 1998
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 the 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 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 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, potential 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 Bank's control.
It should be understood that estimates of credit losses involve an exercise
of judgment. While it is reasonably possible that in the short-term the Banks
may sustain losses which are substantial relative to the allowance for credit
losses, it is the judgment of management that the allowance for credit losses
reflected in the statements of condition is adequate to absorb estimated losses
which may exist in the current loan portfolio.
Real Estate Acquired by Foreclosure--The Banks record real estate acquired
by foreclosure at the lesser of the outstanding loan amount (including accrued
interest, if any) or fair value, less estimated costs to sell, at the time of
foreclosure. Adjustments are made to reflect declines in value subsequent to
acquisition, if any, below the recorded amounts. Operating expenses of such
properties, net of related income, and gains and losses on their disposition
are included in other non-interest expense.
Premises and Equipment--Land is carried at cost. Premises and equipment are
carried at cost less accumulated depreciation and amortization. Depreciation
expense is computed principally using the straight-line method of accounting
over the estimated useful lives of the assets. Leasehold improvements are
amortized straight-line over the periods of the leases or the estimated useful
lives, whichever is shorter.
F-9
<PAGE>
PARADIGM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1999 AND 1998
Income Taxes--In 1997, Paradigm elected to be taxed, commencing January 1,
1998, as an S Corporation under the Internal Revenue Code. In lieu of corporate
income taxes, the stockholders of Paradigm were taxed on their proportionate
share of taxable income. Consequently, no federal income taxes were recorded
during 1998. In 1999, in conjunction with the acquisition of Dayton, the
election to be taxed as an S Corporation was terminated. Therefore, for
December 1999 and in future years, Paradigm was and will be treated as a
regular corporation for tax purposes and federal income taxes were and will be
accrued and paid.
Other Borrowed Funds--These borrowings generally represent secured and
unsecured obligations to financial institutions and the U.S. Treasury using
various rates and terms.
Stock Appreciation Rights--Paradigm implemented a stock appreciation rights
program in 1998 which provides benefits to certain key employees. Under this
program, stock appreciation rights for 30,000 shares were awarded in 1998 and
in 1999, with the exercise price set at the estimated per share fair value of
the outstanding common stock at the grant date, ranging from $4.64 to $6.42.
Compensation expense is being recorded over the five-year period the stock
appreciation rights vest, which amounted to approximately $2,000 and $38,000 in
1998 and 1999, respectively.
Trust Preferred Stock--In conjunction with the acquisition of Dayton,
Capital Trust I issued 512,500 shares of trust preferred stock having limited
voting rights and a liquidation preference of $5,125,000. Cumulative dividends
at 10.375% of liquidation preference are due quarterly.
Preferred Stock--$10 par value, 10,000,000 shares authorized, 1 share issued
and outstanding at December 31, 1999.
Common Stock--$1 par value, 25,000,000 and 1,500,000 shares authorized,
2,375,000 and 1,500,000 shares issued and outstanding at December 31, 1999 and
1998, respectively.
Statements of Cash Flows--Cash and cash equivalents include cash on hand,
amounts due from banks, interest-bearing deposits in financial institutions and
federal funds sold; generally, federal funds are sold for one-day periods.
Comprehensive Income--In 1998, Paradigm adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". SFAS No.
130 requires the reporting of comprehensive income in addition to net income
from operations. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information that
historically has not been recognized in the calculation of net income.
F-10
<PAGE>
PARADIGM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1999 AND 1998
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, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
1999 Cost Gains Losses Value
---- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Securities Available For Sale:
U.S. Government & Agency
Securities.................... $ 3,731,840 $ -- $ (31,338) $ 3,700,502
Mortgage-backed Securities..... 18,106,956 -- (233,526) 17,873,430
State and Municipal
Securities.................... 8,262,455 -- (39,736) 8,222,719
Texas Independent Bank Stock... 50,000 -- -- 50,000
----------- -------- --------- -----------
$30,151,251 $ -- $(304,600) $29,846,651
=========== ======== ========= ===========
Securities to be Held to
Maturity:
U.S. Government Agency
Obligations................... $17,796,308 $ 2,821 $(461,720) $17,337,409
Municipal Bonds................ 2,205,318 -- (22,730) 2,182,588
State and Municipal
Securities.................... 1,443,145 28 (2,261) 1,440,912
----------- -------- --------- -----------
$21,444,771 $ 2,849 $(486,711) $20,960,909
=========== ======== ========= ===========
<CAPTION>
1998
----
<S> <C> <C> <C> <C>
Securities Available For Sale:
U.S. Government Agency
Obligations................... $ 1,037,702 $ 10,256 $ -- $ 1,047,958
Municipal Bonds................ 1,439,860 34,914 -- 1,474,774
----------- -------- --------- -----------
$ 2,477,562 $ 45,170 $ -- $ 2,522,732
=========== ======== ========= ===========
Securities to be Held to
Maturity:
U.S. Government Agency
Obligations................... $15,101,414 $ 33,145 $ (79,631) $15,054,928
Municipal Bonds................ 6,887,100 364,985 -- 7,252,085
----------- -------- --------- -----------
$21,988,514 $398,130 $ (79,631) $22,307,013
=========== ======== ========= ===========
</TABLE>
The amortized cost and estimated market value of debt securities at December
31, 1999, 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 Available for Securities Held to
Sale Maturity
------------------------ -----------------------
Amortized Market Amortized Market
Cost Value Cost Value
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Amounts Maturing In:
1 year or less............. $ 175,444 $ 175,430 $ 2,365,608 $ 2,354,019
1 year through 5 years..... 4,978,925 4,956,525 17,144,914 16,743,771
5 years through 10 years... 6,101,469 6,058,210 1,934,249 1,863,119
After 10 years............. 738,457 733,056 -- --
------------ ----------- ----------- -----------
11,994,295 11,923,221 21,444,771 20,960,909
Mortgage-backed securities... 18,106,956 17,873,430 -- --
------------ ----------- ----------- -----------
Texas Independent Bank
stock....................... 50,000 50,000 -- --
------------ ----------- ----------- -----------
$ 30,151,251 $29,846,651 $21,444,771 $20,960,909
============ =========== =========== ===========
</TABLE>
F-11
<PAGE>
PARADIGM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1999 AND 1998
Investment securities with carrying amounts of approximately $43,612,000 and
$5,558,000 at December 31, 1999 and 1998, respectively, were pledged to secure
public deposits and for other purposes required or permitted by law.
NOTE C--LOANS
The loan portfolio consists of loans classified by major type as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -----------
<S> <C> <C>
Commercial and industrial........................... $ 31,798,263 $16,548,476
Real Estate......................................... 55,640,744 24,646,688
Agricultural........................................ 7,269,980 --
Installment......................................... 17,939,416 8,648,043
------------- -----------
112,648,403 49,843,207
Less unearned discount.............................. (1,404,225) (475,421)
------------- -----------
111,244,178 49,367,786
Less allowance for credit losses.................... (679,791) (113,420)
------------- -----------
$ 110,564,387 $49,254,366
============= ===========
</TABLE>
Impaired loans were approximately $380,806 and $23,908 at December 31, 1999
and 1998, respectively. Average impaired loans outstanding in 1999 and 1998 and
the reduction in interest income associated with these impaired loans was not
significant. A valuation allowance for credit losses related to impaired loans
in the approximate amount of $19,000 has been established and is included in
the allowance for loan losses. There were no commitments to lend additional
funds to borrowers whose loans were classified as impaired.
As of December 31, 1999 and 1998, loans outstanding to directors, officers
and their affiliates were approximately $1,492,000 and $752,000, respectively.
In the opinion of management, all transactions entered into between the Banks
and such related parties, in the ordinary course of business, have been and are
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>
1999 1998
---------- ----------
<S> <C> <C>
Beginning balance....................................... $ 752,000 $ 549,000
Dayton State Bank related party loans................... 267,000 --
New loans during the year............................... 1,065,000 1,680,000
Repayments during the year.............................. (592,000) (1,477,000)
---------- ----------
Ending balance.......................................... $1,492,000 $ 752,000
========== ==========
</TABLE>
NOTE D--NONPERFORMING AND PAST-DUE LOANS
The following table presents information relating to nonperforming and past
due loans:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Nonaccrual loans............................................. $472,984 $111,922
======== ========
90 days or more past due loans............................... $ 52,304 $ --
======== ========
</TABLE>
F-12
<PAGE>
PARADIGM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1999 AND 1998
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.
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Foregone income................................................... $6,850 $2,068
====== ======
Income collected.................................................. $1,500 $1,671
====== ======
</TABLE>
There were no restructured loans at December 31, 1999 or 1998.
NOTE E--ALLOWANCE FOR CREDIT LOSSES
An analysis of activity in the allowance for credit losses is as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Balance at beginning or
year................... $113,420 $165,292
Dayton State Bank
allowance for credit
losses................. 362,750 --
First National Bank of
Dayton allowance for
credit losses.......... -- 78,977
Provision charged to
income................. 309,494 76,000
Loan recoveries......... 54,611 16,528
Loans charged off....... (160,484) (223,377)
-------- --------
Balance at end of year.. $679,791 $113,420
======== ========
</TABLE>
NOTE F--OTHER REAL ESTATE OWNED
An analysis of activity in other real estate owned and acquired by
foreclosure for the year ended December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Balance, beginning of year................................ $232,550 $769,714
Dayton State Bank real estate acquired by foreclosure..... 166,043 --
Dayton State Bank real estate held for future bank
expansion................................................ 145,000 --
Acquisitions.............................................. 467,621 --
Sales..................................................... (470,478) (555,621)
Write-downs............................................... (350) --
Costs capitalized......................................... 1,357 18,457
-------- --------
Balance, end of year...................................... $541,743 $232,550
======== ========
</TABLE>
F-13
<PAGE>
PARADIGM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1999 AND 1998
NOTE G--PREMISES AND EQUIPMENT
Premises and equipment are summarized below:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Land.................................................. $ 1,508,352 $ 1,018,752
Buildings............................................. 7,573,090 1,395,587
Construction in progress.............................. 293,176 --
Leasehold improvements................................ 444,811 448,821
Furniture, fixtures and equipment..................... 2,550,669 1,452,285
Automobiles........................................... 75,311 --
----------- -----------
12,445,409 4,315,445
Less accumulated depreciation and amortization........ (2,487,844) (916,678)
----------- -----------
Bank premises and equipment, net...................... $ 9,957,565 $ 3,398,767
=========== ===========
</TABLE>
NOTE H--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, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Three months or less.................................. $ 5,980,082 $ 7,648,000
Four through six months............................... 4,142,687 2,640,000
Seven through twelve months........................... 5,831,330 3,006,000
Thereafter............................................ 820,163 1,353,000
------------ -----------
$ 16,774,262 $14,647,000
============ ===========
</TABLE>
Interest expense for certificates of deposit in excess of $100,000 was
$770,900 and $752,377 for the years ended December 31, 1999 and 1998,
respectively.
The Banks have no brokered deposits and there are no major concentrations of
deposits.
NOTE I--FEDERAL INCOME TAXES
The components of the provision for federal income tax expense are as
follows:
<TABLE>
<CAPTION>
1999 1998
--------- ----
<S> <C> <C>
Current.......................................................... $ 103,775 $--
Deferred......................................................... -- --
--------- ---
$ 103,775 $--
========= ===
</TABLE>
F-14
<PAGE>
PARADIGM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1999 AND 1998
The provision for federal income taxes differs from the amount computed by
applying the federal income tax statutory rate of 34% on earnings as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Taxes calculated at statutory rate....................... $ 621,446 $ 379,643
Decrease resulting from:
Nondeductible travel, entertainment, dues and other.... 191 --
Nondeductible goodwill amortization.................... 13,732 --
Nontaxable interest income............................. (15,944) --
Net income earned while subchapter S election
effective............................................. (515,650) (379,643)
--------- ---------
$ 103,775 $ --
========= =========
</TABLE>
Significant deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ------
<S> <C> <C>
Deferred Tax Assets
Deferred compensation...................................... $ 136,560 $ --
Net operating loss carryforward............................ 255,812 --
Unrealized losses on securities............................ 103,564 --
--------- ------
495,936 --
--------- ------
Deferred Tax Liabilities
Loan loss reserve.......................................... (150,280) --
Valuation allowance........................................ (242,092) --
--------- ------
(392,372) --
--------- ------
Net Deferred Tax Asset....................................... $ 103,564 $ --
========= ======
</TABLE>
The Bank has a net operating loss carryforward amounting to approximately
$752,000, which expires from 2004 through 2007.
NOTE J--EMPLOYEE BENEFITS
The Banks maintain employee tax-deferred savings plans (401(k) Plan) under
the Internal Revenue Code available to substantially all employees. The funds
contributed under the employee tax-deferred savings plans are invested in a
variety of investment options. Contributions to the plans are in such amounts,
within certain limitations, as management of the Banks may authorize.
NOTE K--DEFERRED COMPENSATION PLAN
Dayton has deferred compensation agreements with key employees that provide
for payments to each of the key employees or their surviving beneficiaries for
a period of ten years beginning at retirement, payable at $25,000 each per
year. Dayton has whole life insurance policies on these employees so that upon
death there will be funds available to pay the beneficiaries or cash value in
the policies from which to make a portion of the payments to the employees upon
retirement. Compensation expense is recorded over the estimated remaining
period of employment. The liability for services previously performed totaled
approximately $402,000 at December 31, 1999 and is included in other
liabilities in the accompanying statement of condition. Cash value accumulated
in the life insurance policies purchased for these agreements, amounting to
approximately $605,000 as of December 31, 1999, is included in other assets on
the accompanying statement of condition.
F-15
<PAGE>
PARADIGM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1999 AND 1998
NOTE L--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, the Banks are party to various financial
instruments with off-balance-sheet risk in the normal course of business. 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 statements of
condition. The contract or notional amounts of the instruments reflect the
extent of the Banks' involvement in particular classes of financial
instruments. The Banks' exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional amount
of these instruments. The Banks use 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:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Commitments to extend credit............................. $9,307,000 $8,501,000
Standby letters of credit................................ $ 283,000 $ 151,000
</TABLE>
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 Banks evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if considered necessary by the Banks
upon extension of credit, is based on management's credit evaluation of the
customer.
Standby letters of credit are conditional commitments issued by the Banks 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 their customers.
NOTE M--COMMITMENTS AND CONTINGENCIES
Leases--A summary of non-cancelable future operating lease commitments
follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
2000.................................................................. $ 65,016
2001.................................................................. 48,000
2002.................................................................. 48,000
2003.................................................................. 16,000
Thereafter............................................................ --
--------
$177,016
========
</TABLE>
It is expected that in the normal course of business, leases that expire
will be renewed or replaced by leases on other property or equipment. Rent
expense under all non-cancelable operating lease obligations aggregated
approximately $111,000 and $95,000 for 1999 and 1998, respectively.
F-16
<PAGE>
PARADIGM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1999 AND 1998
Litigation--Various lawsuits are pending against Paradigm arising in the
normal course of business. Paradigm management, after reviewing these lawsuits
with outside legal counsel, considers that the aggregate liabilities, if any,
will not be material to the consolidated financial statements.
NOTE N--REGULATORY MATTERS
Paradigm is 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 certain mandatory and possibly discretionary
actions by regulators that could have a direct material effect on the Banks'
financial statements. Under the capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Banks must meet specific capital
guidelines based on the Banks' assets, liabilities and certain off-balance-
sheet items as calculated under regulatory accounting practices. The Banks'
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
To meet the capital adequacy requirements, the Banks must maintain minimum
capital amounts and ratios as defined in the regulations. Management believes,
as of December 31, 1999, that the Banks met all capital adequacy requirements
to which they are subject.
As of December 31, 1999, the most recent notifications from the Federal
Deposit Insurance Corporation, the Banks were categorized as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Banks must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table below. There
are no conditions or events since that notification that management believes
have changed the Banks' category.
F-17
<PAGE>
PARADIGM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1999 AND 1998
The following is a summary of capital ratios at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ----------------- -----------------
Woodcreek Bank Amount Ratio Amount Ratio Amount Ratio
-------------- ----------- ----- ----------- ----- ----------- -----
1999
----
<S> <C> <C> <C> <C> <C> <C>
Total Risk Based Capital.. $ 7,792,000 10.4% $ 5,988,000 8.0% $ 7,485,000 10.0%
(to Risk Weighted Assets)
Tier I Capital............ $ 7,469,000 10.0% $ 2,994,000 4.0% $ 4,491,000 6.0%
(to Risk Weighted Assets)
Tier I Capital............ $ 7,469,000 6.8% $ 4,418,000 4.0% $ 5,523,000 5.0%
(to Adjusted Total
Assets)
<CAPTION>
1998
----
<S> <C> <C> <C> <C> <C> <C>
Total Risk Based Capital.. $ 6,820,000 11.8% $ 4,621,000 8.0% $ 5,776,000 10.0%
(to Risk Weighted Assets)
Tier I Capital............ $ 6,707,000 11.6% $ 2,310,000 4.0% $ 3,465,000 6.0%
(to Risk Weighted Assets)
Tier I Capital............ $ 6,707,000 6.6% $ 4,045,000 4.0% $ 5,057,000 5.0%
(to Adjusted Total
Assets)
<CAPTION>
Dayton State Bank
-----------------
1999
----
<S> <C> <C> <C> <C> <C> <C>
Total Risk Based Capital.. $11,137,000 19.3% $ 4,621,000 8.0% $ 5,776,000 10.0%
(to Risk Weighted Assets)
Tier I Capital............ $10,781,000 18.7% $ 2,310,000 4.0% $ 3,465,000 6.0%
(to Risk Weighted Assets)
Tier I Capital............ $10,781,000 10.8% $ 4,045,000 4.0% $ 5,057,000 5.0%
(to Adjusted Total
Assets)
<CAPTION>
1998
----
<S> <C> <C> <C> <C> <C> <C>
Total Risk Based Capital.. $10,300,695 20.7% $ 3,990,240 8.0% $ 4,987,800 10.0%
(to Risk Weighted Assets)
Tier I Capital............ $ 9,897,592 19.8% $ 1,945,120 4.0% $ 2,992,680 6.0%
(to Risk Weighted Assets)
Tier I Capital............ $ 9,897,592 11.2% $ 2,661,660 4.0% $ 4,436,100 5.0%
(to Adjusted Total
Assets)
<CAPTION>
Consolidated
------------
1999
----
<S> <C> <C> <C> <C> <C> <C>
Total Risk Based Capital.. $17,325,000 13.3% $10,384,000 8.0% $12,980,000 10.0%
(to Risk Weighted Assets)
Tier I Capital............ $16,646,000 12.8% $ 5,192,000 4.0% $ 7,788,000 6.0%
(to Risk Weighted Assets)
Tier I Capital............ $16,646,000 8.0% $ 8,273,000 4.0% $10,341,000 5.0%
(to Adjusted Total
Assets)
<CAPTION>
1998
----
<S> <C> <C> <C> <C> <C> <C>
Total Risk Based Capital.. $ 6,837,000 11.8% $ 4,641,000 8.0% $ 5,801,000 10.0%
(to Risk Weighted Assets)
Tier I Capital............ $ 6,724,000 11.6% $ 2,320,000 4.0% $ 3,481,000 6.0%
(to Risk Weighted Assets)
Tier I Capital............ $ 6,724,000 6.6% $ 4,056,000 4.0% $ 5,070,000 5.0%
(to Adjusted Total
Assets)
</TABLE>
F-18
<PAGE>
PARADIGM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1999 AND 1998
NOTE O--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Cash paid during the year for:
Interest............................................... $2,625,000 $2,325,000
Income taxes........................................... $ 146,000 $ --
</TABLE>
NOTE P--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments". The estimated fair
value amounts have been determined by management 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 that could be realized in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may 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.
Investment 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 the quoted market price for similar securities.
Loan Receivables--The fair value of loans is estimated by discounting the
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining maturities.
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.
Due to Former Shareholders and Other Liabilities--The fair value of due to
former shareholders and other liabilities is the amount payable on demand at
the reporting date. Because it is anticipated that these amounts will be paid
in the near term, the carrying value is a reasonable estimate of fair value.
F-19
<PAGE>
PARADIGM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1999 AND 1998
The estimated fair values of financial instruments are as follows (in
thousands):
<TABLE>
<CAPTION>
Woodcreek Bank 1999
-------------- -----------------
Carrying Fair
Amount Values
-------- --------
Financial Assets
----------------
<S> <C> <C>
Cash and due from banks...................................... $ 9,897 $ 9,897
Investment securities........................................ 25,043 24,533
Loans........................................................ 68,742 68,173
-------- --------
$103,682 $102,603
======== ========
<CAPTION>
Financial Liabilities
---------------------
<S> <C> <C>
Deposits..................................................... $100,415 $100,383
Other liabilities............................................ 623 623
-------- --------
$101,038 $101,006
======== ========
<CAPTION>
Dayton State Bank
-----------------
Financial Assets
----------------
<S> <C> <C>
Cash and due from banks...................................... $ 15,369 $ 15,369
Investment securities........................................ 31,240 31,206
Loans........................................................ 41,822 42,231
-------- --------
$ 88,431 $ 88,806
======== ========
<CAPTION>
Financial Liabilities
---------------------
<S> <C> <C>
Deposits..................................................... $ 81,627 $ 81,596
Other liabilities............................................ 719 719
-------- --------
$ 82,346 $ 82,315
======== ========
<CAPTION>
Consolidated
------------
Financial Assets
----------------
<S> <C> <C>
Cash and due from banks...................................... $ 26,539 $ 26,539
Investment securities........................................ 56,282 55,739
Loans........................................................ 110,564 110,404
-------- --------
$193,385 $192,682
======== ========
<CAPTION>
Financial Liabilities
---------------------
<S> <C> <C>
Deposits..................................................... $182,042 $181,979
Due to former shareholders and other liabilities............. 8,433 8,433
-------- --------
$190,475 $190,412
======== ========
</TABLE>
The fair value estimates are based on pertinent information available to
management as of December 31, 1999. 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 that date and, therefore, current estimates of fair value may
differ significantly from the amounts presented herein.
F-20
<PAGE>
PARADIGM BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CONDITION
JUNE 30, 2000
UNAUDITED
<TABLE>
<S> <C>
ASSETS
Cash and due from banks........................................... $ 11,279,802
------------
Interest-bearing deposits in financial institutions............... 3,158,000
Securities available for sale..................................... 28,683,101
Securities to be held to maturity................................. 19,796,324
Federal Home Loan Bank stock...................................... 328,600
Loans............................................................. 124,235,077
Less allowance for credit losses................................ (829,396)
------------
Loans, net...................................................... 123,405,681
Accrued interest receivable....................................... 1,594,463
Goodwill, net..................................................... 3,875,714
Premises and equipment, net....................................... 10,122,307
Other real estate owned........................................... 535,711
Other assets...................................................... 1,185,939
------------
Total Assets.................................................. $203,965,642
============
</TABLE>
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing........................................... $ 67,489,458
Interest-bearing savings...................................... 56,959,419
Interest-bearing certificates of deposit...................... 55,236,906
------------
Total Deposits.............................................. 179,685,783
Due to former shareholders.................................... 1,586,346
Accrued interest payable...................................... 474,529
Federal funds purchased....................................... 50,000
Other liabilities............................................. 942,037
------------
Total Liabilities........................................... 182,738,695
------------
Commitments and Contingencies
Company obligated mandatorily redeemable trust preferred
securities of subsidiary trust................................. 5,125,000
------------
Stockholders' Equity
Preferred stock............................................... 10
Common stock.................................................. 2,375,000
Capital surplus............................................... 10,793,381
Retained earnings............................................. 3,125,076
Accumulated other comprehensive loss.......................... (191,520)
------------
Total Stockholders' Equity.................................... 16,101,947
------------
Total Liabilities and Stockholders' Equity.................. $203,965,642
============
</TABLE>
See accompanying notes.
F-21
<PAGE>
PARADIGM BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
UNAUDITED
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans.............................. $5,755,726 $2,421,735
Investment securities................................... 1,641,634 976,148
Federal funds sold...................................... 190,552 68,186
---------- ----------
Total Interest Income................................. 7,587,912 3,466,069
INTEREST EXPENSE
Deposits and other borrowed funds....................... 2,336,412 1,139,204
---------- ----------
NET INTEREST INCOME....................................... 5,251,500 2,326,865
PROVISION FOR CREDIT LOSSES............................... 270,000 90,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT
LOSSES................................................... 4,981,500 2,236,865
---------- ----------
NON INTEREST INCOME
Customer service fees................................... 1,629,952 632,193
Other income............................................ 41,753 228,217
---------- ----------
Total Non Interest Income............................. 1,671,705 860,410
---------- ----------
NON INTEREST EXPENSES
Salaries and employee benefits.......................... 2,454,039 1,222,901
Net occupancy expense................................... 380,327 170,867
Outside service fees.................................... 512,129 657,313
Equipment............................................... 60,983 55,094
Depreciation and amortization........................... 310,316 139,343
Amortization of intangibles............................. 110,211 26,630
Minority interest expense, company obligated
mandatorily redeemable trust preferred securities of
subsidiary trust....................................... 262,953 --
Other................................................... 937,108 220,010
---------- ----------
Total Non Interest Expenses........................... 5,028,066 2,492,158
---------- ----------
NET INCOME BEFORE INCOME TAX EXPENSE...................... 1,625,139 605,117
INCOME TAX EXPENSE, Current............................... 543,713 --
---------- ----------
CONSOLIDATED NET INCOME................................... $1,081,426 $ 605,117
========== ==========
</TABLE>
See accompanying notes.
F-22
<PAGE>
PARADIGM BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
UNAUDITED
<TABLE>
<CAPTION>
2000 1999
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Consolidated net income........................... $ 1,081,426 $ 605,117
------------ -----------
Adjustments to reconcile consolidated net income
to
net cash provided by operating activities:
Depreciation and amortization................... 310,316 139,343
Provision for credit losses..................... 270,000 90,000
Amortization of goodwill........................ 110,211 26,630
Net amortization/accretion on securities........ 6,032 41,237
Changes in assets and liabilities:
Accrued interest receivable..................... (98,128) (87,050)
Other real estate owned......................... 6,032 (66,587)
Other assets.................................... (27,039) (30,100)
Accrued interest payable........................ 41,185 (16,922)
Other liabilities............................... (368,129) 1,363,869
------------ -----------
Net cash provided by operating activities..... 1,331,906 2,065,537
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities, calls and paydowns of
securities....................................... 2,829,900 1,966,076
Proceeds from maturities of interest-bearing
deposits
in financial institutions........................ 2,470,000 2,080,000
Net change in loans............................... (13,111,294) (12,807,014)
Purchase of securities............................ -- (3,000,000)
Purchase of interest-bearing deposits in financial
institutions..................................... (587,000) --
Due to former shareholders........................ (5,066,805) (15,000)
Purchase of goodwill.............................. (57,849) --
Purchases of premises and equipment, net.......... (475,058) (110,851)
------------ -----------
Net cash used by investing activities......... (13,998,106) (11,886,789)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits............................ (2,356,611) 1,509,624
Dividends paid.................................... (236,773) (349,696)
------------ -----------
Net cash (used) provided by financing
activities................................... (2,593,384) 1,159,928
------------ -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS........... (15,259,584) (8,661,324)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.... 26,539,386 15,864,965
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......... $ 11,279,802 $ 7,203,641
============ ===========
</TABLE>
See accompanying notes.
F-23
<PAGE>
PARADIGM BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
UNAUDITED
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
In the opinion of management, the unaudited financial statements reflect all
adjustments, consisting only of normal and recurring adjustments, necessary to
present fairly the company's financial position at June 30, 2000, results of
operations for the six months ended June 30, 2000 and 1999 and cash flows for
the six months ended June 30, 2000 and 1999. Interim period results are not
necessarily indicative of results of operations or cash flows for a full year
period. These unaudited financial statements do not include all disclosures
required to be in compliance with generally accepted accounting principles.
These financial statements and the notes thereto should be read in conjunction
with the company's financial statements for the year ended December 31, 1999.
NOTE B EARNINGS PER COMMON SHARE
The weighted average number of shares used to calculate earnings per share
for the six months ended June 30, 2000 and 1999 amounted to 2,375,000 and
1,500,000, respectively. The company has no dilutive securities; therefore,
basic and diluted earnings per share were both $.46 and $.40 for the six months
ended June 30, 2000 and 1999, respectively.
NOTE C SUBSEQUENT EVENT, CONTINGENCY
In September 2000, a significant debtor to Dayton State Bank filed a Chapter
11 bankruptcy petition. This debtor owed Dayton State Bank a total of $825,000
on two loans outstanding at August 31, 2000. Of the outstanding balances on
these loans, $429,000 was collateralized by real estate with an estimated
market value of $560,000. The remaining balance was further collateralized by
accounts receivable, which may or may not help reduce the outstanding loan
balances. The potential loss on this contingency is further mitigated by the
specific escrow reserve of $45,000 for these loans from the purchase price of
Dayton State Bank.
Management is unable to determine the likelihood or amount of material loss
from this contingency. Management estimates the possible loss could range from
$0 to $350,000, depending on the results of the bankruptcy proceedings and the
realizable value of the collateral on the loans.
F-24
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholder
Dayton State Bank
Houston, Texas
We have audited the accompanying statement of condition of Dayton State Bank
as of December 31, 1999, and the related statements of income, changes in
stockholder's equity and cash flows for the year then ended. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides 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 Dayton State Bank at
December 31, 1999, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ Harper & Pearson Company
Houston, Texas
February 11, 2000
F-25
<PAGE>
DAYTON STATE BANK
STATEMENT OF CONDITION
DECEMBER 31, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and due from banks............................................... $ 9,144,194
Federal funds sold.................................................... 6,225,000
------------
Total cash and cash equivalents..................................... 15,369,194
Securities available for sale......................................... 29,846,651
Securities to be held to maturity..................................... 1,443,146
Loans................................................................. 42,178,973
Less allowance for credit losses.................................... (356,742)
------------
Loans, net............................................................ 41,822,231
Accrued interest receivable........................................... 888,700
Goodwill, net......................................................... 3,226,817
Premises and equipment, net........................................... 6,403,944
Other real estate owned............................................... 311,043
Other assets.......................................................... 1,015,918
------------
Total Assets.................................................... $100,327,644
============
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C>
Liabilities
Deposits:
Noninterest-bearing................................................. $ 34,005,971
Interest-bearing savings............................................ 31,254,124
Interest-bearing certificates of deposit............................ 22,356,365
------------
Total Deposits.................................................... 87,616,460
Accrued interest payable............................................ 105,279
Other liabilities................................................... 614,024
------------
Total Liabilities................................................. 88,335,763
------------
Stockholder's Equity
Common stock........................................................ 468,965
Capital surplus..................................................... 11,585,734
Retained earnings................................................... 138,218
Accumulated other comprehensive loss................................ (201,036)
------------
Total Stockholder's Equity........................................ 11,991,881
------------
Total Liabilities and Stockholder's Equity...................... $100,327,644
============
</TABLE>
See accompanying notes.
F-26
<PAGE>
DAYTON STATE BANK
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<S> <C>
INTEREST INCOME
Interest and fees on loans........................................ $4,417,570
Investment securities............................................. 1,903,830
Federal funds sold................................................ 372,793
----------
Total Interest Income........................................... 6,694,193
INTEREST EXPENSE
Deposits and debt................................................. 2,019,563
----------
NET INTEREST INCOME................................................. 4,674,630
PROVISION FOR CREDIT LOSSES......................................... 120,000
----------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES............... 4,554,630
----------
NON INTEREST INCOME
Customer service fees............................................. 1,256,433
Gain on sales of securities....................................... 982
Other income...................................................... 100,664
----------
Total Non Interest Income......................................... 1,358,079
----------
NON INTEREST EXPENSES
Salaries and employee benefits.................................... 2,422,827
Net occupancy expense............................................. 287,842
Equipment......................................................... 288,681
Other............................................................. 1,313,912
----------
Total Non Interest Expenses....................................... 4,313,262
----------
NET INCOME BEFORE INCOME TAX EXPENSE................................ 1,599,447
INCOME TAX EXPENSE
Current........................................................... 407,954
Deferred.......................................................... 27,752
----------
435,706
----------
NET INCOME.......................................................... $1,163,741
==========
</TABLE>
See accompanying notes.
F-27
<PAGE>
DAYTON STATE BANK
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Accumulated
Other
Common Capital Retained Comprehensive
Stock Surplus Earnings Income (Loss) Total
-------- ----------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance--December 31,
1998................... $468,965 $ 4,000,000 $5,122,941 $ 305,686 $ 9,897,592
Net Income.............. -- -- 1,163,741 -- 1,163,741
Change in Unrealized
Loss on Securities, Net
of Income Taxes of
$261,039............... -- -- -- (506,722) (506,722)
-----------
Total Comprehensive
Income................. 657,019
Purchase Accounting
Adjustments for
Acquisition by
Paradigm............... -- 7,585,734 (548,464) -- 7,037,270
Cash Dividends.......... -- -- (5,600,000) -- (5,600,000)
-------- ----------- ---------- --------- -----------
Balance--December 31,
1999................... $468,965 $11,585,734 $ 138,218 $(201,036) $11,991,881
======== =========== ========== ========= ===========
</TABLE>
See accompanying notes.
F-28
<PAGE>
DAYTON STATE BANK
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 1,163,741
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.................................................... 270,002
Provision for credit losses..................................... 120,000
Amortization of goodwill........................................ 13,763
Amortization/accretion on securities............................ 127,027
Gain on sale of equipment....................................... (16,155)
Change in assets and liabilities:
Accrued interest receivable.................................... 105,026
Other real estate owned........................................ (42,000)
Other assets................................................... (205,389)
Accrued interest payable....................................... (25,404)
Other liabilities.............................................. (560,768)
-----------
Net cash provided by operating activities........................ 949,843
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of interest-bearing deposits.............. 100,000
Proceeds from maturities, calls and paydowns of securities....... 6,681,925
Purchase of securities........................................... (8,663,160)
Net change in loans.............................................. (2,416,617)
Proceeds from sale of other real estate owned.................... 36,000
Proceeds from sale of equipment.................................. 18,030
Purchases of premises and equipment, net......................... (135,649)
-----------
Net cash used by investing activities............................ (4,379,471)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits........................................... 11,614,896
Dividends paid................................................... (5,600,000)
-----------
Net cash provided by financing activities........................ 6,014,896
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS......................... 2,585,268
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................... 12,783,926
-----------
CASH AND CASH EQUIVALENTS AT END OF YEAR.......................... $15,369,194
===========
</TABLE>
See accompanying notes.
F-29
<PAGE>
DAYTON STATE BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE A--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES
Nature of Operations--Dayton State Bank (the Bank) provides a broad line of
financial products and services to small to medium-sized businesses and
consumers through its community banking offices in Chambers and Liberty
Counties and surrounding counties.
Summary of Significant Accounting and Reporting Policies--The accounting and
reporting policies of the Bank conform to generally accepted accounting
principles (GAAP) and to the prevailing practices within the banking industry.
A summary of significant accounting policies is as follows:
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 these estimates. At December 31, 1999, financial instruments
carrying values approximate fair values.
The determination of the adequacy of the allowance for loan losses is based
on estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. In connection with the
determination of the estimated losses on loans, management obtains independent
appraisals for significant collateral.
The Bank's loans are generally secured by specific items of collateral
including real property, consumer assets, and business assets. Although the
Bank has a diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent on local economic conditions.
While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans 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. 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 may change materially in the near term. However,
the amount of the change that is reasonably possible cannot be estimated.
Acquisition of Dayton State Bank--Effective December 1, 1999, Paradigm
Bancorporation, Inc. acquired all of the outstanding common stock of Dayton
State Bank for $17,257,912. This acquisition has been accounted for by the
purchase method of accounting and accordingly, the operating results have been
included in Paradigm's results of operations from the date of acquisition. The
excess of the consideration paid over the fair value of the net assets acquired
has been recorded as goodwill in the approximate amount of $3,233,000 and is
being amortized ratably over 20 years.
To finance the Dayton purchase, Paradigm (1) sold 875,000 of its common
shares in exchange for cash in the amount of $7,000,000; (2) chartered a
wholly-owned subsidiary, Paradigm Capital Trust I to sell $5,125,000 of
preferred stock for $5,000,000, and (3) upon closing of the transaction with
the Dayton shareholders, received a $5,600,000 dividend from Dayton.
Pursuant to the terms of the acquisition agreement, Paradigm is holding in
escrow, for the benefit of the selling Dayton shareholders, about $524,000 to
be paid upon the fulfillment of certain conditions as set forth in the
agreement.
F-30
<PAGE>
DAYTON STATE BANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1999
Cash and Due From Banks--The Bank is required to maintain reserves for the
purpose of facilitating the implementation of monetary policy. These reserves
may be maintained in the form of balances at the Federal Reserve Bank or by
vault cash. The Bank's reserve requirements were $710,000 at December 31, 1999.
Accordingly, cash and due from banks balances were restricted to that extent.
Investment Securities--Available-for-sale investment securities are carried
at fair value. Unrealized gains and losses are excluded from earnings and
reported as a separate component of stockholder's equity until realized.
Securities within the available-for-sale portfolio may be used as part of the
Bank's assets/liability strategy and may be sold in response to changes in
interest rate risk, prepayment risk or other similar economic factors.
Held-to-maturity investment securities are carried at cost, adjusted for the
amortization of premiums and the accretion of discounts. Management has the
positive intent and the Bank has the ability to hold these assets as long-term
investments until their estimated maturities. Under certain circumstances
(including the significant deterioration of the issuer's creditworthiness or a
significant change in tax-exempt status or statutory or regulatory
requirements), securities held to maturity may be sold or transferred to
another portfolio.
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 sale of these assets.
Loans--Loans are stated at the principal amount outstanding, net of unearned
discounts. Unearned discounts relate principally to consumer installment loans
and are amortized using a method that approximates the interest method. For
other loans, such income is recognized using the simple interest method.
Nonperforming Loans and Past-Due Loans--Included in the nonperforming and
past-due loans 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 the 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 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 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.
F-31
<PAGE>
DAYTON STATE BANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1999
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 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 Bank's control.
It should be understood that estimates of credit losses involve an exercise
of judgment. While it is reasonably possible that in the short-term the Bank
may sustain losses which are substantial relative to the allowance for credit
losses, it is the judgment of management that the allowance for credit losses
reflected in the statements of condition is adequate to absorb estimated losses
which may exist in the current loan portfolio.
Real Estate Acquired by Foreclosure--The Bank records real estate acquired
by foreclosure at the lesser of the outstanding loan amount (including accrued
interest, if any) or fair value, less estimated costs to sell, at the time of
foreclosure. Adjustments are made to reflect declines in value subsequent to
acquisition, if any, below the recorded amounts. Operating expenses of such
properties, net of related income, and gains and losses on their disposition
are included in other non-interest expense.
Premises and Equipment--Land is carried at cost. Premises and equipment are
carried at cost less accumulated depreciation and amortization. Depreciation
expense is computed principally using the straight-line method of accounting
over the estimated useful lives of the assets. Leasehold improvements are
amortized straight-line over the periods of the leases or the estimated useful
lives, whichever is shorter.
Other Borrowed Funds--These borrowings generally represent secured and
unsecured obligations to financial institutions and the U.S. Treasury using
various rates and terms.
Common Stock--$2.50 par value, 198,899 shares authorized, 187,586 shares
issued and outstanding at December 31, 1999.
Income Taxes--Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. When management determines that it is more likely than
not that a deferred tax asset will not be realized, a valuation allowance must
be established. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Statements of Cash Flows--Cash and cash equivalents include cash on hand,
amounts due from banks, interest-bearing deposits in financial institutions and
federal funds sold; generally, federal funds are sold for one-day periods.
Comprehensive Income--In 1998, the Bank adopted FASB No. 130, Reporting
Comprehensive Income. Statement No. 130 requires the reporting of comprehensive
income in addition to net income from operations. Comprehensive income is a
more inclusive financial reporting methodology that includes disclosure of
certain financial information that historically has not been recognized in the
calculation of net income.
F-32
<PAGE>
DAYTON STATE BANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1999
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, 1999 is summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Securities Available For Sale:
U.S. Government & Agency
Securities.................... $ 3,731,840 $-- $ (31,338) $ 3,700,502
Mortgage-backed Securities..... 18,106,956 -- (233,526) 17,873,430
State and Municipal
Securities.................... 8,262,455 -- (39,736) 8,222,719
Texas Independent Bank Stock... 50,000 -- -- 50,000
----------- --- --------- -----------
$30,151,251 $-- $(304,600) $29,846,651
=========== === ========= ===========
Securities to be Held to
Maturity:
State and Municipal
Securities.................... $ 1,443,146 $28 $ (2,261) $ 1,440,913
=========== === ========= ===========
</TABLE>
The amortized cost and estimated market value of debt securities at December
31, 1999, 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 Available for Securities Held to
Sale Maturity
------------------------ ---------------------
Amortized Market Amortized Market
Cost Value Cost Value
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Amounts Maturing In:
1 year or less................ $ 175,444 $ 175,430 $ 601,479 $ 601,504
1 year through 5 years........ 4,978,925 4,956,525 841,667 839,409
5 years through 10 years...... 6,101,469 6,058,210 -- --
After 10 years................ 738,457 733,056 -- --
------------ ----------- ---------- ----------
11,994,295 11,923,221 1,443,146 1,440,913
Mortgage-backed securities...... 18,106,956 17,873,430 -- --
------------ ----------- ---------- ----------
Texas Independent Bank stock.... 50,000 50,000 -- --
------------ ----------- ---------- ----------
$ 30,151,251 $29,846,651 $1,443,146 $1,440,913
============ =========== ========== ==========
</TABLE>
Investment securities with carrying amounts of approximately $30,977,000 at
December 31, 1999 were pledged to secure public deposits and for other purposes
required or permitted by law.
F-33
<PAGE>
DAYTON STATE BANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1999
NOTE C--LOANS
The loan portfolio consists of loans classified by major type at December
31, 1999:
<TABLE>
<S> <C>
Commercial and industrial.......................................... $13,128,652
Real Estate........................................................ 14,932,618
Agricultural....................................................... 7,269,980
Installment........................................................ 7,703,819
-----------
43,035,069
Less unearned discount............................................. (856,096)
-----------
42,178,973
Less allowance for credit losses................................... (356,742)
-----------
$41,822,231
===========
</TABLE>
Impaired loans were approximately $380,806 at December 31, 1999. Average
impaired loans outstanding in 1999 and the reduction in interest income
associated with these impaired loans was not significant. A valuation allowance
for credit losses related to impaired loans in the approximate amount of
$19,000 has been established and is included in the allowance for loan losses.
There were no commitments to lend additional funds to borrowers whose loans
were classified as impaired.
As of December 31, 1999, loans outstanding to directors, officers and their
affiliates were approximately $242,000. In the opinion of management, all
transactions entered into between the Bank and such related parties, in the
ordinary course of business, have been and are 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 as of December
31, 1999:
<TABLE>
<S> <C>
Beginning balance.................................................... $ 277,000
New loans during the year............................................ 247,000
Repayments during the year........................................... (282,000)
---------
Ending balance....................................................... $ 242,000
=========
</TABLE>
NOTE D--NONPERFORMING AND PAST-DUE LOANS
The following table presents information relating to nonperforming and past
due loans at December 31, 1999:
<TABLE>
<S> <C>
Nonaccrual loans...................................................... $380,806
========
90 days or more past due loans........................................ $ 20,792
========
</TABLE>
With respect to the above nonperforming loans, the following table presents
interest income at December 31, 1999 that would have been earned under the
original terms of the loans.
<TABLE>
<S> <C>
Foregone income......................................................... $79,211
=======
Income collected........................................................ $ --
=======
</TABLE>
F-34
<PAGE>
DAYTON STATE BANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1999
There were no restructured loans at December 31, 1999.
No interest income was earned on nonaccrual loans during the year ended
December 31, 1999.
NOTE E--ALLOWANCE FOR CREDIT LOSSES
An analysis of activity in the allowance for credit losses at December 31,
1999 is as follows:
<TABLE>
<S> <C>
Balance at beginning or year......................................... $ 403,103
Provision charged to income.......................................... 120,000
Loan recoveries...................................................... 147,498
Loans charged off.................................................... (313,859)
---------
Balance at end of year............................................... $ 356,742
=========
</TABLE>
NOTE F--OTHER REAL ESTATE OWNED
An analysis of activity in other real estate owned for the year ended
December 31, 1999 is as follows:
<TABLE>
<S> <C>
Balance, beginning of year........................................... $ 305,043
Acquisitions......................................................... 42,000
Sales................................................................ (181,000)
Real estate held for future bank expansion........................... 145,000
---------
Balance, end of year................................................. $ 311,043
=========
</TABLE>
NOTE G--PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1999 are summarized below:
<TABLE>
<S> <C>
Land............................................................... $ 444,600
Premises........................................................... 6,177,503
Furniture, fixtures and equipment.................................. 1,219,089
Automobiles........................................................ 75,311
-----------
7,916,503
Less accumulated depreciation and amortization..................... (1,512,559)
-----------
Bank premises and equipment, net................................... $ 6,403,944
===========
</TABLE>
NOTE H--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, 1999 are as follows:
<TABLE>
<S> <C>
Three months or less................................................ $1,911,658
Four through six months............................................. 632,738
Seven through twelve months......................................... 1,789,029
Thereafter.......................................................... 419,041
----------
$4,752,466
==========
</TABLE>
F-35
<PAGE>
DAYTON STATE BANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1999
Interest expense for certificates of deposit in excess of $100,000 was
$262,000 for the year ended December 31, 1999.
The Bank has no brokered deposits and there are no major concentrations of
deposits.
NOTE I--DEFERRED COMPENSATION PLAN
The Bank has deferred compensation agreements with key employees that
provide for payments to each of the key employees or their surviving
beneficiaries for a period of ten years beginning at retirement, payable at
$25,000 each per year. The Bank has whole life insurance policies on these
employees so that upon death there will be funds available to pay the
beneficiaries or cash value in the policies from which to make a portion of the
payments to the employees upon retirement. Compensation expense is recorded
over the estimated remaining period of employment. Expense of approximately
$13,000 for the year ended December 31, 1999 is included in the accompanying
statement of earnings. The liability of services previously performed totaled
approximately $402,000 at December 31, 1999 and is included in other
liabilities in the accompanying statement of condition. Cash value accumulated
in the life insurance policies purchased for these agreements totaling
approximately $605,000 as of December 31, 1999 is included in the accompanying
statement of condition.
NOTE J--EMPLOYEE BENEFITS
The Bank maintains an employee tax-deferred savings plan (401(k) Plan) under
the Internal Revenue Code available to substantially all employees. The funds
contributed under the employee tax-deferred savings plan are invested in a
variety of investment options. Contributions to the plan are in such amounts,
within certain limitations, as management of the Bank may authorize.
NOTE K--FEDERAL INCOME TAXES
Federal income taxes currently payable and deferred at December 31, 1999
included in other liabilities are as follows:
<TABLE>
<S> <C>
Current federal income taxes payable.................................. $ 24,518
Deferred tax liability................................................ $103,564
</TABLE>
The net deferred tax liability principally represents deferred compensation
expenses accrued for books not yet deducted for tax, tax over book basis of
foreclosed property and the tax effect of the unrealized loss on available for
sale securities. Other temporary differences include the allowance for loan
losses and depreciation differences.
The effective tax rate differs from the statutory rate due to the effects of
nontaxable permanent differences such as tax free income on municipal
securities, officers life insurance expense and nondeductible interest expense.
NOTE L--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, the Banks are party to various financial
instruments with off-balance-sheet risk in the normal course of business. These
financial instruments include commitments to extend credit and standby letters
of credit. These
F-36
<PAGE>
DAYTON STATE BANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1999
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 the instruments reflect the extent of the
Banks' involvement in particular classes of financial instruments. The Banks'
exposure to credit loss in the event of nonperformance by the other party to
the financial instrument for commitments to extend credit and standby letters
of credit is represented by the contractual notional amount of these
instruments. The Banks use 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 at December 31, 1999:
<TABLE>
<S> <C>
Commitments to extend credit........................................ $1,963,000
Standby letters of credit........................................... $ 88,000
</TABLE>
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 creditworthiness 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 M--REGULATORY MATTERS
The Bank is 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 certain mandatory and possibly discretionary
actions by regulators that could have a direct material effect on 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 at calculated under regulatory accounting practices. The Bank's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
To meet the capital adequacy requirements, the Bank must maintain minimum
capital amounts and ratios as defined in the regulations. Management believes,
as of December 31, 1999, that the Bank met all capital adequacy requirements to
which they are subject.
As of December 31, 1999, the most recent notification from the Federal
Deposit Insurance Corporation, the Bank was categorized 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 below. There
are no conditions or events since that notification that management believes
have changed the Bank's category.
F-37
<PAGE>
DAYTON STATE BANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1999
The following is a summary of the Bank's capital ratios at December 31,
1999:
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
----------------- ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Total Risk Based Capital... $11,137,000 19.3% $4,621,000 8.0% $5,776,000 10.0%
(to Risk Weighted Assets)
Tier I Capital............. $10,781,000 18.7% $2,310,000 4.0% $3,465,000 6.0%
(to Risk Weighted Assets)
Tier I Capital............. $10,781,000 10.8% $4,045,000 4.0% $5,057,000 5.0%
(to Adjusted Total Assets)
</TABLE>
NOTE N--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated fair value
amounts have been determined by the Bank 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 that the Bank could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may 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.
Investment 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 the quoted market price for similar securities.
Loan Receivables--The fair value of loans is estimated by discounting the
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining maturities.
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.
F-38
<PAGE>
DAYTON STATE BANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1999
The estimated fair values of the Bank's financial instruments are as follows
(in thousands):
<TABLE>
<CAPTION>
Carrying Fair
Amount Values
-------- -------
Financial Assets
----------------
<S> <C> <C>
Cash and due from banks....................................... $15,369 $15,369
Investment securities......................................... 31,240 31,206
Loans, Net.................................................... 41,822 42,231
------- -------
$88,431 $88,806
======= =======
<CAPTION>
Financial Liabilities
---------------------
<S> <C> <C>
Deposits...................................................... $81,627 $81,596
Other liabilities............................................. 719 719
------- -------
$82,346 $82,315
======= =======
</TABLE>
The fair value estimates are based on pertinent information available to
management as of December 31, 1999. 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 that date and, therefore, current estimates of fair value may
differ significantly from the amounts presented herein.
NOTE O--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<S> <C>
Cash paid during the year for:
Interest.......................................................... $2,045,000
Income taxes...................................................... $ 420,000
</TABLE>
F-39
<PAGE>
DAYTON STATE BANK
STATEMENT OF CONDITION
JUNE 30, 2000
UNAUDITED
<TABLE>
<S> <C>
ASSETS
Cash and due from banks............................................ $ 3,832,702
-----------
Securities available for sale...................................... 28,683,101
Securities to be held to maturity.................................. 995,523
Loans.............................................................. 44,756,699
Less allowance for credit losses................................. (407,881)
-----------
Loans, net....................................................... 44,348,818
Accrued interest receivable........................................ 974,813
Goodwill, net...................................................... 3,201,085
Premises and equipment, net........................................ 6,255,359
Other real estate owned............................................ 288,404
Other assets....................................................... 732,849
-----------
Total Assets................................................... $89,312,654
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Deposits:
Noninterest-bearing.............................................. $25,417,004
Interest-bearing savings......................................... 29,309,743
Interest-bearing certificates of deposit......................... 21,659,725
-----------
Total Deposits................................................. 76,386,472
Accrued interest payable........................................... 106,969
Federal funds purchased............................................ 50,000
Other liabilities.................................................. 459,464
-----------
Total Liabilities.............................................. 77,002,905
-----------
Commitments and Contingencies
Stockholder's Equity
Common stock..................................................... 468,965
Capital surplus.................................................. 11,648,647
Retained earnings................................................ 383,657
Accumulated other comprehensive loss............................. (191,520)
-----------
Total Stockholder's Equity..................................... 12,309,749
-----------
Total Liabilities and Stockholder's Equity..................... $89,312,654
===========
</TABLE>
See accompanying notes.
F-40
<PAGE>
DAYTON STATE BANK
STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 2000
UNAUDITED
<TABLE>
<S> <C>
INTEREST INCOME
Interest and fees on loans........................................ $2,252,884
Investment securities............................................. 979,410
Federal funds sold................................................ 160,589
----------
Total Interest Income........................................... 3,392,883
INTEREST EXPENSE
Deposits and debt................................................. 1,038,748
----------
NET INTEREST INCOME................................................. 2,354,135
PROVISION FOR CREDIT LOSSES......................................... 120,000
----------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES............... 2,234,135
----------
NON INTEREST INCOME
Customer service fees............................................. 707,417
Other income...................................................... 41,747
----------
Total Non Interest Income....................................... 749,164
----------
NON INTEREST EXPENSES
Salaries and employee benefits.................................... 1,082,094
Net occupancy expense............................................. 113,193
Equipment......................................................... 222,780
Amortization of goodwill.......................................... 83,581
Other............................................................. 585,783
----------
Total Non Interest Expenses..................................... 2,087,431
----------
NET INCOME BEFORE INCOME TAX EXPENSE................................ 895,868
INCOME TAX EXPENSE.................................................. 254,421
----------
NET INCOME.......................................................... $ 641,447
==========
</TABLE>
See accompanying notes.
F-41
<PAGE>
DAYTON STATE BANK
STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000
UNAUDITED
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 641,447
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation................................................... 174,439
Provision for credit losses.................................... 120,000
Amortization of goodwill....................................... 83,581
Net amortization/accretion on securities....................... (4,589)
Changes in assets and liabilities:
Accrued interest receivable.................................... (86,113)
Other real estate owned........................................ 22,639
Other assets................................................... 288,070
Accrued interest payable....................................... 1,690
Other liabilities.............................................. (109,462)
-----------
Net cash provided by operating activities.................... 1,131,702
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities, calls and paydowns of securities....... 1,630,180
Net change in loans.............................................. (2,646,587)
Purchases of premises and equipment, net......................... (25,854)
-----------
Net cash used by investing activities........................ (1,042,261)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits........................................... (11,229,988)
Dividends paid................................................... (395,945)
-----------
Net cash used by financing activities........................ (11,625,933)
-----------
NET DECREASE IN CASH AND CASH EQUIVALENTS.......................... (11,536,492)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................... 15,369,194
-----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................... $ 3,832,702
===========
</TABLE>
See accompanying notes.
F-42
<PAGE>
DAYTON STATE BANK
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000
UNAUDITED
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
In the opinion of management, the unaudited financial statements reflect all
adjustments, consisting only of normal and recurring adjustments, necessary to
present fairly the Bank's financial position at June 30, 2000, results of
operations for the six months ended June 30, 2000 and cash flows for the six
months ended June 30, 2000. Interim period results are not necessarily
indicative of results of operations or cash flows for a full year period. These
unaudited financial statements do not include all disclosures required to be in
compliance with generally accepted accounting principles. These financial
statements and the notes thereto should be read in conjunction with the Bank's
financial statements for the year ended December 31, 1999.
NOTE B--EARNINGS PER COMMON SHARE
The weighted average number of shares used to calculate earnings per share
for the six months ended June 30, 2000 amounted to 187,586. The Bank has no
dilutive securities; therefore, basic and diluted earnings per share were both
$3.42 for the six months ended June 30, 2000.
NOTE C--SUBSEQUENT EVENT, CONTINGENCY
In September 2000, a significant debtor to the Bank filed a Chapter 11
bankruptcy petition. This debtor owed the Bank a total of $825,000 on two loans
outstanding at August 31, 2000. Of the outstanding balances on these loans,
$429,000 was collateralized by real estate with an estimated market value of
$560,000. The remaining balance was further collateralized by accounts
receivable, which may or may not help reduce the outstanding loan balances. The
potential loss on this contingency is further mitigated by the specific escrow
reserve of $45,000 for these loans from the purchase price of Dayton State
Bank.
Management is unable to determine the likelihood or amount of material loss
from this contingency. Management estimates the possible loss could range from
$0 to $350,000, depending on the results of the bankruptcy proceedings and the
realizable value of the collateral on the loans.
F-43
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Dayton State Bank
We have audited the balance sheet of Dayton State Bank as of December 31,
1998 and the related statements of earnings, shareholders' equity and cash
flows for the year 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 audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides 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 Dayton State Bank as of
December 31, 1998 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Houston, Texas
February 1, 1999
F-44
<PAGE>
DAYTON STATE BANK
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
1999 December 31, 1998
----------- -----------------
<S> <C> <C>
ASSETS (Unaudited)
Cash and cash equivalents
Cash and due from banks....................... $ 3,656,208 $ 3,878,926
Federal funds sold............................ 6,485,000 8,905,000
----------- -----------
Total cash and cash equivalents............. 10,141,208 12,783,926
Interest-bearing deposits in other financial
institutions................................... -- 100,000
Securities...................................... 33,952,995 30,276,036
Loans, net of allowance for loan losses of
$318,050 and $403,103.......................... 42,221,565 39,525,614
Premises and equipment, net..................... 2,192,918 2,198,041
Other assets.................................... 2,207,714 2,122,704
----------- -----------
$90,716,400 $87,006,321
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing.......................... $25,902,421 $23,283,152
Interest-bearing............................. 54,253,757 52,718,412
----------- -----------
Total deposits.............................. 80,156,178 76,001,564
Other liabilities............................. 773,754 1,107,165
----------- -----------
Total liabilities........................... 80,929,932 77,108,729
Commitments and contingencies................... -- --
Shareholders' equity
Common stock, par value $2.50 per share;
198,899 shares authorized; 187,586 shares
issued and outstanding in 1999 and 1998...... 468,965 468,965
Paid-in capital................................. 4,000,000 4,000,000
Retained earnings............................... 5,597,801 5,122,941
Accumulated other comprehensive income.......... (280,298) 305,686
----------- -----------
Total shareholders' equity...................... 9,786,468 9,897,592
----------- -----------
$90,716,400 $87,006,321
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-45
<PAGE>
DAYTON STATE BANK
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
Interest income
Loans, including fees............................... $2,057,889 $4,155,265
Securities.......................................... 902,399 1,957,443
Federal funds sold.................................. 230,605 305,384
---------- ----------
Total interest income............................. 3,190,893 6,418,092
Interest expense
Deposits............................................ 975,935 2,006,986
Federal funds purchased and repurchase agreements... -- 315
---------- ----------
Total interest expense............................ 975,935 2,007,301
---------- ----------
Net interest income............................... 2,214,958 4,410,791
Provision for loan losses............................. 98,000 (45,000)
---------- ----------
Net interest income after provision for loan
losses........................................... 2,116,958 4,455,791
Other income
Service charges on deposit accounts................. 546,860 1,061,186
Other service charges, fees and commissions......... 46,303 98,818
Net realized gain on sales of available-for-sale
securities......................................... 1,045 29,506
Other............................................... 47,652 273,316
---------- ----------
Total other income................................ 641,860 1,462,826
Other expense
Salaries and employee benefits...................... 1,266,433 2,369,761
Occupancy........................................... 140,395 267,912
Equipment........................................... 155,343 309,943
Other............................................... 565,075 1,253,295
---------- ----------
Total other expense............................... 2,127,246 4,200,911
---------- ----------
Earnings before provision for federal income
taxes............................................ 631,572 1,717,706
Provision for federal income taxes
Current............................................. 52,515 366,212
Deferred............................................ 104,197 104,197
---------- ----------
156,712 470,409
---------- ----------
NET EARNINGS...................................... $ 474,860 $1,247,297
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-46
<PAGE>
DAYTON STATE BANK
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Retained Comprehensive Shareholders'
Stock Surplus Earnings Income Equity
-------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1997................... $497,248 $2,000,000 $6,453,530 $ 226,265 $9,177,043
Comprehensive income:
Net earnings.......... -- -- 1,247,297 -- 1,247,297
Unrealized gains on
securities, net of
reclassification
adjustment
and taxes............ -- -- -- 79,421 79,421
----------
Comprehensive income.... 1,326,718
Dividends............... -- -- (187,586) -- (187,586)
Transfer to surplus..... -- 2,000,000 (2,000,000) -- --
Purchase and retirement
of 11,313 shares of
common stock........... (28,283) -- (390,300) -- (418,583)
-------- ---------- ---------- --------- ----------
Balance at December 31,
1998................... 468,965 4,000,000 5,122,941 305,686 9,897,592
Comprehensive income:
Net earnings
(unaudited).......... -- -- 474,860 -- 474,860
Unrealized losses on
securities, net of
reclassification
adjustment and taxes
(unaudited).......... -- -- -- (585,984) (585,984)
----------
Comprehensive income
(loss) (unaudited)..... -- -- -- -- (111,124)
-------- ---------- ---------- --------- ----------
Balance at June 30, 1999
(unaudited)............ $468,965 $4,000,000 $5,597,801 $(280,298) $9,786,468
======== ========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-47
<PAGE>
DAYTON STATE BANK
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1999 December 31, 1998
---------------- -----------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net earnings............................... $ 474,860 $ 1,247,297
Adjustments to reconcile net earnings to
net cash provided by operating activities
Provision for loan losses.................. 98,000 (45,000)
Depreciation............................... 130,767 245,892
Gain on sale of bank premises.............. (16,155) --
Gain on sale of foreclosed real estate,
net....................................... -- (96,526)
Amortization and accretion of premiums and
discounts on securities
available-for-sale, net................... 86,686 76,399
Amortization and accretion of premiums and
discounts on securities
held-to-maturity, net..................... 768 282
Net realized securities gain on available-
for-sale securities....................... (972) (29,506)
Decrease in other assets................... 23,386 255,247
Decrease in other liabilities.............. (175,937) (1,558)
----------- -----------
Net cash provided by operating
activities............................... 621,403 1,652,527
Cash flows from investing activities
Decrease in interest-bearing deposits in
other financial institutions.............. 100,000 --
Proceeds from sales of available-for-sale
securities................................ 950,733 1,968,653
Proceeds from principal repayments of
available-for-sale securities............. 2,723,303 4,770,779
Proceeds from maturities and calls of
available-for-sale securities............. 700,000 7,082,513
Proceeds from maturities of held-to-
maturity securities....................... 100,000 3,290,000
Purchases of available-for-sale
securities................................ (9,125,331) (14,049,764)
Net increase in loans...................... (2,793,951) (4,713,296)
Proceeds from sales of foreclosed real
estate.................................... 36,000 89,045
Proceeds from sales of bank premises and
equipment................................. 18,030 --
Purchases of bank premises and equipment... (127,519) (194,605)
----------- -----------
Net cash used by investing activities..... (7,418,735) (1,756,675)
Cash flows from financing activities
Net increase in deposits................... 4,154,614 6,653,829
Dividends paid............................. -- (187,586)
Purchase and retirement of common stock.... -- (418,583)
----------- -----------
Net cash provided by financing
activities............................... 4,154,614 6,047,660
----------- -----------
Net (decrease) increase in cash and cash
equivalents.............................. (2,642,718) 5,943,512
Cash and cash equivalents at beginning of
year........................................ 12,783,926 6,840,414
----------- -----------
Cash and cash equivalents at end of year..... $10,141,208 $12,783,926
=========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the year for
Interest................................... $ 999,209 $ 2,020,459
Income taxes............................... 203,990 371,947
Supplemental disclosure of noncash operating and investing activities:
During 1998, the Bank financed the sale of other real estate resulting in a
gain of $39,999. This gain has been deferred.
During 1998, the Bank recognized the gain of sale of other real estate of
$174,999, which had been deferred in 1997.
During 1998, the Bank acquired real estate in satisfaction of loans in the
amount of $298,036.
During the six months ended June 30, 1999, the Bank recorded an unrealized loss
on securities of $887,854. In connection with the unrealized loss the Bank
reversed a deferred tax liability of $157,474 which was included in other
liabilities and recorded a deferred tax asset of $144,396 which is included in
other assets.
</TABLE>
The accompanying notes are an integral part of these statements.
F-48
<PAGE>
DAYTON STATE BANK
NOTES TO FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements for Dayton State Bank (the Bank)
follows.
1. Securities
At the date of purchase, the Bank is required to classify debt and equity
securities into one of three categories: held-to-maturity, trading, or
available-for-sale. At each reporting date, the appropriateness of the
classification is reassessed. Investments in debt securities are classified as
held-to-maturity and measured at amortized cost in the financial statements
only if management has the positive intent and ability to hold those securities
to maturity. Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading and measured at fair
value in the financial statements with unrealized gains and losses included in
earnings. Investments not classified as either held-to-maturity or trading are
classified as available-for-sale and measured at fair value in the financial
statements with unrealized gains and losses reported, net of tax, in a separate
component of shareholders' equity until realized.
Gains and losses on sale of available-for-sale securities are determined
using the specific identification method.
Declines in the fair value of individual held-to-maturity and available-for-
sale securities below their 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.
2. Loans
The Bank grants loans primarily to customers in Liberty, Chambers and
surrounding Texas counties. Although the Bank has a diversified loan portfolio,
a substantial portion of its debtors' ability to honor their contracts is
somewhat dependent on the economies in these areas.
Loans are reported at the principal amount outstanding, net of unearned
discounts and an allowance for credit losses. Unearned discounts on installment
loans are recognized using a method which approximates a level yield over the
term of the loans. Interest on other loans is calculated using the simple
interest method on the daily balance of the principal amount outstanding.
Substantially all fees for the origination of loans are recorded as income
when received. The effect on operations and retained earnings is not materially
different from the deferral of net direct origination fees and costs and the
amortization thereof as an adjustment of the yield on the related loan.
Loans are identified as impaired when it is probable that interest and
principal will not be collected according to the contractual terms of the loan
agreement. The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due. When interest accrual is discontinued, all unpaid accrued interest
is reversed. Interest income is subsequently recognized only to the extent cash
payments are received. When it has been determined that a loan is impaired, an
allowance is established for the excess of the principal balance over the
discounted expected future cash flows or from the liquidation of the
collateral.
3. Allowance for Loan Losses
The allowance is maintained at a level adequate to absorb probable losses.
Management determines the adequacy of the allowance based upon reviews of
individual credits, recent loss experience, current economic conditions, the
risk characteristics of the various categories of loans and other pertinent
factors. Loans deemed uncollectible are charged to the allowance. Provisions
for loan losses and recoveries on loans previously charged-off are added to the
allowance.
F-49
<PAGE>
DAYTON STATE BANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
While management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the allowance. Such agencies may
require additions to the allowance based on their judgments of information
available to them at the time of their examination.
4. Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation included in operating expenses is computed principally using the
straight-line method over the estimated useful life of the asset. Accelerated
methods are used for tax purposes.
5. Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. When management determines that it is more likely than not that a
deferred tax asset will not be realized, a valuation allowance must be
established. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
6. Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and federal funds sold with a maturity of three
months or less.
7. Off-Balance-Sheet Financial Instruments
In the ordinary course of business the Bank enters into off-balance-sheet
financial instruments consisting of commitments to extend credit, commercial
letters of credit and standby letters of credit. Such financial instruments are
recorded in the financial statements when they are funded or related fees are
incurred or received.
8. Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
9. Unaudited Interim Information
The financial information for the six months ended June 30, 1999 has not
been audited by independent accountants. Certain information and footnote
disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been omitted from
the unaudited interim financial information. In the opinion of management of
the Bank, the unaudited interim financial information includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation. Results of operations for the interim period are not necessarily
indicative of the results of operations for the full year.
F-50
<PAGE>
DAYTON STATE BANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE B--SECURITIES
Securities comprise the following at December 31, 1998:
<TABLE>
<S> <C>
Available-for-sale.............................................. $28,756,979
Held-to-maturity................................................ 1,519,057
-----------
$30,276,036
===========
</TABLE>
The carrying amounts of securities as shown in the consolidated balance
sheets and their approximate fair values at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available-for-Sale
U.S. Government and agency
securities............... $ 2,732,643 $ 48,082 $ (2,188) $ 2,778,537
Mortgage-backed
securities............... 17,288,904 73,511 (66,081) 17,296,334
State and municipal
securities............... 8,222,272 409,836 -- 8,632,108
Texas Independent Bank
stock.................... 50,000 -- -- 50,000
----------- -------- -------- -----------
$28,293,819 $531,429 $(68,269) $28,756,979
=========== ======== ======== ===========
Held-to-Maturity
State and municipal
securities............... $ 1,519,057 $ 63,439 $ -- $ 1,582,496
=========== ======== ======== ===========
</TABLE>
Securities with book values of approximately $12,450,000 at December 31,
1998 were pledged to secure public deposits and for other purposes as required
or permitted by law.
Gross realized gains and gross realized losses on sales of securities
available-for-sale during 1998 were:
<TABLE>
<S> <C>
Gross realized gains:
U.S. Government and agency securities.......................... $ 46,774
Mortgage-backed securities..................................... 2,487
State and municipal securities................................. --
--------
$ 49,261
========
Gross realized losses:
U.S. Government and agency securities.......................... $ --
Mortgage-backed securities..................................... (19,755)
SBA Loan Pool.................................................. --
--------
$(19,755)
========
</TABLE>
F-51
<PAGE>
DAYTON STATE BANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
The scheduled maturities of securities at December 31, 1998 were as follows.
Contractual maturities differ from expected maturities because borrowers may
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
--------------------- -----------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less...... $ 99,990 $ 100,377 $ 300,000 $ 300,048
Due after one through five
years....................... 906,234 939,063 1,216,299 1,231,279
Due after five through ten
years....................... 249,675 265,143 6,253,591 6,510,697
Due after ten years.......... 263,158 277,913 3,185,025 3,368,621
---------- ---------- ----------- -----------
1,519,057 1,582,496 10,954,915 11,410,645
Mortgage-backed securities... -- -- 17,288,904 17,296,334
---------- ---------- ----------- -----------
1,519,057 1,582,496 28,243,819 28,706,979
Texas Independent Bank
stock....................... -- -- 50,000 50,000
---------- ---------- ----------- -----------
$1,519,057 $1,582,496 $28,293,819 $28,756,979
========== ========== =========== ===========
</TABLE>
NOTE C--LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans classified according to type as of December 31, 1998 are summarized as
follows:
<TABLE>
<S> <C>
Commercial and industrial...................................... $11,497,048
Real estate mortgage........................................... 12,975,153
Agricultural................................................... 8,881,961
Consumer....................................................... 7,429,102
-----------
40,783,264
Less unearned discount......................................... 854,547
Less allowance for loan losses................................. 403,103
-----------
Loans, net................................................... $39,525,614
===========
Changes in the allowance for loan losses were as follows:
Balance at January 1, 1998..................................... $ 288,056
Provision for loan losses...................................... (45,000)
Loans fully or partially charged off........................... (148,397)
Recoveries of loans previously charged off..................... 308,444
-----------
Balance at December 31, 1998................................... $ 403,103
===========
</TABLE>
At December 31, 1998, executive officers and directors, and entities in
which they have an interest, were indebted to the Bank in the approximate
aggregate amount of $277,000. In management's opinion, all such loans were made
on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other customers
and did not involve more than a normal risk of collectibility or present other
unfavorable features.
Impaired loans were approximately $24,000 at December 31, 1998. The
reduction in interest income associated with these impaired loans was
insignificant. A valuation allowance for credit losses related to impaired
loans has been established and is included in the allowance for loan losses.
There were no commitments to lend additional funds to borrowers whose loans
were classified as impaired.
F-52
<PAGE>
DAYTON STATE BANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE D--PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1998 are summarized as follows:
<TABLE>
<S> <C>
Land............................................................ $ 172,169
Premises........................................................ 2,060,930
Furniture, fixtures and equipment............................... 1,168,502
Bank automobiles................................................ 70,870
----------
3,472,471
Less accumulated depreciation................................... 1,274,430
----------
$2,198,041
==========
</TABLE>
NOTE E--INTEREST-BEARING DEPOSITS
Interest-bearing deposits as of December 31, 1998 are summarized as follows:
<TABLE>
<S> <C>
Savings......................................................... $11,325,705
NOW and money market............................................ 17,338,009
Certificates of deposit:
Less than $100,000............................................ 17,522,034
$100,000 and greater.......................................... 6,532,664
-----------
$52,718,412
===========
</TABLE>
Remaining maturities of certificates of deposit at December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999 $21,039,621
2000 1,594,145
2001 486,560
2002 459,234
2003 475,138
-----------
$24,054,698
===========
</TABLE>
Deposits of executive officers and directors, and entities in which they
have an interest, were approximately $1,039,000 at December 31, 1998.
NOTE F--DEFERRED COMPENSATION PLAN
The Bank has deferred compensation agreements with key employees that
provide for payments to each of the key employees or their surviving
beneficiaries for a period of ten years beginning at retirement, payable at
$25,000 each per year. The Bank has whole life insurance policies on these
employees so that upon death there will be funds available to pay the
beneficiaries or cash value in the policies from which to make a portion of the
payments to the employees upon retirement. Compensation expense is recorded
over the estimated remaining period of employment. In 1998, there was no
expense recorded due to the reversal of amounts previously accrued for an
employee who resigned during the year. The liability for services previously
performed totaled approximately $432,000 at December 31, 1998, and is included
in other liabilities in the accompanying balance sheet. Cash value accumulated
in the life insurance policies purchased for these agreements totaled
approximately $571,000 as of December 31, 1998, and is included in other assets
in the accompanying balance sheet.
F-53
<PAGE>
DAYTON STATE BANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE G--PENSION PLAN
The Bank has a target benefit pension plan, which is a form of defined
contribution plan. The plan covers all employees who have worked six months or
more and who have attained the age of twenty years and six months. Benefits
under the target benefit plan to employees are determined annually based on
current salaries and wages, but a minimum allocation of 3% of pay is
recognized annually for each participant's account. Pension costs charged
against operations for the year ended December 31, 1998 were approximately
$77,000.
Effective January 1, 1999 the target benefit pension plan was amended and
restated to a 401(k) profit-sharing plan.
NOTE H--INCOME TAXES
Federal income taxes currently payable and deferred at December 31, 1998
included in other liabilities and other assets are as follows:
<TABLE>
<S> <C>
Current federal income taxes payable.............................. $(33,686)
Deferred tax (liability) asset.................................... (144,101)
</TABLE>
The net deferred tax liability principally represents deferred compensation
expenses accrued for books not yet deducted for tax, tax over book basis of
foreclosed property and the tax effect of the unrealized gain on available-
for-sale securities. Other temporary differences include the allowance for
loan losses and depreciation differences.
The effective tax rate differs from the statutory rate due to the effects
of nontaxable permanent differences such as tax free income on municipal
securities, officers life insurance expense and nondeductible interest
expense.
NOTE I--COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amounts recognized in the
balance sheets. The contractual or notional amounts of those instruments
reflect the extent of involvement the Bank has in particular classes of
financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
The Bank generally requires collateral or other security to support
financial instruments with credit risk:
<TABLE>
<CAPTION>
Contract or
Notional Amount
December 31, 1998
-----------------
<S> <C>
Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit.......................... $3,666,057
Standby letters of credit............................. $ 172,400
</TABLE>
F-54
<PAGE>
DAYTON STATE BANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the counterparty. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, income-producing
commercial properties, and agricultural crops.
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 customers.
NOTE J--COMPREHENSIVE INCOME
Effective January 1, 1998, the Bank has adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income, which requires an
entity to report and display comprehensive income and its components.
Comprehensive income includes net earnings plus other comprehensive income. The
Bank's other comprehensive income consists of unrealized gains or losses on
securities.
Other comprehensive income and its tax effects at December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Before Tax Net of
Tax (Expense) Tax
Amount Benefit Amount
-------- --------- -------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period.. $149,848 $(50,948) $98,900
Less: reclassification adjustment for gains
included in net earnings....................... (29,506) 10,027 (19,479)
-------- -------- -------
Other comprehensive income........................ $120,342 $(40,921) $79,421
======== ======== =======
</TABLE>
NOTE K--NEW PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS No. 133"), which is effective for financial statements issued
for periods beginning after June 15, 1999. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The Bank does not expect the effect of SFAS No. 133
to be material to the financial statements taken as a whole.
NOTE L--REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the State of Texas Department of Banking and the Federal Deposit Insurance
Corporation (FDIC). Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Bank's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
F-55
<PAGE>
DAYTON STATE BANK
NOTES TO FINANCIAL STATEMENTS--(Continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. Management believes, as of December 31, 1998, that
the Bank meets all capital adequacy requirements to which it is subject.
As of June 30, 1997, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table. There are no conditions or events since that notification
that management believes have changed the Bank's category.
<TABLE>
<CAPTION>
Actual For Capital Adequacy Purposes
----------------- ----------------------------------------------------
Amount Ratio Amount Ratio
----------- ----- ----------------------------- ----------------------
<S> <C> <C> <C> <C>
As of December 31,
1998:
Total Capital
(to Risk Weighted Assets).. $10,300,695 20.65% (greater than or =)$3,990,240 (greater than or =)8.0%
Tier I Capital
(to
Risk Weighted Assets).. 9,897,592 19.84% (greater than or =) 1,945,120 (greater than or =)4.0%
Tier I Capital
(to Average Assets).. 9,897,592 11.16% (greater than or =) 2,661,660 (greater than or =)3.0%
<CAPTION>
To Be Well Capitalized Under Prompt Corrective Action
Provisions
------------------------------------------------------
Amount Ratio
----------------------------- ------------------------
<S> <C> <C>
As of December 31,
1998:
Total Capital
(to Risk Weighted Assets).. (greater than or =)$4,987,800 (greater than or =)10.0%
Tier I Capital
(to
Risk Weighted Assets).. (greater than or =) 2,992,680 (greater than or =) 6.0%
Tier I Capital
(to Average Assets).. (greater than or =) 4,436,100 (greater than or =) 5.0%
</TABLE>
NOTE M--SUBSEQUENT EVENT (UNAUDITED)
On August 13, 1999, the Bank settled a lawsuit in which they were the
defendant. The lawsuit was settled in mediation. The amount of the judgment was
$62,500. The settlement has not been accrued in the accompanying financial
statements, as the likelihood of an unfavorable judgment and a reasonable
estimate of the range of loss could not be determined at the time that the
financial statements were issued.
F-56
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
1,000,000 Floating Rate Cumulative Trust Preferred Securities
Paradigm Capital Trust II
Floating Rate Cumulative Trust Preferred Securities
(Liquidation Amount $10 per Trust Preferred Security)
fully, irrevocably and unconditionally guaranteed by
Paradigm Bancorporation, Inc.
----------------
HOEFER & ARNETT SAMCO Capital Markets
Incorporated
----------------
, 2000
----------------
Until , (25 days after the date of this prospectus), all dealers that
effect transactions in the registered securities, whether or not participating
in this offering, may be required to deliver a prospectus. This delivery
requirement is in addition to the dealers' obligation to deliver a prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Paradigm's Articles of Incorporation and Bylaws require Paradigm to
indemnify officers and directors of Paradigm 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 Paradigm 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 successful in defending on the
merits.
Paradigm's Articles of Incorporation provide that a director of Paradigm
will not be liable to the corporation for monetary damages for an act or
omission in the director's capacity as a director, except to the extent not
permitted by law. Texas law does not permit exculpation of liability in the
case of (i) a breach of the director's duty of loyalty to the corporation or
its shareholders, (ii) an act or omission not in good faith that involves
intentional misconduct or a knowing violation of the law, (iii) a transaction
from which a director received an improper benefit, whether or not the benefit
resulted from an action taken within the scope of the director's office, (iv)
an act or omission for which the liability of the director is expressly
provided by statute, or (v) an act related to an unlawful stock repurchase or
dividend.
Pursuant to the Underwriting Agreement, a form of which is filed as Exhibit
1.1 to this Registration Statement, the Underwriter has agreed to indemnify the
directors, officers and controlling persons of Paradigm against certain civil
liabilities that may be incurred in connection with this Offering, including
certain liabilities under the Securities Act.
Paradigm may provide liability insurance for each director and officer for
certain losses arising from claims or charges made against them while acting in
their capacities as directors or officers of Registrant, whether or not
Registrant would have the power to indemnify such person against such
liability, as permitted by law.
Item 25. Other Expenses of Issuance and Distribution
The estimated fees and expenses incurred by the Registrant in connection
with the sale and distribution of the securities being registered are as
follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.................. $ 2,640
National Association of Securities Dealers, Inc. filing fee.......... $ 1,500
Printing and mailing expenses........................................ $ 62,000
Legal fees and expenses of counsel for the Registrant................ $ 50,000
Accounting fees and expenses......................................... $ 50,000
Blue sky filing fees and expenses (including legal fees and
expenses)........................................................... $ 5,000
Trustee fees and expenses............................................ $ 16,000
Transfer Agent fees.................................................. $ 5,000
Miscellaneous........................................................ $ 7,860
--------
Total................................................................ $200,000
========
</TABLE>
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities
On December 8, 1999, Paradigm issued 875,000 shares of its common stock to
certain individuals and entities at $8.00 per share. Each sale was for cash and
was made pursuant to the registration exemption provided by Section 4(2) of the
Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated
thereunder.
On December 1, 1999, Paradigm Capital Trust I issued $512,500 trust
preferred securities to a third party at $10.00 per share. The sale was for
cash and was made pursuant to the registration exemption provided by Section
4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D
promulgated thereunder.
Item 27. Exhibits and Financial Statement Schedules
(a) Exhibits
The following documents are filed as exhibits to this Registration
Statement:
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
1.1* Form of Underwriting Agreement for the Trust Preferred Securities
3.1 Amended and Restated Articles of Incorporation of Paradigm
3.2 Amended and Restated Bylaws of Paradigm
4.1 Form of Indenture by and between Paradigm Bancorporation, Inc. and
First Union Trust Company, National Association
4.2 Form of Subordinated Debenture (included as an exhibit to Exhibit 4.1)
4.3 Certificate of Trust
4.4 Trust Agreement
4.5 Form of Amended and Restated Trust Agreement
4.6 Form of Trust Preferred Securities Certificate (included as an exhibit
to Exhibit 4.5)
4.7 Form of Trust Preferred Securities Guarantee Agreement
4.8 Form of Agreement of Expense and Liabilities (included as an exhibit
to Exhibit 4.5)
5.1 Opinion of Bracewell & Patterson, L.L.P. as to the legality of the
securities being registered
5.2* Opinion of Richards, Layton & Finger, P.A.
8.1* Opinion of Bracewell & Patterson, L.L.P. as to certain tax matters
10.1 Agreement and Plan of Reorganization by and between Paradigm
Bancorporation, Inc. and Dayton State Bank dated May 3, 1999
10.2 Paradigm Bancorporation, Inc. 1999 Stock Incentive Plan
10.3* Paradigm Bancorporation, Inc. 1998 Stock Plan
10.4 Fagan Employment Agreement
10.5 Fisher Employment Agreement
10.6* Porter Employment Agreement
10.7 Woodall Employment Agreement
10.8 Form of Indenture by and between Paradigm Bancorporation, Inc. and
First Union Trust Company, National Association (Paradigm Capital
Trust I)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
10.9 Amended and Restated Trust Agreement (Paradigm Capital Trust I)
10.10* Trust Preferred Securities Guarantee Agreement (Paradigm Capital Trust
I)
10.11 Agreement of Expense and Liabilities (Paradigm Capital Trust I)
(included as an exhibit to Exhibit 10.9)
10.12 Escrow Agreement dated as of December 10, 1999 by and among Paradigm
Bancorporation, Inc., Dayton State Bank, and J. Robert Jamison
16.1 Letter from Wallingford, McDonald, Fox & Co., P.C. regarding change in
accountants
21.1 Subsidiaries of Paradigm
23.1 Consent of Harper & Pearson Company, P.C.
23.2 Consent of Grant Thornton LLP
23.3 Consent of Bracewell & Patterson, L.L.P. (included in the opinion to
be filed as Exhibit 5.1)
23.4 Consent of Richards, Layton & Finger, P.A. (included in the opinion to
be filed as Exhibit 5.2)
24.1 Powers of Attorney (included as part of Signature Pages)
25.1 Form T-1 Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of First Union Trust Company, National Association,
as trustee under the Indenture
25.2 Form T-1 Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of First Union Trust Company, National Association,
as trustee under the Trust Agreement
25.3 Form T-1 Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of First Union Trust Company, National Association,
as trustee under the Guarantee Agreement
27.1 Financial Data Schedule
</TABLE>
--------
*To be filed 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 28. Undertakings
(e) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrants pursuant to the foregoing provisions, or otherwise, the
Registrants have 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
Registrants of expenses incurred or paid by a director, officer, or controlling
person of the Registrants in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, each 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.
II-3
<PAGE>
(f) The undersigned Registrants hereby undertake 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 Registrants pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 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.
(j) The undersigned Registrants hereby undertake to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with
the rules and regulations prescribed by the Commission under section 305(b)(2)
of the Act.
II-4
<PAGE>
SIGNATURES
Paradigm. In accordance with the requirements of the Securities Act of 1933,
the registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, there
unto duly authorized, in the City of Houston, State of Texas on September 21,
2000.
PARADIGM BANCORPORATION, INC.
(Registrant)
/s/ Peter E. Fisher
By __________________________________
Peter E. Fisher
President and Chief Executive
Officer
Paradigm Capital Trust II. In accordance with the requirements of the
Securities Act of 1933, the registrant certifies that it has reasonable grounds
to believe that it meets all of the requirements for filing on form SB-2 and
authorized this registration statement to be signed on its behalf by the
undersigned, there unto duly authorized, in the City of Houston, State of Texas
on September 21, 2000.
PARADIGM CAPITAL TRUST II
(Registrant)
/s/ Peter E. Fisher
By __________________________________
Peter E. Fisher
Trustee
/s/ William H. Fagan, M.D.
By __________________________________
William H. Fagan, M.D.
Trustee
/s/ Jay W. Porter, Jr.
By __________________________________
Jay W. Porter, Jr.
Trustee
II-5
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
William H. Fagan, M.D. and Peter E. Fisher, with full power to each of them to
act without the other, the undersigned's true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for the undersigned
and in the undersigned's name, place and stead, in any and all capacities
(until revoked in writing), to sign this Registration Statement and any and all
amendments (including post-effective amendments) thereto, to file the same,
together with all exhibits thereto and documents in connection therewith, with
the Securities and Exchange Commission, to sign any and all applications,
registration statements, notices and other documents necessary or advisable to
comply with the applicable state securities authorities, granting unto said
attorney-in-fact and agent, or his or their substitute or substitutes, full
power and authority to do and perform each and every act and thing requisite
and necessary to be done in and about the premises to effectuate the same as
fully to all intents and purposes as the undersigned might or could do if
personally present, thereby ratifying and confirming all that said attorneys-
in-fact and agents, or his or their substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated and on the 21st day of September, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Peter E. Fisher President, Chief Executive Officer and Director
____________________________________ (Principal Executive Officer)
Peter E. Fisher
/s/ Brad Fagan Chief Financial Officer and Director
____________________________________ (Principal Financial Officer/Principal Accounting
Brad Fagan Officer)
/s/ Dennis M. Cain Director
____________________________________
Dennis M. Cain
/s/ William H. Fagan, M.D. Director
____________________________________
William H. Fagan, M.D.
/s/ Charles J. Howard, M.D. Director
____________________________________
Charles J. Howard, M.D.
/s/ Leah Boomer Huffmeister Director
____________________________________
Leah Boomer Huffmeister
/s/ Jay W. Porter, Jr. Director
____________________________________
Jay W. Porter, Jr.
/s/ James A. Woodall, Jr. Director
____________________________________
James A. Woodall, Jr.
/s/ Walter G. Finger Director
____________________________________
Walter G. Finger
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
1.1* Form of Underwriting Agreement for the Trust Preferred Securities
3.1 Amended and Restated Articles of Incorporation of Paradigm
3.2 Amended and Restated Bylaws of Paradigm
4.1 Form of Indenture by and between Paradigm Bancorporation, Inc. and
First Union Trust Company, National Association
4.2 Form of Subordinated Debenture (included as an exhibit to Exhibit 4.1)
4.3 Certificate of Trust
4.4 Trust Agreement
4.5 Form of Amended and Restated Trust Agreement
4.6 Form of Trust Preferred Securities Certificate (included as an exhibit
to Exhibit 4.5)
4.7 Form of Trust Preferred Securities Guarantee Agreement
4.8 Form of Agreement of Expense and Liabilities (included as an exhibit
to Exhibit 4.5)
5.1 Opinion of Bracewell & Patterson, L.L.P. as to the legality of the
securities being registered
5.2* Opinion of Richards, Layton & Finger, P.A.
8.1* Opinion of Bracewell & Patterson, L.L.P. as to certain tax matters
10.1 Agreement and Plan of Reorganization by and between Paradigm
Bancorporation, Inc. and Dayton State Bank dated May 3, 1999
10.2 Paradigm Bancorporation, Inc. 1999 Stock Incentive Plan
10.3* Paradigm Bancorporation, Inc. 1998 Stock Plan
10.4 Fagan Employment Agreement
10.5 Fisher Employment Agreement
10.6* Porter Employment Agreement
10.7 Woodall Employment Agreement
10.8 Form of Indenture by and between Paradigm Bancorporation, Inc. and
First Union Trust Company, National Association (Paradigm Capital
Trust I)
10.9 Amended and Restated Trust Agreement (Paradigm Capital Trust I)
10.10* Trust Preferred Securities Guarantee Agreement (Paradigm Capital Trust
I)
10.11 Agreement of Expense and Liabilities (Paradigm Capital Trust I)
(included as an exhibit to Exhibit 10.9)
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
10.12 Escrow Agreement dated as of December 10, 1999 by and among Paradigm
Bancorporation, Inc., Dayton State Bank, and J. Robert Jamison
16.1 Letter from Wallingford, McDonald, Fox & Co., P.C. regarding change in
accountants
21.1 Subsidiaries of Paradigm
23.1 Consent of Harper & Pearson Company, P.C.
23.2 Consent of Grant Thornton LLP
23.3 Consent of Bracewell & Patterson, L.L.P. (included in the opinion to
be filed as Exhibit 5.1)
23.4 Consent of Richards, Layton & Finger, P.A. (included in the opinion to
be filed as Exhibit 5.2)
24.1 Powers of Attorney (included as part of Signature Pages)
25.1 Form T-1 Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of First Union Trust Company, National Association,
as trustee under the Indenture
25.2 Form T-1 Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of First Union Trust Company, National Association,
as trustee under the Trust Agreement
25.3 Form T-1 Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of First Union Trust Company, National Association,
as trustee under the Guarantee Agreement
27.1 Financial Data Schedule
</TABLE>
--------
*To be filed by amendment.
II-8
