<PAGE>
As filed with the Securities and Exchange Commission on February 9, 1995.
Registration No. 33-86750
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
AMENDMENT NO. 2
to
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
_____________________________
GULF SOUTHWEST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Texas 6060 76-0045946
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
4200 Westheimer, Suite 210
Houston, Texas 77027
(713) 622-0042
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
J. W. LANDER, III
President
Gulf Southwest Bancorp, Inc.
4200 Westheimer, Suite 210
Houston, Texas 77027
(713) 622-0042
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
_______________________
Copies to:
ROBERT E. CRAWFORD, JR., ESQ.
JEANNE G. SELZER, ESQ.
Winstead Sechrest & Minick P.C.
1201 Elm Street
5400 Renaissance Tower
Dallas, Texas 75270
_______________________
Approximate date of commencement of proposed sale to the public: As soon as
practicable following effectiveness of this registration statement.
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [ ]
_________________
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item Number and Caption Location or Heading in Prospectus
------------------------------- ------------------------------------------
<C> <S> <C>
1. Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus...... Forepart of Registration Statement and
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus..... Inside Front Cover Page and Outside Back
Cover Pages of Prospectus
3. Risk Factors, Ratio of
Earnings to Fixed Charges and
Other Information............. Risk Factors; Summary - The Parties;
Texas Gulf Coast; Gulf Southwest; Summary
- The Merger; Summary -Selected Financial
Data; Summary - Pro Forma Financial Data;
Summary - Vote Required; Description of
the Merger -Required Regulatory
Approvals; Description of the Merger -
Appraisal Rights of Dissenting
Shareholders; Description of the Merger -
Federal Income Tax Consequences
4. Terms of the Transaction...... Summary - The Merger; Summary -Reasons
for the Merger; Information With Respect
to the Special Meeting -Recommendation of
the Board of Directors; Description of
GSW Stock; Comparative Rights of
Shareholders; Description of the Merger -
Accounting Treatment; Summary - The
Merger; Description of the Merger -
Fairness Opinion; Description of the
Merger
5. Pro Forma Financial
Information................... The Summary - Pro Forma Financial Data
6. Material Contacts with the
Company Being Acquired........ Description of the Merger - Material
Contacts
7. Additional Information
Required for Reoffering by
Persons and Parties Deemed to
be Underwriters............... Not Applicable
8. Interests of Named Experts
and Counsel................... Experts; Legal Matters
9. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities................... Not Applicable
10. Information with Respect to
S-3 Registrants............... Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Item Number and Caption Location or Heading in Prospectus
------------------------------- ------------------------------------------
<C> <S> <C>
11. Incorporation of Certain
Information by Reference...... Not Applicable
12. Information with Respect to
S-2 or S-3 Registrants........ Not Applicable
13. Incorporation of Certain
Information by Reference...... Not Applicable
14. Information with Respect to
Registrants Other Than S-3 or
S-2 Registrants............... Gulf Southwest; Gulf Southwest
-Properties; Gulf Southwest - Market for
GSW Common Stock and Related Shareholder
Matters; Gulf Southwest -Dividends and
Dividend Policy; Financial Statements;
Summary - Selected Financial Data; Gulf
Southwest - Management's Discussion and
Analysis of Financial Condition and
Results of Operations
15. Information with Respect to
S-3 Companies................. Not Applicable
16. Information with Respect to
S-2 or S-3 Companies.......... Not Applicable
17. Information with Respect to
Companies Other Than S-2 or
S-3 Companies................. Texas Gulf Coast; Texas Gulf Coast
-Market for TGC Common Stock and Related
Shareholder Matters; Texas Gulf Coast -
Dividends and Dividend Policy; Summary -
Selected Financial Data; Texas Gulf Coast
- Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Financial Statements
18. Information if Proxies,
Consents or Authorizations
are to be Solicited........... Summary - The Special Meeting; Outside
Front Cover Page; Stockholder Proposals;
Information With Respect to the Special
Meeting - Quorum and Voting; Description
of the Merger - Appraisal Rights of
Dissenting Shareholders; Outside Front
Cover Page; Risk Factors -Conflicts of
Interest; Gulf Southwest -Market for GSW
Common Stock and Related Shareholder
Matters; Gulf Southwest - Principal
Shareholders;
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Item Number and Caption Location or Heading in Prospectus
------------------------------- ------------------------------------------
<C> <S> <C>
Texas Gulf Coast - Principal
Shareholders; Gulf Southwest - Officers
and Directors; Gulf Southwest - Executive
Compensation; Gulf Southwest
-Compensation Committee Interlocks and
Insider Participation; Gulf Southwest
-Certain Relationships and Related
Transactions
19. Information if Proxies,
Consents or Authorizations
are not to be Solicited or in
an Exchange Offer............. Not Applicable
</TABLE>
<PAGE>
TEXAS GULF COAST BANCORP, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH 22, 1995
To the Shareholders of Texas Gulf Coast Bancorp, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting (the "Special Meeting") of
the shareholders of Texas Gulf Coast Bancorp, Inc. ("Texas Gulf Coast"), will be
held at Texas City Bank, 701 Sixth Street North, Texas City, Texas 77592, at
10:00 a.m. local time, on Wednesday, March 22, 1995, for the following purposes:
1. To consider and vote on a proposal (the "Merger Proposal") to
approve the form and content of (i) that certain Agreement and Plan of
Reorganization, dated as of November 9, 1994, by and among Texas Gulf
Coast, Gulf Southwest Bancorp, Inc., a Texas corporation ("Gulf
Southwest"), and Gulf Southwest Nevada Bancorp, Inc., a Nevada corporation
and a wholly-owned subsidiary of Gulf Southwest (the "Merger Sub"), and
(ii) the related Agreement and Plan of Merger to be entered into by and
among Texas Gulf Coast and Merger Sub, pursuant to which Texas Gulf Coast
will be merged into Merger Sub (such transaction being hereinafter referred
to as the "Merger").
2. To transact any other business properly coming before the special
meeting or any adjournment thereof.
Only shareholders of record at the close of business on February 8, 1995,
are entitled to notice of and to vote at the Special Meeting and any adjournment
thereof. The affirmative vote of the holders of at least two-thirds of the
issued and outstanding shares of common stock, $1.00 par value per share, of
Texas Gulf Coast is required to approve the Merger Proposal.
Under the Texas Business Corporation Act (the "TBCA"), a shareholder who
objects to the Merger can assert statutory dissenter's rights of appraisal by
strict and complete compliance with the requirements of the TBCA. See
"Description of the Merger - Appraisal Rights of Dissenting Shareholders" and
Exhibit B to the attached Joint Proxy Statement/Prospectus.
- ---------
Please date, complete and sign the enclosed proxy and return it promptly to
Texas Gulf Coast in the enclosed postage prepaid envelope. You may revoke your
proxy at any time prior to the time it is voted and, if you attend the meeting,
you may vote in person.
By Order of the Board of Directors,
-----------------------------------
A. Harrel Blackshear, Secretary
Houston, Texas
February , 1995
<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS
GULF SOUTHWEST BANCORP, INC.
698,253 shares of common stock, $1.00 par value per share
The above-referenced shares of common stock ("GSW Common Stock") of Gulf
Southwest Bancorp, Inc., a Texas corporation ("Gulf Southwest"), to which this
Joint Proxy Statement/Prospectus relates are being offered to the shareholders
of Texas Gulf Coast Bancorp, Inc., a Texas corporation ("Texas Gulf Coast"),
pursuant to the Agreement and Plan of Reorganization and the related Agreement
and Plan of Merger described herein. If the merger transaction contemplated by
such agreements is approved by the shareholders of Texas Gulf Coast, upon
consummation of the merger, each share of the common stock, $1.00 par value per
share, of Texas Gulf Coast ("TGC Common Stock") will be converted into 2.1176
shares of GSW Common Stock. In lieu of fractional shares, each holder of TGC
Common Stock who would otherwise be entitled to receive a fractional share of
GSW Common Stock will receive a cash payment.
This Joint Proxy Statement/Prospectus is being furnished to the
shareholders of Texas Gulf Coast in connection with the solicitation by the
Board of Directors of Texas Gulf Coast of proxies to be used at the Special
Meeting described herein. This Joint Proxy Statement/Prospectus and related
form of proxy were released to the shareholders of Texas Gulf Coast on February
, 1995.
The GSW Common Stock is not actively traded.
______________________________
THE SECURITIES OFFERED HEREBY INVOLVE CERTAIN RISKS.
SEE "RISK FACTORS."
_______________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
_______________________________
February , 1995
<PAGE>
AVAILABLE INFORMATION
Gulf Southwest is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith files
reports, proxy and information statements, and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy and
information statements, and other information filed by Gulf Southwest with the
Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at its New York Regional Office, 7 World Trade
Center, 13th Floor, New York, New York 10048, and at its Chicago Regional
Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material also may be obtained from the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates.
Gulf Southwest has filed with the Commission in Washington, D.C. a
Registration Statement under the Securities Act of 1933, as amended, with
respect to the securities offered hereby. This Joint Proxy Statement/Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits thereto. For further information with respect to Gulf
Southwest and the securities offered hereby, reference is made to such
Registration Statement and exhibits, a copy of which may be obtained from the
Commission.
No person has been authorized to give any information or to make any
representation not contained in this Joint Proxy Statement/Prospectus, and, if
given or made, such information or representation must not be relied upon as
having been authorized by Gulf Southwest or Texas Gulf Coast. This Joint Proxy
Statement/Prospectus does not constitute an offer to sell or a solicitation of
an offer to buy any securities other than the securities offered by this Joint
Proxy Statement/Prospectus, or an offer to sell or a solicitation of an offer to
buy such securities in any jurisdiction to any person to whom it is unlawful to
make such offer or solicitation in such jurisdiction. Neither the delivery of
this Joint Proxy Statement/Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that there has been no change in the
affairs of Gulf Southwest or Texas Gulf Coast since the date hereof or that the
information contained herein is correct as of any time subsequent to the date
hereof.
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
DEFINITIONS OF CERTAIN TERMS............................................... 1
SUMMARY.................................................................... 3
The Parties........................................................... 3
The Special Meeting................................................... 5
Vote Required......................................................... 5
The Merger............................................................ 5
Reasons for the Merger................................................ 7
Recommendation of the Board of Directors of Texas Gulf Coast.......... 7
Fairness Opinion...................................................... 7
Comparative Rights of Shareholders.................................... 8
Antitakeover Measures................................................. 8
Market Prices and Dividend History of GSW Stock....................... 8
Resales of GSW Common Stock by Shareholders of Texas Gulf Coast....... 9
Selected Financial Data............................................... 9
Pro Forma Financial Data.............................................. 14
RISK FACTORS............................................................... 16
Inability to Integrate Operations..................................... 16
Competition in the Banking Industry................................... 16
Government Fiscal and Monetary Policies............................... 16
Interest Rate Risks................................................... 17
Lack of Market for Gulf Southwest Common Stock........................ 17
Conflicts of Interest................................................. 17
INFORMATION WITH RESPECT TO THE SPECIAL MEETING............................ 18
General............................................................... 18
Quorum and Voting..................................................... 19
Recommendation of the Board of Directors.............................. 20
TEXAS GULF COAST........................................................... 21
The TGC Banks......................................................... 21
Non-Banking Activities................................................ 27
Properties............................................................ 27
Legal Proceedings of Texas Gulf Coast................................. 28
Market for TGC Common Stock and Related Shareholder Matters........... 28
Dividends and Dividend Policy......................................... 29
Principal Shareholders................................................ 29
Officers and Directors................................................ 31
Executive Compensation................................................ 32
Compensation Committee Interlocks and Insider Participation........... 32
Meetings of the Board of Directors.................................... 33
-i-
<PAGE>
Certain Relationships and Related Transactions........................ 33
Recent Developments................................................... 33
Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 33
Statistical Information............................................... 43
GULF SOUTHWEST............................................................. 53
Merger Sub............................................................ 54
Merchants Bank........................................................ 54
Non-Banking Activities................................................ 56
Properties............................................................ 56
Legal Proceedings of Gulf Southwest................................... 56
Market for GSW Common Stock and Related Shareholder Matters........... 56
Dividends and Dividend Policy......................................... 57
Principal Shareholders................................................ 58
Officers and Directors................................................ 60
Addition to the Board of Directors Following Merger................... 61
Executive Compensation................................................ 61
Compensation Committee Interlocks and Insider Participation........... 62
Meetings of the Board of Directors.................................... 62
Certain Relationships and Related Transactions........................ 62
Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 63
Statistical Information............................................... 74
SUPERVISION AND REGULATION OF BANK HOLDING COMPANIES....................... 83
The Interstate Banking Efficiency Act of 1994......................... 84
Subsidiary Banks...................................................... 85
Government Fiscal and Monetary Policies............................... 86
Effects of Interest Rates and Usury Laws.............................. 87
DESCRIPTION OF THE MERGER.................................................. 88
General............................................................... 88
Effect of the Merger.................................................. 88
Effective Time of the Merger.......................................... 88
Operations Pending Consummation of the Merger......................... 88
Required Regulatory Approvals......................................... 89
Termination of the Reorganization Agreement........................... 89
Conditions to the Merger.............................................. 90
Waiver................................................................ 90
Exchange and Surrender of Stock Certificates.......................... 90
Dividends............................................................. 91
Fairness Opinion...................................................... 91
Determination of Exchange Ratio....................................... 93
Accounting Treatment.................................................. 96
Federal Income Tax Consequences....................................... 97
-ii-
<PAGE>
Appraisal Rights of Dissenting Shareholders........................... 99
Resales of GSW Common Stock by Shareholders of Texas Gulf Coast....... 100
Material Contracts.................................................... 101
Restrictions on Transfer of TGC Common Stock Subsequent to the
Special Meeting.................................................... 101
DESCRIPTION OF TGC STOCK................................................... 101
TGC Common Stock...................................................... 102
TGC Preferred Stock................................................... 102
TGC Class A Preferred Stock........................................... 102
DESCRIPTION OF GSW STOCK................................................... 103
GSW Common Stock...................................................... 103
GSW Preferred Stock................................................... 103
COMPARATIVE RIGHTS OF SHAREHOLDERS......................................... 104
Dividend Rights....................................................... 104
Voting Rights......................................................... 104
Liquidation Rights.................................................... 104
Preemptive Rights..................................................... 104
LEGAL MATTERS.............................................................. 104
EXPERTS.................................................................... 104
STOCKHOLDER PROPOSALS...................................................... 105
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
EXHIBITS
--------
Exhibit A Agreement and Plan of Reorganization
Exhibit B Provisions of the Texas Business Corporation Act relating to
Appraisal Rights of Dissenting Shareholders
Exhibit C Fairness Opinion of Alex Sheshunoff & Co. Investment Banking
-iii-
<PAGE>
DEFINITIONS OF CERTAIN TERMS
The following terms, which are frequently used in this Joint Proxy
Statement/Prospectus, have the respective meanings indicated:
"Articles of Merger" refers to the Articles of Merger to be filed by Merger
Sub and Texas Gulf Coast with the Secretary of State of the State of Texas and
the Secretary of State of the State of Nevada.
"Bank Holding Company Act" refers to the Bank Holding Company Act of 1956,
as amended.
"Board of Governors" refers to the Board of Governors of the Federal
Reserve System.
"Closing Date" refers to the date on which the Merger is consummated.
"Code" refers to the Internal Revenue Code of 1986, as amended.
"Combined Company" refers to Merger Sub following the merger of Texas Gulf
Coast with and into Merger Sub.
"Commissioner" refers to the Commissioner of Internal Revenue.
"Effective Time" refers to the time the Articles of Merger have been filed
with the Secretary of State of the State of Texas and the Secretary of State of
the State of Nevada.
"Exchange Act" refers to the Securities Exchange Act of 1934, as amended.
"FDIC" refers to the Federal Deposit Insurance Corporation.
"First Bank Mainland" refers to First Bank Mainland, 920 First Street, La
Marque, Texas, a banking corporation chartered under the Texas Banking Code and
a wholly-owned subsidiary of Texas Gulf Coast.
"First Bank Pearland" refers to First Bank Pearland, 3102 E. Broadway,
Pearland, Texas, a banking corporation chartered under the Texas Banking Code,
of which Texas Gulf Coast owns 99.5% of the issued and outstanding capital
stock.
"GSW Common Stock" refers to the common stock, $1.00 par value per share,
of Gulf Southwest.
"GSW Preferred Stock" refers to the preferred stock, $20.00 par value per
share, of Gulf Southwest.
<PAGE>
"GSW Stock" refers to the GSW Common Stock and GSW Preferred Stock.
"GSWDP" refers to G.S.W. Data Processing, Inc., a wholly-owned subsidiary
of Merger Sub which performs data processing functions for banks.
"Gulf Southwest" refers to Gulf Southwest Bancorp, Inc., a Texas
corporation.
"Joint Proxy Statement/Prospectus" refers to this Joint Proxy
Statement/Prospectus which has been prepared for use in connection with the
Merger.
"Merchants Bank" refers to Merchants Bank, 999 North Shepherd, Houston,
Texas, a banking corporation chartered under the Texas Banking Code and a
wholly-owned subsidiary of Gulf Southwest.
"Merger" refers to the merger of Texas Gulf Coast into Merger Sub pursuant
to the terms and conditions of the Merger/Reorganization Agreements.
"Merger Agreement" refers to the Agreement and Plan of Merger (attached to
the Reorganization Agreement as Exhibit A) pursuant to which Texas Gulf Coast
will be merged into Merger Sub.
"Merger Proposal" refers to the proposal to approve the
Merger/Reorganization Agreements and the transactions contemplated thereby to be
voted upon at the Special Meeting.
"Merger/Reorganization Agreements" refers to the Merger Agreement and
Reorganization Agreement.
"Merger Sub" refers to Gulf Southwest Nevada Bancorp, Inc., a Nevada
corporation and a wholly-owned subsidiary of Gulf Southwest.
"Record Date" refers to February 8, 1995, which is the record date for
determining shareholders of record of Texas Gulf Coast who are entitled to
notice of and to vote at the Special Meeting.
"Reorganization Agreement" refers to that certain Agreement and Plan of
Reorganization (attached hereto as Exhibit A), dated as of November 9, 1994, by
---------
and among Texas Gulf Coast, Gulf Southwest and Merger Sub.
"SEC" refers to the Securities and Exchange Commission.
"Securities Act" refers to the Securities Act of 1933, as amended.
"Special Meeting" refers to the special meeting of shareholders of Texas
Gulf Coast to be held at Texas City Bank, 701 Sixth Street North, Texas City,
Texas 77592, at 10:00 a.m.,
-2-
<PAGE>
local time, on Wednesday, March 22, 1995, for the purpose of considering and
voting on the Merger Proposal.
"Subsidiary Banks" refers to Merchants Bank and the TGC Banks.
"TBCA" refers to the Texas Business Corporation Act.
"Texas Banking Code" refers to the Texas Banking Code of 1943, as amended.
"Texas City Bank" refers to Texas City Bank, 701 Sixth Street N., Texas
City, Texas, a banking corporation chartered under the Texas Banking Code, of
which Texas Gulf Coast owns 97.1% of the issued and outstanding capital stock.
"Texas Commissioner" refers to the Texas Banking Commissioner.
"Texas Gulf Coast" refers to Texas Gulf Coast Bancorp, Inc., a Texas
corporation.
"TGC Class A Preferred Stock" refers to the Class A preferred stock, $10.00
par value per share, of Texas Gulf Coast.
"TGC Common Stock" refers to the common stock, $1.00 par value per share,
of Texas Gulf Coast.
"TGC Preferred Stock" refers to the preferred stock, $16.00 par value per
share, of Texas Gulf Coast.
"TGC Banks" refers to Texas City Bank, First Bank Mainland and First Bank
Pearland.
"TGC Stock" refers to the TGC Common Stock, the TGC Preferred Stock and the
TGC Class A Preferred Stock, collectively.
SUMMARY
The following is a brief summary of certain information contained in this
Joint Proxy Statement/Prospectus. Reference is made to, and this summary is
qualified in its entirety by, the more detailed information contained elsewhere
herein and the exhibits hereto.
The Parties
Gulf Southwest. Gulf Southwest was incorporated under the laws of Texas in
--------------
1982 and is registered under the Bank Holding Company Act. Gulf Southwest is
based in Houston, Texas and owns 100% of the issued and outstanding capital
stock of Merger Sub. Merger Sub owns 100% of the issued and outstanding capital
stock of Merchants Bank, its primary operating subsidiary. As of December 31,
1994, Merchants Bank had total assets of approximately
-3-
<PAGE>
$251,306,000 and total deposits of approximately $226,450,000. Merchants Bank
operates four banking offices in Harris County, Texas and one banking office in
Galveston County, Texas. Merchants Bank offers a variety of commercial and
consumer banking services similar to those offered by commercial banks of
comparable size in its market area. For additional information regarding the
business of Gulf Southwest and Merchants Bank, see "Gulf Southwest." GSWDP, a
non-banking subsidiary of Merger Sub, conducts various aspects of Gulf
Southwest's non-banking operations. For additional information regarding the
business of GSWDP, see "Gulf Southwest."
The principal executive offices of Gulf Southwest are located at 4200
Westheimer, Suite 210, Houston, Texas 77027, and its telephone number at such
address is (713) 622-0042.
Texas Gulf Coast. Texas Gulf Coast was incorporated under the laws of
----------------
Texas in 1984 and is registered under the Bank Holding Company Act. Texas Gulf
Coast is based in Houston, Texas and owns 97.1% of the issued and outstanding
capital stock of Texas City Bank, 100% of the issued and outstanding capital
stock of First Bank Mainland and 99.5% of the issued and outstanding capital
stock of First Bank Pearland. The principal operating subsidiaries of Texas
Gulf Coast are the TGC Banks. As of December 31, 1994, Texas City Bank had
three banking offices in Galveston County, Texas and had total assets of
approximately $81,101,000 and total deposits of approximately $72,487,000, First
Bank Mainland had two banking offices in Galveston County, Texas and had total
assets of approximately $77,752,000 and total deposits of approximately
$70,139,000 and First Bank Pearland had two banking offices in Brazoria County,
Texas and had total assets of approximately $47,784,000 and total deposits of
approximately $43,528,000. The TGC Banks each offer a variety of commercial and
consumer banking services similar to those offered by commercial banks of
comparable size in their respective market areas. For additional information
regarding the business of Texas Gulf Coast and the TGC Banks, see "Texas Gulf
Coast." Texas Gulf Coast also has formed Central Data Processing, Inc., a non-
banking subsidiary, to conduct various aspects of its non-banking operations.
For information regarding the business of Central Data Processing, Inc., see
"Texas Gulf Coast."
The principal executive offices of Texas Gulf Coast are located at 4200
Westheimer, Suite 210, Houston, Texas 77027, and its telephone number at such
address is (713) 622-0042.
Merger Sub. Merger Sub is a wholly-owned subsidiary of Gulf Southwest and
----------
is based in Reno, Nevada. As of the date hereof, Merger Sub has not conducted
any significant business activities. Effective as of the close of business on
November 30, 1994, Gulf Southwest transferred ownership of the capital stock of
Merchants Bank and GSWDP to Merger Sub. Gulf Southwest has applied to the Board
of Governors for permission to merge Texas Gulf Coast into Merger Sub.
The principal executive offices of Merger Sub are located at One East First
Street, Reno, Nevada 89501.
-4-
<PAGE>
The Special Meeting
The Special Meeting will be held on Wednesday, March 22, 1995, at 10:00
a.m., local time, at Texas City Bank, 701 Sixth Street North, Texas City, Texas
77592. Only holders of record of TGC Common Stock at the close of business on
the Record Date are entitled to notice of and to vote at the Special Meeting.
The purpose of the Special Meeting is to consider and vote upon approval of the
Merger Proposal. For additional information regarding the Special Meeting, see
"Information With Respect to the Special Meeting."
Vote Required
The affirmative vote of the holders of at least two-thirds of the issued
and outstanding shares of TGC Common Stock is necessary to approve the Merger
Proposal.
As of the Record Date, the officers and directors of Texas Gulf Coast
collectively owned of record 18.8% of the TGC Common Stock.
As of the date hereof, 177,236 shares of TGC Common Stock (53.8% of the
issued and outstanding shares of TGC Common Stock) are committed to voting in
favor of the approval of the Merger Proposal. These shares are subject to a
voting trust, of which Mr. J.W. Lander, Jr., a member of the Board of Directors
of Texas Gulf Coast, is the sole voting trustee. See "Information With Respect
to the Special Meeting" and "Texas Gulf Coast - Principal Shareholders." Mr.
Lander, Jr. also is Chairman of the Board of Directors of Gulf Southwest and is
the sole voting trustee of a voting trust to which 55.2% of the issued and
outstanding GSW Common Stock is subject. Subsequent to the Merger, Mr. Lander
will have the power to vote 47.3% of the GSW Common Stock pursuant to the terms
of such trust.
The Merger
General. Pursuant to the Merger/Reorganization Agreements, Texas Gulf
-------
Coast will merge into Merger Sub, which will be the surviving corporation. Upon
consummation of the Merger, each share of TGC Common Stock will be converted
into 2.1176 shares of GSW Common Stock. No fractional shares of GSW Common
Stock will be issued. In lieu of fractional shares, each holder of TGC Common
Stock who would otherwise be entitled to receive a fractional share of GSW
Common Stock will, in lieu thereof, receive cash based upon each share of GSW
Common Stock having a value of $25.50.
Board Approval. The Boards of Directors of Texas Gulf Coast and Gulf
--------------
Southwest have approved the Merger/Reorganization Agreements and the
transactions contemplated thereby. The Board of Directors of Texas Gulf Coast
has recommended adoption and approval of the Merger Proposal to the shareholders
of Texas Gulf Coast. The Board of Directors of Gulf Southwest has authorized
Gulf Southwest, as the sole shareholder of Merger Sub, to approve the Merger.
-5-
<PAGE>
Effect of the Merger. If the Merger is effected, Merger Sub will succeed
--------------------
to all the rights, franchises, interests, properties and liabilities of Texas
Gulf Coast and the separate existence of Texas Gulf Coast will cease. See
"Description of the Merger." Upon consummation of the Merger, Gulf Southwest
will own, either directly or indirectly, 100% of the issued and outstanding
capital stock of Merchants Bank, First Bank Mainland, GSWDP and Central Data
Processing, Inc., 97.1% of the issued and outstanding capital stock of Texas
City Bank and 99.5% of the issued and outstanding capital stock of First Bank
Pearland.
Effective Time of the Merger. The Merger will become effective at the time
----------------------------
when all necessary orders, consents and approvals have been entered or granted
by the requisite regulatory authorities, all applicable statutory waiting
periods have expired and Articles of Merger have been filed with the Secretary
of State of the State of Texas and the Secretary of State of the State of
Nevada. For additional information regarding the Effective Time, see
"Description of the Merger - Effective Time of the Merger." If the Merger is
not effected by June 30, 1995, Gulf Southwest, Merger Sub or Texas Gulf Coast
may, under certain circumstances, terminate the Reorganization Agreement and
thus cause the Merger to be abandoned. For additional information regarding
termination of the Merger/Reorganization Agreements, see "Description of the
Merger -Termination of the Reorganization Agreement."
Appraisal Rights. Shareholders of Texas Gulf Coast may dissent from the
----------------
Merger and exercise appraisal rights with respect to their shares of TGC Common
Stock pursuant to the procedures summarized under "Description of the Merger -
Appraisal Rights of Dissenting Shareholders." Gulf Southwest and Merger Sub
will not be obligated to consummate the Merger if holders of more than 10% of
the TGC Common Stock exercise their rights of dissent and appraisal. See
"Description of the Merger - Conditions to the Merger."
Federal Income Tax Consequences. The Merger is intended to qualify as a
-------------------------------
tax-free "reorganization" within the meaning of Sections 354 and 368(a)(2)(D) of
the Code. Accordingly, no gain or loss should be recognized by shareholders of
Texas Gulf Coast upon the receipt of GSW Common Stock pursuant to the Merger.
Gain or loss should be recognized to the extent the cash received in lieu of
fractional shares of GSW Common Stock exceeds or is less than, respectively, the
adjusted basis of the fractional shares to which the shareholders of Texas Gulf
Coast would have otherwise been entitled. Shareholders of Texas Gulf Coast who
exercise their right of dissent and appraisal should recognize gain or loss to
the extent they receive cash for their shares of TGC Common Stock in an amount
other than the adjusted basis of such shares. The tax basis of any shares of
GSW Common Stock received should be the same as that of the TGC Common Stock
exchanged therefor, decreased by the amount of money received and increased by
the amount of gain recognized. The holding period for federal income tax
purposes of shares of GSW Common Stock received pursuant to the Merger should
include the holding period of the shares of TGC Common Stock exchanged therefor,
if such shares are held as capital assets at the Effective Time. Gulf Southwest
has received an opinion from its counsel, Winstead Sechrest & Minick P.C., as to
the federal income tax consequences of the Merger. See "Description of the
Merger - Federal Income Tax Consequences."
-6-
<PAGE>
Delivery of Stock Certificates. Promptly after the Effective Time, a
------------------------------
Letter of Transmittal will be forwarded to the former shareholders of Texas Gulf
Coast containing detailed instructions for the surrender of certificates
representing TGC Common Stock. Do not send certificates representing TGC Common
Stock to Texas Gulf Coast, Gulf Southwest or Merger Sub prior to receipt of the
Letter of Transmittal. See "Description of the Merger - Effective Time of the
Merger" and "Description of the Merger - Exchange and Surrender of Stock
Certificates."
Restrictions on Transfer of TGC Common Stock. Assuming the Merger Proposal
--------------------------------------------
is approved at the Special Meeting, neither the Merger/Reorganization Agreements
nor the TBCA impose any restrictions on the transferability of shares of TGC
Common Stock pending consummation of the Merger. See "Description of the Merger
- - Restrictions on Transfer of TGC Common Stock Subsequent to the Special
Meeting." Subsequent to the Merger, any person who was an affiliate of Texas
Gulf Coast on the date of the Special Meeting must comply with certain
restrictions on the manner in which he or she may resell his or her shares of
GSW Stock obtained in connection with the Merger. See "Description of the
Merger - Resales of GSW Common Stock by Shareholders of Texas Gulf Coast."
Reasons for the Merger
The Board of Directors of each of Texas Gulf Coast and Gulf Southwest
believes that (i) the Merger represents an alliance that will enhance the
potential for the growth and future success of Gulf Southwest, (ii) recent and
anticipated regulatory and business developments may tend to favor larger
institutions over independent banks, (iii) the Merger will create a larger pool
of management experience and expertise for Gulf Southwest to draw on and should
enable Gulf Southwest to more easily attract and retain qualified personnel,
(iv) the Merger will allow for the elimination of certain duplicative staff and
services, thereby increasing the profitability of Gulf Southwest, (v) the
increased number of shareholders of GSW Common Stock should increase the
likelihood of a public market developing for shares of GSW Common Stock and (vi)
the Merger will permit greater diversification in the business opportunities
available to the Subsidiary Banks. For additional information regarding the
reasons for the Merger, see "Information With Respect to the Special Meeting -
Recommendation of the Board of Directors."
Recommendation of the Board of Directors of Texas Gulf Coast
The Board of Directors of Texas Gulf Coast believes that the Merger is in
the best interests of Texas Gulf Coast and its shareholders, has approved the
Merger/Reorganization Agreements and the transactions contemplated thereby and
unanimously recommends that the shareholders of Texas Gulf Coast vote FOR
---
approval of the Merger Proposal. See "Information With Respect to the Special
Meeting - Recommendation of the Board of Directors."
Fairness Opinion
Alex Sheshunoff & Co. Investment Banking ("Sheshunoff") has delivered to
the Board of Directors of Gulf Southwest and the Board of Directors of Texas
Gulf Coast its written opinion, dated November 7, 1994, to the effect that, as
of September 30, 1994 and based upon
-7-
<PAGE>
the matters described therein, the terms of the Merger as provided in the
Agreement and Plan of Merger are fair, from a financial perspective, to the
shareholders of Gulf Southwest and Texas Gulf Coast. Because Sheshunoff also
was retained to assist in determining the exchange ratio at which shares of TGC
Common Stock will be converted into shares of GSW Common Stock, Sheshunoff may
be deemed to have a vested interest in opining as to the fairness of the
transaction. See "Description of the Merger - Fairness Opinion."
Comparative Rights of Shareholders
There are no material differences between the rights of holders of GSW
Common Stock and TGC Common Stock. See "Comparative Rights of Shareholders."
Antitakeover Measures
Neither Gulf Southwest nor Texas Gulf Coast has any antitakeover measures
in place.
Market Prices and Dividend History of GSW Stock
Neither the TGC Common Stock nor the GSW Common Stock is actively traded.
There can be no assurance that a market for GSW Common Stock will develop
following the Merger.
The following table sets forth the number of shares of GSW Common Stock
presented for transfer on the books of Gulf Southwest for each quarterly period
within the last three calendar years.
<TABLE>
<CAPTION>
1992 1993 1994
------ ------ ------
<S> <C> <C> <C>
First Quarter 496 1,438 10,338
Second Quarter 460 143 3,021
Third Quarter 16,690 714 5,581
Fourth Quarter 190 4,179 2,652
</TABLE>
Because there is no public market for the GSW Common Stock, the trading
price for GSW Common Stock is determined by private negotiations between the
buyer and the seller. Gulf Southwest has pricing information with respect to
only four transactions during the periods presented above. In July 1992, two
transfers of 5,428 shares took place, each at a price of $3.50 per share. In
October 1992, a transfer of 3,300 shares took place at a price of $2.56 per
share, and a transfer of 167 shares took place at a price of $6.00 per share.
These prices may or may not reflect the fair market value of the shares at the
time of the transfers and should not be viewed as indicative of the current or
future value of the GSW Common Stock. The remaining transfers during the
periods presented above may or may not have been at prices similar to those
stated.
-8-
<PAGE>
Gulf Southwest has paid a quarterly dividend of $0.05 per share of GSW
Common Stock since December 27, 1993. However, there can be no assurance that
any dividends will be paid in the future. Currently, no shares of GSW Preferred
Stock are issued and outstanding. Accordingly, no dividends have been paid with
respect to the GSW Preferred Stock. For additional information regarding the GSW
Common Stock, GSW Preferred Stock and dividend history of Gulf Southwest, see
"Gulf Southwest - Market for GSW Common Stock and Related Shareholder Matters."
Resales of GSW Common Stock by Shareholders of Texas Gulf Coast
Although the shares of GSW Common Stock to be issued pursuant to the Merger
have been registered under the Securities Act, any public reoffering or sale of
such shares by any person who is an "affiliate" of Texas Gulf Coast or Gulf
Southwest at the time the Merger is submitted to a vote will, under current law,
require either (i) further registration under the Securities Act of the shares
of GSW Common Stock to be sold, (ii) compliance with Rule 145 promulgated under
the Securities Act, which permits sales under certain circumstances, or (iii)
the availability of an exemption from such further registration. See
"Description of the Merger -Resales of GSW Common Stock by Shareholders of Texas
Gulf Coast."
Selected Financial Data
The following selected financial data of Gulf Southwest for the fiscal
years ended December 31, 1993, 1992, 1991, 1990 and 1989 and of Texas Gulf Coast
for the fiscal year ended December 31, 1993 is derived from the consolidated
financial statements of Gulf Southwest and Texas Gulf Coast which were audited
by Hidalgo, Banfill, Zlotnik & Kermali, P.C. The following selected financial
data of Texas Gulf Coast for the fiscal years ended December 31, 1992, 1991,
1990 and 1989 is derived from the consolidated financial statements of Texas
Gulf Coast which were audited by Griffin, Iles, Masel & Duvall, P.C., Certified
Public Accountants. The information presented for the nine-month periods ended
September 30, 1994 and 1993 for Gulf Southwest and Texas Gulf Coast is unaudited
but, in the opinion of their respective management, such information reflects
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of their respective financial data for such interim periods.
The results of operations for the nine-month period ended September 30, 1994,
are not necessarily indicative of the results for the full year.
The following financial data should be read in conjunction with "Gulf
Southwest - Managements' Discussion and Analysis of Financial Condition and
Results of Operations" and "Texas Gulf Coast - Management's Discussion and
Analysis of Financial Condition and Results of Operations" presented elsewhere
herein and in conjunction with the consolidated financial statements (and
related notes) of Gulf Southwest and Texas Gulf Coast presented elsewhere
herein.
-9-
<PAGE>
<TABLE>
<CAPTION>
GULF SOUTHWEST BANCORP, INC.
SELECTED FINANCIAL DATA
(In thousands, except per share data)
Nine-Month Period
Ended September 30, Year Ended December 31,
------------------------ ----------------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
----------- ----------- ----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance sheet information
- -------------------------
Loans $ 139,914 $ 127,500 $ 127,452 $ 123,456 $ 122,842 $ 118,061 $115,568
Allowance for loan losses 1,886 2,027 1,986 1,725 2,079 2,213 2,358
Investment securities 61,507 50,524 52,329 47,672 40,313 46,603 33,163
Total assets 240,816 241,111 242,005 228,920 215,299 220,298 215,039
Deposits 215,347 218,541 218,942 207,968 198,662 205,038 201,315
Long-term debt 0 350 0 350 350 350 1,243
Shareholders' equity 24,270 21,146 21,932 19,637 15,264 13,532 10,878
Income information
- ------------------
Interest income $ 12,318 $ 11,783 $ 15,801 $ 16,317 $ 18,449 $ 19,403 $ 19,693
Interest expense 3,564 3,719 4,943 5,898 9,048 10,229 10,563
Net interest income 8,754 8,064 10,858 10,419 9,401 9,174 9,130
Provision for loan losses 50 410 410 1,165 825 519 3,053
Noninterest income 2,393 2,224 2,979 2,811 3,113 2,780 2,750
Noninterest expense 7,639 7,788 10,494 9,919 9,921 9,840 10,786
Income before income taxes 3,458 2,090 2,933 2,146 1,768 1,595 (1,959)
Income tax expense (benefit) 850 581 512 242 36 0 176
Cumulative effect of an accounting
change 0 0 0 2,470 0 0 0
---------- ---------- ---------- ---------- ---------- ---------- --------
Net income (loss) $ 2,608 $ 1,509 $ 2,421 $ 4,374 $ 1,752 $ 1,595 $ (2,135)
Per share data
- --------------
Weighted average number of
shares of GSW Common
Stock outstanding 1,258,636 1,261,775 1,261,731 1,261,775 1,261,775 1,001,259 977,638
Net income (loss)
per share of GSW Common Stock $ 2.07 $ 1.20 $ 1.92 $ 3.47 $ 1.37 $ 1.47 $ (2.44)
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
GULF SOUTHWEST BANCORP, INC.
SELECTED FINANCIAL DATA
(In thousands, except per share data)
Nine-Month Period
Ended September 30, Year Ended December 31,
------------------------ -----------------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
----------- ----------- ----------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Dividends per share of
GSW Common Stock $ 0.15 $ 0.00 $ 0.10 $ 0.00 $ 0.00 $ 0.00 0.00
Book value per share of
GSW Common Stock $ 19.28 $ 16.76 $ 17.39 $ 15.56 $ 12.10 $ 10.72 $ 8.62
Ratios
- ------
Return on average assets 1.43% .86% 1.03% 1.99% 0.79% 0.73% N/A
Return on average stockholders equity 15.17% 9.92% 11.56% 25.38% 12.03% 13.07% N/A
Dividend payout ratio 7.25% N/A 5.21% N/A N/A N/A N/A
Average equity to average assets 9.45% 8.71% 8.89% 7.85% 6.54% 5.59% 5.67%
Allowance for loan losses as a percentage of
nonperforming loans 73.8% 123.3% 122.4% 78.7% 51.8% 52.3% 48.7%
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
TEXAS GULF COAST BANCORP, INC.
SELECTED FINANCIAL DATA
(In thousands, except per share data)
Nine-Month Period
Ended September 30, Year Ended December 31,
--------------------- -----------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
---------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance sheet information
- -------------------------
Loans $ 79,145 $ 78,332 $ 78,137 $ 84,367 $ 83,276 $ 80,414 $ 82,810
Allowance for loan losses 792 992 1,022 1,060 1,152 1,297 1,142
Investment securities 87,714 86,124 80,156 76,664 88,212 75,222 54,191
Total assets 205,426 215,052 218,444 217,740 208,849 200,960 187,142
Deposits 183,438 189,816 195,492 193,912 186,025 178,600 165,484
Borrowings 978 1,185 1,105 1,350 1,600 1,700 1,801
Shareholders' equity 19,689 22,675 19,232 21,390 19,865 18,937 18,215
Income information
- ------------------
Interest income $ 9,468 $ 10,197 $ 13,326 $ 14,908 $ 16,804 $ 17,133 $ 16,842
Interest expense 3,101 3,350 4,389 5,927 8,959 9,596 9,334
-------- -------- -------- -------- -------- -------- --------
Net interest income 6,367 6,847 8,936 8,981 7,845 7,536 7,508
Provision for loan losses 129 193 475 263 235 592 544
Noninterest income 2,262 2,347 3,309 2,942 2,567 2,060 1,841
Noninterest expense 7,379 7,317 10,435 9,099 8,523 7,611 7,210
-------- -------- -------- -------- -------- -------- --------
Income before income taxes 1,121 1,684 1,336 2,561 1,654 1,394 1,596
Income tax expense (benefit) 184 376 211 475 296 228 159
Cumulative effect of an accounting change 0 158 158 0 0 0 0
-------- -------- -------- -------- -------- -------- --------
Net income $ 937 $ 1,466 $ 1,283 $ 2,087 $ 1,358 $ 1,166 $ 1,436
Per share data
- --------------
Weighted average number of
shares of TGC Common
Stock outstanding 329,738 373,166 372,759 379,156 379,554 379,594 379,825
Net income
per share of TGC Common Stock $ 2.39 $ 3.53 $ 2.91 $ 4.98 $ 3.05 $ 2.55 $ 3.26
Dividends per share of TGC
Common Stock $ .45 $ .45 $ 0.60 $ 0.60 $ 0.60 $ 0.60 $ 0.60
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
TEXAS GULF COAST BANCORP, INC.
SELECTED FINANCIAL DATA
(In thousands, except per share data)
Nine-Month Period
Ended September 30, Year Ended December 31,
--------------------- -----------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
---------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Dividends per share of
TGC Preferred Stock $ 0.96 $ 0.96 $ 1.28 $ 1.28 $ 1.28 $ 1.28 $ 1.28
Book value per share of
TGC Common Stock $ 52.19 $ 53.16 $ 50.80 $ 50.75 $ 45.82 $ 43.35 $ 41.40
Ratios
- ------
Return on average assets .50% .82% .60% .97% .64% .59% .77%
Return on average stockholders equity 5.39% 8.10% 6.01% 10.17% 7.04% 6.32% 8.13%
Dividend payout ratio 15.79% 12.75% 20.62% 12.05% 19.67% 23.53% 18.40%
Average equity to average assets 9.30% 10.08% 9.89% 9.51% 9.11% 9.38% 9.48%
Allowance for loan losses as a percentage of
non-performing loans 95.5% 72.5% 87.3% 68.7% 77.5% 80.3% 61.3%
</TABLE>
-13-
<PAGE>
Pro Forma Financial Data
The following summary pro forma consolidated balance sheet and statement of
income reflect the financial position and results of operations of Gulf
Southwest as if the Merger had occurred at the beginning of the periods
presented. See the Pro Forma Consolidating Financial Statements included
elsewhere in this Joint Proxy Statement/Prospectus for detailed information
regarding the calculation of the pro forma financial statements.
GULF SOUTHWEST BANCORP, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
September 30,
-------------
1994
----
Assets
------
<S> <C>
Cash and due from banks $ 27,722,000
Time deposits in financial institutions 2,144,000
Federal fund sold and deposits with Federal Home Loan 33,185,000
Bank
Investment securities:
U.S. Treasury and other U.S. Government agencies 124,780,000
State, County and Municipal obligations 22,565,000
Other 433,000
------------
147,778,000
Net loans 216,438,000
Bank premise and equipment 8,394,000
Accrued interest receivable 3,513,000
Excess of cost of subsidiaries over equity in net assets
acquired, net of accumulated amortization 3,269,000
Other assets 4,508,000
------------
Total Assets $446,951,000
============
Liabilities and Stockholders' Equity
------------------------------------
Deposits:
Non interest bearing $104,377,000
Interest bearing 294,669,000
------------
Total Deposits 399,046,000
Accrued interest, taxes and other liabilities 2,266,000
Borrowings 3,459,000
Minority interest 254,000
------------
Total Liabilities 405,025,000
------------
Stockholders Equity:
Common stock, $1 par value 1,980,000
Paid in capital 25,588,000
Retained earnings 14,665,000
------------
42,233,000
Less cost of stock held in treasury: Common stock, $1
par value (307,000)
------------
Total Stockholders' Equity 41,926,000
------------
Total Liabilities and Stockholders' Equity $446,951,000
============
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
GULF SOUTHWEST BANCORP, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
September 30, 1994 December 31, 1993
------------------ -----------------
<S> <C> <C>
Interest income $21,786,000 $29,128,000
Interest expense 6,814,000 9,530,000
----------- -----------
Net interest income 14,972,000 19,958,000
Provision for loan losses 179,000 885,000
----------- -----------
Net interest income after 14,793,000 18,713,000
provision for loan losses ----------- -----------
Non interest income:
Service charges and fees 3,462,000 4,756,000
Other operating income 1,193,000 1,492,000
Securities transactions -- 40,000
----------- -----------
Total non interest income 4,655,000 6,288,000
----------- -----------
Non interest expense:
Salaries and employee benefits 6,959,000 9,472,000
Furniture, fixtures and occupancy 1,967,000 2,520,000
expense
Other operating expense 6,447,000 9,411,000
----------- -----------
Total non interest expense 15,373,000 21,403,000
----------- -----------
Income before income taxes 4,075,000 3,598,000
Provision for income taxes 862,000 495,000
----------- -----------
Net Income $ 3,213,000 $ 3,103,000
=========== ===========
</TABLE>
COMPARATIVE PER SHARE DATA
<TABLE>
<CAPTION>
September 30, 1994 December 31, 1993
------------------ -----------------
Gulf Texas Gulf Texas
Southwest Gulf Coast Southwest Gulf Coast
------------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Historical Per Share Data:
Weighted average number of
shares of common stock
outstanding 1,258,636 329,738 1,261,731 372,759
Net income per share $2.07 $2.39 $1.92 $2.91
Dividends per share of common
stock $.15 $.45 $.10 $.60
Dividends per share of preferred
stock N/A $.96 N/A $1.28
Book value per common share $19.28 $52.19 $17.39 $50.80
Pro Forma Consolidated/Equivalent
Per Share Data:
Weighted average number of
shares of common stock
outstanding 1,956,889 924,107 1,959,984 N/A
Net Income per share $1.64 $3.47 $1.59 $3.37
Dividends per share $.17 $.36 $.17 $.36
Book value per share $21.43 $45.38 $19.97 $42.29
</TABLE>
-15-
<PAGE>
RISK FACTORS
Prior to deciding whether or not to approve the Merger Proposal, each holder
of TGC Common Stock should consider carefully all of the information contained
in this Joint Proxy Statement/Prospectus, especially the factors described or
cross-referenced in the following paragraphs.
Inability to Integrate Operations
While both Gulf Southwest and Texas Gulf Coast believe that the Merger offers
significant opportunity to benefit from (i) economies resulting from elimination
of certain duplicative staff and services, (ii) a larger pool of management
experience and expertise and (iii) greater diversification in the business
opportunities available to the Subsidiary Banks, none of such benefits are
expected to have an immediate impact and all will require significant effort by
the management and employees of the Combined Company and the Subsidiary Banks.
In addition, there can be no assurance that such integration will occur and, if
so, that any or all of such benefits will be realized.
Competition in the Banking Industry
The activities in which the Subsidiary Banks engage are highly competitive.
Each activity engaged in and geographic market served involves competition with
other banks, as well as with non-banking financial institutions and non-
financial enterprises. The Subsidiary Banks actively compete with other banks
in their efforts to obtain deposits and make loans, in the scope of types of
services offered, in interest rates paid on time deposits and charged on loans
and in other aspects of banking.
In addition to competing with other commercial banks within and outside their
primary service area, the Subsidiary Banks compete with other financial
institutions engaged in the business of making loans or accepting deposits, such
as savings and loan associations, credit unions, industrial loan associations,
insurance companies, small loan companies, finance companies, mortgage
companies, real estate investment trusts, certain governmental agencies, credit
card organizations and other enterprises. In recent years, competition for
funds from securities brokers for money market accounts has intensified.
Additional competition for deposits comes from governmental and private issuers
of debt obligations and other investment alternatives for depositors such as
money market funds.
There can be no assurance that the Subsidiary Banks will be able to
successfully compete with other banks, non-banking financial institutions and
non-financial enterprises.
Government Fiscal and Monetary Policies
The commercial banking business is affected not only by general economic
conditions but also by the fiscal and monetary policies of the Board of
Governors. Changes in the discount rate on Federal Reserve borrowings,
availability of borrowings at the Federal Reserve "discount window", open market
operations, the imposition of any changes in reserve requirements against
-16-
<PAGE>
member banks' deposits and assets of foreign branches, the imposition of any
changes in reserve requirements against certain borrowings by member banks and
their affiliates, and the placing of limits on interest rates which member banks
may pay on time and savings deposits are some of the instruments of fiscal and
monetary policy available to the Board of Governors. Fiscal and monetary
policies influence to a significant extent the overall growth of bank loans,
investments and deposits and the interest rates charged on loans or paid on time
and savings deposits. The nature of future monetary policies and the effect of
such policies on the future business and earnings of Gulf Southwest, Texas Gulf
Coast and the Subsidiary Banks cannot be predicted. See "Supervision and
Regulation of Bank Holding Companies - Government Fiscal and Monetary Policies."
Interest Rate Risks
As a bank holding company, Gulf Southwest experiences fluctuations in its
operating results as a result of fluctuations in interest rates.
Lack of Market for Gulf Southwest Common Stock
As of December 31, 1994, there were 1,258,636 shares of GSW Common Stock
issued and outstanding. Pursuant to the Merger, Gulf Southwest will issue up to
698,253 additional shares of GSW Common Stock.
There is no established trading market for shares of GSW Stock. However, a
limited market for shares of GSW Common Stock exists, primarily among the
existing shareholders of Gulf Southwest, and such securities are traded on a
sporadic basis. While the Board of Directors of Texas Gulf Coast believes that
the increased number of shareholders of GSW Common Stock should increase the
likelihood of a public market developing for such shares, there can be no
assurance that such a market will develop, that the GSW Common Stock will be
able to be resold at a favorable price or that shares of GSW Common Stock may be
sold at the value placed on such shares by the terms of the Merger. The Board
of Directors of Gulf Southwest has no present intention to arrange for the
listing of the GSW Common Stock on any stock exchange after the Merger.
Conflicts of Interest
J. W. Lander, Jr. is Chairman of the Board of Directors of Gulf Southwest and
a member of the Board of Directors of Texas Gulf Coast. In addition, he is the
voting trustee under voting trust agreements with certain shareholders of Gulf
Southwest and certain shareholders of Texas Gulf Coast, pursuant to which he has
voting power with respect to over 50% of the shares of each corporation.
However, Mr. Lander may not, without the consent of the holders of at least two-
thirds of the TGC Common Stock subject to the respective voting trust agreement,
vote the shares in favor of the Merger. Such consent has been received. See
"Texas Gulf Coast -Principal Shareholders."
J. W. Lander, III is a member of the Board of Directors and an executive
officer of both Gulf Southwest and Texas Gulf Coast and is a shareholder of both
corporations. The shares of
-17-
<PAGE>
GSW Common Stock held by J. W. Lander, III are subject to the voting trust
described previously.
As a result of such positions, J. W. Lander, Jr. and J. W. Lander, III may be
influenced in their votes as directors of Texas Gulf Coast to recommend the
Merger to the holders of TGC Common Stock, and may have interests which conflict
with the interests of other holders of TGC Common Stock in voting on the Merger
Proposal.
J. W. Lander, Jr. and J. W. Lander, III have abstained from voting upon
resolutions adopted by the Boards of Directors of Texas Gulf Coast and Gulf
Southwest which relate to the Merger.
Immediately following the Merger, A. Harrel Blackshear, who is presently a
member of the Board of Directors of Texas Gulf Coast, will be appointed to the
Board of Directors of Gulf Southwest.
J. W. Lander, Jr., J. W. Lander, III, Vanco Trusts and certain other
shareholders own capital stock in both Gulf Southwest and Texas Gulf Coast. For
information regarding this common ownership, see "Texas Gulf Coast - Principal
Shareholders" and "Gulf Southwest -Principal Shareholders." After the Merger,
Mr. Lander, Jr. will own 390,784 shares, or 20.0%, of the GSW Common Stock, and
will under certain circumstances control the voting of an additional 533,338
shares, or 27.3%, of the GSW Common Stock pursuant to the terms of the voting
trust. Mr. Lander, Jr.'s control of 47.3% of the GSW Common Stock will not be
sufficient by itself to definitively determine the future election of directors.
INFORMATION WITH RESPECT TO THE
SPECIAL MEETING
General
The accompanying proxy is solicited by the board of directors of Texas Gulf
Coast for use in connection with the Special Meeting to be held at Texas City
Bank, 701 Sixth Street North, Texas City, Texas 77592, on Wednesday, March 22,
1995, at 10:00 a.m., local time, and at any adjournment. The Special Meeting
has been called for the purpose of considering and voting upon the Merger
Proposal. Upon approval of the Merger Proposal and receipt of all required
regulatory approvals and the expiration of all statutory waiting periods, Texas
Gulf Coast will merge into Merger Sub pursuant to the Merger/Reorganization
Agreements. See "Description of the Merger."
The Reorganization Agreement provides that Texas Gulf Coast, Merger Sub and
Gulf Southwest each will bear their own expenses (including legal fees) incurred
in connection with the Merger. Solicitation will be primarily by mail. Proxies
may also be solicited personally or by telephone or telegraph by officers,
directors and regular employees of Texas Gulf Coast. Brokerage firms,
fiduciaries and other custodians who forward soliciting materials to the
beneficial owners of TGC Stock held of record by them will be reimbursed for
their reasonable expenses incurred in forwarding such material.
-18-
<PAGE>
Proxy solicitation materials were released to shareholders on February 13,
1995.
Quorum and Voting
Only holders of TGC Common Stock of record at the close of business on
February 8, 1995 (the "Record Date"), will be entitled to notice of and to vote
at the Special Meeting. At the Record Date, 329,738 shares of TGC Common Stock
were outstanding and were owned of record by 307 shareholders.
The presence in person or by proxy of the owners of a majority of the issued
and outstanding shares of TGC Common Stock is necessary to constitute a quorum
at the Special Meeting.
Each shareholder is entitled to one vote for each share of TGC Common Stock
held of record by him on the Record Date. The affirmative vote of the holders
of at least two-thirds of the outstanding shares of TGC Common Stock is required
to adopt and approve the Merger Proposal. As of the date hereof, 177,236 shares
of TGC Common Stock (53.8% of the issued and outstanding shares of TGC Common
Stock) are committed to voting in favor of the approval of the Merger Proposal.
Each properly signed and submitted proxy will be voted, and where a choice has
been specified by the shareholder as provided on the proxy, it will be voted (or
withheld) in accordance with such specifications. In the absence of any
contrary specification, each proxy will be voted for adoption and approval of
the Merger Proposal. The management of Texas Gulf Coast is not aware of any
other matter to be brought before the Special Meeting. As to any such other
matter, proxies will be voted in accordance with the judgment of the person or
persons voting the proxy. Any shareholder giving a proxy may revoke such proxy
at any time prior to its use at the Special Meeting by giving written notice of
revocation to the Secretary of Texas Gulf Coast, by signing and delivering to
the Secretary of Texas Gulf Coast a proxy bearing a later date or by personally
appearing at the Special Meeting and voting.
Votes cast by proxy or in person will be counted by two persons appointed by
Texas Gulf Coast to act as election inspectors for the Special Meeting. The
election inspectors will treat shares represented by proxies that reflect
abstentions as shares that are present and entitled to vote for the purpose of
determining the presence of a quorum and of determining the outcome of any
matter submitted to the shareholders for a vote. Because the approval of the
Merger Proposal requires the affirmative vote of the holders of at least two-
thirds of the issued and outstanding shares of TGC Common Stock, an abstention
will have the same effect as a vote against the Merger Proposal.
The election inspectors will treat shares referred to as "broker non-votes"
(i.e., shares held by brokers or nominees as to which instructions have not been
received from the beneficial owners and as to which the broker or nominee does
not have discretionary voting power on a particular matter) as shares that are
present and entitled to vote for the purpose of determining the presence of a
quorum. However, for the purpose of determining the outcome of any matter as to
which the broker or nominee has indicated on the proxy that it does not have
discretionary
-19-
<PAGE>
authority to vote those shares will be treated as not present and not entitled
to vote with respect to that matter (even though those shares are considered
entitled to vote for quorum purposes and may be entitled to vote on other
matters). Because the approval of the Merger Proposal requires the affirmative
vote of the holders of at least two-thirds of the issued and outstanding shares
of TGC Common Stock, broker non-votes are the equivalent of votes against the
Merger Proposal.
Recommendation of the Board of Directors
There appears to be a trend toward greater concentration in the banking
industry. Commentators have speculated that this trend indicates a belief that
recent and anticipated regulatory and business developments (such as the use of
automatic teller machines, a greater reliance on computerization, competition
from other financial concerns, elimination of restrictions on interest rates
payable on deposits, and reductions to barriers against interstate banking) may
tend to favor larger institutions over independent banks. Likewise, banks
controlled by a multi-bank holding company may enjoy economies of scale in
advertising expenditures, certain general and administrative expenses and other
costs. In addition, various subsidiaries of a multi-bank holding company can
participate in loans which would exceed the regulatory limits of any single
subsidiary. In view of these factors, it is possible that the TGC Banks, as
subsidiaries of Gulf Southwest, may be in a better position to serve their
customers and to compete for desirable loan customers than if they continued to
be subsidiaries of Texas Gulf Coast. Further, the Merger will create a larger
pool of management experience and expertise for Gulf Southwest to draw on and
should enable Gulf Southwest to more easily attract and retain qualified
personnel. Finally, the combined market areas served by Merchants Bank and the
TGC Banks will allow them to diversify their geographic markets.
To any extent that the Subsidiary Banks are better able to meet competition or
serve their customers as a result of the Merger, shareholders of Texas Gulf
Coast will share in the ownership of a business with greater prospects for
growth. In addition, a shareholder's investment will be diversified inasmuch as
shareholders of Texas Gulf Coast will also be entitled to share in the potential
earnings of Merchants Bank. No representation is made, however, that any growth
in the consolidated income of Gulf Southwest and its subsidiaries will in fact
exceed that which Texas Gulf Coast would experience alone.
There is now substantially no market for the securities of Texas Gulf Coast or
Gulf Southwest. Since there will be more shareholders of Gulf Southwest
following the Merger, its securities may be relatively more marketable. In this
regard, however, the distribution of securities of Gulf Southwest will still be
relatively restricted, and no securities dealer has indicated any intention to
"make a market" in such securities. Accordingly, there is no assurance that an
active market will develop in the future.
In view of its greater financial resources following the Merger, Gulf
Southwest may be in a stronger position to seek future growth through
acquisitions or formation of new banks. However, there are no present plans in
this regard.
There is no assurance whatsoever that any of these possible benefits from the
Merger will be achieved.
-20-
<PAGE>
The board of directors of Texas Gulf Coast has unanimously approved the
Merger, subject to requisite shareholder and regulatory approval.
THE BOARD OF DIRECTORS OF TEXAS GULF COAST RECOMMENDS THAT THE SHAREHOLDERS OF
TEXAS GULF COAST VOTE FOR ADOPTION AND APPROVAL OF THE MERGER PROPOSAL AND THE
---
TRANSACTIONS CONTEMPLATED THEREBY.
TEXAS GULF COAST
Texas Gulf Coast is a Texas corporation organized in 1984 and is registered
under the Bank Holding Company Act. The principal executive offices of Texas
Gulf Coast are located at 4200 Westheimer, Suite 210, Houston, Texas 77027. The
telephone number of Texas Gulf Coast at such address is (713) 622-0042.
Texas Gulf Coast's principal activity is the ownership and management of the
TGC Banks. Each of the TGC Banks is a state-chartered bank. In the aggregate,
the TGC Banks operate seven banking offices in Galveston and Brazoria Counties,
Texas. The TGC Banks draw substantially all of their deposits and make
substantially all of their loans in the Galveston County/Brazoria County, Texas-
area. In addition, Texas Gulf Coast has formed Central Data Processing, Inc., a
non-banking subsidiary, to conduct various aspects of its operations.
As a bank holding company, Texas Gulf Coast may own or control, directly or
indirectly, one or more banks and furnish services to such banks. All of the
banking activities of Texas Gulf Coast are currently conducted by the TGC Banks.
The officers and directors of each of the TGC Banks direct their respective
operations. The principal role of Texas Gulf Coast is to provide management
assistance with respect to various aspects of the TGC Banks' operations,
including the areas of asset and liability management, business development,
loan policies and procedures, capital planning, advertising, data processing,
credit and loan administration, accounting, auditing, financial reporting and
compliance with legal and governmental regulations.
Other than the TGC Banks' charters to operate as banks, the business of Texas
Gulf Coast is not materially dependent upon any patent, trademark, license,
franchise or concession. The business of Texas Gulf Coast is not seasonal.
As of December 31, 1994, Texas Gulf Coast employed 181 persons.
The TGC Banks
The TGC Banks offer a wide range of financial services to commercial,
industrial, financial and individual customers, including short-term and medium-
term loans, revolving credit arrangements, inventory and accounts receivable
financing, equipment financing, real estate lending, Small Business
Administration lending, letters of credit, installment and other consumer loans,
savings accounts and various savings programs, including individual retirement
accounts, and interest and non-interest-bearing checking accounts. Other
services include federal tax
-21-
<PAGE>
depository, safe deposit, and night depository services. None of the TGC Banks
engage in international operations or trust activities.
Lending. Loans include commercial real estate, commercial, residential real
--------
estate, construction and credit card and other consumer loans. As of September
30, 1994, loans made by the TGC Banks represented approximately 39% of Texas
Gulf Coast's total assets.
Approximately $34.2 million, or 43.2%, of the aggregate loans made by the TGC
Banks are secured by various types of real estate. Loans secured by one-to-four
family residential properties total approximately $15.1 million and loans
secured by multi-family (five or more) residential properties total
approximately $1.2 million. Nonfarm nonresidential properties account for
approximately $14.9 million. Real estate construction loans, totaling
approximately $2.9 million, include loans for the construction of commercial
buildings, such as retail and office buildings and multi-family properties, as
well as loans for the construction of single family homes and land development.
Construction loans are made to individuals on the basis of the individual's
financial condition, the loan to value ratio, the reputation of the builder, and
whether the individual will be pre-qualified for permanent financing.
Construction loans are also made to qualified builders who build homes for sale.
Such loans are underwritten based upon several elements including experience,
current financial condition of the borrowing entity, amount of the loan to
appraised value, and general conditions of the market.
Consumer lending totals approximately $33.5 million, or approximately 42.3% of
the TGC Banks' aggregate loan portfolio. Consumer lending includes installment
lending to individuals in the market areas served by the banking offices of the
TGC Banks as well as credit cards. Installment lending includes automobile
loans, recreational vehicle loans, and home improvement loans as well as
unsecured loans. These loans are underwritten based on the borrower's income,
current debt, past credit history and collateral.
Each of the TGC Banks conducts its lending activities pursuant to the loan
policies adopted by the Board of Directors of such TGC Bank. The loan policies
grant individual loan officers authority to make secured and unsecured loans in
specific dollar amounts. Larger loans must be approved by senior officers or
various loan committees. The TGC Banks' management information systems and loan
review policies are designed to monitor lending sufficiently to ensure adherence
to the loan policies.
The TGC Banks generally require that loans secured by first mortgages on real
estate have loan-to-value ratios within specified limits, ranging from 65% for
loans secured by raw land to 85% for improved property, although exceptions are
made in certain circumstances. The TGC Banks generally require an 80% loan-to-
value ratio for loans secured by owner-occupied, one-to-four family properties,
although exceptions are made in certain circumstances. From time to time the TGC
Banks also make loans secured by marketable securities, investment quality
bonds, and equipment or consumer goods with useful lives in excess of the term
of the loan.
Loan Originations. The TGC Banks originate conventional first mortgage
------------------
loans primarily through referrals from real estate brokers, builders,
developers, prior customers, and media advertising. The origination of a loan
from the date of initial application to a loan closing
-22-
<PAGE>
normally takes four to eight weeks. It involves the processing of the
borrower's credit and other qualifications consistent with underwriting criteria
established by private institutional investors and insuring or guaranteeing
agencies, obtaining investor approvals, property appraisals, and title
insurance, arranging for hazard insurance and handling various other matters
customarily associated with the closing of a residential loan. For this
service, the TGC Banks typically earn a premium of 1% of the principal
amount of the loan as either an origination fee or gain on sale. Costs that are
incurred in originating mortgage loans include overhead, origination commissions
paid to originators and closers and mortgage tax fees.
The preponderance of conventional residential real estate loans originated by
the TGC Banks qualify for purchase by the Federal National Mortgage
Association ("FNMA"). To qualify for sale to FNMA, loans must meet the property
and credit standards and loan size limits (currently a maximum of $203,150)
established by FNMA. Loans which do not meet FNMA underwriting criteria but
which do meet the underwriting criteria established by private institutional
investors have, on occasion, been sold to private mortgage companies.
Sale of Mortgage Loans. Loans originated by the TGC Banks typically are
-----------------------
sold with servicing retained. Commitments are purchased from the appropriate
investor on a loan-by-loan basis on a 30 or 60 day delivery commitment.
Interest rates are committed to the borrower when a commitment to purchase is
received from the investor. Loans are funded by the bank and purchased by the
investor within 30 days following closing pursuant to commitments obtained at
the time of origination. The TGC Banks sell conventional conforming
residential real estate loans directly to FNMA and non-conforming loans to
private mortgage companies on a non-recourse basis. Consequently, foreclosure
losses on all sold loans generally are the responsibility of the investor and
not that of the TGC Banks.
The sale of mortgage loans can generate a market gain or loss. A gain (loss)
from the sale of loans may occur if interest rates fall (rise) between the time
a TGC Bank fixes the interest rates charged to the borrowers on the loans
and the time the loans are committed to an investor. To reduce the risk of a
loss, the TGC Banks usually obtain commitments permitting them to sell loans
at predetermined rates. A loss typically would occur only when the TGC Banks
are unable to fulfill the commitment. The loss would be in the form of a paid-
off fee that is based on changes in investor yield requirements.
Loan Servicing. When the TGC Banks sell the mortgage loans they have
---------------
originated, they typically retain the right to service those loans and to
receive the related fees. Loan servicing includes collecting and remitting loan
payments, accounting for principal and interest, holding escrow funds for
payment of mortgage-related expenses such as taxes and insurance, making
advances to cover delinquent payments, making required inspections of the
mortgage premises, contacting delinquent mortgagors, supervising foreclosures
and property dispositions in the event of unremedied defaults and generally
administering loans. Fees received by the TGC Banks for servicing mortgage loans
generally range from 0.25% to 0.50% per annum on the declining principal
balances of the loans. Servicing fees are collected by the TGC Banks monthly
from mortgage payments. Other sources of loan servicing revenues include late
charges and assumption and transfer fees.
-23-
<PAGE>
At September 30, 1994, the TGC Banks were servicing mortgages totaling
approximately $19.5 million under a FNMA contract and an additional $300,000
under other servicing contracts.
Environmental Issues. Under the Comprehensive Environmental Response,
--------------------
Compensation and Liability Act ("CERCLA"), an owner or operator of a property
where hazardous substances are located is potentially liable for hazardous waste
cleanup costs. CERCLA specifically excludes from the definition of owner or
operator "a person, who without participating in the management of a vessel or
facility, holds indicia of ownership primarily to protect his security interest
in the vessel or facility." However, courts have reached differing conclusions
as to what actions can be taken by a secured lender without such lender being
deemed to be "participating in the management" of a property. The TGC Banks are
not aware of any material liability to which they may be subject for hazardous
waste clean-up costs. If a property is deemed to have a potential environmental
problem, the TGC Banks will not foreclose on the property until an environmental
study has been performed.
Competition. The activities in which the TGC Banks engage are highly
-----------
competitive. Each activity engaged in and geographic market served involves
competition with other banks, as well as with non-banking financial institutions
and non-financial enterprises. The TGC Banks actively compete with other banks
in their efforts to obtain deposits and make loans, in the scope of types of
services offered, in interest rates paid on time deposits and charged on loans
and in other aspects of banking. AtDecember 31, 1994, Texas City Bank, First
Bank Mainland and First Bank Pearland had deposits of approximately $72,487,000,
$70,139,000 and $43,528,000, respectively.
In addition to competing with other commercial banks within and outside their
primary service area, the TGC Banks compete with other financial institutions
engaged in the business of making loans or accepting deposits, such as savings
and loan associations, credit unions, industrial loan associations, insurance
companies, small loan companies, finance companies, mortgage companies, real
estate investment trusts, certain governmental agencies, credit card
organizations and other enterprises. In recent years, competition for funds
from securities brokers for money market accounts has intensified. Additional
competition for deposits comes from government and private issuers of debt
obligations and other investment alternatives for depositors such as money
market funds.
Texas Gulf Coast believes that price (as reflected by interest rates charged
or paid) is the principal means of competition in attracting deposits and loans.
However, service and convenience are also important factors, especially with
regard to smaller loans and deposits.
Customers. None of the TGC Banks is dependent upon any single customer or few
---------
customers.
Texas City Bank. Texas City Bank is a state-chartered banking association
---------------
organized in 1907. Texas City Bank's main office is located at 701 Sixth
Street N., Texas City, Texas. It also has two branches in Texas City. Texas
Gulf Coast owns 97.1% of the outstanding capital stock of Texas City Bank.
-24-
<PAGE>
The following table sets forth certain balance sheet and operating information
with respect to Texas City Bank:
<TABLE>
<CAPTION>
SELECTED FINANCIAL INFORMATION
(In Thousands)
September 30, 1994
------------------
<S> <C>
Balance Sheet:
Assets $ 80,346
Deposits 71,900
Loans 33,335
Allowance for Credit Losses 250
Total Equity 8,077
<CAPTION>
Nine Months Ended Year Ended
September 30, 1994 December 31, 1993
------------------ -----------------
<S> <C> <C>
Results of Operations:
Interest Income $ 3,947 $ 5,676
Interest Expense 1,267 1,822
Provision for Credit Losses 68 233
Net Earnings 556 439
</TABLE>
First Bank Mainland. First Bank Mainland is a state-chartered banking
-------------------
association organized in 1947. First Bank Mainland's main office is located at
920 First Street, LaMarque, Texas. It also has a branch in an adjoining
community. Texas Gulf Coast owns 100% of the outstanding capital stock of First
Bank Mainland.
-25-
<PAGE>
The following table sets forth certain balance sheet and operating information
with respect to First Bank Mainland:
<TABLE>
<CAPTION>
SELECTED FINANCIAL INFORMATION
(In Thousands)
September 30, 1994
------------------
<S> <C>
Balance Sheet:
Assets $77,881
Deposits 70,425
Loans 33,345
Allowance for Credit Losses 422
Total Equity 6,989
<CAPTION>
Nine Months Ended Year Ended
September 30, 1994 December 31, 1993
------------------ -----------------
<S> <C> <C>
Results of Operations:
Interest Income $3,634 $ 4,934
Interest Expense 1,156 1,633
Provision for Credit Losses 39 200
Net Earnings 479 759
</TABLE>
First Bank Pearland. First Bank Pearland is a state-chartered banking
-------------------
association organized in 1976. First Bank Pearland's main office is located at
3102 E. Broadway, Pearland, Texas. It also has a branch in Pearland. Texas
Gulf Coast owns 99.5% of the outstanding capital stock of First Bank Pearland.
-26-
<PAGE>
The following table sets forth certain balance sheet and operating information
with respect to First Bank Pearland:
<TABLE>
<CAPTION>
SELECTED FINANCIAL INFORMATION
(In Thousands)
September 30, 1994
------------------
<S> <C>
Balance Sheet:
Assets $45,500
Deposits 41,173
Loans 13,465
Allowance for Credit Losses 119
Total Equity 4,157
<CAPTION>
Nine Months Ended Year Ended
September 30, 1994 December 31, 1993
------------------ -----------------
<S> <C> <C>
Results of Operations:
Interest Income $1,887 $ 2,700
Interest Expense 625 855
Provision for Credit Losses 23 43
Net Earnings 289 415
</TABLE>
Non-Banking Activities
Central Data Processing, Inc. performs certain proof and bookkeeping services
for Texas Gulf Coast. Texas Gulf Coast owns 100% of the outstanding capital
stock of Central Data Processing, Inc.
Properties
Texas Gulf Coast's primary asset is its investment in the TGC Banks, and their
primary assets are their respective loan portfolios.
The main banking facility of Texas City Bank, located at 701 Sixth St. N.,
Texas City, Texas, consists of a two-story brick building owned by the bank.
The banking quarters and the adjacent seven-window drive-in facility consist of
approximately 17,000 square feet.
The main banking facility of First Bank Mainland, located at 920 First St.,
LaMarque, Texas, consists of a 19,000 square feet, two-story building owned by
the bank.
The main banking facility of First Bank Pearland, located at 3102 E. Broadway,
Pearland, Texas, consists of approximately 8,000 square feet of office and lobby
space with a four-window drive-in facility and is owned by the bank.
-27-
<PAGE>
With the exception of one leased facility, the branch offices of the
subsidiary banks are owned of record by the respective banks.
The other banking quarters and adjacent land used for parking and drive-in
facilities are leased.
Legal Proceedings of Texas Gulf Coast
Neither Texas Gulf Coast nor any of its subsidiaries is a party to any legal
proceedings which, in management's judgment, based upon opinions of legal
counsel, would have a material adverse effect on the consolidated financial
position of Texas Gulf Coast and its subsidiaries.
Market for TGC Common Stock and Related Shareholder Matters
Trading Market. There is no established trading market for shares of TGC
--------------
Common Stock. However, a limited market for shares of TGC Common Stock exists,
primarily among the existing shareholders of Texas Gulf Coast, and such
securities are traded on a sporadic basis.
The following table sets forth the number of shares of TGC Common Stock
presented for transfer on the books of Texas Gulf Coast for each quarterly
period within the last three calendar years.
<TABLE>
<CAPTION>
1992 1993 1994
----- ------ -----
<S> <C> <C> <C>
First Quarter 864 0 2,354
Second Quarter 322 818 3,819
Third Quarter 2,627 6,776 3,393
Fourth Quarter 1,068 51,078 2,943
</TABLE>
Because there is no public market for the TGC Common Stock, the trading
price for TGC Common Stock is determined by private negotiations between the
buyer and the seller. Texas Gulf Coast has pricing information with respect to
only two transactions during the periods presented above. In the fourth quarter
of 1993, Texas Gulf Coast repurchased 50,162 shares from a former officer of
Texas Gulf Coast at a price of $62.88 per share in connection with his
retirement. In the third quarter of 1992 a transfer of 6,734 shares took place
at a price of $20.60 per share. These prices may or may not reflect the fair
market value of the shares at the time of the transfers and should not be viewed
as indicative of the current or future value of the TGC Common Stock. The
remaining transfers during the periods presented above may or may not have been
at prices similar to those stated.
-28-
<PAGE>
Holders. At January 3, 1995, TGC Common Stock was owned of record by
-------
approximately 306 shareholders. On such date, no shares of TGC Preferred Stock
or TGC Class A Preferred Stock were issued and outstanding. The officers and
directors of Texas Gulf Coast collectively owned of record 18.8% of the TGC
Common Stock as of the Record Date.
Dividends and Dividend Policy
Dividends With Respect to TGC Common Stock. Holders of TGC Common Stock
------------------------------------------
are entitled to receive such dividends as are declared by Texas Gulf Coast's
Board of Directors in accordance with Texas Gulf Coast's dividend policy.
Factors which Texas Gulf Coast's Board of Directors considers prior to declaring
a dividend include earnings, regulatory capital requirements, general business
conditions and the capital needs of it and its subsidiaries, as well as other
factors which the Board of Directors may deem relevant.
Dividends With Respect to TGC Preferred Stock. Upon issuance thereof, any
---------------------------------------------
holders of TGC Preferred Stock would be entitled to receive, when, as and if
declared by the Board of Directors of Texas Gulf Coast out of funds legally
available therefor, cumulative dividends of $1.28 per year (payable in semi-
annual installments or at such intervals as the Board of Directors may
determine) for each share of TGC Preferred Stock owned by them. Until all such
dividends have been paid or provided for, no dividends could be declared or paid
in respect of shares of TGC Common Stock. As of the date hereof, there are no
shares of TGC Preferred Stock outstanding.
Dividends With Respect to TGC Class A Preferred Stock. Upon issuance
-----------------------------------------------------
thereof, any holders of TGC Class A Preferred Stock would be entitled to receive
dividends, when, as and if declared by the Board of Directors of Texas Gulf
Coast, in accordance with such dividend entitlements as the Board of Directors
determines in creating a series of such shares. As of the date hereof, there
are no shares of TGC Class A Preferred Stock outstanding.
Dividend History. Texas Gulf Coast has paid a regular quarterly dividend
----------------
of $0.15 per share of TGC Common Stock since 1984.
Principal Shareholders
As of February 8, 1995, the Record Date, 329,738 shares of TGC Common Stock
were outstanding, each of which is entitled to one vote.
The following table sets forth information regarding the beneficial
ownership of TGC Stock as of February 8, 1995 by each of Texas Gulf Coast's
directors, each beneficial owner of more than five percent of the TGC Common
Stock and by all directors and officers of Texas Gulf Coast as a group.
-29-
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL STOCK OWNERSHIP
Amount and Nature of
Beneficial Ownership of Percent of
Name TGC Common Stock/(1)/ TGC Common Stock
---- --------------------- ----------------
<S> <C> <C>
A. Harrel Blackshear/(2)/ 2,100 Less than 1%
B. Jackie Childs 250 Less than 1%
W.R. Dietel/(2)/ 534 Less than 1%
John Kvinta, Jr. 3,609 1.1%
J. W. Lander, Jr./(3)/ 177,236 53.8%
J. W. Lander, III 128 Less than 1%
James J. Tarpey/(2)/ 1,053 Less than 1%
Vanco Trusts/(2)//(4)/ 53,002 16.1%
All directors and officers as a 181,223 55.0%
group (7 persons)/(5)/
</TABLE>
(1) Unless otherwise indicated, each person has sole voting and investment
powers over the shares listed.
(2) The shares owned by this person/entity are subject to the voting trust
agreement referenced in footnote (3).
(3) Certain shareholders have entered into a voting trust agreement with J. W.
Lander, Jr., pursuant to which Mr. Lander, Jr. is voting trustee. The
voting trust may be terminated only by the written agreement of holders
owning at least a majority of the shares subject to the voting trust
agreement. An aggregate of 177,236 shares of TGC Common Stock are subject
to the voting trust agreement, of which 54,286 shares are owned of record
and beneficially by Mr. Lander, Jr. Mr. Lander, Jr., as voting trustee,
has all rights and powers with respect to the shares subject to the voting
trust agreement as if he were the sole shareholder, except that Mr. Lander,
Jr. may not, without the consent of the holders of at least two-thirds of
the shares subject to such voting trust agreement, vote the shares in favor
of or execute any consent with respect to (a) increases in capital stock,
(b) sales or mortgages of all or substantially all of the assets of Texas
Gulf Coast, (c) dissolution of Texas Gulf Coast, (d) charter amendments,
(e) consolidation or merger, or (f) partial liquidation. Mr. Lander, Jr.'s
address is 4200 Westheimer, Suite 210, Houston, Texas 77027. The voting
trust agreement will be terminated upon consummation of the Merger.
(4) The address for Vanco Trusts is P.O. Box 940, McAllen, Texas 78502-0940.
(5) Includes shares referenced in footnotes (2) and (3) which are subject to
the voting trust agreement referenced in footnote (3).
Vanco Trusts and J. W. Lander, Jr. may be deemed to be controlling persons
of Texas Gulf Coast, within the meaning of the rules promulgated by the
Securities and Exchange Commission.
-30-
<PAGE>
Officers and Directors
Set forth below is certain information relating to the executive officers
and directors of Texas Gulf Coast:
A. Harrel Blackshear, 69, is Vice President, Secretary and a director of
Texas Gulf Coast. He has served in these capacities since November 1993.
He is also President and a director of Texas City Bank. He has served in
these capacities since November 1993. Mr. Blackshear is a director of
First Bank Mainland, a capacity in which he has served since 1993, First
Bank Pearland, a capacity in which he has served since 1991, and Central
Data Processing, Inc., a capacity in which he has served since 1993. Mr.
Blackshear was President of First Bank Pearland from 1991 to 1993. Prior
to joining First Bank Pearland, Mr. Blackshear was Executive Vice President
of Medical Center Bank in Houston, Texas. Immediately following the
Merger, Mr. Blackshear will be appointed to the Board of Directors of Gulf
Southwest.
B. Jackie Childs, 59, is a director of Texas Gulf Coast, a capacity in
which he has served since 1993, and a director of First Bank Mainland, a
capacity in which he has served since 1978. Since 1965, he has served as
the Chairman of the Board of Southern Instrument & Valve Co., a corporation
which is engaged in equipment manufacturing.
W.R. Dietel, 49, is a director of Texas Gulf Coast and an advisory director
of Texas City Bank. He has served in such capacities since 1989. He has
served as the President of Piling, Inc., a corporation which is engaged in
construction, since 1970.
John Kvinta, Jr., 67, is a director of Texas Gulf Coast and is Vice
Chairman and a director of First Bank Mainland. He has served in such
capacities since 1984. Mr. Kvinta was President of First Bank Mainland
from October 1989 to March 1992.
J. W. Lander, Jr., 68, is President and a director of Texas Gulf Coast and
has served in such capacities since 1985. He is also Chairman of the Board
and a director of Texas City Bank, First Bank Mainland, First Bank
Pearland, Gulf Southwest, and Merchants Bank. In addition, he acts as an
officer and director of GSWDP and Central Data Processing Inc., and is a
director of Stewart & Stevenson, Inc., a manufacturer of heavy equipment.
J. W. Lander, Jr. is the father of J. W. Lander, III.
J. W. Lander, III, 43, is Vice President, Treasurer and a director of Texas
Gulf Coast, positions he has held since 1984. He is a director of Texas
City Bank, First Bank Mainland, First Bank Pearland, and Merchants Bank.
He is also President and a director of Gulf Southwest. J. W. Lander, III
is the son of J. W. Lander, Jr.
James J. Tarpey, 90, is a director of Texas Gulf Coast and First Bank
Mainland. He has served in those capacities since 1984 and 1947,
respectively. Other than his directorships, Mr. Tarpey is retired.
-31-
<PAGE>
Officers and directors are elected annually and serve, unless they sooner resign
or are removed, until their respective successors are elected and qualify.
Executive Compensation
None of the executive officers or directors of Texas Gulf Coast, other than
Mr. Lander, III, who is paid a salary, receive any compensation (other than
dividends paid to all shareholders) from Texas Gulf Coast and Texas Gulf Coast
has no present intention to alter this policy. Each of such persons receive
compensation from one or more of the TGC Banks and will continue to do so until
such employment is terminated.
The following table sets forth certain information with resect to annual
and long term compensation for services in all capacities for the years ended
December 31, 1993, 1992 and 1991 paid by the TGC Banks to the chief executive
officer of Texas Gulf Coast (who was the most highly compensated officer of
Texas Gulf Coast):
ANNUAL AND LONG TERM COMPENSATION
<TABLE>
<CAPTION>
Annual Compensation
---------------------------------
Name and Principal Other Annual All Other
Position Year Salary Compensation/(1)/ Compensation
---- ------ ----------------- ------------
<S> <C> <C> <C> <C>
J. W. Lander, Jr., 1993 $66,742 $17,600 --
President and Director 1992 66,772 16,675 --
1991 66,844 16,600 --
</TABLE>
(1) Amounts in this column consist of director fees paid to Mr. Lander, Jr. in
his capacities as a director of Texas City Bank, First Bank Mainland and
First Bank Pearland. The value of the perquisites and other personal
benefits provided to Mr. Lander, Jr. did not exceed the lesser of either
(a) $50,000 or (b) 10% of Mr. Lander, Jr.'s total salary.
Compensation Committee Interlocks and Insider Participation
Texas Gulf Coast does not have a separate compensation committee.
Compensation decisions are made by the Boards of Directors of the TGC Banks.
J.W. Lander, Jr. (President and a director of Texas Gulf Coast) and J.W.
Lander, III (Vice President, Treasurer and a director of Texas Gulf Coast) each
serve as an officer and director of Gulf Southwest and Merchants Bank. As
directors of Gulf Southwest and Merchants Bank, they participate in compensation
decisions relating to their respective officers and directors.
A. Harrel Blackshear, (Vice President, Secretary and a director of Texas
Gulf Coast) J.W. Lander, Jr. and J.W. Lander, III each serve as a director of
each of the TGC Banks. The TGC Banks do not have a separate compensation
committee. Accordingly, such persons participate in decisions regarding
compensation of the officers and directors of the TGC Banks. J.W. Lander, Jr. is
also an executive officer of each of the TGC Banks.
-32-
<PAGE>
Meetings of the Board of Directors
Texas Gulf Coast has not established any committees of its Board of
Directors. During 1994, the Board of Directors held five meetings. All directors
attended 75% or more of the total number of meetings held during 1994.
Certain Relationships and Related Transactions
Some of the directors and officers of Texas Gulf Coast and their affiliates
are customers of the TGC Banks. Such directors, officers and affiliates have had
transactions in the ordinary course of business with the TGC Banks, including
borrowings, all of which were on substantially the same terms and conditions,
including interest rates and collateral, as those prevailing from time to time
for comparable transactions with unaffiliated persons and did not involve more
than the normal risk of collectibility or features unfavorable to the TGC Banks.
Texas Gulf Coast expects that its directors and officers and their affiliates
will continue to enter into such transactions on similar terms and conditions in
the future.
Recent Developments
On December 31, 1994, Texas Gulf Coast redeemed all of the outstanding
shares of TGC Preferred Stock at the stated redemption price of $16.00 per share
in accordance with the provisions of the Articles of Incorporation of Texas Gulf
Coast. In order to finance this redemption and to renew and extend certain
existing debt, Texas Gulf Coast borrowed $3,400,000 from Texas Commerce Bank.
This debt bears interest at the prime rate and is scheduled to be repaid at
$175,000 per quarter, plus accrued interest.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Nine-Month Period Comparison. Set forth below is a discussion of the
----------------------------
financial condition and results of operations of Texas Gulf Coast as of and for
the nine-month periods ended September 30, 1994 and 1993:
General. Texas Gulf Coast recorded earnings of $216,000 in the third
-------
quarter of 1994 and $937,000 in the first nine months of 1994 compared to
$229,000 and $1,466,000 for the third quarter and the first nine months of 1993,
respectively.
Net Interest Income. Net interest income decreased 5.6% in the third
-------------------
quarter of 1994 when compared to the same period of 1993 and decreased by 7.0%
during the first nine months of 1994 as compared to the first nine months of
1993. The decrease of $124,000 for the third quarter of 1994 over the third
quarter of 1993 resulted from a $130,000 (3.9%) decrease in interest income or
earning assets partially offset by a $6,000 decrease in interest expense. A
reduction in earning assets was the primary reason for the decrease in interest
income.
Provision for Possible Loan Losses. The provision for possible loan losses
----------------------------------
remained the same for the third quarters of 1994 and 1993 and decreased by
$64,000 for the first nine months of 1994 as compared to the same period of
1993. The decrease was due to write-off of problem
-33-
<PAGE>
loans with a corresponding charge to the allowance. In addition, because of the
overall decrease in loans, the allowance is similarly lower. The provision for
possible losses for the first nine months of 1994 was offset by $359,000 in net
losses charged to the allowance as compared with net losses of $261,000 for the
same period in 1993. The ratio of the allowance for possible loan losses to
outstanding loans decreased to 1.00% at September 30, 1994 as compared to 1.27%
at September 30, 1993.
The transactions in the allowance for possible loan losses were as follows:
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-------------------------
1994 1993
----------- ------------
<S> <C> <C>
Balance at beginning of period $1,022,000 $1,060,000
Net losses charged to allowance (359,000) (261,000)
Provision charged to operating expense 129,000 193,000
---------- ----------
Balance at end of period $ 792,000 $ 992,000
========== ==========
Period-end allowance as a percentage
of outstanding loans 1.00% 1.27%
</TABLE>
Non-accrual loans and past due loans (90 days or more) totaled $741,000, and
$88,000, respectively, at September 30, 1994, as compared to $1,167,000 and
$202,000, respectively, at September 30, 1993.
It is the policy of the TGC Banks to maintain a level in the allowance for
possible loan losses that is adequate to cover the loan losses sustained plus
provide for any future possible losses on problem loans. The adequacy of the
allowance is continually monitored and management considers the current level to
be appropriate based on an evaluation of the TGC Banks' loan portfolios and the
decreases in non accrual/past due loans.
Non-Interest Income. Total non-interest income decreased by 2.8% for the
-------------------
third quarter of 1994 compared to the third quarter of 1993 and decreased 3.6%
for the first nine months of 1994 compared to the same period of 1993. The
components included in non-interest income for the indicated periods are as
follows:
<TABLE>
<CAPTION>
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
-------------------- ------------------------
1994 1993 1994 1993
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Service charges & fees $520,000 $585,000 $1,529,000 $1,695,000
Other operating income 207,000 164,000 730,000 652,000
Securities transactions 1,000 0 3,000 0
-------- -------- ---------- ----------
Total Non-Interest Income $728,000 $749,000 $2,262,000 $2,347,000
======== ======== ========== ==========
</TABLE>
-34-
<PAGE>
The total of the various service charges and fees earned by Texas Gulf
Coast and the TGC Banks for the third quarter and the first nine months of 1994
decreased by 11.1% and 9.8%, respectively, as compared to the same periods of
1993. Other operating income increased by $43,000 and $78,000 for the third
quarter and the first nine months of 1994, respectively, as compared to the same
periods of 1993.
Texas Gulf Coast maintains a policy of constantly monitoring and evaluating
service charges and fees to ensure that the fees charged reflect the cost of
service provided and remain competitive with other financial institutions
located in the TGC Banks' market area.
Non-Interest Expenses. Non-interest expenses increased 8.6% for the third
---------------------
quarter of 1994 over the third quarter of 1993 and increased 0.9% for the first
nine months of 1994 compared to the first nine months of 1993. The totals were
as follows:
<TABLE>
<CAPTION>
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
1994 1993 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Salaries and benefits $1,128,000 $1,136,000 $3,371,000 $3,432,000
Occupancy expense 269,000 288,000 809,000 810,000
Other operating expense 1,181,000 951,000 3,199,000 3,075,000
---------- ---------- ---------- ----------
Total Non-Interest Expense $2,578,000 $2,375,000 $7,379,000 $7,317,000
========== ========== ========== ==========
</TABLE>
Salaries and employee benefits are the most significant expenses for Texas
Gulf Coast. These expenses decreased 0.7% and 1.8% for the third quarter and
the first nine months of 1994, respectively, when compared to the same periods
of 1993.
Occupancy expense, which included furniture and equipment expenses,
decreased 6.6% for the third quarter of 1994 as compared to the third quarter of
1993, but the totals remained the same for the first nine months of 1994 and
1993.
Other operating expenses increased by 24.2% and 4.0% for the third quarter
and the first nine months of 1994, respectively, as compared to the same periods
of 1993. The $230,000 increase in the third quarter of 1994 is primarily due to
writedowns of other real estate.
The major components of other operating expenses are legal and accounting
fees, data processing, supplies and advertising expenses. Also included are
expenses related to real estate held for sale and other loan-related assets
acquired through foreclosure.
Earning Assets. When comparing the total of earning assets at September
--------------
30, 1994, to the total at December 31, 1993, earning assets decreased 7.3%. The
decrease of $14,326,000 was due to a decrease of $22,792,000 in federal funds
sold and deposits with the Federal Home Loan Bank, partially offset by an
increase of $7,558,000 and $1,008,000 in investment securities and loans,
respectively. The substantial increase in investment securities is the result
of somewhat lower loan demand and the sale of other real estate previously
foreclosed on. The change in other assets is primarily due to the deferred tax
asset, which fluctuates from year to year.
-35-
<PAGE>
Included in the total of earning assets at September 30, 1994, are loans
totalling $741,000, which are on a non-accrual basis. This compares to non-
accrual loans totalling $1,167,000 and $1,033,000 at September 30, 1994 and
December 31, 1993, respectively. The decrease in non-accrual loans is
attributable to better loan performance, increased loan portfolio quality,
increased collection efforts and write-offs of uncollectible loans.
Deposits. The most important funding source for earning asset growth is
--------
deposits. Total deposits decreased by 6.2% from December 31, 1993 to September
30, 1994, compared to a decrease of 2.1% from December 31, 1992 to September 30,
1993. Non-interest bearing deposits decreased 6.7% from December 31, 1993 to
September 30, 1994, while interest-bearing deposits decreased 6.0% for the same
period.
Capital. Shareholders' equity increased $457,000 or 2.4% for the first
-------
nine months of 1994, as compared to an increase of $1,285,000 or 6.0% for the
first nine months ended September 30, 1993. The ratio of shareholders' equity
to total assets was 9.6% on September 30, 1994, as compared to 8.8% on December
31, 1993.
Bank holding companies and their bank subsidiaries are required to maintain
certain capital ratios. The Federal Reserve Board's guidelines classify capital
into two tiers, referred to as Tier 1 and Tier 2. Tier 1 capital consists of
common and qualifying preferred shareholders' equity less goodwill. Tier 2
capital consists of mandatory convertible debt, preferred stock not qualifying
as Tier 1 capital, qualifying subordinated debt and the allowance for loan
losses up to 1.25% for risk-weighted assets. The minimum ratio for the sum of
Tier 1 and Tier 2 is 8.0%, at least one-half of which should be in the form of
Tier 1 capital. At September 30, 1994, core capital (Tier 1) and total capital
(Tier 1 and Tier 2) as a percentage of risk-weighted assets was 21.6% and 22.7%,
respectively. The TGC Banks at September 30, 1994 had core capital of 21.8% and
total capital of 22.6% as a percentage of risk weighted assets.
In addition to the foregoing ratios, bank holding companies are required to
maintain a minimum ratio of core capital to total assets (hereinafter referred
to as the "Leverage Ratio") of at least 3.0%. At September 30, 1994, Texas Gulf
Coast's Leverage Ratio was 9.6%. A similar leverage ratio applicable to the TGC
Banks has been adopted by the FDIC. At September 30, 1994, the TGC Banks' ratio
was 9.4%.
Liquidity and Capital Commitments. Liquidity is the ability of Texas Gulf
---------------------------------
Coast and the TGC Banks to meet their short-term needs for cash arising from
demands such as operating expenses, withdrawal of deposits and demand for loans.
The liquidity of Texas Gulf Coast is primarily provided by dividends from the
TGC Banks and interest on time deposits in financial institutions.
The TGC Banks' liquidity is primarily provided by maturing loans, deposits,
cash, short-term investments, time deposits in other banks, federal funds sold
and profits. With bank regulators critically reviewing liquidity, Texas Gulf
Coast has adopted a policy of maintaining a minimum liquidity level of 20%, as
measured by the FDIC formula, at the TGC Banks. As of September 30, 1994, the
liquidity level of the TGC Banks was 51.6%.
-36-
<PAGE>
Texas Gulf Coast believes that it has sufficient capital and financial
resources to meet its current and anticipated capital commitments.
Fiscal Year Comparison. Set forth below is a discussion of the
----------------------
financial condition and results of operations of Texas Gulf Coast as of and for
the years ended December 31, 1993, 1992 and 1991:
General. Net earnings decreased 38.5% in 1993 to $1,283,000, as compared
-------
to $2,087,000 in 1992. In 1993, earnings per common share were $2.91, as
compared to $4.98 in 1992. In the following sections, the major factors and
trends affecting the components of income and expense are examined in depth.
Information concerning assets and liabilities is also provided so that an
evaluation can be made of capitalization and liquidity as they may affect Texas
Gulf Coast.
Net Interest Income. Net interest income on a taxable equivalent basis
-------------------
remained virtually the same, $9,331,000 in 1993 as compared to $9,348,000 in
1992. Total interest income decreased by $1,583,000 from 1992 to 1993 and total
interest expense decreased by $1,539,000 from 1992 to 1993 primarily due to
decreased interest rates earned and paid by Texas Gulf Coast.
Loan Portfolio Composition. The composition of the loan portfolio at the
--------------------------
end of each of the last three years is displayed in the following table:
<TABLE>
<CAPTION>
LOAN PORTFOLIO COMPOSITION
December 31,
----------------------------------------
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Commercial and industrial 13.5% 17.3% 14.2%
Real estate - construction 2.2% 3.8% 2.4%
Real estate - other 38.4% 38.4% 38.0%
Individuals for household and
other consumer purposes 43.2% 38.6% 43.4%
Other 2.7% 1.9% 2.0%
</TABLE>
Total loans, net of unearned discount, totaled $78,137,000 at December
31, 1993 and $84,379,000 at December 31, 1992. The decrease in loans is
attributable to reduced loan demand.
Non-accrual loans and past due loans (90 days or more) totaled
$1,150,000 and $20,000, respectively, at December 31, 1993, as compared to
$1,241,000 and $302,000, respectively, at December 31, 1992. The decreases in
non-accrual loans and past due loans resulted from better loan performance,
increased loan portfolio quality, increased collection efforts and write-offs of
uncollectible loans.
Provision for Credit Losses. The allowance for credit losses at
---------------------------
December 31, 1993 was $1,022,000, representing 1.31% of outstanding loans. A
year earlier, this ratio was 1.26%. The provision for credit losses charged
against earnings was $475,000 in 1993, $263,000 in 1992 and $235,000 in 1991.
Net loan losses in 1993 were $512,000, compared to $355,000 in 1992 and $380,000
in 1991. These loan losses resulted in a net charge-off ratio to average loans
of 0.64% in 1993, an increase from 0.43% in 1992 and 0.49% in 1991. To a very
large extent, the TGC
-37-
<PAGE>
Banks' loan portfolio remains secured and current re-appraisals of collateral
value have been received and undertaken in an effort to further assess loss
potential. Management has closely scrutinized its loss potential on its non-
performing assets, as well as on the entire loan portfolio, and has, to the best
of its knowledge and belief, reserved for losses accordingly.
Non-Interest Income. Non-interest income increased 12.5% in 1993
-------------------
compared to an increase of 14.6% during 1992. Service charges on deposits, the
largest component of non-interest income, increased by 4.6% in 1993 as compared
to an increase of 12.0% in 1992. The increase in service charge income for 1993
was primarily due to an increase in the average volume of transaction deposit
accounts which generate the majority of this fee income.
The components of the "other" categories of non-interest income
consist of mortgage origination and servicing fees plus miscellaneous fees such
as collection fees, credit card fees, safe deposit rentals, research fees, check
printing income and wire transfer fees. These fees correlate to the level of
transactions in each of the referenced categories. The "other" categories of
non-interest income increased 31.7% in 1993 over 1992 and increased 9.7% in 1992
over 1991. These increases were primarily due to the higher levels of home
mortgage refinancing in these years.
The following table sets forth by category the non-interest income and
the percentage from the prior year for the most recent three years:
<TABLE>
<CAPTION>
NON-INTEREST INCOME
(In Thousands)
1993 1992 1991
--------------- --------------- ---------------
% % %
Amount Change Amount Change Amount Change
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Service charges on
deposit accounts $2,031 4.6% $1,942 12.0% $1,734 19.4%
Other service
charges and fees 137 24.5% 110 115.7% 51 15.5%
Other operating income 1,130 31.7% 858 9.7% 782 41.4%
Securities transactions 11 65.6% 32 -- -- 100.0%
------ ----- ----- ------ ----- ------
Total $3,309 12.5% $2,942 14.6% $2,567 24.6%
====== ===== ===== ===== ===== =====
</TABLE>
Non-Interest Expense. Total non-interest expense increased by 14.7%
--------------------
for 1993 as compared to a 6.8% increase in 1992. The most significant
percentage increases were in the categories of other operating expense and other
real estate expense. The 27.8% increase during 1993 in other operating expense
is primarily attributable to the writedowns of obsolete equipment and other
identifiable assets, legal expenses relating to a defaulted loan, costs incurred
in changing independent auditors, hiring of consultants for compliance and
credit file review, and conversion of the TGC Banks from national banks to state
banks. Other real estate expense decreased 15.6% during 1993 primarily due to
the chargedowns of other real estate acquired through foreclosure.
-38-
<PAGE>
The following table sets forth by category the operating expenses and the
percentage change from the prior year for the most recent three years:
<TABLE>
<CAPTION>
OPERATING EXPENSES
(In Thousands)
1993 1992 1991
---------------- --------------- ---------------
% % %
Amount Change Amount Change Amount Change
------- ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee
benefits $ 4,702 8.0% $4,355 20.6% $3,612 0.3%
Occupancy expense 604 4.3% 579 14.6% 678 20.5%
Furniture and equipment
expense 516 12.7% 458 3.4% 443 8.3%
Other real estate expense 243 15.6% 288 43.6% 511 21.3%
Other operating expense 4,369 27.8% 3,419 4.3% 3,278 40.7%
------ ---- ----- ---- ----- ----
Total $10,434 14.7% $9,099 6.8% $8,522 12.0%
====== ==== ===== ==== ===== ====
</TABLE>
Balance Sheet Management. During 1993, total average earning assets increased
------------------------
$4.1 million or 2.1% from 1992. Average investment securities increased $1.6
million or 1.9% and average federal funds sold increased $5.2 million or 19.8%.
These increases were partially offset by a decrease of $2.7 million or 3.3% in
average loans outstanding. The increase in average earning assets was primarily
due to a reduction of $1.8 million or 11.5% in cash and due from banks.
-39-
<PAGE>
The following table presents Texas Gulf Coast's average balance sheet
composition:
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEET COMPOSITION
Percentage of Total Assets 1993 1992 1991
- -------------------------- ---- ---- ----
<S> <C> <C> <C>
Investment securities:
Taxable 33.7% 34.7% 34.0%
Non-taxable 5.6 4.1 5.6
Due from CD's .3 .3 .2
Federal funds sold 14.3 12.0 11.3
Net loans 36.0 37.4 37.4
---- ---- ----
Total earning assets 89.9 88.5 88.5
Cash and due from banks 6.4 7.3 6.6
Premises, equipment and other 3.7 4.2 4.9
---- ---- ----
Total Assets 100.0% 100.0% 100.0%
===== ===== =====
<CAPTION>
Percentage of Total Liabilities
- -------------------------------
and Stockholders' Equity
- ------------------------
1993 1992 1991
---- ---- ----
Deposits - interest bearing 69.2% 70.6% 71.1%
Borrowings .6 .7 .8
---- ---- ----
Total interest bearing liabilities 69.8 71.3 71.9
Deposits - non-interest bearing 19.5 18.4 17.7
Other liabilities .8 .8 .9
Stockholders' Equity 9.9 9.5 9.5
----- ----- -----
Total Liabilities and Stockholders'
Equity 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Liquidity Management. Like any commercial bank, the liability structures
--------------------
of the TGC Banks require that they maintain an appropriate level of liquid
resources to meet normal day-to-day fluctuations in deposit volume and to make
new loans and investments as opportunities arise. Liquidity can be provided by
either assets or liabilities. Sources of liquidity for the TGC Banks are
principally maturing loans, deposits, cash, short-term investments, time
deposits in other financial institutions, federal funds sold and profits.
At December 31, 1993, Texas Gulf Coast had $14,887,000 in cash, $38,302,000 in
federal funds sold and deposits with the Federal Home Loan Bank and $80,156,000
in investment securities portfolio in which the market value was $1,749,000 more
than the carrying value. The
-40-
<PAGE>
loan-to-loan deposit ratio was 40.0% at December 31, 1993, compared to 43.5% at
December 31, 1992.
A financial service company's activities consist primarily of
financing and investing activities. These activities result in large cash
flows. Texas Gulf Coast's Consolidated Statement of Cash Flows (included in its
consolidated financial statements included herein) indicates the sources of
these cash flows.
On December 31, 1994, Texas Gulf Coast redeemed all of the outstanding
shares of TGC Preferred Stock at the stated redemption price of $16.00 per share
in accordance with the provisions of the Articles of Incorporation of Texas Gulf
Coast. In order to finance this redemption and to renew and extend certain
existing debt, Texas Gulf Coast borrowed $3,400,000 from Texas Commerce Bank.
This debt bears interest at the prime rate and is scheduled to be repaid at
$175,000 per quarter, plus accrued interest.
Interest Rate Sensitivity. The objectives of monitoring and managing
-------------------------
the interest rate risk position of the balance sheet are to contribute to
earnings and to minimize the adverse changes in net interest income. The
potential for earnings to be affected by changes in interest rates is inherent
in a financial institution.
Interest rate sensitivity is the relationship between changes in
market interest rates and changes in net interest income due to the repricing
characteristics of assets and liabilities. An asset-sensitive position in a
given period will result in more assets being subject to repricing; therefore,
market interest rate changes will be reflected more quickly in asset rates. If
interest rates decline, such a position will normally have an adverse effect on
net interest income. Conversely, in a liability-sensitive position, where
liabilities reprice more quickly than assets in a given period, a decline in
rates will benefit net interest income.
One way to analyze interest rate risk is to evaluate the balance of
the interest sensitivity position. A mix of assets and liabilities that are
roughly equal in volume and repricing represents a matched interest sensitivity
position. Any excess of assets or liabilities results in an interest
sensitivity gap. The purpose of this analysis is to be aware of the potential
risk on future earnings resulting from the impact of possible future changes in
interest rates on currently existing net asset or net liability positions.
However, this type of analysis is as of a point in time, when in fact that
position can quickly change as market conditions, customer needs, and management
strategies change. Additionally, interest rate changes do not affect all
categories of assets and liabilities equally or at the same time.
At December 31, 1993, earning assets that were repriceable within one
year or maturing within one year totalled $87,498,000, while interest-bearing
liabilities that reprice within one year or mature within one year totalled
$146,313,000.
-41-
<PAGE>
The following table presents the interest sensitivity position of Texas
Gulf Coast at December 31, 1993:
INTEREST SENSITIVITY
As of December 31, 1993
(In Thousands)
<TABLE>
<CAPTION>
Rate-Sensitive Within Non-rate
---------------------
90 Days One Year Total Sensitive Total
------- -------- ----- --------- -----
<S> <C> <C> <C> <C> <C>
Earning Assets:
Loans, Net of Unearned
Discount $ 18,425 $11,699 $ 30,124 $ 48,013 $ 78,137
Investment Securities 9,937 9,035 18,972 61,184 80,156
Federal Funds Sold 38,302 0 38,302 0 38,302
Other Earning Assets 100 0 100 0 100
-------- ------- -------- -------- --------
Total Earning Assets 66,764 20,734 87,498 109,197 196,695
======== ======= ======== ======== ========
Interest Bearing Liabilities:
Interest-Bearing Deposits 120,123 25,190 145,313 5,480 150,793
Borrowings 1,000 0 1,000 105 1,105
-------- ------- -------- -------- --------
Total Interest-Bearing
Liabilities 121,123 25,190 146,313 5,585 151,898
-------- ------- -------- -------- --------
Interest Sensitivity Gap $(54,359) $(4,456) $(58,815)
======== ======= ========
Ratio of Earning Assets to
Interest-Bearing Liabilities 55.10% 82.30% 59.80%
</TABLE>
Capital Management. The Board of Governors has adopted a system using the
------------------
risk-based capital adequacy guidelines to evaluate the capital adequacy of bank
holding companies. Under the risk-based capital guidelines, different
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. Certain
off-balance sheet items, which previously were not expressly considered in
capital adequacy computations, are added to the risk-weighted asset base by
converting to them a balance sheet equivalent and assigning to them the
appropriate risk weight.
The guidelines require that banking organizations achieve minimum ratios of
total capital-to-risk-weighted assets of 8.0% (of which at least 4.0% should be
in the form of certain "Tier 1" elements). "Total Capital" is defined as the
sum of "Tier 1" and "Tier 2" capital elements, with "Tier 2" being limited to
100% of "Tier 1." For bank holding companies, "Tier 1" capital includes, with
certain restrictions, common stockholders' equity, perpetual preferred stock,
and minority interests in consolidated subsidiaries. "Tier 2" capital includes,
with certain limitations, certain forms of perpetual preferred stock as well as
maturing capital instruments and the reserve for possible credit losses.
-42-
<PAGE>
The following table summarizes Texas Gulf Coast's Tier 1 and Total Capital:
<TABLE>
<CAPTION>
TIER 1 AND TOTAL CAPITAL
(In Thousands)
December 31, 1993
-------------------
Amount Ratio
------ -----
<S> <C> <C>
Tier 1 Capital $16,751 17.9%
Tier 1 Capital Minimum Requirement 3,745 4.0
-------
Excess Tier 1 Capital $13,006 13.9%
====== =====
Total Capital $20,254 21.6%
Total Capital Minimum Requirement 7,490 8.0
------ ----
Excess Total Capital $12,764 13.6%
====== ====
Risk Adjusted Assets, Net of Goodwill $93,629
======
</TABLE>
At December 31, 1993, Texas Gulf Coast's ratios of "Tier 1" and Total
Capital to risk-weighted assets were approximately 17.9% and 21.6% respectively.
Both ratios significantly exceed regulatory minimums.
In addition to the risk-based capital guidelines, the Board of Governors
and the FDIC have adopted the use of a leverage ratio as an additional tool to
evaluate the capital adequacy of banks and bank holding companies. The leverage
ratio replaces the old standard of primary and secondary capital, and is defined
to be a company's "Tier 1" capital divided by its adjusted total assets. The
leverage ratio adopted by the federal banking agencies requires a ratio of 3.0%
"Tier 1" capital to adjusted total assets for bank holding companies with a
BOPEC rating of 1. All other institutions will be expected to maintain a 100 to
200 basis point cushion, i.e., these institutions will be expected to maintain a
leverage ratio of 4.0% to 5.0%. Texas Gulf Coast's leverage ratio at December
31, 1993 was 7.7%, which also exceeds the regulatory minimum.
Pending Regulatory Matters. The Federal Deposit Insurance Corporation
--------------------------
("FDIC") has proposed a reduction in the premium rates paid by federally-insured
banks to the FDIC. The new rates would be at various levels ranging from $.04
per $100 of deposits to $.23 per $100 of deposits with the rate paid by each
bank determined by its financial strength. If the premium rate reduction
proposal is adopted, this would have a favorable impact on the net income of
Texas Gulf Coast. In 1994, the TGC Banks paid aggregate premiums of
approximately $409,000 based on a rate of $.23 per $100 of deposits. No
assurance can be given as to whether the proposal will be adopted in its present
form and, if adopted, at what rate the TGC Banks will be assessed.
Statistical Information
Condensed Average Balance Sheets. Although year-end statistics present
--------------------------------
general trends, the daily average balance sheets are more indicative of Texas
Gulf Coast's levels of activity throughout the years indicated and are less
subject to day-to-day business activity fluctuations.
-43-
<PAGE>
The following schedule sets forth a comparison of the consolidated daily average
balance sheets for Texas Gulf Coast for the years ended December 31, 1993, 1992
and 1991.
<TABLE>
<CAPTION>
DAILY AVERAGE BALANCE SHEET
(In Thousands)
Year Ended December 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Assets:
Cash and due from banks $ 13,957 $ 15,767 $ 13,505
Loans, net 78,616 81,298 76,149
Interest-bearing deposits 600 600 421
Investment securities:
Taxable 73,446 75,281 69,262
Non-taxable 12,245 8,838 11,516
------- ------- -------
Total Securities 85,691 84,119 80,778
------- ------- -------
Federal funds sold 31,219 26,056 23,138
Other assets 8,151 9,299 9,953
------- ------- -------
Total Assets $218,234 $217,139 $203,944
======= ======= =======
Liabilities and Stockholders' Equity:
Deposits
Non-interest bearing $ 42,521 $ 39,873 $ 36,056
Savings 25,373 22,432 18,130
Interest bearing time 125,569 130,892 126,837
------- ------- -------
Total Deposits 193,463 193,197 181,023
------- ------- -------
Borrowings 1,215 1,475 1,700
Other liabilities 1,883 1,772 1,820
------- ------- -------
Total Liabilities 196,561 196,444 184,543
------- ------- -------
Stockholders' Equity 21,673 20,695 19,401
------- ------- -------
Total Liabilities and $218,234 $217,139 $203,944
Stockholders' Equity ======= ======= =======
</TABLE>
Net Interest Income. The data used in the analysis of net interest income
-------------------
changes is derived from the daily average levels of interest-bearing assets and
liabilities as well as from the rates earned and paid on these amounts. The
following schedule gives a history of Texas Gulf Coast's daily average interest-
earning assets and interest-bearing liabilities for the years ended December 31,
1993, 1992 and 1991. Net interest income is developed on a taxable equivalent
basis because management of Texas Gulf Coast is of the opinion that such a
presentation facilitates the analytical discussion of changes in the components
of earnings that follows. A history of the net interest margin on a taxable
equivalent basis (using a federal income tax rate of 34%), including detailed
information regarding its components, is set forth below.
-44-
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED AVERAGE BALANCES, INTEREST AND RATES
(In Thousands)
December 31, 1993 December 31, 1992 December 31, 1991
------------------------------- ------------------------------ -------------------------------
Avg. Bal. Interest Avg. Rate Avg. Bal. Interest Avg. Rate Avg. Bal. Interest Avg. Rate
--------- -------- ---------- --------- -------- ---------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Securities:
Taxable $ 73,446 4,552 6.20% 75,281 5,466 7.26% 69,262 5,832 8.42%
Non-taxable 12,245 1,159 9.47% 8,838 1,105 12.50% 11,516 1,458 12.66%
Due from CD's 600 20 3.33% 600 23 3.83% 421 38 9.03%
Federal Funds Sold 31,219 940 3.01% 26,056 900 3.45% 23,138 1,490 6.44%
Net Loans 78,616 7,049 8.97% 81,298 7,791 9.58% 76,149 8,482 11.14%
-------- ------- ---- -------- ------- ----- -------- ------- -----
Total interest-earning assets 196,126 13,720 7.00% 192,073 15,285 7.96% 180,486 17,300 9.59%
-------- ------- ---- -------- ------- ----- -------- ------- -----
Cash and due from banks 13,957 15,767 13,505
Premises, equipment and other 8,151 9,299 9,953
-------- -------- --------
$218,234 $217,139 $203,944
======== ======== ========
Deposits:
Demand-interest bearing 56,229 1,215 2.16% 56,039 1,755 3.13% 42,604 2,147 5.04%
Savings 25,373 708 2.79% 22,432 770 3.43% 18,130 983 5.42%
Time 69,340 2,387 3.44% 74,853 3,290 4.40% 84,233 5,703 6.77%
Borrowings 1,215 79 6.50% 1,475 113 7.66% 1,700 126 7.41%
-------- ------- ---- -------- ------- ----- -------- ------- -----
Total interest-bearing 152,157 4,389 2.89% 154,799 5,928 3.83% 146,657 8,959 6.11%
liabilities -------- ------- ---- -------- ------- ----- -------- ------- -----
Noninterest-Bearing Deposits 42,521 39,873 36,056
Other liabilities 1,883 1,772 1,820
Stockholders' equity 21,673 20,695 19,401
-------- -------- --------
$218,234 $217,139 $203,944
======== ======== ========
Net interest earnings $ 9,331 $ 9,357 $ 8,341
======= ======= =======
Net yield on interest-earning 4.76% 4.87% 4.62%
assets ==== ===== =====
Interest rate on spread 4.11% 4.13% 3.48%
==== ===== =====
</TABLE>
Note: Average balances are based upon daily balances. The interest on
non-taxable securities has been calculated on a fully taxable equivalent
basis - 34% tax basis. Non-accruing loans have been included in assets
for these computations, thereby reducing yields on these loans. Net yield
on interest earning assets is equal to net interest earnings divided by
average interest earning assets.
-45-
<PAGE>
The following rate/volume variance has been allocated to the changes in rates.
Non-accrual loans are included in the calculations made below. The interest on
non-taxable investment income has been calculated on a fully taxable equivalent
basis incorporating an effective tax rate of 34%.
<TABLE>
<CAPTION>
RATE/VOLUME ANALYSIS
CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
(In Thousands)
December 31, 1993 December 31, 1992
--------------------------------------- ---------------------------------------
Changes From Changes in Changes in Changes from Changes in Changes in
Prior Year Volume Rates Prior Year Volume Rates
------------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Taxable Securities $ (914) $(133) $ (781) $ (366) $ 507 $ (873)
Non-taxable securities 54 426 (372) (353) (339) (14)
Due from CD's (3) -- (3) (15) 16 (31)
Federal funds sold 40 178 (138) (590) 188 (778)
Loans (742) (257) (485) (691) 574 (1,265)
------- ----- ------- ------- ----- -------
Total interest income (1,565) 214 (1,779) (2,015) 946 (2,961)
------- ----- ------- ------- ----- -------
Interest expense:
Deposits:
Demand-interest bearing (540) 6 (546) (392) 677 (1,069)
Savings (62) 101 (163) (213) 233 (446)
Time (903) (243) (660) (2,413) (635) (1,778)
Borrowings (34) (20) (14) (13) (17) 4
------- ----- ------- ------- ----- -------
Total interest expense (1,539) (156) (1,383) (3,031) 258 (3,289)
------- ----- ------- ------- ----- -------
Net interest income $ (26) $ 370 $ (396) $ 1,016 $ 688 $ 328
======= ===== ======= ======= ===== =======
</TABLE>
-46-
<PAGE>
Loan Portfolio. The following tables show the composition of the loan
--------------
portfolio at December 31, 1993, 1992 and 1991 and the loan maturity distribution
as of December 31, 1993:
LOAN PORTFOLIO
(In Thousands)
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1993 1992 1991
----------- ---------- ----------
<S> <C> <C> <C>
Commercial and industrial $10,574 $9,235 $11,813
Real estate - construction 1,733 1,848 1,980
Real estate - other 29,994 37,227 31,603
Installment 33,742 34,695 36,113
Other 2,094 1,374 1,680
------ ------ ------
Total loans, net of
unearned discount $78,137 $84,379 $83,189
====== ====== ======
<CAPTION>
LOAN MATURITY DISTRIBUTION
As of December 31, 1993
Due in:
-----------------------------------
1 year 1-5 After
or less years 5 years
------- ----- -------
<S> <C> <C> <C>
Commercial and industrial loans $ 6,903 $ 3,477 $194
Real estate construction 1,772 32 99
------ ------ -------
Total $ 8,675 $ 3,509 $ 293
====== ====== =======
Loans due after 1 year which have:
Predetermined interest rates $ 3,802
Floating or adjustable rates --
------
Total $ 3,802
======
</TABLE>
Provision for Credit Losses. The transactions occurring in the allowance
---------------------------
for credit losses for the last five fiscal years, including a breakdown of net
charge-offs by type of loan, are as follows:
-47-
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
(In Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1993 1992 1991 1990 1989
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Average loans outstanding $79,636 $82,219 $82,028 $82,122 $80,872
======= ======= ======= ======= =======
Loans outstanding at year-end $78,137 $84,377 $83,276 $80,414 $82,810
======= ======= ======= ======= =======
Allowance at beginning of period $ 1,060 $ 1,152 $ 1,297 $ 1,142 $ 1,038
Provision charged to expense 475 263 235 591 544
Loans charged off:
Commercial and industrial (228) (114) (227) (204) (231)
Real estate - construction 0 0 0 0 0
Real estate - other (26) (19) (20) (18) (44)
Installment (308) (287) (222) (323) (273)
Other (7) 0 0 0 0
------- ------- ------- ------- -------
Total (569) (420) (469) (545) (548)
------- ------- ------- ------- -------
Loans recovered:
Commercial and industrial 12 21 32 52 35
Real estate - construction 0 0 0 0 0
Real estate - other 9 8 3 3 39
Installment 35 36 54 54 34
Other 0 0 0 0 0
------- ------- ------- ------- -------
Total 56 65 89 109 108
------- ------- ------- ------- -------
Net loans charged off (513) (355) (380) (436) (440)
------- ------- ------- ------- -------
Allowance at end of period $ 1,022 $ 1,060 $ 1,152 $ 1,297 $ 1,142
======= ======= ======= ======= =======
Ratios:
Allowance as a percent of 1.31% 1.26% 1.38% 1.61% 1.38%
loans outstanding at year-end
Allowance as percent of 1.28% 1.29% 1.40% 1.58% 1.41%
average loans
Net loans charged off as a
percent of average loans
outstanding 0.64% 0.43% 0.46% 0.53% 0.54%
Allowance as a percent of
nonperforming loans 87.3% 68.7% 77.5% 80.3% 61.3%
</TABLE>
-48-
<PAGE>
Management of the TGC Banks continues to concentrate on identifying and
addressing credit problems. Efforts have been undertaken and are ongoing to
strengthen credit review policies and procedures. Intensive efforts are ongoing
to ensure that any existing or identifiable developing problem loans receive the
necessary effective attention. The TGC Banks' procedures for reviewing the
adequacy of their allowances for credit losses involve a review of lending
policies and practices, the lending history of personnel involved in the lending
process and the compliance by those personnel with the policies. Consideration
also is given to (i) management's review of individual outstanding and proposed
credits, (ii) the current size and composition of the loan portfolio, (iii)
expectations of future economic conditions and their impact on particular
industries and specific borrowers, (iv) the level and composition of non-
performing loans, (v) evaluation of the underlying collateral for secured loans,
(vi) historical loan loss and recovery experience and (vii) comments made during
regular examinations or audits by banking regulators, each TGC Bank's internal
loan review staff and independent auditors. The above-referenced policies and
procedures have been implemented by each of the TGC Banks.
-49-
<PAGE>
The allocation of the TGC Banks' allowances for credit losses by loan category
for the five years ended December 31, 1993, 1992, 1991, 1990 and 1989 is
presented in the following table:
<TABLE>
<CAPTION>
ALLOWANCE FOR CREDIT LOSSES
(In Thousands)
December 31,
-----------------------------------------------------------------------------------
1993 1992 1991 1990 1989
--------------- --------------- --------------- --------------- ---------------
% of % of % of % of % of
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial $ 410 13.5% $ 288 10.9% $ 558 14.2% $ 485 11.1% $ 481 11.9%
Real estate - construction * 2.2% * 2.2% * 2.4% * 3.2% * 2.7%
Real estate - other 47 38.4% 48 44.1% 49 38.0% 43 35.3% 92 34.9%
Installment 553 43.2% 724 41.1% 545 43.4% 769 48.4% 569 50.1%
Other 12 2.7% * 1.7% * 2.0% * --% * 0.4%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $1,022 100.0% $1,060 100.0% $1,152 100.0% $1,297 100.0% $1,142 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
*Less than $1,000
-50-
<PAGE>
Non-Performing Assets. All loans which cause management to have doubt as to
---------------------
the borrower's ability to substantially comply with present loan repayment terms
are included in the schedule of non-performing loans.
Non-performing loans consist of loans on which interest is not being accrued;
i.e., loans which are 90 days or more past due as to principal and/or interest
payment and not yet in a non-accruing status. The policy of the TGC Banks is to
continue to accrue interest on loans which are 90 days or more past due if
periodic payments are being made on the loans. If a loan is classified as past
due and payments then resume on the loan, it continues to be classified as past
due until all past due amounts are paid. The TGC Banks had no material
renegotiated or troubled debt restructuring loans during the years 1989 through
1993.
The following table discloses information regarding non-performing assets at
the end of each of the last five years:
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS
(In Thousands)
December 31,
--------------------------------------
1993 1992 1991 1990 1989
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $1,151 $1,241 $1,456 $1,607 $ 747
Past due 90 days or more 20 302 30 8 1,116
------ ------ ------ ------ ------
Total non-performing/
non-accrual loans 1,171 1,543 1,486 1,615 1,863
Other Real Estate Owned 1,477 1,142 1,746 2,108 1,984
------ ------ ------ ------ ------
Total non-performing
assets $2,648 $2,685 $3,232 $3,723 $3,847
====== ====== ====== ====== ======
</TABLE>
The TGC Banks included in reported income for 1993 $4,319 of interest received
on non-accrual loans. Had these loans paid interest at their original rates,
the TGC Banks would have reported $178,716 of interest on those non-accrual
loans.
-51-
<PAGE>
Investment Securities. The book and market values of investment securities
---------------------
held by Texas Gulf Coast as of the dates indicated are summarized as follows:
<TABLE>
<CAPTION>
INVESTMENT SECURITIES
(In Thousands)
December 31,
-------------------------
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Book Value:
U.S. Treasury & Agencies $62,765 $65,768 $76,234
States and Political Subdivisions 16,552 10,401 11,409
Other 839 495 569
------- ------- -------
Total Book Value $80,156 $76,664 $88,212
======= ======= =======
Market Value $81,905 $78,323 $90,058
======= ======= =======
</TABLE>
The following table shows as of December 31, 1993, the distribution of
maturities and the weighted average interest yields to maturity of Texas Gulf
Coast's investment securities (dollars in thousands):
<TABLE>
<CAPTION>
INVESTMENT SECURITIES
MATURITIES AND YIELDS
(In Thousands)
U.S. States & Mortgage-
Treasury Political backed
& Agencies Subdivisions Securities Other Total
----------- ------------- ----------- ------ ---------
<S> <C> <C> <C> <C> <C>
Due within one year
Book Value $13,672 $1,548 $ 218 $ 100 $15,538
Yield 6.43% 10.21% 2.04% 3.00% 6.72%
Due after one but within five years
Book Value $45,015 $6,322 $ 46 $ -- $51,538
Yield 5.68% 8.49% 8.73% --% 6.01%
Due after five but within ten years
Book Value $ 4,078 $8,187 $ -- $ -- $12,265
Yield 6.13% 5.64% --% --% 5.80%
Due after ten years
Book Value $ -- $ 495 $ 355 $ 120 $ 970
Yield --% 7.65% 6.73% 3.00% 6.74%
</TABLE>
The interest on non-taxable investment securities has been calculated on a fully
taxable equivalent basis incorporating an effective tax rate of 34%.
Deposits. The most important source of the TGC Banks' funds is deposits. The
--------
types of deposits that were in the TGC Banks on a daily average basis and the
related average rate paid during each of the last three years are broken down as
follows:
-52-
<PAGE>
<TABLE>
<CAPTION>
DEPOSITS
(In Thousands)
1993 1992 1991
-------------- -------------- ---------------
Rate Rate Rate
Amount Paid Amount Paid Amount Paid
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Demand - non-interest bearing $42,521 --% $39,873 -- % $36,056 -- %
Demand - interest bearing 56,229 2.16% 56,039 3.13% 42,604 5.04%
Savings 25,373 2.79% 22,432 3.43% 18,130 5.42%
Time 69,340 3.44% 74,853 4.40% 84,233 6.77%
</TABLE>
The following table provides certain information regarding
certificates of deposit issued by the TGC Banks in amounts equal to or exceeding
$100,000:
<TABLE>
<CAPTION>
CERTIFICATES OF DEPOSIT
As of December 31, 1993
(In Thousands)
<S> <C>
Three (3) months or less $ 5,824
Over three (3) months through six (6) months 4,050
Over six (6) months through twelve (12) months 1,303
Over twelve (12) months 725
-------
Total $11,902
=======
</TABLE>
Long Term Debt. On December 31, 1994, the existing debt of $900,000
--------------
was combined with an additional $2,500,000 of debt which was used to redeem 100%
of the then-outstanding TGC Preferred Stock. The new debt, totalling
$3,400,000, will have quarterly payments of $175,000 plus interest and will
mature on December 31, 1996. The debt bears interest at the prime rate and the
debt is secured by the stock owned in the TGC Banks.
GULF SOUTHWEST
Gulf Southwest is a Texas corporation organized in 1982 and is
registered under the Bank Holding Company Act. The principal executive offices
of Gulf Southwest are located at 4200 Westheimer, Suite 210, Houston, Texas
77027, and its telephone number at such address is (713) 622-0042.
Gulf Southwest's principal business activities are conducted through
Merchants Bank, a state-chartered bank with five branch locations in the
Houston, Texas area. Merchants Bank draws substantially all of its deposits and
makes substantially all of its loans in the Houston/Harris County, Texas area.
In addition, Gulf Southwest has formed GSWDP, a non-banking subsidiary, to
conduct various aspects of its non-banking operations.
As a bank holding company, Gulf Southwest may own or control, directly
or indirectly, one or more banks and furnish services to such banks. All of the
banking activities of Gulf Southwest are currently conducted by Merchants Bank.
The officers and directors of Merchants Bank direct its operations. The
principal role of Gulf Southwest is to provide management assistance with
respect to various aspects of Merchants Bank's operations, including the areas
of asset and liability management, business development, loan policies and
procedures, capital
-53-
<PAGE>
planning, advertising, data processing, credit and loan administration,
accounting, auditing, financial reporting and compliance with legal and
governmental regulations.
Other than Merchants Bank's charter to operate as a bank, the business
of Gulf Southwest is not materially dependent upon any patent, trademark,
license, franchise or concession. The business of Gulf Southwest is not
seasonal.
As of December 31, 1994, Gulf Southwest employed 160 persons.
Merger Sub
Merger Sub is a Nevada corporation organized in 1994, and is wholly
owned by Gulf Southwest. The only activity of Merger Sub is holding the stock
of Merchants Bank and GSWDP, which was transferred to Merger Sub by Gulf
Southwest on November 30, 1994.
Merger Sub currently has no employees.
Merchants Bank
Merchants Bank is a state-chartered banking association organized in
1970. Merchants Bank's main office is at 999 North Shepherd, Houston, Texas.
It also has four branches in adjoining communities. Merchants Bank does not
engage in international operations or trust activities. Gulf Southwest owns
100% of Merger Sub. Merger Sub owns 100% of the outstanding stock of Merchants
Bank.
Merchants Bank offers a wide range of financial services to
commercial, industrial, financial and individual customers, including short-term
and medium-term loans, revolving credit arrangements, inventory and accounts
receivable financing, equipment financing, real estate lending, Small Business
Administration lending, letters of credit, installment and other consumer loans,
savings accounts and various savings programs, including individual retirement
accounts, and interest and non-interest-bearing checking accounts. Other
services include federal tax depository, safe deposit, and night depository
services.
Environmental Issues. Under the Comprehensive Environmental Response,
--------------------
Compensation and Liability Act ("CERCLA"), an owner or operator of a property
where hazardous substances are located is potentially liable for hazardous waste
cleanup costs. CERCLA specifically excludes from the definition of owner or
operator "a person, who without participating in the management of a vessel or
facility, holds indicia of ownership primarily to protect his security interest
in the vessel or facility." However, courts have reached differing conclusions
as to what actions can be taken by a secured lender without such lender being
deemed to be "participating in the management" of a property. Merchants Bank is
not aware of any material liability to which it may be subject for hazardous
waste clean-up costs. If a property is deemed to have a potential environmental
problem, Merchants Bank will not foreclose on the property until an
environmental study has been performed.
-54-
<PAGE>
Competition. The activities in which Merchants Bank engages are
-----------
highly competitive. Each activity engaged in and geographic market served
involves competition with other banks, as well as with non-banking financial
institutions and non-financial enterprises. Merchants Bank actively competes
with other banks in its efforts to obtain deposits and make loans, in the scope
of types of services offered, in interest rates paid on time deposits and
charged on loans and in other aspects of banking. At December 31, 1994,
Merchants Bank had deposits of approximately $226,450,000.
In addition to competing with other commercial banks within and
outside its primary service area, Merchants Bank competes with other financial
institutions engaged in the business of making loans or accepting deposits, such
as savings and loan associations, credit unions, industrial loan associations,
insurance companies, small loan companies, finance companies, mortgage
companies, real estate investment trusts, certain governmental agencies, credit
card organizations and other enterprises. In recent years, competition for
funds from securities brokers for money market accounts has intensified.
Additional competition for deposits comes from government and private issuers of
debt obligations and other investment alternatives for depositors such as money
market funds.
Gulf Southwest believes that price (as reflected by interest rates
charged or paid) is the principal means of competition in attracting deposits
and loans. However, service and convenience are also important factors,
especially with regard to smaller loans and deposits.
Customers. Merchants Bank is not dependent upon any single customer
---------
or few customers.
Financial Information. The following table sets forth certain balance
---------------------
sheet and operating information with respect to Merchants Bank:
<TABLE>
<CAPTION>
SELECTED FINANCIAL INFORMATION
(In Thousands)
September 30, 1994
------------------
<S> <C>
Balance Sheet:
Assets $ 238,856
Deposits 215,651
Loans 139,914
Allowance for Credit Losses 1,886
Total Equity 21,660
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1994 December 31, 1993
------------------ ------------------
<S> <C> <C>
Results of Operations:
Interest Income $ 12,311 $ 15,799
Interest Expense 3,564 4,907
Provision for Credit Losses 50 410
Net Earnings 2,371 2,140
</TABLE>
-55-
<PAGE>
Non-Banking Activities
GSWDP performs certain data processing services for Merchants Bank. In
addition, the Board of Governors has authorized GSWDP to furnish data processing
services to banks in Texas which are not affiliated with Gulf Southwest. As of
December 31, 1994, GSWDP was furnishing data processing services for one non-
affiliated bank and the TGC Banks. Merger Sub owns 100% of the outstanding
capital stock of GSWDP.
Properties
Gulf Southwest's primary asset is its investment in Merchants Bank, and
Merchants Bank's primary asset is its loan portfolio.
The branch facility of Merchants Bank located at 1111 Spencer Highway, South
Houston, Texas consists of a two-story brick building owned by Merchants Bank.
The banking quarters and the adjacent fourteen-window drive-in facility consist
of approximately 27,000 square feet.
The branch facility of Merchants Bank located at 2051 West Main, League City,
Texas consists of approximately 13,000 square feet of office and lobby space
with an eight-window drive-in facility and is owned by Merchants Bank.
The branch facility located at 3409 Spencer Highway, Pasadena, Texas consists
of a two-story brick veneer building containing approximately 4,400 square feet
and is owned by Merchants Bank.
The other banking quarters and adjacent land used for parking and drive-in
facilities are leased.
Legal Proceedings of Gulf Southwest
Neither Gulf Southwest nor any of its subsidiaries is a party to any legal
proceedings which, in management's judgment, based upon opinions of legal
counsel, would have a material adverse effect on the consolidated financial
position of Gulf Southwest and its subsidiaries.
Market for GSW Common Stock and Related Shareholder Matters
Trading Market. There is no established trading market for shares of GSW
--------------
Stock. However, a limited market for shares of GSW Common Stock exists, and
such securities are traded on a sporadic basis. The Board of Directors of Gulf
Southwest has no present intention to arrange for the listing of the GSW Common
Stock on any stock exchange after the Merger.
-56-
<PAGE>
The following table sets forth the number of shares of GSW Common Stock
presented for transfer on the books of Gulf Southwest for each quarterly period
within the last three calendar years.
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
First Quarter 496 1,438 10,338
Second Quarter 460 143 3,021
Third Quarter 16,690 714 5,581
Fourth Quarter 190 4,179 2,652
</TABLE>
Because there is no public market for the GSW Common Stock, the
trading price for GSW Common Stock is determined by private negotiations between
the buyer and the seller. Gulf Southwest has pricing information with respect
to only four transactions during the periods presented above. In July 1992, two
transfers of 5,428 shares took place, each at a price of $3.50 per share. In
October 1992, a transfer of 3,300 shares took place at a price of $2.56 per
share, and a transfer of 167 shares took place at a price of $6.00 per share.
These prices may or may not reflect the fair market value of the shares at the
time of the transfers and should not be viewed as indicative of the current or
future value of the GSW Common Stock. The remaining transfers during the
periods presented above may or may not have been at prices similar to those
stated.
Subsequent to the Merger, any person who was an affiliate of Texas
Gulf Coast on the date of the Special Meeting must comply with certain
restrictions on the manner in which he or she may resell his or her shares of
GSW Stock obtained in connection with the Merger. See "Description of the
Merger - Resales of GSW Common Stock by Shareholders of Texas Gulf Coast."
Holders. At January 3, 1995, GSW Common Stock was owned of record
-------
by approximately 636 shareholders. On such date, no shares of GSW Preferred
Stock were issued and outstanding. The officers and directors of Gulf Southwest
collectively owned 22.8% of the GSW Common Stock as of such date.
Dividends and Dividend Policy
Dividend Policy. Holders of GSW Common Stock are entitled to receive
---------------
such dividends as are declared by Gulf Southwest's Board of Directors in
accordance with Gulf Southwest's dividend policy. Factors which Gulf
Southwest's Board of Directors considers prior to declaring a dividend include
earnings, regulatory capital requirements, general business conditions and the
capital needs of it and its subsidiaries, as well as other factors which the
Board of Directors may deem relevant.
-57-
<PAGE>
Dividend History. Gulf Southwest paid quarterly cash dividends on GSW
----------------
Common Stock from 1983 through December 31, 1986. Effective March 31, 1987,
Gulf Southwest suspended the payment of dividends to holders of GSW Common Stock
as a consequence of losses sustained from operations and a resulting desire to
conserve capital. On December 14, 1993, Gulf Southwest's Board of Directors
resumed the payment of cash dividends on GSW Common Stock by declaring a
quarterly cash dividend of $.05 per share and a special cash dividend of $.05
per share to be paid on December 27, 1993 to the holders of GSW Common Stock as
of December 14, 1993. Since that date regular quarterly dividends of $0.05 per
share of GSW Common Stock have been paid.
Principal Shareholders
As of January 3, 1995, 1,258,636 shares of GSW Common Stock were
outstanding, each of which is entitled to one vote.
The following table sets forth information regarding the beneficial
ownership of GSW Common Stock as of January 3, 1995 by each of Gulf Southwest's
directors, each beneficial owner of more than five percent of the GSW Common
Stock and by all directors and officers as a group.
-58-
<PAGE>
BENEFICIAL STOCK OWNERSHIP
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership of Percent of
Name GSW Common Stock/(1)/ GSW Common Stock
---- --------------------- -----------------
<S> <C> <C>
Norman H. Bird 820 Less than 1%
Donald R. Harding 4,379 Less than 1%
J. W. Lander, Jr./(2)/ 696,658 55.2%
J. W. Lander, III/(3)/ 6,772 Less than 1%
Vanco Trusts/(3)(4)/ 341,758 27.1%
All directors and officers as 701,857 55.7%
a group (4 persons)/(5)/
</TABLE>
(1) Unless otherwise indicated, each person has sole voting and investment
powers over the shares listed.
(2) Certain shareholders have entered into a voting trust agreement with J. W.
Lander, Jr., pursuant to which Mr. Lander is voting trustee. The voting
trust may be terminated only by the written agreement of holders owning at
least a majority of the shares subject to the voting trust agreement. An
aggregate of 696,658 shares of GSW Common Stock are subject to the voting
trust agreement, of which 275,828 shares are owned by Mr. Lander. Mr.
Lander, as voting trustee, has all rights and powers with respect to the
shares subject to the voting trust agreement as if he were the sole
shareholder, except that Mr. Lander may not, without the consent of the
holders of at least two-thirds of the shares subject to such voting trust
agreement, vote the shares in favor of or execute any consent with respect
to (a) increases in capital stock, (b) sales or mortgages of all or
substantially all of the assets of Gulf Southwest, (c) dissolution of Gulf
Southwest, (d) charter amendments, (e) consolidation or merger, or (f)
partial liquidation. Mr. Lander's address is 4200 Westheimer, Suite 210,
Houston, Texas 77027.
(3) The shares owned by this person/entity are subject to the voting trust
agreement referenced in footnote (2).
(4) The address for Vanco Trusts is P. O. Box 940, McAllen, Texas 78502-0940.
(5) Includes shares referenced in footnotes (2) and (3) which are subject to
the voting trust agreement referenced in footnote (2).
Vanco Trusts and J. W. Lander, Jr. may be deemed to be controlling persons
of Gulf Southwest, within the meaning of the rules promulgated by the Securities
and Exchange Commission.
The following table sets forth information regarding the beneficial
ownership of GSW Common Stock subsequent to the Merger by each of Gulf
Southwest's directors and A. Harrel Blackshear, who will become a director of
Gulf Southwest immediately following the Merger, each beneficial owner of more
than five percent of the GSW Common Stock and by all of Gulf Southwest's then-
current directors and officers as a group:
-59-
<PAGE>
BENEFICIAL STOCK OWNERSHIP SUBSEQUENT TO THE MERGER
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership
of GSW Common Percent of
Name Stock/(1)(2)/ GSW Common Stock/(2)/
---- -------------------- ---------------------
<S> <C> <C>
Norman H. Bird 820 Less than 1%
A. Harrel Blackshear 4,446 Less than 1%
Donald R. Harding 4,379 Less than 1%
J. W. Lander, Jr./(3)/ 924,122 47.2%
J. W. Lander, III/(4)/ 7,043 Less than 1%
Vanco Trusts/(4)/ 453,995 23.2%
All directors and officers 933,767 47.7%
as a group (4 persons)/(5)/
</TABLE>
(1) Unless otherwise indicated, each person has sole voting and investment
powers over the shares listed.
(2) Assumes no holder of TGC Common Stock exercises dissenters rights and all
of the TGC Common Stock is exchanged for GSW Common Stock.
(3) Certain shareholders have entered into a voting trust agreement with J. W.
Lander, Jr., pursuant to which Mr. Lander is voting trustee. The voting
trust may be terminated only by the written agreement of holders owning at
least a majority of the shares subject to the voting trust agreement.
After the consummation of the Merger, an aggregate of 924,122 shares of GSW
Common Stock will be subject to the voting trust agreement, of which
390,784 shares will be owned by Mr. Lander. Mr. Lander, as voting trustee,
has all rights and powers with respect to the shares subject to the voting
trust agreement as if he were the sole shareholder, except that Mr. Lander
may not, without the consent of the holders of at least two-thirds of the
shares subject to such voting trust agreement, vote the shares in favor of
or execute any consent with respect to (a) increases in capital stock, (b)
sales or mortgages of all or substantially all of the assets of Gulf
Southwest, (c) dissolution of Gulf Southwest, (d) charter amendments, (e)
consolidation or merger, or (f) partial liquidation.
(4) The shares owned by this person/entity are subject to the voting trust
agreement referenced in footnote (3).
(5) Includes shares referenced in footnotes (3) and (4) which are subject to
the voting trust agreement referenced in footnote (3).
Officers and Directors
Set forth below is certain information relating to the executive officers
and directors of Gulf Southwest:
Norman H. Bird, 50, is Vice President and Secretary of Gulf Southwest and
has held these offices since May 1988. Mr. Bird is also Executive Vice
President of Merchants Bank, an office he has held since April 1985, and
has served as a director of Merchants
-60-
<PAGE>
Bank since December 1991. He is Secretary and a director of GSWDP,
positions he has held since April 1986. He has been a director of Gulf
Southwest since September 1991.
Donald R. Harding, 54, is President and a director of Merchants Bank and
has served in these capacities since March 1982. He has been a director of
Gulf Southwest since 1982.
J. W. Lander, Jr., 68, is Chairman of the Board of Gulf Southwest and has
served in this capacity since May 1988. He was President of Gulf Southwest
from July 1982 to April 1988. Mr. Lander is also Chairman of the Board and
a director of Merchants Bank, Texas City Bank, First Bank Mainland and
First Bank Pearland. In addition, he acts as an officer and a director of
Texas Gulf Coast, GSWDP and Central Data Processing, Inc., and is a
director of Stewart & Stevenson, Inc., a manufacturer of heavy equipment.
J. W. Lander, Jr. is the father of J. W. Lander, III. He has been a
director of Gulf Southwest since 1982.
J. W. Lander, III, 43, is President, Treasurer and Assistant Secretary of
Gulf Southwest and has served in these capacities since May 1988. Mr.
Lander is also Vice President and a director of Merchants Bank, President
and a director of GSWDP, a director and Vice President of Texas Gulf Coast
and a director of Texas City Bank, First Bank Mainland, First Bank
Pearland, and Central Data Processing, Inc. J. W. Lander, III is the son
of J. W. Lander, Jr. He has been a director of Gulf Southwest since 1983.
Officers and directors are elected annually and serve, unless they sooner
resign or are removed, until their respective successors are elected and
qualify.
Addition to the Board of Directors Following Merger
As a part of the Merger, Mr. A. Harrel Blackshear will be appointed to the
Board of Directors of Gulf Southwest. See "Texas Gulf Coast - Officers and
Directors" for the biographical information of Mr. Blackshear.
Executive Compensation
None of the executive officers or directors of Gulf Southwest receive any
compensation (other than dividends paid to all shareholders) from Gulf Southwest
and Gulf Southwest has no present intention to alter this policy. Each of such
persons receive compensation from Merchants Bank and will continue to do so
until employment with Merchants Bank is terminated.
The following table sets forth certain information with resect to annual
and long term compensation for services in all capacities for the years ended
December 31, 1993, 1992 and 1991 paid to the chief executive officer of Gulf
Southwest, who is the only executive officer of Gulf Southwest who received in
excess of $100,000 in total annual salary and bonuses for the fiscal year ended
December 31, 1993:
-61-
<PAGE>
<TABLE>
<CAPTION>
Annual Compensation
-----------------------------------
Name and Principal Other Annual All Other
Position Year Salary Compensation/(1)/ Compensation/(2)/
------------------ ---- ------ ----------------- -----------------
<S> <C> <C> <C> <C>
J. W. Lander, Jr. 1993 $141,270 $5,200 $9,064
Chairman & Chief 1992 $159,000 $4,000 $4,379
Executive Officer 1991 $143,163 $3,900 $4,248
</TABLE>
(1) Amounts included in this columnconsists of fees paid to Mr. Lander, Jr. in
his capacity as a director of Merchants Bank and a member of the Development
Board of Merchants Bank - League City. The value of the perquisites and
other personal benefits provided to Mr. Lander, Jr. did not exceed the
lesser of either (a) $50,000 or (b) 10% of Mr. Lander, Jr.'s total salary.
(2) Amounts included in this column include amounts contributed by Merchants
Bank on behalf of Mr. Lander pursuant to Merchants Bank's Employee Savings
Plan and the amount accrued with respect to Mr. Lander's account during the
fiscal year ended December 31, 1993.
Compensation Committee Interlocks and Insider Participation
Gulf Southwest does not have any paid employees or a separate compensation
committee. Compensation decisions are made by the Board of Directors of
Merchants Bank.
J. W. Lander, Jr. (Chairman of the Board and a director of Gulf Southwest)
and J. W. Lander, III (President, Treasurer and a director of Gulf Southwest)
each serve as officers and directors of Texas Gulf Coast. As directors of Texas
Gulf Coast, they participate in compensation decisions relating to its officers
and directors.
Donald R. Harding (a director of Gulf Southwest), Norman H. Bird (Vice
President, Secretary and a director of Gulf Southwest), J. W. Lander, Jr. and
J. W. Lander, III each serve as a director of Merchants Bank. Merchants Bank
does not have a separate compensation committee. Accordingly, such persons
participate in decisions regarding compensation of the officers and directors of
Merchants Bank. Each of such persons is also an executive officer of Merchants
Bank.
Meetings of the Board of Directors
Gulf Southwest has not established any committees of its Board of
Directors.
During 1994, the Board of Directors of Gulf Southwest heldfive meetings.
All directors attended 75% or more of the total number of meetings of the Board
of Directors of Gulf Southwest during 1994.
Certain Relationships and Related Transactions
Some of the officers and directors of Gulf Southwest and their affiliates
are customers of Merchants Bank. Such directors, officers and affiliates have
had transactions in the ordinary course of business with Merchants Bank,
including borrowings, all of which were on substantially
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<PAGE>
the same terms and conditions, including interest rates and collateral, as those
prevailing from time to time for comparable transactions with unaffiliated
persons and did not involve more than the normal risk of collectibility or
features unfavorable to Merchants Bank. Gulf Southwest expects that its
directors and officers and their affiliates will continue to enter into such
transactions on similar terms and conditions in the future.
In connection with Gulf Southwest's recapitalization in September 1991, J.
W. Lander, Jr. (Chairman of the Board) and Vanco Trusts (both of which are major
shareholders) loaned Gulf Southwest $350,000. The loan had an initial term of
three years, accrued interest at a rate of 10% per annum, payable quarterly, and
was collateralized by 8,235 shares of the common stock of Merchants Bank. In
November 1993 the principal balance and accrued interest was paid in full in
accordance with the terms of the note.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Nine-Month Period Comparison. Set forth below is a discussion of the
----------------------------
financial condition and results of operations of Gulf Southwest as of and for
the nine-month periods ended September 30, 1994 and 1993:
General. Gulf Southwest recorded earnings of $1,025,000 in the third
-------
quarter of 1994 and $2,608,000 in the first nine months of 1994 as compared to
$535,000 in the third quarter of 1993 and $1,509,000 in the first nine months of
1993.
Net Interest Income. Net interest income increased 13.8% in the third
-------------------
quarter of 1994 when compared to the same period of 1993 and increased by 8.6%
during the first nine months of 1994 as compared to the first nine months of
1993. The increase in net interest income of $375,000 and $690,000 for the third
quarter and first nine months of 1994, respectively, was the result of the shift
in funds from lower-earning assets to higher-earning assets and of interest
rates on earning assets increasing faster than the interest rates paid on
liabilities. This positive effect on operations is expected to continue in an
increasing interest rate environment.
Provision for Possible Loan Losses. The provision for possible loan losses
----------------------------------
decreased by $150,000 for the third quarter of 1994 and $360,000 for the first
nine months of 1994 when compared to the respective periods of 1993. The
provision for possible loan losses for the first nine months of 1994 was offset
by $150,000 in net losses charged to the allowance as compared with an offset of
$108,000 for the same period in 1993. The ratio of the allowance for possible
loan losses to outstanding loans decreased to 1.35% at September 30, 1994 from
1.59% at September 30, 1993. The allowance is $141,000 less at September 30,
1994 than it was on the comparable date in 1993. The improving quality of the
loans in Merchants Bank's portfolio allowed it to decrease the provision for
possible loan losses despite increased loan balances.
Merchants Bank's policy is to maintain a level in the allowance for
possible loan losses that is adequate to cover the loan losses sustained plus
provide for any future possible losses on problem loans. The adequacy of the
allowance is continually monitored and management considers the current level to
be appropriate based on an evaluation of the subsidiary bank's loan portfolio.
The transactions in the allowance for possible loan losses were as follows:
-63-
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
------------------------
1994 1993
----------- -----------
<S> <C> <C>
Balance at beginning of period $1,986,000 $1,725,000
Net losses charged to allowance (150,000) (108,000)
Provision charged to operating expenses 50,000 410,000
---------- ----------
Balance at end of period $1,886,000 $2,027,000
========== ==========
Period-end allowance as a percentage
of outstanding loans $ 1.35% 1.59%
</TABLE>
Loan losses are a regular cost of doing business for banks. Although the
regional economyhas improved from the late 1980's, net loan losses are expected
to continue to have an adverse impact on Merchants Bank, and, therefore, Gulf
Southwest's results of operations for the foreseeable future.
Non-accrual loans and past due loans (90 days or more) totaled $2,355,000
and $201,000, respectively, at September 30, 1994, as compared to $1,321,000 and
$323,000, respectively, at September 30, 1993.
Non-Interest Income. Total non-interest income increased by 26.2% for the
-------------------
third quarter of 1994 as compared to the third quarter of 1993 and increased by
7.6% for the first nine months of 1994 over the same period of 1993. The
components included in non-interest income for the indicated periods are as
follows:
<TABLE>
<CAPTION>
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
------------------- -----------------------
1994 1993 1994 1993
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Service charges and fees $639,000 $672,000 $1,933,000 $1,907,000
Other operating income 315,000 84,000 460,000 288,000
Securities transactions - - - 29,000
-------- -------- ---------- ----------
Total non-interest income $954,000 $756,000 $2,393,000 $2,224,000
======== ======== ========== ==========
</TABLE>
The total of the various service charges and fees earned by Merchants Bank
for the third quarter of 1994 decreased by $33,000, or 4.9%, over the same
period in 1993; but for the nine months of 1994, service charges and fees
increased $26,000, or 1.4% when compared to the same period of 1993.
Other operating income increased by $231,000 and $172,000 for the third
quarter of 1994 and the first nine months of 1994, respectively, as compared to
the same periods in 1993. These increases are primarily attributable to GSWDP
providing data processing services to the TGC Banks.
-64-
<PAGE>
Gulf Southwest maintains a policy of constantly monitoring and evaluating
service charges and fees to ensure that the fees charged reflect the cost of
service provided and remain competitive with other financial institutions
located in the subsidiary bank's market area.
Non-Interest Expenses. Non-interest expenses increased by 4.2% for the
---------------------
third quarter of 1994 over the third quarter of 1993 and decreased by 1.9% for
the first nine months of 1994 over the first nine months of 1993. The totals
were as follows:
<TABLE>
<CAPTION>
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Salaries and employee
benefits $1,188,000 $1,200,000 $3,588,000 $3,533,000
Furniture, equipment and
occupancy expense 405,000 360,000 1,158,000 997,000
Other operating expenses 1,087,000 1,011,000 2,893,000 3,258,000
---------- ---------- ---------- ----------
Total non-interest
expenses $2,680,000 $2,571,000 $7,639,000 $7,788,000
========== ========== ========== ==========
</TABLE>
Salaries and employee benefits are the single most significant expense for
Gulf Southwest. These expenses decreased by 1.0% for the third quarter of 1994
as compared to the third quarter of 1993 and increased 1.6% for the first nine
months of 1994 over the same period in 1993.
Furniture, equipment and occupancy expense increased by 12.5% for the third
quarter of 1994 over the third quarter of 1993 and increased by 16.1% for the
first nine months of 1994 compared to the same period in 1993. These increases
are primarily attributable to the expansion of Merchants Bank's main banking
facility.
Other operating expenses increased by 7.5% for the third quarter of 1994 as
compared to the third quarter of 1993 and decreased by 11.2% for the first nine
months of 1994 as compared to 1993. The major components of other operating
expenses are legal and accounting fees, data processing supplies and advertising
expenses. Also included are expenses related to real estate held for sale and
other loan-related assets acquired through foreclosure. The expenses to
maintain and provision for losses on real estate held for sale and other loan-
related assets decreased materially since December 31, 1993, due to the
disposition of the majority of these assets.
Earning Assets. When comparing the total earning assets at September 30,
--------------
1994 to the total at December 31, 1993, earning assets remained virtually the
same, with a slight decrease of $509,000. Investment securities increased during
this period as a result of transfers from federal funds to investment securities
and the reinvestment of the proceeds from sales of other real estate, while
loans increased as a result of higher loan demand.
-65-
<PAGE>
Included in the total of earning assets at September 30, 1994 are loans
totaling $2,355,000 which are on a non-accrual status. This compares to non-
accrual loans totaling $1,321,000 and $1,455,000 at September 30, 1993 and
December 31, 1993, respectively. The increase in non-accrual loans is primarily
the result of a single $900,000 loan which was placed on non-accrual status.
Deposits. The most important funding source for earning asset growth is
--------
deposits. Total deposits decreased by 1.6% from December 31, 1993 to September
30, 1994, compared to an increase of 5.1% from December 31, 1992 to September
30, 1993. Non-interest bearing deposits increased 1.7% from December 31, 1993
to September 30, 1994, while interest-bearing deposits decreased by 3.0% for the
same period.
Capital. Shareholders' equity increased $2,338,000, or 10.7% for the first
-------
nine months of 1994, as compared to an increase of $1,509,000, or 7.7% for the
nine months ended September 30, 1993. The ratio of shareholders' equity to
total assets was 10.1% on September 30, 1994, as compared to 9.1% on December
31, 1993.
Bank holding companies and their bank subsidiaries are required to maintain
certain capital ratios. The Federal Reserve Board's guidelines classify capital
into two tiers, referred to as Tier 1 and Tier 2. Tier 1 capital consists of
common and qualifying preferred shareholders' equity less goodwill. Tier 2
capital consists of mandatory convertible debt, preferred stock not qualifying
as Tier 1 capital, qualifying subordinated debt and the allowance for loan
losses up to 1.25% of risk-weighted assets. The minimum ratio for the sum of
Tier 1 and Tier 2 is 8.0%, at least one-half of which should be in the form of
Tier 1 capital. At September 30, 1994, core capital (Tier 1) and total capital
(Tier 1 and Tier 2) as a percentage of risk-weighted assets was 17.1% and 18.5%,
respectively.
In addition to the foregoing ratios, bank holding companies are required to
maintain a minimum ratio of core capital to total assets (hereinafter referred
to as the "Leverage Ratio") of at least 3.0%. At September 30, 1994, Gulf
Southwest's Leverage Ratio was 10.0%. A similar leverage ratio applicable to
the Company's subsidiary bank has been adopted by the FDIC. At September 30,
1994, Merchant Bank's ratio was 9.1%.
Liquidity and Capital Commitments. Liquidity is the ability of the Company
---------------------------------
and its subsidiary bank to meet their short-term needs for cash arising from
demands such as operating expenses, withdrawal of deposits and demand for loans.
The liquidity of Gulf Southwest is primarily provided by dividends from the
subsidiary bank, income tax benefits and interest on time deposits in financial
institutions.
Merchants Bank's liquidity is primarily provided by maturing loans,
deposits, cash, short-term investments, time deposits in other banks, federal
funds sold and profits. With bank regulators critically reviewing liquidity,
Gulf Southwest has adopted a policy of maintaining a minimum liquidity level of
20%, as measured by the FDIC formula, at Merchants Bank. As of September 30,
1994, the liquidity level of Merchants Bank was 40.3%.
-66-
<PAGE>
Gulf Southwest believes that it has sufficient capital and financial
resources to meet its current and anticipated capital commitments.
Fiscal Year Comparison. Set forth below is a discussion of the financial
----------------------
condition and results of operations of Gulf Southwest as of and for the years
ended December 31, 1993, 1992 and 1991:
General. Net earnings before the cumulative effect of an accounting change
-------
increased 27.2% in 1993 to $2,421,000, as compared to $1,904,000 in 1992. After
the cumulative effect of an accounting change, earnings in 1992 were $4,374,000
as compared to $2,421,000 in 1993. In 1993, earnings per common share were
$1.92, as compared to $1.51 in 1992 before the accounting change and $3.47 after
the accounting change. Highlights of the major components that affect Gulf
Southwest's net earnings are as follows:
Average assets grew $16.2 million, or 7.4%, to $235,625,000, with average
deposits totaling $212,967,000, representing an increase of 6.2%.
Non-performing assets -- loans past due 90 days or more, non-accrual loans
plus other real estate ("ORE") acquired -- decreased by 38.8% to $3,201,000 at
December 31, 1993, or 1.3% of total assets. Non-performing assets continue to
have a negative impact on Gulf Southwest's operations in such areas as lost
interest income, legal fees, carrying costs and losses associated with these
assets.
Net interest income -- the difference between total interest income on earning
assets and total interest expense on deposits and borrowings -- increased
4.2%, or $439,000 to $10,858,000 for the year.
Provision for credit losses -- the amounts charged to earnings in order to
maintain an adequate allowance for credit losses -- decreased by $755,000 to
$410,000 for 1993.
Non-interest income, excluding securities transactions -- the fees charged for
banking services -- increased by $155,000 to $2,950,000 for the year.
Non-interest expense -- carrying costs and losses incurred with the
acquisition and sale of other real estate, employee compensation and other
expenses, such as for occupancy, furniture and equipment, advertising,
professional fees, deposit insurance premiums and supplies -- increased by
5.8%, or $575,000 to $10,494,000 for 1993.
Income tax expense -- the income tax provision on current year earnings --
increased by $270,000 to $512,000 for 1993.
Net Interest Income. Net interest income on a taxable equivalent basis
-------------------
increased 3.1% in 1993 to $11,128,000, compared to $10,790,000 in 1992. Total
interest income decreased by $516,000 from 1992 to 1993 and total interest
expense decreased by $955,000 from 1992 to 1993 primarily due to decreases in
interest rates earned and paid by Merchants Bank. The decreased volume of
deposits from 1991 to 1992 was attributable to withdrawals by customers in
search
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<PAGE>
of higher returns as interest rates declined significantly. Additionally, Gulf
Southwest closed a branch office and sold the related deposits during this
period.
Loan Portfolio Composition. Total loans increased 3.2% from December 31,
--------------------------
1992 to December 31, 1993. Commercial and industrial loans increased $1,888,000,
or 7.3%, real estate related loans increased $3,847,000, or 5.7%, and
installment loans decreased $1,894,000, or 6.5%. The composition of the loan
portfolio at the end of each of the last three years is displayed in the
following table:
<TABLE>
<CAPTION>
LOAN PORTFOLIO COMPOSITION
December 31,
-----------------------------
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Commercial and industrial 21.9% 21.1% 20.9%
Real estate - construction 2.4% 1.7% 2.2%
Real estate - other 54.0% 53.3% 52.9%
Individuals for household and
other consumer purposes 21.5% 23.8% 23.8%
Other .2% .1% .2%
</TABLE>
Non-accrual loans and past due loans (90 days or more) totaled $1,455,000
and $168,000, respectively, at December 31, 1993, as compared to $1,737,000 and
$456,000, respectively, at December 31, 1992.
Provision for Credit Losses. The allowance for credit losses at December
---------------------------
31, 1993 was $1,986,000, representing 1.56% of outstanding loans. A year
earlier, this ratio was 1.40%. The provision for credit losses charged against
earnings was $410,000 in 1993, $1,165,000 in 1992 and $825,000 in 1991. Net loan
losses in 1993 were $149,000, compared to $1,519,000 in 1992 and $959,000 in
1991. These loan losses resulted in a net charge-off ratio to average loans of
0.12% in 1993, a decrease from 1.20% in 1992 and .80% in 1991.
To a very large extent, Merchants Bank's loan portfolio remains secured and
current reappraisals of collateral value have been received and undertaken in
an effort to further assess loss potential. Management has closely scrutinized
its loss potential on its non-performing assets, as well as on the entire loan
portfolio, and has, to the best of its knowledge and belief, reserved for losses
accordingly.
Non-Interest Income. Non-interest income increased 6.0% in 1993 compared
-------------------
to a decrease of 9.7% during 1992. Service charges on deposits, the largest
component of non-interest income, increased by 5.4% in 1993 as compared to an
increase of 2.9% in 1992. The increase in service charge income for 1993 was
primarily due to an increase in the average volume of transaction deposit
accounts which generate the majority of this fee income.
-68-
<PAGE>
The components of the "other" categories of non-interest income consist of
rental income on other real estate owned plus miscellaneous fees such as
collection fees, credit card fees, safe deposit rentals, research fees, check
printing income and wire transfer fees. These fees correlate to the level of
transactions in each of the referenced categories. The "other" categories of
non-interest income increased by $32,000, or 6.0%.
The following table sets forth by category the non-interest income and the
percentage from the prior year for the most recent three years:
<TABLE>
<CAPTION>
NON-INTEREST INCOME
(In Thousands)
1993 1992 1991
---------------- ---------------- ----------------
% % %
Amount Change Amount Change Amount Change
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Service charges on
deposit accounts $2,387 5.4% $2,264 2.9% $2,201 0%
Other service
charges and fees 200 (4.8%) 210 (4.1%) 219 (12.1%)
Other operating income 363 12.8% 321 (53.7%) 693 90.4%
Securities transactions 29 81.3% 16 0% 0 0%
------ ---- ------ ----- ------ -----
Total $2,979 6.0% $2,811 (9.7%) $3,113 12.0%
====== ==== ====== ===== ====== =====
</TABLE>
Non-Interest Expense. Total non-interest expense increased by 5.8% for 1993
--------------------
as compared to no change in 1992 and a slight increase of 0.8% in 1991. The most
significant percentage increases were in the categories of salaries and employee
benefits and occupancy expense. The 10.8% increase during 1993 in salaries and
employee benefits is primarily attributable to increased costs of group health
insurance. The opening of a new branch location during the latter part of 1992
affected occupancy expense, as well as related furniture and equipment expense.
The most significant decrease in expenses was in the category of other real
estate expense. The 21.1% decrease is attributable to the reduction of other
real estate owned of $1,578,000 at December 31, 1993, as compared to a balance
of $3,037,000 at December 31, 1992.
The following table sets forth by category the operating expenses and the
percentage change from the prior year for the most recent three years:
-69-
<PAGE>
<TABLE>
<CAPTION>
OPERATING EXPENSES
(In Thousands)
1993 1992 1991
----------------- ---------------- ----------------
% % %
Amount Change Amount Change Amount Change
------- -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee
benefits $ 4,770 10.8% $4,306 1.0% $4,264 (1.3%)
Occupancy expense 920 15.9% 794 (3.4%) 822 (3.6%)
Furniture and equipment
expense 479 4.6% 458 (22.5%) 591 (8.7%)
Other real estate expense 951 (21.1%) 1,206 45.8% 827 (16.7%)
Other operating expense 3,374 7.0% 3,155 (7.7%) 3,417 12.9%
------- ----- ------ ----- ------ -----
Total $10,494 5.8% $9,919 0% $9,921 .8%
======= ===== ====== ===== ====== =====
</TABLE>
Income Taxes. At December 31, 1993, Gulf Southwest had, for tax reporting
------------
purposes, investment tax credit carryforwards of approximately $96,000 and a net
operating loss carryforward of approximately $5,750,000 that expire on or before
2004.
Balance Sheet Management. During 1993, total average earning assets
------------------------
increased $15.3 million or 7.8% from 1992. Average loans increased $236,000 or
.2% and average investment securities increased $6.1 million or 13.7%. Average
short-term money market investments increased by $9.0 million or 31.1% (these
investments include federal funds sold and interest-bearing deposits in
financial institutions.) The increase in average earning assets was due to a
$16.2 million increase in average total assets and a reduction in non-interest
earning assets such as non-accrual loans and other real estate. The growth in
average assets was funded by deposits and shareholders' equity, which expanded
by an average balance of $12.4 million and $3.7 million, respectively.
-70-
<PAGE>
The following table presents Gulf Southwest's average balance sheet
composition:
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEET COMPOSITION
Percentage of Total Assets 1993 1992 1991
- -------------------------- ------ ------ ------
<S> <C> <C> <C>
Investment securities:
Taxable 18.2% 15.5% 13.3%
Non-taxable 3.2 4.7 6.1
Due from CD's .7 1.0 1.2
Federal funds sold 15.4 11.9 13.3
Net loans 52.5 56.2 55.0
----- ----- -----
Total earning assets 90.0 89.3 88.9
Cash and due from banks 5.1 5.7 5.3
Premises, equipment and other 4.9 5.0 5.8
----- ----- -----
Total Assets 100.0% 100.0% 100.0%
===== ===== =====
Percentage of Total Liabilities
- -------------------------------
and Stockholders' Equity
- ------------------------
1993 1992 1991
----- ----- -----
Deposits - interest bearing 65.1% 67.5% 69.9%
Borrowings .1 .2 .2
----- ----- -----
Total interest bearing liabilities 65.2 67.7 70.1
Deposits - non-interest bearing 25.3 23.9 22.9
Other liabilities .6 .5 .5
Stockholders' Equity 8.9 7.9 6.5
----- ----- -----
Total Liabilities and Stockholders'
Equity 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Liquidity Management. Like any commercial bank, the liability structure of
--------------------
Merchants Bank requires that it maintain an appropriate level of liquid
resources to meet normal day-to-day fluctuations in deposit volume and to make
new loans and investments as opportunities arise. Liquidity can be provided by
either assets or liabilities. Sources of liquidity for Merchants Bank are
principally provided by maturing loans, deposits, cash, short-term investments,
time deposits in other financial institutions, federal funds sold and profits.
At December 31, 1993, Gulf Southwest had $12,047,000 in cash, $40,775,000
in federal funds sold, $1,294,000 in time deposits with other financial
institutions and $52,329,000 in investment securities portfolio in which the
market value was $1,778,000 more than the carrying
-71-
<PAGE>
value. The loan-to-deposit ratio was 58.2% at December 31, 1993, compared to
59.4% at December 31, 1992.
A financial service company's activities consist primarily of financing and
investing activities. These activities result in large cash flows. Gulf
Southwest's Consolidated Statement of Cash Flows (included in its consolidated
financial statements included herein) indicates the sources of these cash flows.
Interest Rate Sensitivity. The objectives of monitoring and managing the
-------------------------
interest rate risk position of the balance sheet are to contribute to earnings
and to minimize the adverse changes in net interest income. The potential for
earnings to be affected by changes in interest rates is inherent in a financial
institution.
Interest rate sensitivity is the relationship between changes in market
interest rates and changes in net interest income due to the repricing
characteristics of assets and liabilities. An asset-sensitive position in a
given period will result in more assets being subject to repricing; therefore,
market interest rate changes will be reflected more quickly in asset rates. If
interest rates decline, such a position will normally have an adverse effect on
net interest income. Conversely, in a liability-sensitive position, where
liabilities reprice more quickly than assets in a given period, a decline in
rates will benefit net interest income.
One way to analyze interest rate risk is to evaluate the balance of the
interest sensitivity position. A mix of assets and liabilities that are roughly
equal in volume and repricing represents a matched interest sensitivity
position. Any excess of assets or liabilities results in an interest
sensitivity gap. The purpose of this analysis is to be aware of the potential
risk on future earnings resulting from the impact of possible future changes in
interest rates on currently existing net asset or net liability positions.
However, this type of analysis is as of a point in time, when in fact that
position can quickly change as market conditions, customer needs, and management
strategies change. Additionally, interest rate changes do not affect all
categories of assets and liabilities equally or at the same time.
-72-
<PAGE>
The following table presents the interest sensitivity position of Gulf
Southwest at December 31, 1993:
<TABLE>
<CAPTION>
INTEREST SENSITIVITY
As of December 31, 1993
(In Thousands)
Rate Sensitive Within Non-rate
----------------------------------------------------------
30 Days 90 Days 180 Days One Year Total Sensitive Total
---------- ---------- ---------- --------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans, Net of Unearned
Discount $28,955 $4,058 $6,164 $9,386 $48,563 $78,889 $127,452
Investment Securities 951 1,986 2,202 7,832 12,971 39,358 52,329
Federal Funds Sold 40,775 0 0 0 40,775 0 40,775
Other Earning Assets 400 400 200 294 1,294 0 1,294
--------- --------- --------- ------- ---------- -------- --------
Total Earning Assets 71,081 6,444 8,566 17,512 103,603 118,247 221,850
--------- --------- --------- ------- ---------- -------- --------
Interest Bearing Liabilities:
Interest-Bearing Deposits 82,769 14,428 16,132 17,760 131,089 26,234 157,323
--------- --------- --------- ------- ---------- -------- --------
Total Interest-Bearing
Liabilities 82,769 14,428 16,132 17,760 131,089 26,234 157,323
--------- --------- --------- ------- ---------- -------- --------
Interest Sensitivity Gap ($11,688) ($ 7,984) ($ 7,566) ($ 248) ($ 27,486)
========= ========= ========= ======= ==========
Ratio of Earning Assets
to Interest-Bearing
Liabilities 85.9% 44.7% 53.1% 98.6% 79.0%
==== ==== ==== ==== ====
</TABLE>
Gulf Southwest had a negative interest rate sensitive gap position in the
30-day period of $11.7 million. The cumulative rate sensitive gap position was a
negative $27.5 million, which indicates that Gulf Southwest may benefit from
falling interest rates; conversely rising interest rates may have a negative
impact upon Gulf Southwest.
Capital Management. The Board of Governors has adopted a system using the
------------------
risk-based capital adequacy guidelines to evaluate the capital adequacy of bank
holding companies. Under the risk-based capital guidelines, different
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. Certain
off-balance sheet items, which previously were not expressly considered in
capital adequacy computations, are added to the risk-weighted asset base by
converting them to a balance sheet equivalent and assigning to them the
appropriate risk weight.
The guidelines require that banking organizations achieve minimum ratios of
total capital-to-risk-weighted assets of 8.0% (of which at least 4.0% should be
in the form of certain "Tier 1" elements). "Total Capital" is defined as the
sum of "Tier 1" and "Tier 2" capital elements, with "Tier 2" being limited to
100% of "Tier 1." For bank holding companies, "Tier 1" capital includes, with
certain restrictions, common stockholders' equity, perpetual preferred stock,
and minority interests in consolidated subsidiaries. "Tier 2" capital includes,
with certain limitations, certain forms of perpetual preferred stock as well as
maturing capital instruments and the reserve for possible credit losses.
-73-
<PAGE>
At December 31, 1993, Gulf Southwest's ratio of "Tier 1" and Total Capital
to risk-weighted assets were approximately 15.44% and 16.86%, respectively. Both
ratios significantly exceed regulatory minimums.
The following table summarizes Gulf Southwest's Tier 1 and Total Capital:
<TABLE>
<CAPTION>
TIER 1 AND TOTAL CAPITAL
(In Thousands)
December 31, 1993
-----------------
Amount Ratio
--------- ------
<S> <C> <C>
Tier 1 Capital $ 21,606 15.44%
Tier 1 Capital Minimum Requirement 5,596 4.00
-------- -----
Excess Tier 1 Capital $ 16,010 11.44%
======== =====
Total Capital $ 23,592 16.86%
Total Capital Minimum Requirement 11,191 8.00
-------- -----
Excess Total Capital $ 12,401 8.86%
======== =====
Risk Adjusted Assets, Net of Goodwill $139,891
========
</TABLE>
In addition to the risk-based capital guidelines, the Board of Governors
and the FDIC have adopted the use of a leverage ratio as an additional tool to
evaluate the capital adequacy of bank holding companies. The leverage ratio
replaces the old standard of primary and secondary capital, and is defined to be
a company's "Tier 1" capital divided by its adjusted total assets. The leverage
ratio adopted by the federal banking agencies requires a ratio of 3.0% "Tier 1"
capital to adjusted total assets for bank holding companies with a BOPEC rating
of 1. All other institutions will be expected to maintain a 100 to 200 basis
point cushion, i.e., these institutions will be expected to maintain a leverage
ratio of 4.0% to 5.0%. Gulf Southwest's leverage ratio at December 31, 1993 was
9.18%, which also exceeds the regulatory minimum.
Pending Regulatory Matters. The Federal Deposit Insurance Corporation
--------------------------
("FDIC") has proposed a reduction in the premium rates paid by federally-insured
banks to the FDIC. The new rates would be at various levels ranging from $.04
per $100 of deposits to $.23 per $100 of deposits with the rate paid by each
bank determined by its financial strength. If the premium rate reduction
proposal is adopted, this would have a favorable impact on the net income of
Gulf Southwest. In 1994, Merchants Bank paid premiums of $477,000 based on a
rate of $.23 per $100 of deposits. No assurance can be given as to whether the
proposal will be adopted in its present form and, if adopted, at what rate
Merchants Bank will be assessed.
Statistical Information
Condensed Average Balance Sheets. Although year-end statistics present
--------------------------------
general trends, the daily average balance sheets are more indicative of Gulf
Southwest's levels of activity throughout the years indicated and less subject
to day-to-day business activity fluctuations. The following schedule sets forth
a comparison of the consolidated daily average balance sheets for Gulf Southwest
for the years ended December 31, 1993, 1992 and 1991.
-74-
<PAGE>
<TABLE>
<CAPTION>
DAILY AVERAGE BALANCE SHEET
(In Thousands)
Year Ended December 31,
-------------------------------
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Assets:
Cash and due from banks $ 12,123 $ 12,572 $ 11,609
Loans, net 123,605 123,369 121,006
Interest-bearing deposits 1,573 2,889 2,693
Investment securities:
Taxable 42,795 34,099 29,364
Non-taxable 7,600 10,237 13,411
-------- -------- --------
Total Securities 50,395 44,336 42,775
-------- -------- --------
Federal funds sold 36,420 26,094 29,304
Other assets 11,509 10,184 12,775
-------- -------- --------
Total Assets $235,625 $219,444 $220,162
======== ======== ========
Liabilities and Stockholders' Equity:
Deposits
Non-interest bearing demand deposits $ 59,577 $ 52,385 $ 50,398
Interest bearing demand deposits 46,643 46,377 45,808
Savings 28,035 25,617 19,013
Time 78,712 76,195 89,003
-------- -------- --------
Total Deposits 212,967 200,574 204,222
-------- -------- --------
Borrowings 321 350 350
Other liabilities 1,394 1,284 1,192
-------- -------- --------
Total Liabilities 214,682 202,208 205,764
-------- -------- --------
Stockholders' Equity 20,943 17,236 14,398
-------- -------- --------
Total Liabilities and
Stockholders' Equity $235,625 $219,444 $220,162
======== ======== ========
</TABLE>
Net Interest Income. The data used in the analysis of net interest income
-------------------
changes is derived from the daily average levels of interest-bearing assets and
liabilities as well as from the rates earned and paid on these amounts. The
following schedule gives a history of Gulf Southwest's daily average interest-
earning assets and interest-bearing liabilities for the years ended December 31,
1993, 1992 and 1991. Net interest income is developed on a taxable equivalent
basis because the management of Gulf Southwest is of the opinion that such a
presentation facilitates the analytical discussion of changes in the components
of earnings that follows. A history of the net interest margin on a taxable
equivalent basis (using a federal income tax rate of 34%) including detailed
information regarding its components, is set forth below.
-75-
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES, INTEREST AND RATES
(In Thousands)
December 31, 1993 December 31, 1992 December 31, 1991
------------------------ ----------------------- ----------------------
Avg. Bal. Interest Avg. Rate Avg. Bal. Interest Avg. Rate Avg. Bal. Interest Avg. Rate
---------- --------- ---------- ---------- ---------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Securities:
Taxable $ 42,795 $ 2,642 6.17% $ 34,099 $ 2,606 7.64% $ 29,364 $ 2,514 8.56%
Non-Taxable 7,600 795 10.46% 10,237 1,092 10.67% 13,411 1,503 11.21%
Due from CD's 1,573 46 2.92% 2,889 76 2.63% 2,693 170 6.31%
Federal Funds Sold 36,420 1,076 2.95% 26,094 892 3.42% 29,304 1,661 5.67%
Net Loans 123,605 11,513 9.31% 123,369 12,022 9.75% 121,006 13,110 10.83%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-earning 211,993 16,072 7.58% 196,688 16,688 8.48% 195,778 18,958 9.68%
assets -------- ------- ----- -------- ------- ----- -------- ------- -----
Cash and due from banks 12,123 12,572 11,609
Premises, equipment and 11,509 10,184 12,775
other -------- -------- --------
$235,625 $219,444 $220,162
======== ======== ========
Deposits:
Demand - interest-bearing $ 46,643 1,082 2.32% $ 46,377 1,375 2.96% $ 45,808 2,227 4.86%
Savings 28,035 758 2.70% 25,617 895 3.49% 19,013 1,009 5.31%
Time 78,712 3,066 3.90% 76,195 3,593 4.72% 89,003 5,777 6.49%
Borrowings 321 37 11.53% 350 35 10.00% 350 35 10.00%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing 153,711 4,943 3.22% 148,539 5,898 3.97% 154,174 9,048 5.87%
liabilities -------- ------- ----- -------- ------- ----- -------- ------- -----
Deposits -
noninterest-bearing 59,577 52,385 50,398
Other liabilities 1,394 1,284 1,192
Stockholders' equity 20,943 17,236 14,398
-------- -------- --------
$235,625 $219,444 $220,162
======== ======== ========
Net interest earnings $11,129 $10,790 $ 9,910
======= ======= =======
Net yield on 5.25% 5.49% 5.06%
interest-earning ===== ===== =====
assets
Interest rate spread 4.36% 4.51% 3.81%
===== ===== =====
</TABLE>
Note: Average balances are based upon daily balances. The interest on non-
taxable securities has been calculated on a fully taxable basis - 34% tax
basis. Non-accruing loans have been included in assets for these
computations, thereby reducing yields on these investments.
-76-
<PAGE>
The following rate/volume variance has been allocated to the changes in
rates. Non-accrual loans are included in the calculations made below. The
interest on non-taxable investment income has been calculated on a fully taxable
equivalent basis incorporating an effective tax rate of 34%.
<TABLE>
<CAPTION>
RATE/VOLUME ANALYSIS
CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
(In Thousands)
December 31, 1993 December 31, 1992
--------------------------------------- ---------------------------------------
Changes From Changes in Changes in Changes from Changes in Changes in
Prior Year Volume Rates Prior Year Volume Rates
------------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Taxable securities $ 36 $ 664 $ (628) $ 92 $ 405 $ (313)
Non-taxable securities (297) (281) (16) (411) (355) (56)
Due from CD's (30) (35) 5 (94) 12 (106)
Federal funds sold 184 354 (170) (769) (181) (588)
Loans (509) 23 (532) (1,088) 251 (1,339)
----- ----- ------- ------- ------- -------
Total interest income (616) 725 (1,341) (2,270) 132 (2,402)
----- ----- ------- ------- ------- -------
Interest expense:
Deposits:
Demand - interest (293) 8 (301) (852) 27 (879)
bearing
Savings (137) 83 (220) (114) (579) 465
Time (527) 119 (646) (2,184) (832) (1,352)
Borrowings 2 (3) 5 0 0 0
----- ----- ------- ------- ------- -------
Total interest expense (955) 207 (1,162) (3,150) (1,384) (1,766)
----- ----- ------- ------- ------- -------
Net interest income $ 339 $ 518 $ (179) $ 880 $ 1,516 $ (636)
===== ===== ======= ======= ======= =======
</TABLE>
-77-
<PAGE>
Loan Portfolio. The following tables show the composition of the loan
--------------
portfolio at December 31, 1993, 1992 and 1991 and the loan maturity distribution
as of December 31, 1993:
<TABLE>
<CAPTION>
LOAN PORTFOLIO
(In Thousands)
December 31,
-------------------------------
1993 1992 1991
--------- -------- --------
<S> <C> <C> <C>
Commercial and industrial $ 27,935 $ 26,047 $ 25,715
Real estate - construction 2,997 2,145 2,690
Real estate - other 68,837 65,842 64,958
Installment 27,428 29,322 29,216
Other 255 100 263
-------- -------- --------
Total loans, net of
unearned discount $127,452 $123,456 $122,842
======== ======== ========
<CAPTION>
LOAN MATURITY DISTRIBUTION
As of December 31, 1993
Due in:
----------------------------
1 year 1-5 After
or less years 5 years
--------- -------- --------
<S> <C> <C> <C>
Commercial and industrial loans $ 19,413 $ 6,846 $ 1,676
Real estate construction 2,100 812 85
-------- -------- --------
Total $ 21,513 $ 7,658 $ 1,761
======== ======== ========
Loans due after 1 year which have:
Predetermined interest rates $ 5,278
Floating or adjustable rates 4,141
--------
Total $ 9,419
========
</TABLE>
Provision for Credit Losses. The transactions occurring in the allowance
---------------------------
for credit losses for the last five fiscal years and, including a breakdown
of net charge-offs by type of loan, are as follows:
-78-
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
(In Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Average loans outstanding $125,476 $125,199 $123,056 $116,481 $118,422
======== ======== ======== ======== ========
Loans outstanding at year-end $127,452 $123,456 $122,842 $118,061 $115,568
======== ======== ======== ======== ========
Allowance at beginning of period $ 1,725 $ 2,079 $ 2,213 $ 2,358 $ 2,050
-------- -------- -------- -------- --------
Provision charged to expense 410 1,165 825 519 3,053
-------- -------- -------- -------- --------
Loans charged off:
Commercial and industrial (197) (441) (583) (651) (2,702)
Real estate - construction 0 0 0 0 0
Real estate - other (54) (1,002) (291) (255) (176)
Installment (136) (201) (277) (133) (129)
Other 0 0 0 0 0
-------- -------- -------- -------- --------
Total (387) (1,644) (1,151) (1,039) (3,007)
-------- -------- -------- -------- --------
Loans recovered:
Commercial and industrial 150 54 86 237 232
Real estate - construction 0 0 0 0 0
Real estate - other 44 20 54 97 0
Installment 44 51 52 41 30
Other 0 0 0 0 0
-------- -------- -------- -------- --------
Total 238 125 192 375 262
-------- -------- -------- -------- --------
Net loans charged off (149) (1,519) (959) (664) (2,745)
-------- -------- -------- -------- --------
Allowance at end of period $ 1,986 $ 1,725 $ 2,079 $ 2,213 $ 2,358
======== ======== ======== ======== ========
Ratios:
Allowance as a percent of
loans outstanding at year-end 1.56% 1.40% 1.69% 1.87% 2.04%
Allowance as percent of
average loans 1.58% 1.38% 1.69% 1.90% 1.99%
Net loans charged off as a
percent of average loans
outstanding 0.12% 1.20% 0.80% 0.50% 2.30%
Allowance as a percent of
nonperforming loans 122.4% 78.7% 51.8% 52.3% 48.7%
</TABLE>
-79-
<PAGE>
Management of Merchants Bank continues to concentrate on identifying and
addressing credit problems. Efforts have been undertaken and are ongoing to
strengthen credit review policies and procedures. Intensive efforts are ongoing
to ensure that any existing or identifiable developing problem loans receive the
necessary effective attention. Merchants Bank's procedures for reviewing the
adequacy of its allowance for credit losses involve a review of lending policies
and practices, the lending history of personnel involved in the lending process
and the compliance by those personnel with the policies. Consideration also is
given to (i) management's review of individual outstanding and proposed credits,
(ii) the current size and composition of the loan portfolio, (iii) expectations
of future economic conditions and their impact on particular industries and
specific borrowers, (iv) the level and composition of non-performing loans, (v)
evaluation of the underlying collateral for secured loans, (vi) historical loan
loss and recovery experience and (vii) comments made during regular examinations
or audits by banking regulators, Merchants Bank's internal loan review staff and
independent auditors. The above-referenced policies and procedures have been
implemented on an integrated company-wide basis.
The allocation of Merchants Bank's allowance for credit losses by loan
category for the five years ended December 31, 1993, 1992, 1991, 1990 and 1989
is presented in the following table (dollars in thousands):
<TABLE>
<CAPTION>
ALLOWANCE FOR CREDIT LOSSES
(In Thousands)
December 31,
-----------------------------------------------------------------------------------
1993 1992 1991 1990 1989
--------------- --------------- --------------- --------------- ---------------
% of % of % of % of % of
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
industrial $1,010 21.9% $ 463 21.1% $1,424 20.9% $1,295 24.7% $1,890 31.2%
Real estate -
construction * 2.4% * 1.7% 4 2.2% 22 1.6% * 2.0%
Real estate - other 277 54.0% 1,051 53.3% 314 52.9% 666 51.0% 354 49.4%
Installment 699 21.5% 211 23.8% 337 23.8% 230 22.4% 114 17.3%
Other * .2% * .1% * .2% * .3% * .1%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $1,986 100.0% $1,725 100.0% $2,079 100.0% $2,213 100.0% $2,358 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
*Less than $1,000.
-80-
<PAGE>
Non-Performing Assets. All loans which cause management to have doubt as to
---------------------
the borrower's ability to substantially comply with present loan repayment terms
are included in the schedule of non-performing loans.
Non performing loans consist of loans on which interest is not being
accrued; i.e., loans which are 90 days or more past due as to principal and/or
interest payment and not yet in a non-accruing status. The policy of Merchants
Bank is to continue to accrue interest on loans which are 90 days or more past
due if periodic payments are being made on the loans. If a loan is classified as
past due and payments then resume on the loan, it continues to be classified as
past due until all past due amounts are paid. Merchants Bank had no material
renegotiated or troubled debt restructuring loans during the years 1989 through
1993.
The following table discloses information regarding non-performing assets
at the end of each of the last five years:
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS
(In Thousands)
December 31,
-----------------------------------------
1993 1992 1991 1990 1989
------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $1,455 $1,737 $3,394 $ 3,829 $ 4,204
Past due 90 days or more 168 456 621 401 640
------ ------ ------ ------- -------
Total non-performing/
non-accrual loans 1,623 2,193 4,015 4,230 4,844
Other Real Estate Owned 1,578 3,037 5,090 6,284 7,318
------ ------ ------ ------- -------
Total non-performing
assets $3,201 $5,230 $9,105 $10,514 $12,162
====== ====== ====== ======= =======
</TABLE>
Merchants Bank included in reported income for 1993 $24,094 of interest received
on non-accrual loans. Had these loans paid interest at their original rates,
Merchants Bank would have reported $197,689 of interest on those non-accrual
loans.
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<PAGE>
Investment Securities. The book and market values of investment securities
---------------------
held by Gulf Southwest as of the dates indicated are summarized as follows:
<TABLE>
<CAPTION>
INVESTMENT SECURITIES
(In Thousands)
December 31,
-------------------------
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Book Value:
U.S. Treasury & Agencies $44,096 $37,732 $26,703
States and Political Subdivisions 8,226 9,934 13,599
Other 7 6 11
------- ------- -------
Total $52,329 $47,672 $40,313
======= ======= =======
Market Value $54,107 $48,981 $41,770
======= ======= =======
</TABLE>
The following table shows as of December 31, 1993, the distribution of
maturities and the weighted average interest yields to maturity of Gulf
Southwest's investment securities:
<TABLE>
<CAPTION>
INVESTMENT SECURITIES
MATURITIES AND YIELDS
(In Thousands)
States & Political
U.S. Subdivision
Treasury ----------------------
& Agencies Taxable Non-Taxable Other Total
----------- -------- ------------ ------ ---------
<S> <C> <C> <C> <C> <C>
Due within one year
Book Value $10,001 $ 535 $1,449 $ 7 $11,992
Yield 5.39% 4.27% 9.82% 0.00% 5.88%
Due after one but within five years
Book Value $29,509 $1,214 $3,609 $ 0 $34,332
Yield 5.72% 5.08% 9.75% 0.0% 6.12%
Due after five but within ten years
Book Value $ 4,586 $ 0 $1,359 $ 0 $ 5,945
Yield 6.88% 0.0% 6.88% 0.0% 6.88%
Due after ten years
Book Value $ 0 $ 0 $ 60 $ 0 $ 60
Yield 0.00% 0.00% 10.42% 0.00% 10.42%
</TABLE>
The interest on non-taxable investment securities has been calculated on a fully
taxable equivalent basis incorporating an effective tax rate of 34%.
Deposits. The most important source of Merchants Bank's funds is
--------
deposits. The types of deposits that were in Merchants Bank on a daily average
basis and the related average interest rate paid during each of the last three
years are broken down as follows:
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<PAGE>
<TABLE>
<CAPTION>
DEPOSITS
(In Thousands)
December 31,
1993 1992 1991
--------------- --------------- ---------------
Rate Rate Rate
Amount Paid Amount Paid Amount Paid
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Demand - non-interest bearing $59,577 0.00% $52,385 0.00% $50,398 0.00%
Demand - interest bearing 46,643 2.32% 46,377 2.96% 45,808 4.86%
Savings 28,035 2.70% 25,617 3.49% 19,013 5.31%
Time 78,712 3.90% 76,195 4.72% 89,003 6.49%
</TABLE>
The following table provides certain information regarding
certificates of deposit issued by Merchants Bank in amounts equal to or
exceeding $100,000:
<TABLE>
<CAPTION>
CERTIFICATES OF DEPOSIT
As of December 31, 1993
(In Thousands)
<S> <C>
Three (3) months or less $ 4,808
Over three (3) months through six (6) months 2,511
Over six (6) months through twelve (12) months 2,246
Over twelve (12) months 3,781
-------
Total $13,346
=======
</TABLE>
SUPERVISION AND REGULATION
OF BANK HOLDING COMPANIES
Bank holding companies are subject to regulation by the Board of Governors
and are required to file with the Board of Governors an annual report and to
furnish such additional information as the Board of Governors may require
pursuant to the Bank Holding Company Act. The Board of Governors may conduct
examinations of bank holding companies and their subsidiaries.
Bank holding companies are required to obtain the prior approval of the
Board of Governors for the acquisition of five percent or more of the voting
shares or substantially all the assets of any bank or bank holding company. In
considering proposed acquisitions, the Board of Governors considers the expected
benefits to the public, including greater convenience, identifying and meeting
the credit needs of its entire community, increased competition or gains in
efficiency, weighed against the risks of possible adverse effects, such as undue
concentration of resources, lessening or elimination of competition, conflicts
of interest or unsound banking practices. After an application to acquire the
voting shares of a state or national bank in Texas has been accepted for filing
by the Board of Governors, a copy of such application must be submitted to the
Texas Commissioner pursuant to the Texas Banking Code. Prior to September 29,
1995, no application to acquire shares of a bank located outside Texas submitted
by a bank holding company which owns a bank located in Texas may be approved by
the Board
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<PAGE>
of Governors unless such acquisition is expressly authorized by the statutes of
the state where the bank whose shares or assets are to be acquired is located.
Beginning on September 29, 1996, bank holding companies may acquire banks in any
state subject to certain conditions.
Bank holding companies are prohibited by law, except in certain instances
authorized by statute, from acquiring a direct or indirect interest in or
control of more than five percent of the voting shares of any company which is
not a bank or bank holding company and from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks or
providing services to its subsidiaries. Bank holding companies, however, may
engage in, and may own shares of companies engaged in, certain activities found
by the Board of Governors to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. Bank holding companies are
required to obtain the prior approval of the Board of Governors to engage in
such activities. After an application concerning these activities has been
accepted for filing by the Board of Governors, a copy of such application also
must be submitted to the Texas Commissioner pursuant to the Texas Banking Code
for a determination as to whether the application should be approved. The Texas
Commissioner is required to deny the application unless a finding is made that
the proposed activities will produce benefits to the public, such as greater
convenience or increased competition, that outweigh possible adverse effects,
such as unfair competition, conflicts of interest or unsound banking practices.
Under the Bank Holding Company Act and the regulations of the Board of
Governors, a bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit or lease or sale of property or furnishing of services. The Board of
Governors possesses enforcement powers intended to prevent or eliminate
practices of bank holding companies and their non-bank subsidiaries deemed to be
unsafe and unsound or in violation of applicable laws.
The Interstate Banking Efficiency Act of 1994
On September 29, 1994, the Interstate Banking Efficiency Act of 1994
("IBEA") was enacted into law. IBEA authorizes adequately capitalized and
adequately managed bank holding companies to acquire banks in any state. In
addition, IBEA authorizes interstate branching. Beginning June 1, 1997, a bank
may merge with another bank in another state so long as both states have not
opted out of interstate branching. Based on this authority, bank holding
companies may consolidate their subsidiary banks located in different states
into a single bank. States may enact laws opting out of interstate branching
anytime before June 1, 1997. States also may enact laws permitting (a)
interstate branching before June 1, 1997, or (b) de novo branching. If a state
opts out, no bank in any other state may establish a branch in that state,
either through an acquisition or de novo. A bank whose home state opts out of
interstate branching may not participate in any interstate branching. If Texas
does not opt out, certain competitors may consolidate their subsidiaries in
order to reduce operating costs and create a nation-wide branch network.
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<PAGE>
Subsidiary Banks
Various requirements of federal and Texas law affect the operation of
the Subsidiary Banks, including requirements relating to maintenance of reserves
against deposits, restrictions on the nature and amount of loans which may be
made and the interest that may be charged thereon and restrictions relating to
investments and other activities. As Texas state chartered banks, the
Subsidiary Banks are subject to regulation, supervision and periodic examination
by the Texas Department of Banking. The deposits of the Subsidiary Banks are
insured by the FDIC to the extent authorized by law.
Texas City Bank and First Bank Pearland are members of the Federal
Reserve System (i.e., member banks). As member banks, they are subject to
primary federal supervision and regulation as well as examination by the Board
of Governors and its delegate, the Federal Reserve Bank of Dallas. Because
their deposits are insured by the FDIC to the extent authorized by law, they are
also subject to supervision and regulation, as well as examination, by the FDIC.
Merchants Bank and First Bank Mainland are not members of the Federal Reserve
System (i.e., "nonmember banks"). As nonmember banks, they are subject to
federal supervision and regulation as well as examination by the FDIC.
Cash revenues derived from dividends paid by the Subsidiary Banks
represent the primary source of revenues for Gulf Southwest and Texas Gulf
Coast. Under Texas law, prior to the declaration of any dividend by a
Subsidiary Bank, the Subsidiary Bank must transfer to certified surplus an
amount not less than 10% of its net profits earned since the last dividend was
declared, if certified surplus is less than the capital stock of such bank. At
December 31, 1994, there was an aggregate of approximately $13,110,000,
$4,158,000, $$3,481,000 and $1,021,000 available for the payment of dividends by
Merchants Bank, Texas City Bank, First Bank Mainland and First Bank Pearland,
respectively, under these restrictions. Before a state member bank (i.e., Texas
City Bank and First Bank Pearland) can declare a dividend, it must establish
that the payment of the dividend will not impair its capital under 12 U.S.C. (S)
56, and that the dividend can be paid out of recent earnings under 12 U.S.C. (S)
60(b). Under 12 U.S.C. (S) 60(b), a state member bank may not pay a dividend if
the total of all dividends declared by the bank in any calendar year exceeds the
total net profits for that year combined with its retained net profits of the
preceding two years, less any required transfers to surplus or to a fund for the
retirement of any preferred stock. If the dividend payment does not meet the
requirements of these sections the state member bank must obtain the approval of
the Federal Reserve Board before paying the dividend. The payment of dividends
is further subject to the authority of regulatory authorities to prohibit
payment of dividends if such payment is determined to be an unsafe or unsound
banking practice or if after making such distribution, the Subsidiary Bank would
be considered "undercapitalized."
For further discussion of certain additional regulations affecting Gulf
Southwest, Texas Gulf Coast, and the Subsidiary Banks, reference should be made
to the "Government Fiscal and Monetary Policies" discussion below.
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<PAGE>
Government Fiscal and Monetary Policies
The commercial banking business is affected not only by general economic
conditions but also by the fiscal and monetary policies of the Board of
Governors. Changes in the discount rate on Federal Reserve borrowings,
availability of borrowings at the Federal Reserve "discount window", open market
operations, the imposition of any changes in reserve requirements against member
banks' deposits and assets of foreign branches, the imposition of any changes in
reserve requirements against certain borrowings by member banks and their
affiliates, and the placing of limits on interest rates which member banks may
pay on time and savings deposits are some of the instruments of fiscal and
monetary policy available to the Board of Governors. Fiscal and monetary
policies influence to a significant extent the overall growth of bank loans,
investments and deposits and the interest rates charged on loans or paid on time
and savings deposits. The nature of future monetary policies and the effect of
such policies on the future business and earnings of Gulf Southwest, Texas Gulf
Coast and the Subsidiary Banks cannot be predicted.
The Board of Governors has cease and desist powers over bank holding
companies, non-banking subsidiaries or any institution-affiliated party thereof
to forestall activities which represent unsafe and unsound practices or
constitute violations of law or regulations. The Board of Governors can also
require affirmative actions to correct a violation or practice through the
issuance of a cease and desist order. In certain instances, the Board of
Governors is empowered to assess civil penalties against companies or
individuals who violate the Bank Holding Company Act or regulations or orders
issued pursuant thereto in amounts up to $1,000,000 for each day's violation, to
order termination of non-banking activities of non-banking subsidiaries and to
order termination of ownership and control of a non-subsidiary bank by a bank
holding company.
Section 18(j) of the Federal Deposit Insurance Act makes applicable to
state nonmember insured banks the provisions of Section 23A of the Federal
Reserve Act among other statutes. Section 23A of the Federal Reserve Act and
related statutes imposes limits and collateralization requirements with respect
to the amount of loans, extensions of credit, or investments or certain other
transactions by member banks with their "affiliates", as well as limits on the
amount of advances to third parties which are collateralized by the securities
or obligations. Gulf Southwest, Merger Sub and its non-banking subsidiary are
"affiliates" of Merchants Bank, and Texas Gulf Coast and its non-banking
subsidiary are "affiliates" of the TGC Banks, and, therefore, these restrictions
are applicable to transactions among them. In addition, Section 23B of the
Federal Reserve Act prohibits a bank that is an insured depository institution
from engaging in certain transactions (including, for example, loans) with
certain affiliates unless the transactions are substantially the same or at
least as favorable to such bank or its subsidiaries as those prevailing at the
time for comparable transactions with or involving other nonaffiliated
companies. In the absence of such comparable transactions, any transaction
between a member bank and its affiliates must be on terms and under
circumstances, including credit standards, that, in good faith, would be offered
to or would apply to nonaffiliated companies. The Subsidiary Banks are also
subject to certain prohibitions against tie-in arrangements in connection with
extensions of credit and certain other transactions.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") contains important provisions affecting all federally insured
financial institutions ("banking
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<PAGE>
organizations") in such areas as anti-fraud and anti-abuse enforcement powers,
each banking organization's performance and record in meeting community credit
needs, and acquisitions of savings and loans institutions. For further
discussion of these capital requirements, reference should be made to "Capital
Management."
During December 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was enacted by Congress and signed into law
by President Bush. The provisions of FDICIA have increased the frequency of on-
site examinations by federal banking regulators, changed the deposit insurance
system, imposed an array of new consumer lending requirements, and resulted in
the adoption of the Truth in Savings Act. FDICIA also authorizes federal
banking regulators to take prompt corrective action against institutions which
are under-capitalized, institute a risk-based assessment system for deposit
insurance, and implement a series of operational and management-based standards
and potential sanctions for violations of such standards. FDICIA has increased
the regulatory burden on financial institutions and imposes substantial actual
and incidental costs on financial institutions and their customers. In
response to the savings and loan crisis of the 1980's, financial institutions
are expected to encounter further legislative and regulatory changes in the
future. Under FDICIA, the FDIC has been authorized to assess insurance premiums
on a bank's deposits at a variable rate depending on the probability that the
deposit insurance fund will incur a loss with respect to the bank. The premium
which is charged ranges from $.23 per $100.00 of deposits to $.31 per $100.00 of
deposits. Currently, the Subsidiary Banks are paying premiums at the rate of
$.23 per $100.00 of deposits.
Effects of Interest Rates and Usury Laws
Texas usury laws limit the rate of interest that may be charged by the
Subsidiary Banks. Certain federal laws provide a limited preemption of Texas
usury laws. The maximum rate of interest that the Subsidiary Banks may charge
on business loans under Texas law varies between 18% per annum and (i) 28% per
annum for business loans above $250,000 or (ii) 24% per annum for other loans.
Texas' floating usury ceilings are tied to the 26-week United States Treasury
Bill auction rate. A 1980 federal statute removed the interest ceiling under
usury laws for loans by banks such as the Subsidiary Banks which are secured by
first liens on residential real property.
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<PAGE>
DESCRIPTION OF THE MERGER
The following summary discusses the material provisions of the
Reorganization Agreement. Reference is made to the Reorganization Agreement
(included as Exhibit A to this Joint Proxy Statement/Prospectus) for more
---------
complete information.
General
Pursuant to the Merger/Reorganization Agreements, Texas Gulf Coast will
merge into Merger Sub, which will be the surviving corporation. Upon
consummation of the Merger, each share of TGC Common Stock be converted into
2.1176 shares of GSW Common Stock. No fractional shares of GSW Common Stock will
be issued. In lieu of fractional shares, each holder of TGC Common Stock who
would otherwise be entitled to receive a fractional share of GSW Common Stock
will, in lieu thereof, receive cash based upon each share of GSW Common Stock
having a value of $25.50, which represents the per share transaction value of
GSW Common Stock as determined by Sheshunoff.
Effect of the Merger
If the Merger is effected, Merger Sub will succeed to all the rights,
franchises, interests, properties and liabilities of Texas Gulf Coast and the
separate existence of Texas Gulf Coast will cease. Upon consummation of the
Merger, Gulf Southwest will own, either directly or indirectly, 100% of the
issued and outstanding capital stock of Merchants Bank, First Bank Mainland,
GSWDP and Central Data Processing, Inc., 97.1% of the issued and outstanding
capital stock of Texas City Bank and 99.5% of the issued and outstanding capital
stock of First Bank Pearland.
Effective Time of the Merger
The Merger will become effective at the time when all necessary
orders, consents and approvals have been entered or granted by the requisite
regulatory authorities, all applicable statutory waiting periods have expired
and Articles of Merger have been filed with the Secretary of State of the State
of Texas and the Secretary of State of the State of Nevada. If the Merger is
not effected by June 30, 1995, Gulf Southwest, Merger Sub or Texas Gulf Coast
may, under certain circumstances, terminate the Reorganization Agreement and
thus cause the Merger to be abandoned.
Operations Pending Consummation of the Merger
Prior to the Closing Date, Texas Gulf Coast has agreed to conduct its
business and cause the TGC Banks to conduct their business only in the ordinary
course, consistent with their present business practices and policies. Texas
Gulf Coast has specifically agreed (i) to use its best efforts to preserve its
and the TGC Banks' business relationships and to perform and cause the TGC Banks
to perform all of their material obligations, (ii) not to incur or permit the
TGC Banks to incur additional indebtedness (except in the ordinary course),
(iii) to provide Gulf Southwest with access to Texas Gulf Coast's books, records
and properties, (iv) to notify Gulf Southwest of every
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<PAGE>
new loan to be made by the TGC Banks in excess of $100,000, (v) to obtain Gulf
Southwest's prior approval of any new loan to be made by the TGC Banks in excess
of $250,000, (vi) not to pay any dividends with respect to the TGC Stock in
excess of the dividends paid in comparable periods during 1993 and (vii) to
indemnify Gulf Southwest against certain losses and expenses arising out of the
inaccuracy and/or incompleteness of any information furnished to Gulf Southwest.
Holders of TGC Stock will be permitted to sell their shares after the Merger
Proposal is approved until the transfer books of Texas Gulf Coast are closed at
the Effective Time.
Prior to the Closing Date Gulf Southwest has agreed to conduct its
business and cause its subsidiaries to conduct their business only in the
ordinary course, consistent with their present business practices and policies.
Gulf Southwest has specifically agreed (i) to use its best efforts to preserve
its and Merchants Bank's business relationships and to perform and cause
Merchants Bank to perform all of their material obligations, (ii) not to incur
or permit Merchants Bank to incur additional indebtedness (except in the
ordinary course), (iii) to provide Texas Gulf Coast with access to Gulf
Southwest's books, records and properties, (iv) to notify Texas Gulf Coast of
every new loan in excess of $100,000 to be made by Merchants Bank, (v) to obtain
Texas Gulf Coast's prior approval of any new loan in excess of $250,000 to be
made by Merchants Bank, (vi) not to pay any dividends with respect to the GSW
Stock in excess of the dividends paid in comparable periods during 1993 and
(vii) to indemnify Texas Gulf Coast against certain losses and expenses arising
out of the inaccuracy and/or incompleteness of any information furnished to
Texas Gulf Coast.
Required Regulatory Approvals
Pursuant to the Bank Holding Company Act, Gulf Southwest and Merger
Sub are required to obtain the prior approval of the Board of Governors to
acquire Texas Gulf Coast and its subsidiaries. Gulf Southwest's application is
currently pending. In considering the application, the Board of Governors will
consider the expected benefits to the public, including greater convenience,
Gulf Southwest's record in identifying and meeting the credit needs of the
entire community, increased competition or gains in efficiency, weighed against
the risks of possible adverse effects, such as undue concentration of resources,
lessening or elimination of competition, or unsound banking practices. Gulf
Southwest is not aware of any reason why its application would be denied. After
the Board of Governors accepts the application for processing, a copy of the
application must be submitted to the Texas Commissioner pursuant to the Texas
Banking Code. An acquisition may not be consummated before the 30th calendar
day or after 3 months following approval by the Board of Governors unless the
Board of Governors agrees otherwise.
Termination of the Reorganization Agreement
The Reorganization Agreement may be terminated (i) by the mutual consent of
Gulf Southwest and Texas Gulf Coast, (ii) by either Gulf Southwest or Texas Gulf
Coast if (a) the other has not complied with its obligations required to be
complied with prior to the Closing Date, (b) any of the representations and
warranties of the other contained in the Reorganization Agreement are false in
any material respect as of the Closing Date or (c) the Effective Time has not
occurred by June 30, 1995 and the party desiring to terminate the Reorganization
Agreement
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<PAGE>
is not in default under the Reorganization Agreement and has complied with all
of its obligations thereunder.
Conditions to the Merger
Consummation of the Merger is conditioned, among other things, upon (i)
approval of the Merger Proposal by the holders of not less than two-thirds of
the outstanding shares of TGC Common Stock, (ii) the receipt of all necessary
approvals, consents and orders of Federal and state regulatory authorities and
the expiration of all applicable statutory waiting periods, (iii) the accuracy
of the representations and warranties and the performance of the covenants
contained in the Reorganization Agreement, (iv) the absence of any materially
adverse change in the consolidated financial condition and consolidated results
of operations of Texas Gulf Coast or Gulf Southwest, (v) the absence of any
pending or threatened litigation or other proceeding by any governmental agency
which seeks to prohibit or restrain the consummation of the Merger, (vi) the
exercise of dissenter's rights of appraisal by the holders of no more than 10%
of the TGC Common Stock, (vii) the assets of each of the Subsidiary Banks
classified as substandard or doubtful not exceeding two percent (2%) of their
respective total assets as of the Closing Date and (viii) an examination by each
of Gulf Southwest and Texas Gulf Coast of the loans and assets of the other will
have shown to the examining party's satisfaction that no material loans or, with
certain exceptions, assets are carried on the books of the party being examined
at amounts in excess of their fair market value. Gulf Southwest has established
a limit of 10% on the exercise of dissenter's rights in order to limit the
amount of cash it may be required to expend in consummating the Merger.
Waiver
It is expected that all the conditions to the obligations of Gulf
Southwest and Texas Gulf Coast to consummate the Merger as set forth in the
Reorganization Agreement will be satisfied. However, any such condition (other
than those relating to approval by the appropriate regulatory authorities and
the shareholders of Texas Gulf Coast) may be waived by the party entitled to the
benefits of such condition.
Exchange and Surrender of Stock Certificates
Following consummation of the Merger, Letters of Transmittal will be sent
by Gulf Southwest to holders of record of TGC Common Stock for use in forwarding
their share certificates representing TGC Common Stock to Gulf Southwest for
surrender and cancellation. Do not send certificates representing TGC Common
Stock to Texas Gulf Coast, Gulf Southwest or Merger Sub prior to receipt of the
Letter of Transmittal. Upon receipt by Gulf Southwest from shareholders of
certificates representing shares of TGC Common Stock and properly completed
Letters of Transmittal, such certificates will be cancelled and exchanged for
shares of GSW Common Stock. At the Effective Time, certificates representing TGC
Common Stock will be deemed for all corporate purposes to have been cancelled
and no dividends or distributions will be paid in respect of such shares. The
certificates representing shares of GSW Common Stock issuable upon surrender of
such certificates including all dividends and other distributions payable in
respect of such shares will be retained by Gulf Southwest and will be
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<PAGE>
issued and paid to the holder of such certificates upon surrender of the
certificates representing the related TGC Common Stock. No interest will be
paid with respect to retained dividends or distributions.
Dividends
Pending completion of the Merger, the Reorganization Agreement restricts
the payment of dividends by Gulf Southwest and Texas Gulf Coast to the amounts
declared and paid by them during comparable periods of 1993.
Fairness Opinion
In June 1994, Gulf Southwest and Texas Gulf Coast retained Alex
Sheshunoff & Co. Investment Banking ("Sheshunoff"), an investment banking firm
based in Austin, Texas, on the basis of its experience, to determine a fair and
equitable exchange ratio and to render a written fairness opinion (the
"Opinion") to the Boards of Directors and shareholders of Gulf Southwest and
Texas Gulf Coast. Sheshunoff has been in the business of consulting for the
banking industry for twenty years, including the appraisal and valuation of
banking institutions and their securities in connection with mergers and
acquisitions and equity offerings. Sheshunoff has a long history of familiarity
and involvement with the banking industry nationwide, as well as familiarity
with the Texas market and recent transactions in this market. Sheshunoff did
review the negotiated terms of the Agreement and Plan of Merger including
corporate governance matters. Except as described herein, Sheshunoff is not
affiliated in any way with Gulf Southwest or Texas Gulf Coast or their
respective affiliates.
On November 7, 1994, in connection with their consideration of the
Agreement and Plan of Merger, Sheshunoff issued its Opinion to the Board of
Directors of Gulf Southwest and Texas Gulf Coast that, in its opinion as
investment bankers, the terms of the Merger as provided in the Agreement and
Plan of Merger are fair, from a financial perspective, to the shareholders of
Gulf Southwest and Texas Gulf Coast. This Opinion is based upon conditions as
they existed on September 30, 1994. A copy of the Opinion is attached as
Exhibit C to this Proxy Statement/Prospectus and should be read in its entirety
by Gulf Southwest and Texas Gulf Coast shareholders. Sheshunoff's written
opinion does not constitute an endorsement of the merger or a recommendation to
any shareholder as to how such shareholder should vote at the Special Meeting.
In rendering its written Opinion, Sheshunoff reviewed certain publicly
available information concerning Gulf Southwest and Texas Gulf Coast, including
each party's audited financial statements and annual reports. Sheshunoff
considered many factors in making its evaluation. In arriving at its Opinion
regarding the exchange ratio and fairness of the transaction, Sheshunoff
reviewed: (i) the Agreement and Plan of Merger between Gulf Southwest and Texas
Gulf Coast; (ii) the most recent external auditor's reports to the Boards of
Directors of each organization; (iii) the September 30, 1994 Balance Sheet and
Income Statements for each organization and the audited December 31, 1993
Balance Sheet and Income Statements for each organization; (iv) the Rate
Sensitivity Analysis reports for each organization; (v) each organization's
listing of marketable securities showing rate, maturity and market value as
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compared to book value; (vi) each organization's internal loan classification
list; (vii) a listing of other real estate owned for each organization; (viii)
the budget and long range operating plan for each organization; (ix) a listing
of unfunded letters of credit and any other off-balance sheet risks for each
organization; (x) the Minutes of the Board of Directors meetings for each
organization; (xi) the most recent Board report for each organization; (xii) the
listing and description of significant real properties for each organization;
(xiii) material leases on real and personal property; (xiv) the directors and
officers liability and blanket bond insurance policies for each organization;
and (xv) market conditions and current trading levels of outstanding equity
securities of both organizations. Sheshunoff conducted an on-site review of
each organization's historical performance, current financial condition and
performed a market area analysis.
In addition, Sheshunoff discussed with the management of Gulf Southwest and
Texas Gulf Coast the relative operating performance and future prospects of each
organization, primarily with respect to the current level of their earnings and
future expected operating results, giving weight to Sheshunoff's assessment of
the future of the banking industry and each organization's performance within
the industry. Sheshunoff compared the results of operation of Merchants Bankwith
those of Texas banks with total assets of $100 to $499 million. In addition to
Merchants Bank, Gulf Southwest had one non-banking subsidiary, GSWDP. GSWDP
conducted data processing for Merchants Bank, three affiliated banks and one
non-affiliated bank. Texas Gulf Coast had three subsidiary banks, First Bank
Mainland, First Bank Pearland and Texas City Bank. Texas Gulf Coast also owned
Central Data Processing, Inc., a company responsible for the data processing
functions of the TGC Banks. Sheshunoff compared the results of operations of
First Bank Mainland and Texas City Bank with Texas banks with total assets of
between $50 to $99 million. Sheshunoff compared the results of operations of
First Bank Pearland with Texas banks with total assets of between $25 to $49
million. Both Gulf Southwest's and Texas Gulf Coast's data processing
subsidiaries were considered as operating subsidiaries whose value was primarily
derived from their respective tangible assets.
Sheshunoff considered this transaction as a merger rather than a purchase.
Consideration was given to the levels of book value and earnings per share
appreciation or dilution percentages between the merger partners over the next
three to five years after consummation. A merger is usually completed with the
hopes of realizing economies of sale and earnings enhancement opportunities,
thereby providing a benefit to Gulf Southwest and Texas Gulf Coast shareholders
that otherwise might not be attainable. To justify the fairness of the
transaction for Gulf Southwest and Texas Gulf Coast shareholders, it is
important to project, based upon realistic projections of future performance, a
positive impact for Gulf Southwest and Texas Gulf Coast shareholders. Sheshunoff
projected that Gulf Southwest shareholders will have a higher level of book
value and earnings per share after the Merger than they would on a stand-alone
basis. Sheshunoff projected that Texas Gulf Coast shareholders will have a lower
level of book value and significantly higher level of earnings per share after
the merger than they would on a stand-alone basis. Based upon discussions with
management of Gulf Southwest and Texas Gulf Coast, Sheshunoff estimates that the
combined entity would also be able to realize savings and earnings enhancement
opportunities based upon economies realized over time. The primary focus has
been on the short-term and long-term book value per share and earnings per share
appreciation potential for Gulf Southwest and Texas Gulf Coast shareholders.
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Neither Gulf Southwest nor Texas Gulf Coast imposed any limitations upon
the scope of the investigation to be performed by Sheshunoff in formulating its
Opinion. In rendering its Opinion, Sheshunoff did not independently verify the
asset quality and financial condition of Gulf Southwest or Texas Gulf Coast, but
instead relied upon the data provided by or on behalf of Gulf Southwest and
Texas Gulf Coast to be true and accurate in all material respects.
For its services as independent financial analyst for the purchase,
including the rendering of its Opinion referred to above, Gulf Southwest and
Texas Gulf Coast have paid Sheshunoff aggregate fees of $30,700. Gulf Southwest
and Texas Gulf Coast also agreed to reimburse Sheshunoff for reasonable out-of-
pocket expenses. Prior to being retained for this assignment, Sheshunoff has
provided professional services and products to Gulf Southwest and Texas Gulf
Coast. The revenues derived from such services and products are insignificant
when compared to the Sheshunoff's total gross revenues.
Determination of Exchange Ratio
In determining a fair and equitable exchange ratio, Sheshunoff determined
the total transaction values for GSW Common Stock and TGC Common Stock. In
determining the total transaction value for GSW Common Stock of approximately
$32,045,000, Sheshunoff first determined the total transaction value of
Merchants Bank. In determining the total transaction value for TGC Common Stock
of approximately $17,782,000, Sheshunoff first determined the total transaction
values of the TGC Banks. Sheshunoff analyzed the transaction values on a cash
equivalent fair market value basis using the standard evaluation techniques (as
discussed below) including comparable sales multiples, net present value, cash
flow analysis, return on investment and the price equity index based on certain
assumptions of projected growth, earnings and dividends and a range of discount
rates from 10% to 15%.
The total transaction value of approximately $32,045,000 for Gulf Southwest
was determined by adding parent only cash and other tangible assets to and
subtracting parent only other liabilities from the transaction value of
Merchants Bank. The total transaction value of Texas Gulf Coast of approximately
$17,782,000 was derived by adding parent only cash and other tangible assets to
and subtracting parent only long term debt, other liabilities and preferred
stock from the sum of the transaction values of the TGC Banks. Sheshunoff then
divided the total transaction values derived for Gulf Southwest and Texas Gulf
Coast by their respective number of common shares outstanding to arrive at a
transaction value per common share for the organizations. Finally, the exchange
ratio of 2.1176 was then determined by dividing Texas Gulf Coast's per share
transaction value of $54.00 by Gulf Southwest's per share transaction value of
$25.50.
Many variables affect the value of banks, not the least of which is the
uncertainty of future events, so that the relative importance of the valuation
variables differs in different situations, with the result that appraisal
theorists debate about which variables are the most appropriate ones on which to
focus. Although most appraisers agree that the primary financial variables to be
considered are earnings, equity, dividends or dividend-paying capacity, asset
quality and cash flow. In addition, in most instances, if not all, value is
further tempered by non-financial factors such as marketability, voting rights
or block size, history of past sales of
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the banking company's stock, nature and relationship of the other shareholdings
in the bank, and special ownership or management considerations.
Net asset value is the value of the net equity of a bank, including
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every kind of property and value. This approach normally assumes liquidation on
the date of appraisal with the recognition of securities gains or losses, real
estate appreciation or depreciation, adjustments to the loan loss reserve,
discounts to the loan portfolio and changes in the net value of other assets.
As such, it is not the best approach to use when valuing a going concern,
because it is based on historical costs and varying accounting methods. Even if
the assets and liabilities are adjusted to reflect prevailing prices and yields
(which is often of limited accuracy because readily available data is often
lacking), it still results in a liquidation value for the concern. Furthermore,
since this method does not take into account the values attributable to the
going concern such as the interrelationship among the company's assets and
liabilities, customer relations, market presence, image and reputation, and
staff expertise and depth, little weight is given by Sheshunoff to the net asset
value method of valuation.
Market value is generally defined as the price, established on an
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"arms-length" basis, at which knowledgeable, unrelated buyers and sellers would
agree. The market value is frequently used to determine the price of a minority
block of stock when both the quantity and the quality of the "comparable" data
----
are deemed sufficient. However, the relative thinness of the specific market
for the stock of the banking company being appraised may result in the need to
review alternative markets for comparative pricing purposes. The "hypothetical"
market value for a small bank with a thin market for its stock is normally
determined by comparison to the average price to earnings, price to equity and
dividend yield of local or regional publicly-traded bank issues, adjusting for
significant differences in financial performance criteria and for any lack of
marketability or liquidity. The market value in connection with the evaluation
of control of a bank is determined by the previous sales of banks in the state
or region. In valuing a business enterprise, when sufficient comparable trade
data is available, the market value deserves greater weighing than the net asset
value and similar emphasis as the investment value as discussed below.
Sheshunoff maintains substantial files concerning the prices paid for
banking institutions nationwide. The database includes transactions involving
Texas banking organizations and banking organizations in the Southwest region of
the United States in the first half of 1994 and over the past five years. The
database provides comparable pricing and financial performance data for banking
organizations sold or acquired. Organized by different peer groups, the data
present averages of financial performance and purchase price levels, thereby
facilitating a valid comparative purchase price analysis. In analyzing the
transaction values of Merchants Bank, the TGC Banks, Gulf Southwest and Texas
Gulf Coast, Sheshunoff has considered the market approach and has evaluated
price to equity and price to earnings multiples of Texas and southwestern
banking organizations.
Sheshunoff calculated "Adjusted Book Values" of $43,102,749, $13,907,614,
$8,272,362 and $16,073,286 for Merchants Bank, First Bank Mainland, First Bank
Pearland and Texas City Bank, respectively, based on their September 30, 1994
equity balances and the average price to equity multiple for regional banking
organizations sold in the first half of 1994. Sheshunoff
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calculated "Adjusted Earnings Values" of $25,477,900, $9,029,625, $4,933,550 and
$5,224,279 for Merchants Bank, First Bank Mainland, First Bank Pearland and
Texas City Bank, respectively, based on their 1993 earnings and the average
price to earnings multiple for regional banking organizations sold in the first
half of 1994. The financial performance characteristics of the regional banking
organizations vary, sometimes substantially, from those of Merchants Bank,
First Bank Mainland, First Bank Pearland and Texas City Bank. When the variance
is significant for relevant performance factors, adjustment to the price
multiples is appropriate when comparing them to the transaction value.
The investment value, is sometimes referred to as the income value or
----------------
earnings value. One investment value method frequently used estimates the
present value of an enterprise's future earnings or cash flow. Another popular
investment value method is to determine the level of current annual benefits
(earnings, cash flow, dividends, etc), and then capitalize one or more of the
benefit types using an appropriate capitalization rate such as an earnings or
dividend yield.
Yet another method of calculating investment value is a cash flow
analysis of the ability of a banking company to service acquisition debt
obligations (at a certain price level) while providing sufficient earnings for
reasonable dividends and capital adequacy requirements. In connection with the
cash flow analysis, the return on investment that would accrue to a prospective
buyer at the transaction value is calculated.
The investment or earnings value of any banking organization's stock is an
estimate of the present value of the future benefits, usually earnings, cash
flow or dividends, which will accrue to the stock. An earnings value is
calculated using an annual future earnings stream over a period of time of not
less than ten years and the residual value of the earnings stream after ten
years, assuming no earnings growth, and an appropriate capitalization rate (the
net present value discount rate). Sheshunoff's computations were based on an
analysis of the banking industry, the economic and competitive situations in the
market area of the Subsidiary Banks, and their current financial conditions and
historical levels of growth and earnings. Using a net present value discount
rate of 10%, an acceptable discount rate considering the risk-return
relationship most investors would demand for an investment of this type as of
the valuation date, the "Net Present Values of Future Earnings," equaled
$33,891,070, $7,765,181, $5,929,187 and $8,238,730 for Merchants Bank, First
Bank Mainland, First Bank Pearland and Texas City Bank, respectively.
The cash flow method assumes the formation of a bank holding company with
maximum leverage according to Federal Reserve System guidelines and analyzes the
ability of the bank to retire holding company acquisition debt within a
reasonable period of time while maintaining adequate capital. Using this method
Sheshunoff arrived at values of $32,300,000, $7,925,000, $6,300,000 and
$8,450,000 for Merchants Bank, First Bank Mainland, First Bank Pearland and
Texas City Bank, respectively.
Return on investment analysis (ROI) also assumes the formation of a bank
holding company using maximum regulatory leverage and analyzes the ten year ROI
of a 33.33% equity investment at the transaction values of $29,750,000,
$7,200,000, $4,800,000 and $8,250,000 for Merchants Bank, First Bank Mainland,
First Bank Pearland and Texas City Bank, respectively,
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compared to a liquidation at book value in the year 2003, and a sale at ten
times projected earnings for the year 2003. This ROI analysis provides a
benchmark for assessing the validity of the transaction value of a majority
block of stock. The ROI analysis is one approach to valuing a going concern,
and is directly impacted by the earnings stream, dividend payout levels and
levels of debt, if any. Other financial and nonfinancial factors indirectly
affect the ROI; however, these factors more directly influence the level of ROI
an investor would demand from an investment in a majority block of stock of a
specific bank at a certain point in time. The ROI, assuming liquidation at book
value is 2003, was 9.34%, 12.15%, 13.46% and 11.40% for Merchants Bank, First
Bank Mainland, First Bank Pearland and Texas City Bank, respectively. The ROI,
assuming sale at ten times earnings in 2003, was 15.52%, 15.20%, 18.81% and
13.21% for Merchants Bank, First Bank Mainland, First Bank Pearland and Texas
City Bank, respectively.
Furthermore, a price level indicator, the equity index, may be used to
confirm the validity of the transaction value. The equity index adjusts the
price to equity multiple in order to facilitate a truer price level comparison
with comparable banking organizations, regardless of the differing levels of
equity capital. The equity index is derived by multiplying the price to equity
multiple by the equity-to-assets ratio. In this instance, transaction values of
$29,750,000, $7,200,000, $4,800,000 and $8,250,000 results in equity indices of
12.43, 9.24, 10.51 and 10.25 Merchants Bank, First Bank Mainland, First Bank
Pearland and Texas City Bank, respectively. The price equity index for banking
organizations sold in the southwest for 100% cash in the first half of 1994
equaled 11.41.
Finally, another test of appropriateness for the transaction value of
a majority block of stock is the net present value-to-transaction value ratio.
Theoretically, an earnings stream may be valued through the use of a net present
value analysis. In Sheshunoff's experience with majority block community bank
stock valuations, it has determined that a relationship does exist between the
net present value of an "average" community banking organization and the
transaction value of a majority block of the banking organization's stock. The
net present value-to-transaction value ratios equaled 113.92%, 107.85%, 123.52%
and 99.86% for Merchants Bank, First Bank Mainland, First Bank Pearland and
Texas City Bank, respectively, which falls within Sheshunoff's expected range.
There are many other factors to consider, when valuing a going concern, which do
not directly impact the earnings stream and the net present value but which do
exert a degree of influence over the transaction value of a going concern.
These factors include, but are not limited to, the general condition of the
industry, the economic and competitive situations in the market area and the
expertise of the management of the organization being valued.
When the net asset value, market value and investment value methods are
subjectively weighed, using the appraiser's experience and judgment, it is
Sheshunoff's opinion that the resulting transaction values and exchange ratio
are fair.
Accounting Treatment
The Merger will be accounted for as a purchase.
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Federal Income Tax Consequences
General. Gulf Southwest has received an opinion from its counsel,
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Winstead Sechrest & Minick P.C., as to the tax consequences of the Merger.
Based upon certain assumptions and representations by Gulf Southwest and Texas
Gulf Coast, Winstead Sechrest & Minick P.C. is of the opinion that (i) the
Merger will constitute a "reorganization" within the meaning of Section 368(a)
of the Code and that no gain or loss (except with respect to cash received in
lieu of fractional shares) will be recognized by holders of TGC Common Stock on
the exchange of their TGC Common Stock solely for shares of GSW Common Stock
pursuant to the Merger; (ii) the tax basis of the shares of GSW Common Stock
received by holders of TGC Common Stock will be the same as the tax basis of the
shares of TGC Common Stock exchanged therefor, decreased by the amount of any
cash received and increased by the amount of any gain recognized on the exchange
and (iii) the holding period of shares of GSW Common Stock received by holders
of shares of TGC Common Stock will include the holding period of the shares of
TGC Common Stock exchanged therefor, provided that such shares of TGC Common
Stock were held as capital assets on the date of consummation of the Merger.
It is not practicable to present a detailed analysis and explanation of the
Federal income tax considerations which are pertinent to the Merger. The
following summary is based on the provisions of the Internal Revenue Code of
1986, as amended (the "Code"). In connection with the preparation of this
summary, the legislative history of the Code and existing and proposed
regulations promulgated thereunder have been considered, as have judicial
decisions and current administrative rulings and practices. However, no
assurance can be given that legislative, judicial or administrative changes may
not be forthcoming which would effect the accuracy of the summary. Any such
changes may or may not be retroactive with respect to transactions entered into
or contemplated prior to the effective date thereof.
The Board of Directors of Gulf Southwest does not intend to apply to the
Internal Revenue Service for a private ruling with respect to the Merger.
Moreover, if a ruling were applied for, there is no assurance that a favorable
ruling concerning the federal income tax consequences of the Merger would be
issued or that additional conditions would not have to be satisfied in order to
secure a favorable ruling. FOR THESE REASONS, EACH SHAREHOLDER OF TEXAS GULF
COAST IS URGED TO SEEK ADVICE FROM HIS OR HER OWN TAX COUNSEL REGARDING THE
INDIVIDUAL FEDERAL INCOME TAX CONSEQUENCES OF HIS OR HER PARTICIPATION IN THE
MERGER.
Nonrecognition of Gain or Loss on the Exchange. Section 354(a)(1) of
----------------------------------------------
the Code provides that no gain or loss will be recognized when stock or
securities in a corporation a party to a reorganization are, in pursuance of a
plan of reorganization, exchanged solely for stock or securities in such
corporation or in another corporation a party to the reorganization. In this
connection, Section 368(a)(1)(A) of the Code provides that the term
"reorganization" includes a statutory merger or consolidation.
In accordance with applicable law, and pursuant to the provisions of the
Merger/Reorganization Agreements to be adopted and approved by the shareholders
of Texas Gulf Coast and Merger Sub, Texas Gulf Coast will be merged with and
into Merger Sub. Upon
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consummation of the Merger, each share of TGC Common Stock will be exchanged for
2.1176 shares of GSW Common Stock. Since shareholders will receive only GSW
Common Stock in exchange for their shares of TGC Common Stock (other than cash
distributed in lieu of fractional shares), the Merger should qualify as a tax-
free "reorganization" under Sections 368(a)(1)(A) and 368(a)(2)(D) of the Code.
Accordingly, those shareholders of Texas Gulf Coast who receive only GSW Common
Stock should not recognize taxable gain or loss under Section 354(a)(1) of the
Code (other than as described below with respect to fractional shares). It is
not a condition to consummation of the Merger that the Merger qualify as a tax-
free reorganization.
Each shareholder of Texas Gulf Coast, if any, who perfects any dissenters'
rights he or she may have, should be aware that the sale of his or her shares of
TGC Common Stock will result in the recognition of gain if the valuation of such
stock exceeds the selling shareholder's basis therein. Such gain generally will
be characterized as long-term capital gain if the TGC Common Stock sold is a
capital asset and has been held for more than 12 months. However, in certain
circumstances, all or a part of such gain may be taxable as ordinary income,
depending on the individual situation of the shareholder. Each shareholder
contemplating the perfection of dissenters' rights, and the sale of his or her
TGC Stock pursuant thereto, is urged to consult with his or her own tax adviser
regarding the individual federal income tax consequences of such sale.
Under the terms of the Merger/Reorganization Agreements, no fractional
shares of Gulf Southwest Stock will be issued; rather, cash will be distributed
in lieu thereof on the basis of $25.50 per whole share of GSW Common Stock. In
this connection, the Internal Revenue Service ruled in Rev. Rul. 66-365, 1966-2
C.B. 116, that cash distributed by an acquiring corporation to shareholders in
lieu of the issuance of fractional shares of stock in a reorganization would be
treated as a redemption of such fractional shares under Section 302(a) of the
Code where the cash distributed was the result of a mechanical rounding off of
the fractional interests, was not separately bargained for consideration, and
was not essentially equivalent to a dividend. Accordingly, those shareholders
who receive cash in lieu of fractional shares of GSW Common Stock should
recognize capital gain in accordance with Section 302(a) of the Code in the
amount by which the cash received exceeds the basis of the fractional shares of
GSW Common Stock to which such shareholders would have otherwise been entitled.
Basis of GSW Common Stock. Section 358(a)(1) of the Code provides
-------------------------
that in the case of an exchange to which Section 354 of the Code applies, the
basis of property permitted to be received under such section without the
recognition of gain or loss shall be the same as the basis of the property
exchanged, decreased by the amount of money and the fair market value of other
property received by the taxpayer, and the amount of loss recognized by the
taxpayer on the exchange, and increased by the amount which was treated as a
dividend, and the amount of gain recognized by the taxpayer on such exchange
(not including the portion of such gain which was treated as a dividend).
Accordingly, if Sections 368(a)(1)(A), 368 (a)(2)(D) and 354 of the Code apply
to the exchange as discussed above, the basis of the GSW Common Stock received
by each exchanging Texas Gulf Coast shareholder should be the same as the basis
of the TGC Common Stock surrendered in exchange therefor, decreased by the
amount of money received, and increased by the amount of gain recognized on the
exchange (except with respect to fractional shares).
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Holding Period of the GSW Common Stock. Section 1223(1) of the Code
--------------------------------------
provides that in determining the period for which the taxpayer has held property
received in an exchange, there shall be included the period for which he or she
held the property exchanged if the property received has the same basis in whole
or in part in his or her hands as the property exchanged, and the property
exchanged was, at the time of the exchange, held as a capital asset. Because
the basis of the GSW Common Stock received by the exchanging Texas Gulf Coast
shareholders should, pursuant to Section 358(a) of the Code, be determined by
reference to the basis of the TGC Common Stock exchanged therefor, the holding
period of such GSW Common Stock should include the period during which the TGC
Common Stock surrendered in exchange therefor was held, provided that such TGC
Common Stock was held as a capital asset on the date of the exchange.
Dividend Distributions by Gulf Southwest. As in the case of cash
----------------------------------------
dividends distributed by Texas Gulf Coast and Gulf Southwest prior to the
consummation of the Merger with respect to their outstanding stock, cash
dividends distributed by Gulf Southwest after the Merger will be taxable to the
recipients thereof as ordinary income.
Appraisal Rights of Dissenting Shareholders
Any owner of TGC Common Stock may dissent from approval of the Merger
Proposal by complying with procedures described in this section. None of Gulf
Southwest, Merger Sub or Texas Gulf Coast will be obligated to consummate the
Merger if the holders of more than 10% of the TGC Common Stock elect to exercise
their statutory rights of dissent.
The following summary does not purport to be a complete statement of
dissenters' rights of appraisal, and such summary is qualified in its entirety
by reference to Articles 5.11, 5.12 and 5.13 of the Texas Business Corporation
Act, which are reproduced in full as Exhibit B to this Joint Proxy
---------
Statement/Prospectus.
Under the TBCA, any shareholder of Texas Gulf Coast may object to the
Merger and demand payment of the fair value of his shares of TGC Common Stock
after filing with Texas Gulf Coast, at 4200 Westheimer, Suite 210, Houston,
Texas 77027, Attention: President, prior to the vote of the shareholders of
Texas Gulf Coast on the Merger Proposal, a written objection to the Merger,
setting out that his right of dissent will be exercised and giving his address
to which notice is to be delivered or mailed.
If the Merger is effected and a shareholder having made objection did
not vote in favor thereof, written notice of the consummation of the Merger will
be sent, within ten (10) days of such event, to such shareholder and such
shareholder may, within ten (10) days thereafter, make written demand to Texas
Gulf Coast, at 4200 Westheimer, Suite 210, Houston, Texas 77027, Attention:
President, for payment of the fair value of his shares. Such demand must state
the number and class of shares held by the shareholder and his estimate of the
fair value of his shares.
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It is not necessary for a shareholder to vote against consummation of the
Merger in order to perfect his right to dissent and demand appraisal. However,
no such shareholder may vote for approval and adoption of the Merger Proposal
and thereafter demand his appraisal rights. Because all proxies submitted which
do not specify how such proxy is to be voted will be voted in favor of the
adoption and approval of the Merger Proposal, a shareholder who desires to
dissent from approval of the Merger should not submit such a proxy.
Unless demand for payment is made by an objecting shareholder within
the ten-day period specified in the statute, he will be bound by the Merger and
his rights of appraisal will be terminated. A vote against consummation of the
Merger will not satisfy the statutory requirement that a shareholder give notice
of his intention to dissent and make demand for payment of his shares. Upon
making such demand (and satisfying the other conditions described above), such
shareholder will cease to be a shareholder of Texas Gulf Coast and will become a
creditor of Merger Sub.
Within twenty (20) days of making written demand for payment of the fair
value of his shares, an objecting shareholder must submit the certificates
representing such shares to the Combined Company for notation on the
certificates that such a demand has been made. Failure to submit the
certificates for notation will, at the option of the Combined Company, terminate
the shareholder's appraisal rights and he will be conclusively presumed to have
approved the Merger and his right to be paid the fair value of his shares will
terminate. Such a shareholder then will only be entitled to receive shares of
GSW Common Stock in exchange for his TGC Common Stock.
Within 20 days after receiving any demand for payment, Merger Sub will send
the dissenting shareholder notice to the effect that either it will pay the
amount claimed, or that it will pay some other amount as the fair value.
If, within 60 days after the date the Merger is effected, Merger Sub and
the dissenting shareholder can agree upon the fair value, such value will be
paid and all rights of the dissenting shareholder will cease. If agreement as to
the fair value cannot be reached within such 60-day period, either the
dissenting shareholder or Merger Sub may, within 60 days after the expiration of
the 60-day period, file an action in a court of competent jurisdiction, asking
for a finding and determination of the fair value of such shares. Court costs
will be allocated between the parties in such manner as the court may determine.
Resales of GSW Common Stock by Shareholders of Texas Gulf Coast
The shares of GSW Common Stock issuable to the shareholders of Texas Gulf
Coast pursuant to the Merger may be traded freely and without restriction by
those shareholders of Texas Gulf Coast who are not deemed to be "affiliates," as
that term is defined in the rules under the Securities Act, of either Gulf
Southwest or Texas Gulf Coast. An affiliate of a corporation is defined as "a
person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with" such
corporation. Any public reoffering or sale of GSW Common Stock issued pursuant
to the Merger by any affiliate of Texas Gulf Coast will, under current law,
require either (a) further registration under the Securities Act of
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the GSW Common Stock to be sold, (b) compliance with Rule 145 promulgated under
the Securities Act permitting sales under certain circumstances, or (c) the
availability of an exemption from such further registration. Gulf Southwest is
not obligated to register under the Securities Act any shares of GSW Common
Stock that may be sold by an affiliate of Texas Gulf Coast. Rule 145 provides
generally that for a period of two years following a merger, an affiliate may
resell shares of common stock issued pursuant to such merger only in a broker's
transaction or in a transaction directly with a market maker, and such sales by
the affiliate during any three-month period may not exceed the greater of (i) 1%
of the shares of common stock outstanding or (ii) the average reported weekly
trading volume during the four calendar weeks preceding such sale. In addition,
if an affiliate acts in concert with another person for the purpose of any such
sale, the sales of all persons acting in concert would be limited in the
aggregate to such maximum number of shares in any three-month period. After any
such affiliate has held his shares of stock for at least two years, any sale of
such shares by him would not be subject to the restrictions of Rule 145, if he
is not affiliated with Gulf Southwest and assuming Gulf Southwest has filed all
reports required to be filed by it under the Exchange Act, during the twelve
months preceding any such sale. Additionally, a person who is not, and has not
been for at least three months, an affiliate of Gulf Southwest and has been the
beneficial owner of the GSW Common Stock for at least three years may sell his
shares of GSW Common Stock without being subject to the restrictions of Rule
145. It should be noted that any subsequent offer or sale of the GSW Common
Stock must be effected in compliance with applicable state securities statutes.
Material Contracts
GSWDP provides data processing services for the TGC Banks. The fees for
these services are comparable to those charged to other banks.
Other than as discussed above, prior to entering into discussions
regarding the Merger, there have been no material contracts, arrangements,
understandings, relationships, negotiations or transactions between Texas Gulf
Coast and Gulf Southwest. However, Texas Gulf Coast and Gulf Southwest have a
number of common officers, directors and shareholders. For information
regarding such common officers, directors and shareholders, see "Texas Gulf
Coast - Principal Shareholders," "Texas Gulf Coast - Officers and Directors,"
"Gulf Southwest - Principal Shareholders," "Gulf Southwest - Officers and
Directors" and "Risk Factors - Conflicts of Interest."
Restrictions on Transfer of TGC Common Stock Subsequent to the Special Meeting
Assuming that the Merger Proposal is approved at the Special Meeting,
neither the Merger/Reorganization Agreements nor the TBCA impose any
restrictions on the transferability of shares of the TGC Common Stock pending
consummation of the Merger.
DESCRIPTION OF TGC STOCK
The authorized capital stock of Texas Gulf Coast consists of 1,000,000
shares of TGC Preferred Stock (of which there are no shares outstanding), and
5,000,000 shares of TGC Class A
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Preferred Stock (of which there are no shares outstanding), and 1,000,000 shares
of TGC Common Stock, (of which 329,738 shares are outstanding as of the date
hereof).
All outstanding shares of TGC Stock are fully paid and nonassessable.
TGC Common Stock
Subject to the prior rights of holders of outstanding shares of TGC
Preferred Stock (and TGC Class A Preferred Stock, if such rights are
established), the holders of TGC Common Stock are entitled to dividends when, as
and if declared by the board of directors out of legally available funds. Each
holder of TGC Common Stock is entitled to one vote for each share held on all
matters submitted to owners of TGC Common Stock. The owners of TGC Common Stock
do not have any preemptive right to purchase a pro rata portion of shares of TGC
Common Stock issued by Texas Gulf Coast in future transactions. Holders of TGC
Common Stock do not have cumulative voting rights in the election of directors.
In the event of a statutory liquidation, after payment of all creditors,
the holders of TGC Common Stock (subject to the prior rights of the holders of
outstanding TGC Preferred Stock, and TGC Class A Preferred Stock, if such rights
are established) will be entitled to receive pro rata any assets remaining for
distribution to shareholders.
TGC Preferred Stock
Upon issuance, the owners of TGC Preferred Stock are entitled to receive,
when, as and if declared by the Board of Directors of Texas Gulf Coast out of
fund legally available therefore, cumulative dividends of $1.28 per year
(payable in semi-annual installments or at such intervals as the Board of
Directors may determine) for each share of TGC Preferred Stock owned by them.
Until all such dividends have been paid or provided for, no dividends may be
declared or paid in respect of shares of TGC Common Stock.
Upon issuance, the TGC Preferred Stock may be redeemed by Texas Gulf Coast
at any time, in whole or in part, at a price of $16.00 per share.
Upon liquidation, following issuance the owners of TGC Preferred Stock are
entitled to receive $16.00 per share and all accumulated but unpaid dividends to
which shares of TGC Preferred Stock owned by them are entitled before any
distributions may be made to holders of TGC Common Stock.
The Board of Directors of Texas Gulf Coast does not have any present
intention to authorize the issuance of shares of TGC Preferred Stock.
TGC Class A Preferred Stock
In addition to the TGC Preferred Stock, Texas Gulf Coast is authorized to issue
up to 5,000,000 shares of TGC Class A Preferred Stock. The Board of Directors of
Texas Gulf Coast has the authority, in its discretion, to fix or alter the
dividend rights, dividend rate, conversion rights, voting rights, rights and
terms of redemption (including sinking fund provisions), redemption price or
prices, liquidation preferences of unissued series of the TGC Class A Preferred
Stock, the number of shares constituting any such series and the designation
thereof. Upon issuance, the holders of any series of the TGC Class A Preferred
Stock will have such
-102-
<PAGE>
preferences over the holders of TGC Common Stock and TGC Preferred Stock,
including preferences as to dividends or upon liquidation, or both, and such
voting, conversion, redemption, and other rights, as the Board of Directors of
Texas Gulf Coast determines in creating such series.
The Board of Directors of Texas Gulf Coast does not have any present
intention to authorize the issuance of shares of TGC Class A Preferred Stock.
DESCRIPTION OF GSW STOCK
The authorized capital stock of Gulf Southwest consists of 10,000,000
shares of GSW Common Stock, of which 1,258,636 shares are outstanding, and
2,000,000 shares of GSW Preferred Stock, of which no shares are outstanding as
of the date hereof.
All outstanding shares of GSW Stock are fully paid and nonassessable.
GSW Common Stock
Subject to the prior rights of holders of outstanding shares of GSW
Preferred Stock, the holders of GSW Common Stock are entitled to dividends when,
as and if declared by the board of directors out of legally available funds.
Each holder of GSW Common Stock is entitled to one vote for each share held on
all matters submitted to owners of GSW Common Stock. The owners of GSW Common
Stock do not have any preemptive rights to purchase a pro rata portion of shares
of GSW Common Stock issued by Gulf Southwest in future transactions. Holders of
GSW Common Stock do not have cumulative voting rights in the election of
directors.
In the event of a statutory liquidation, after payment of all creditors,
the holders of GSW Common Stock (subject to the prior rights of the holders of
outstanding GSW Preferred Stock) will be entitled to receive pro rata any assets
remaining for distribution to shareholders.
GSW Preferred Stock
Gulf Southwest is authorized to issue up to 2,000,000 shares of preferred
stock ("Gulf Southwest Preferred Stock"). The Board of Directors of Gulf
Southwest has the authority, in its discretion, to fix or alter the dividend
rights, dividend rate, conversion rights, voting rights, rights and terms of
redemption (including sinking fund provisions), redemption price or prices,
liquidation preferences of unissued series of the Gulf Southwest Preferred
Stock, the number of shares constituting any such series and the designation
thereof. Upon issuance, the holders of any series of the Gulf Southwest
Preferred Stock will have such preferences over the holders of GSW Common Stock,
including preferences as to dividends or upon liquidation, or both, and such
voting, conversion, redemption, and other rights, as the Board of Directors of
Gulf Southwest determines in creating such series.
The Board of Directors of Gulf Southwest does not have any present
intention to authorize the issuance of shares of GSW Preferred Stock.
-103-
<PAGE>
COMPARATIVE RIGHTS OF SHAREHOLDERS
The information contained in this section is intended to summarize and
compare certain significant rights of shareholders of Gulf Southwest and Texas
Gulf Coast and does not purport to be a complete discussion of all such rights
or all of the differences among the rights of such shareholders.
Dividend Rights
Both the holders of TGC Common Stock and the holders of GSW Common
Stock are entitled to dividends, subject to the prior payment of dividends to
holders of TGC Preferred Stock, TGC Class A Preferred Stock or GSW Preferred
Stock, as applicable, when, as and if declared by the respective Board of
Directors out of funds legally available therefor.
Voting Rights
Except as otherwise provided by law for certain types of transactions,
all voting rights of both Texas Gulf Coast and Gulf Southwest are vested in the
respective holders of shares of TGC Common Stock and GSW Common Stock. Each
outstanding share of such stock is entitled to one vote and none of the holders
of such shares have cumulative voting rights in the election of directors.
Liquidation Rights
In the event of liquidation, the holders of shares of TGC Common Stock
and GSW Common Stock are entitled to receive, on an equal per share basis,
subject to the prior payment of amounts due to holders of TGC Preferred Stock,
TGC Class A Preferred Stock or GSW Preferred Stock, as applicable, any assets of
their respective corporations remaining after payment of all obligations.
Preemptive Rights
None of the holders of shares of TGC Common Stock or GSW Common Stock
have the preemptive right to purchase their pro rata portion of any additional
shares of such stock which may be issued in the future.
LEGAL MATTERS
The validity of the shares of GSW Common Stock offered hereby will be
passed upon for Gulf Southwest by Winstead Sechrest & Minick P.C., Dallas,
Texas.
EXPERTS
The consolidated financial statements (including schedules) of Gulf
Southwest for the years ended December 31, 1993, 1992 and 1991 and the financial
statements (including schedules) of Gulf Southwest (parent company only) for
the years ended December 31, 1993,
-104-
<PAGE>
1992 and 1991, have been audited by Hidalgo, Banfill, Zlotnik & Kermali, P.C.,
independent auditors, as set forth in their report thereon included herein. The
financial statements (including schedules) of Texas Gulf Coast for the year
ended December 31, 1993, and the financial statements (including schedules) of
Texas Gulf Coast (parent company only) for the year ended December 31, 1993,
have been audited by Hidalgo, Banfill, Zlotnik & Kermali, P.C., independent
auditors, as set forth in their report thereon, included herein. The financial
statements (including schedules) of Texas Gulf Coast for the years ended
December 31, 1992 and 1991 and the financial statements (including schedules) of
Texas Gulf Coast (parent company only) for the years ended December 31, 1992 and
1991 have been audited by Griffin, Iles, Masel & Duvall, P.C., Certified Public
Accountants. Such financial statements are included herein in reliance upon
such reports, given upon the authority of such firms as experts in accounting
and auditing.
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the 1995 Annual
Meeting of Stockholders of Gulf Southwest must be received at Gulf Southwest's
principal executive offices no later than May 15, 1995 in order to be considered
for inclusion in the Company's proxy materials related to that meeting.
-105-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Gulf Southwest Bancorp, Inc.
Report of Hidalgo, Banfill, Zlotnik & Kermali, P.C.,
Independent Auditors................................................... F-3
Consolidated Balance Sheets as of December 31, 1993 and December 31,
1992 and (unaudited) as of September 30, 1994 and
September 30, 1993..................................................... F-4
Consolidated Statement of Income for the Years Ended December 31,
1993, 1992 and 1991 and for the Nine Months Ended September 30,
1994 and 1993 (unaudited).............................................. F-6
Statement of Stockholders' Equity for the Period from January 1,
1991 Through December 31, 1993 and (unaudited) for the Nine Months
Ended September 30, 1994............................................... F-8
Consolidated Statement of Cash Flows for the Years Ended December 31,
1993, 1992 and 1991 and for the Nine Months Ended September 30, 1994
and 1993 (unaudited)................................................... F-9
Balance Sheets (Parent Company Only) as of December 31, 1993 and
December 31, 1992 and (unaudited) as of September 30, 1994 and
September 30, 1993..................................................... F-12
Statement of Income (Parent Company Only) for the Years Ended
December 31, 1993, 1992 and 1991 and for the Nine Months Ended
September 30, 1994 and 1993 (unaudited)................................ F-13
Statement of Cash Flows (Parent Company Only) for the Years Ended
December 31, 1993, 1992 and 1991 and for the Nine Months Ended
September 30, 1994 and 1993 (unaudited)................................ F-14
Notes to Financial Statements............................................. F-15
Texas Gulf Coast Bancorp, Inc.
Report of Hidalgo, Banfill, Zlotnik & Kermali, P.C., Independent
Auditors............................................................... F-28
Report of Griffin, Iles, Masel & Duvall, P.C., Independent Auditors....... F-29
Consolidated Balance Sheets as of December 31, 1993 and December 31,
1992 and (unaudited) as of September 30, 1994 and September 30, 1993... F-30
Consolidated Statement of Income for the Years Ended December 31, 1993,
1992 and 1991 and for the Nine Months Ended September 30, 1994 and
1993 (unaudited)....................................................... F-32
Statement of Stockholders' Equity for the Period from January 1, 1991
Through December 31, 1993 and (unaudited) for the Nine Months
Ended September 30, 1994............................................... F-34
F-1
<PAGE>
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1993, 1992 and 1991 and for the Nine Months Ended
September 30, 1994 and 1993 (unaudited)................................ F-36
Balance Sheets (Parent Company Only) as of December 31, 1993 and 1992
and (unaudited) as of September 30, 1994 and September 30, 1993........ F-39
Statement of Income (Parent Company Only) for the Years Ended December
31, 1993, 1992 and 1991 and for the Nine Months Ended September 30,
1994 and 1993 (unaudited).............................................. F-40
Statement of Cash Flows (Parent Company Only) for the Years Ended
December 31, 1993, 1992 and 1991 and for the Nine Months Ended September
30, 1994 and 1993 (unaudited).......................................... F-41
Notes to Financial Statements............................................. F-42
Pro Forma Consolidating Financial Statements
Report of Hidalgo, Banfill, Zlotnik & Kermali, P.C., Independent
Auditors............................................................... F-56
Pro Forma Consolidating Financial Statements Objectives................... F-57
Pro Forma Consolidating Balance Sheet as of September 30, 1994
(unaudited)............................................................ F-58
Pro Forma Consolidating Statement of Income for the Year Ended
December 31, 1993 (unaudited).......................................... F-60
Pro Forma Consolidating Statement of Income for the Nine Months Ended
September 30, 1994 (unaudited)......................................... F-61
Notes to Pro Forma Consolidating Financial Statements..................... F-62
All other schedules or supplementary data are omitted as the required
information is inapplicable or the information is presented in the financial
statements or related notes.
F-2
<PAGE>
Board of Directors and Shareholders
Gulf Southwest Bancorp, Inc.
Houston, Texas
Independent Auditors' Report
----------------------------
We have audited the accompanying consolidated balance sheet of Gulf Southwest
Bancorp, Inc. and subsidiaries as of December 31, 1993 and 1992, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1993, and the balance sheet
of Gulf Southwest Bancorp, Inc. (parent company only) as of December 31, 1993
and 1992, and the related statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1993. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Gulf Southwest
Bancorp, Inc. and subsidiaries and the financial position of Gulf Southwest
Bancorp, Inc. (parent company only) as of December 31, 1993 and 1992, and the
respective results of their operations and their cash flows for each of the
three years in the period ended December 31, 1993, in conformity with generally
accepted accounting principles.
Hidalgo, Banfill, Zlotnik & Kermali, P.C.
Houston, Texas
January 26, 1994
F-3
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
ASSETS
------
<TABLE>
<CAPTION>
December 31, September 30,
-------------------------- ----------------------------
1993 1992 1994 1993
------------ ------------ ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Cash and due from banks (Note 2) $ 12,047,000 $ 13,007,000 $ 12,099,000 $ 12,679,000
Time deposits in financial institutions 1,294,000 1,942,000 2,144,000 1,494,000
Federal funds sold 40,775,000 33,075,000 17,675,000 40,875,000
Investment securities (Note 3):
Held-to-Maturity (market value:
1993 - $54,107,000
1992 - $48,981,000):
U.S. Treasury and other U.S.
Government agencies 44,096,000 37,731,000 45,733,000 42,255,000
State, county and municipal obligations 8,226,000 9,934,000 6,756,000 8,262,000
Other 7,000 7,000 -- 7,000
------------ ------------ ------------ ------------
Total Held-to-Maturity 52,329,000 47,672,000 52,489,000 50,524,000
Available-for-Sale:
U.S. Treasury - - 9,011,000 -
Other - - 7,000 -
------------ ------------ ------------ ------------
Total Available-for-Sale - - 9,018,000 -
------------ ------------ ------------ ------------
Total investment securities 52,329,000 47,672,000 61,507,000 50,524,000
Loans (Note 4):
Loans, net of unearned income of
$2,900,000 in 1993 and $3,505,000
in 1992 127,452,000 123,456,000 139,914,000 127,500,000
Less allowance for possible
loan losses 1,986,000 1,725,000 1,886,000 2,027,000
------------ ------------ ------------ ------------
Total loans, net 125,466,000 121,731,000 138,028,000 125,473,000
Bank premises and equipment (Note 5) 4,198,000 4,001,000 4,701,000 3,776,000
Accrued interest receivable 1,687,000 1,655,000 1,977,000 1,652,000
Excess of cost of subsidiaries over
equity in net assets acquired, net of
accumulated amortization of $250,000
in 1993 and $235,000 in 1992 326,000 340,000 315,000 330,000
Real estate and other loan-related assets 1,578,000 3,037,000 755,000 2,082,000
Other assets 2,305,000 2,460,000 1,615,000 2,226,000
------------ ------------ ------------ ------------
Total Assets $242,005,000 $228,920,000 $240,816,000 $241,111,000
============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-4
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
December 31, September 30,
---------------------------- -----------------------------
1993 1992 1994 1993
------------- ------------- -------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Deposits:
Non-interest bearing $ 61,619,000 $ 58,705,000 $ 62,668,000 $ 60,966,000
Interest bearing (Note 6) 157,323,000 149,263,000 152,679,000 157,575,000
------------ ------------ ------------ ------------
218,942,000 207,968,000 215,347,000 218,541,000
Accrued interest, taxes and other
liabilities 1,131,000 965,000 1,199,000 1,074,000
Borrowings (Note 7) - 350,000 - 350,000
------------ ------------ ------------ ------------
Total Liabilities 220,073,000 209,283,000 216,546,000 219,965,000
------------ ------------ ------------ ------------
Commitments and Contingencies (Note 10) - - - -
Stockholders' Equity (Notes 8 and 11):
Preferred stock $20 par value,
authorized 2,000,000 shares - - - -
Common stock, $1 par value,
authorized 10,000,000 shares,
issued 1,281,650 shares in 1993
and in 1992 1,281,000 1,281,000 1,281,000 1,281,000
Paid-in capital 8,631,000 8,631,000 8,631,000 8,631,000
Retained earnings 12,290,000 9,995,000 14,708,000 11,504,000
Net unrealized loss on investment
securities available for sale (net of
income taxes) - - (43,000) -
------------ ------------ ------------ ------------
22,202,000 19,907,000 24,577,000 21,416,000
Less cost of stock held in treasury:
Common, 20,407 shares in 1993 and
19,875 in 1992 (270,000) (270,000) (307,000) (270,000)
------------ ------------ ------------ ------------
Total Stockholders' Equity 21,932,000 19,637,000 24,270,000 21,146,000
------------ ------------ ------------ ------------
Total Liabilities and Stockholders'
Equity $242,005,000 $228,920,000 $240,816,000 $241,111,000
============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-5
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended September 30,
-------------------------------------------------- -------------------------------
1993 1992 1991 1994 1993
---------- ---------- --------- --------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Interest Income:
Interest and fees
on loans $ 11,513,000 $ 12,022,000 $ 13,110,000 $ 8,857,000 $ 8,587,000
Investment securities:
Taxable interest 2,642,000 2,606,000 2,515,000 2,243,000 1,974,000
Non-taxable interest 525,000 721,000 992,000 290,000 415,000
Time deposits with
financial institutions 46,000 76,000 170,000 40,000 35,000
Federal funds sold 1,076,000 892,000 1,662,000 888,000 772,000
----------- ----------- ----------- ----------- -----------
Total Interest Income 15,802,000 16,317,000 18,449,000 12,318,000 11,783,000
----------- ----------- ----------- ----------- -----------
Interest Expense:
Deposits 4,907,000 5,863,000 9,013,000 3,564,000 3,690,000
Long-term borrowings 36,000 35,000 35,000 - 29,000
----------- ----------- ----------- ----------- -----------
Total Interest
Expense 4,943,000 5,898,000 9,048,000 3,564,000 3,719,000
----------- ----------- ----------- ----------- -----------
Net interest income 10,859,000 10,419,000 9,401,000 8,754,000 8,064,000
Provision for possible
loan losses (Note 4) 410,000 1,165,000 825,000 50,000 410,000
----------- ----------- ----------- ----------- -----------
Net interest income
after provision for
possible loan losses 10,449,000 9,254,000 8,576,000 8,704,000 7,654,000
----------- ----------- ----------- ----------- -----------
Non-Interest Income:
Service charges on
deposit accounts 2,387,000 2,264,000 2,201,000 1,782,000 1,775,000
Other service charges
and fees 201,000 210,000 219,000 151,000 132,000
Other operating income 362,000 321,000 693,000 460,000 288,000
Securities transactions
(Note 3) 29,000 16,000 - - 29,000
----------- ----------- ----------- ----------- -----------
Total Non-Interest Income 2,979,000 2,811,000 3,113,000 2,393,000 2,224,000
----------- ----------- ----------- ----------- -----------
Non-Interest Expenses:
Salaries and employee
benefits 4,770,000 4,306,000 4,264,000 3,588,000 3,533,000
Occupancy expense 920,000 794,000 822,000 771,000 644,000
Furniture and equipment
expense 479,000 458,000 591,000 387,000 353,000
Other real estate expense 951,000 1,206,000 827,000 348,000 705,000
Other operating expense
(Note 13) 3,375,000 3,155,000 3,417,000 2,545,000 2,553,000
----------- ----------- ----------- ----------- -----------
Total Non-Interest Expenses 10,495,000 9,919,000 9,921,000 7,639,000 7,778,000
----------- ----------- ----------- ----------- -----------
</TABLE>
See notes to financial statements.
F-6
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENT OF INCOME (continued)
--------------------------------------------
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
------------------------------------
1993 1992 1991 1994 1993
----------- ---------- ----------- ----------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Income before income taxes
and cumulative effect
of an accounting change 2,933,000 2,146,000 1,768,000 3,458,000 2,090,000
Provision for income taxes
(Note 9) 512,000 242,000 36,000 850,000 581,000
---------- ---------- ---------- ---------- ----------
Income before cumulative
effect of an accounting
change 2,421,000 1,904,000 1,732,000 2,608,000 1,509,000
Cumulative effect of an
accounting change (Note 9) - 2,470,000 - - -
---------- ---------- ---------- ---------- ----------
Net Income $2,421,000 $4,374,000 $1,732,000 $2,608,000 $1,509,000
========== ========== ========== ========== ==========
Weighted Average Number of
Common shares outstanding 1,261,731 1,261,775 1,261,775 1,258,636 1,261,775
========== ========== ========== ========== ==========
Net Income per Common Share:
Income before cumulative
effect of an accounting
change $ 1.92 $ 1.51 $ 1.37 $ 2.07 $ 1.20
Accounting Change - 1.96 - - -
---------- ---------- ---------- ---------- ----------
Net Income $ 1.92 $ 3.47 $ 1.37 $ 2.07 $ 1.20
========== ========== ========== ========== ==========
</TABLE>
See notes to financial statements.
F-7
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES (Consolidated)
AND
GULF SOUTHWEST BANCORP, INC.
(Parent Company Only)
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net Unrealized Gain
Preferred Common Paid-In Retained (Loss) on Securities Treasury
Stock Stock Capital Earnings Available for Sale Stock
--------- ---------- ---------- ------------ --------------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1991 $ - $ 1,281,000 $ 8,631,000 $ 3,889,000 $ - $(270,000)
Net income - - - 1,732,000 - -
--------- ----------- ----------- ----------- --------- ---------
Balance at
December 31, 1991 - 1,281,000 8,631,000 5,621,000 - (270,000)
Net income - - - 4,374,000 - -
--------- ----------- ----------- ----------- --------- ---------
Balance at
December 31, 1992 - 1,281,000 8,631,000 9,995,000 - (270,000)
Net income - - - 2,421,000 - -
Cash dividend paid
common stock - - - (126,000) - -
Acquired 532 shares
of treasury stock - - - - - -
--------- ----------- ----------- ----------- --------- ---------
Balance at
December 31, 1993 - 1,281,000 8,631,000 12,290,000 - (270,000)
Net income (unaudited) - - - 2,608,000 - -
Cash dividend paid
common stock - - - (190,000) - -
Change in accounting
method (Note 3) - - - - 50,000 -
Net change in un-
realized losses on
investment securities
available for sale - - - - (93,000) -
Acquired 2,607 shares
of treasury stock - - - - - (37,000)
--------- ----------- ----------- ----------- --------- ----------
Balance at
September 30, 1994 $ - $ 1,281,000 $ 8,631,000 $ 14,708,000 $ (43,000) $ (307,000)
========= ========== ========== =========== ======== =========
</TABLE>
See notes to financial statements.
F-8
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
----------------------- ---------------------
1993 1992 1991 1994 1993
----------- ------------ ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating
Activities:
Net Income $2,421,000 $ 4,374,000 $1,732,000 $2,608,000 $1,509,000
---------- ----------- ---------- ---------- ----------
Adjustments to Reconcile
Net Income to Cash Flows
From Operating Activities:
Provision for possible
loan losses 410,000 1,165,000 825,000 50,000 410,000
Discount (accretion) amortized
to income 384,000 83,000 (15,000) 241,000 272,000
(Gain) Loss on sale of
investment securities (29,000) (16,000) - - (29,000)
Depreciation and amortization 429,000 395,000 497,000 383,000 318,000
Loss (Gain) on sale of premises
and equipment 51,000 7,000 (353,000) 4,000 72,000
Provision for losses on real
estate and other loan-related
assets 654,000 1,146,000 440,000 209,000 392,000
(Gain) Loss on sale of real
estate and other loan-related
assets (43,000) (196,000) 105,000 1,000 (38,000)
(Increase) Decrease in accrued
interest receivable (32,000) 145,000 343,000 (291,000) 3,000
Decrease (Increase) in other
assets 154,000 (2,058,000) 24,000 712,000 242,000
Increase (Decrease) in accrued
interest, taxes and other
liabilities 166,000 (59,000) (355,000) 68,000 109,000
---------- ----------- ---------- ---------- ----------
Total Adjustments 2,144,000 612,000 1,510,000 1,377,000 1,751,000
---------- ----------- ---------- ---------- ----------
Net Cash Flows From
Operating Activities 4,565,000 4,986,000 3,242,000 3,985,000 3,260,000
---------- ----------- ---------- ---------- ----------
</TABLE>
See notes to financial statements.
F-9
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
------------------------------------------------
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
------------------------ --------------------
1993 1992 1991 1994 1993
------------ ------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From Investing
Activities:
Net decrease (increase)
in time deposits in
financial institutions $ 648,000 $ 196,000 $ 1,485,000 $ (850,000) $ 448,000
Proceeds from sales of
investment securities 745,000 - - - -
Proceeds from maturities of
investment securities 13,548,000 16,303,000 10,603,000 9,083,000 11,003,000
Purchase of investment
securities (19,305,000) (23,729,000) (4,298,000) (18,567,000) (14,097,000)
Net (increase) decrease in
loans (3,259,000) (1,473,000) (5,062,000) (12,047,000) (3,560,000)
Rebates paid to customers (594,000) (785,000) (706,000) (366,000) (442,000)
Recoveries of loans charged-off 237,000 125,000 192,000 186,000 165,000
Proceeds from sale of premises
and equipment 63,000 133,000 681,000 8,000 33,000
Capital expenditures (725,000) (763,000) (263,000) (887,000) (188,000)
Proceeds from sale of real
estate and other loan-related
assets 319,000 1,103,000 485,000 229,000 277,000
------------ ------------ ------------ ------------ ------------
Net Cash Flows from Investing
Activities (8,323,000) (8,889,000) 3,117,000 (23,211,000) (6,361,000)
------------ ------------ ------------ ------------ ------------
Cash Flows From Financing
Activities:
Net increase (decrease) in
deposits 10,974,000 9,306,000 (6,375,000) (3,595,000) 10,073,000
Repayment of long-term
borrowings (350,000) - - - -
Dividends paid (126,000) - - (190,000) -
Purchase of treasury stock - - - (37,000) -
------------ ------------ ------------ ------------ ------------
Net Cash Flows From
Financing Activities 10,498,000 9,306,000 (6,375,000) (3,822,000) 10,573,000
------------ ------------ ------------ ------------ ------------
Net Increase (decrease) in
Cash and Cash Equivalents 6,740,000 5,403,000 (16,000) (23,048,000) 7,472,000
Cash and cash Equivalents
at Beginning of Period 46,082,000 40,679,000 40,695,000 52,822,000 46,082,000
------------ ------------ ------------ ------------ ------------
Cash and Cash Equivalents
at End of Period $ 52,822,000 $ 46,082,000 $ 40,679,000 $ 29,774,000 $ 53,554,000
============ ============ ============ ============ ============
Interest Paid $ 4,908,000 $ 6,084,000 $ 9,354,000 $ 3,610,000 $ 3,699,000
============ ============ ============ ============ ============
Federal Income Taxes Paid $ 12,000 $ 55,000 $ 21,000 $ 189,000 $ 12,000
============ ============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-10
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------------- ----------------------
1993 1992 1991 1994 1993
-------- --------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Non-cash Transactions:
Bank loans for real estate
and other loan-related
assets sold $ 972,000 $ 1,413,000 $ 936,000 $ 665,000 $ 697,000
Foreclosed properties
transferred to real
estate and other loan
related assets $ 450,000 $ 1,440,000 $ 772,000 $ 280,000 $ 382,000
</TABLE>
See notes to financial statements.
F-11
<PAGE>
GULF SOUTHWEST BANCORP, INC.
----------------------------
(Parent Company Only)
---------------------
BALANCE SHEET
-------------
ASSETS
------
<TABLE>
<CAPTION>
December 31, September 30,
------------------------- ------------------------
1993 1992 1994 1993
------------ ----------- ----------- -----------
[Unaudited]
<S> <C> <C> <C> <C>
Cash $ 395,000 $ 31,000 $ 932,000 $ 199,000
Certificates of deposit - 200,000 - 200,000
Due from non-bank subsidiary 78,000 110,000 104,000 60,000
Due from bank subsidiary 419,000 170,000 345,000 486,000
Investment in subsidiaries:
Bank 19,332,000 17,192,000 21,660,000 17,186,000
Non-bank 203,000 169,000 253,000 174,000
Excess of cost of subsidiaries over
equity in net assets acquired, net
of accumulated amortization of
$250,000 in 1993 and $235,000 in 1992 326,000 340,000 315,000 330,000
Deferred tax asset 1,228,000 1,775,000 662,000 1,307,000
----------- ----------- ----------- -----------
Total Assets $21,981,000 $19,987,000 $24,271,000 $19,942,000
=========== =========== =========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C> <C>
Accrued taxes payable $ 49,000 $ - $ 1,000 $ 8,000
Borrowings (Note 7) - 350,000 - 350,000
----------- ----------- ----------- -----------
Total Liabilities 49,000 350,000 1,000 358,0000
----------- ----------- ----------- -----------
Commitments and Contingencies (Note 10) - - - -
Stockholders' Equity (Notes 8 and 11):
Preferred stock, $20 par value,
authorized 2,000,000 shares - - - -
Common stock $1 par value,
authorized 10,000,000 shares,
issued 1,281,650 shares in 1993
and in 1992 1,281,000 1,281,000 1,281,000 1,281,000
Paid-in capital 8,631,000 8,631,000 8,631,000 8,631,000
Retained earnings 12,290,000 9,995,000 14,708,000 9,942,000
Unrealized gain (loss) in investment securities - - (43,000) -
----------- ----------- ----------- -----------
22,202,000 19,907,000 24,577,000 19,854,000
Less cost of stock held in treasury:
Common, 20,407 shares in 1993 and
19,875 in 1992 (270,000) (270,000) (307,000) (270,000)
----------- ----------- ----------- -----------
Total Stockholders' Equity 21,932,000 19,637,000 24,270,000 19,584,000
----------- ----------- ----------- -----------
Total Liabilities and Stockholders' Equity $21,981,000 $19,987,000 $24,271,000 $19,942,000
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-12
<PAGE>
GULF SOUTHWEST BANCORP, INC.
----------------------------
(Parent Company Only)
---------------------
STATEMENT OF INCOME
-------------------
<TABLE>
<CAPTION>
For Nine Months Ended
Year Ended December 31, September 30,
-------------------------------------- ------------------------
1993 1992 1991 1994 1993
----------- ------------ ----------- ----------- -----------
[Unaudited]
<S> <C> <C> <C> <C> <C>
Income:
Interest income $ 5,000 $ 8,000 $ 17,000 $ 7,000 $ 4,000
Other income (loss) - - 1,000 - -
---------- ---------- ---------- ---------- ----------
5,000 8,000 18,000 7,000 4,000
---------- ---------- ---------- ---------- ----------
Expenses:
Interest 37,000 35,000 37,000 - 27,000
Other operating expenses 50,000 63,000 72,000 66,000 37,000
---------- ---------- ---------- ---------- ----------
87,000 98,000 109,000 66,000 64,000
---------- ---------- ---------- ---------- ----------
(Loss) income before
income tax benefit and equity
in undistributed income of
subsidiaries and cumulative
effect of an accounting change (82,000) (90,000) (91,000) (59,000) (60,000)
Income tax benefit 328,000 104,000 42,000 245,000 6,000
---------- ---------- ---------- ---------- ----------
Income (loss) before equity in
undistributed income of subsidiaries
and cumulative effect of an
accounting change 246,000 14,000 (49,000) 186,000 (54,000)
Equity in undistributed income
of subsidiaries 2,174,000 2,520,000 1,781,000 2,422,000 1,563,000
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of
an accounting change 2,422,000 2,533,000 1,732,000 2,608,000 1,509,000
Cumulative effect of an accounting
change (Note 9) - 1,841,000 - - -
---------- ---------- ---------- ---------- ----------
Net income $2,421,000 $4,374,000 $1,732,000 $2,608,000 $1,509,000
========== ========== ========== ========== ==========
</TABLE>
See notes to financial statements.
F-13
<PAGE>
GULF SOUTHWEST BANCORP, INC.
----------------------------
(Parent Company Only)
---------------------
STATEMENT OF CASH FLOWS
-----------------------
<TABLE>
<CAPTION>
For Nine Months Ended
Year Ended December 31, September 30,
---------------------------------------------------- --------------------------
1993 1992 1991 1994 1993
------------ ------------ ----------- ----------- ------------
[Unaudited]
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating
Activities:
Net Income $ 2,421,000 $ 4,374,000 $ 1,732,000 $ 2,608,000 $ 1,509,000
Adjustments to Reconcile
Net Income to Cash Flows
From Operating Activities:
Equity in undistributed income
of subsidiaries (2,174,000) (2,520,000) (1,781,000) (2,422,000) (1,563,000)
Amortization and depreciation 14,000 14,000 17,000 11,000 11,000
(Income) Losses of unconsolidated
subsidiary - - (1,000) - -
Increase (Decrease) in accruals 49,000 - (39,000) (48,000) 8,000
(Increase) in other assets (216,000) (199,000) (42,000) 48,000 (265,000)
Decrease (Increase) in deferred
tax asset 547,000 (1,775,000) - 566,000 468,000
----------- ----------- ----------- ----------- -----------
Net Cash Flows From
Operating Activities 641,000 (106,000) (114,000) 763,000 168,000
----------- ----------- ----------- ----------- -----------
Cash Flows From Financing
Activities:
Payments on long-term borrowings (350,000) - - - -
Dividends paid (126,000) - - (189,000) -
Purchase of treasury stock - - - (37,000) -
----------- ----------- ----------- ----------- -----------
Net Cash Flow From Financing
Activities: (476,000) - - (226,000) -
----------- ----------- ----------- ----------- -----------
Net Increase (Decrease) in Cash
and Cash Equivalents 165,000 (106,000) (114,000) 537,000 168,000
Cash and Cash Equivalents at
Beginning of Year 230,000 336,000 450,000 395,000 231,000
----------- ----------- ----------- ----------- -----------
Cash and Cash Equivalents at
End of Year $ 395,000 $ 230,000 $ 336,000 $ 932,000 $ 399,000
=========== =========== =========== =========== ===========
Interest Paid $ 37,000 $ 35,000 $ 20,000 $ - $ 26,000
=========== =========== =========== =========== ===========
Taxes Paid $ 12,000 $ 55,000 $ - $ 189,000 $ 12,000
=========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-14
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
---------------------------------------------
AND
---
GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY)
--------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
Note 1 - Summary of Significant Accounting Policies
- ---------------------------------------------------
The accounting and reporting policies of Gulf Southwest Bancorp, Inc. (Company)
and its subsidiaries conform to generally accepted accounting principles and
practices within the banking industry. The Company and its subsidiaries provide
banking and data processing services to its customers in the greater Houston,
Texas metropolitan area. A summary of the more significant accounting policies
follows:
Financial Statement Presentation
- --------------------------------
The consolidated financial statements include the accounts of the parent company
and its wholly-owned subsidiaries, Merchants Bank and G.S.W. Data Processing,
Inc. All significant intercompany accounts and transactions have been
eliminated in consolidation. Investments in subsidiaries are accounted for on
the equity method of accounting in the Parent Company Only financial statements.
Investment Securities
- ---------------------
Effective January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115). Investment securities that may be sold in response to
or in anticipation of changes in interest rates or other factors are classified
as available-for-sale and carried at fair value. The unrealized gains and
losses on these securities are reported net of applicable income taxes in a
separate component of stockholders' equity. Securities that the Company has the
intent and ability to hold to maturity continue to be carried at amortized cost.
At December 31, 1993 and 1992, investment securities were carried at amortized
cost.
Interest income on investment securities, including amortization of premiums and
accretion of discounts, is recognized using the interest method. The specific
identification method is used to determine realized gains and losses on sales of
securities, which are reported in securities transactions.
Loans
- -----
Loans are stated at the principal amount outstanding, net of unearned income and
the allowance for possible loan losses. Interest on commercial and real estate
loans is accrued over the term of the loan based on the amount of principal
outstanding except where serious doubt exists as to the collectibility of a
loan, in which case the accrual of interest is discontinued. Interest income on
installment loans is computed primarily on sum-of-the-months-digit method which,
in the aggregate, does not differ materially from the interest method. Net loan
origination and
F-15
<PAGE>
commitment fees are being deferred over the contractual life of the loans as an
adjustment of the yield.
Allowance For Possible Loan Losses
- ----------------------------------
The allowance for possible loan losses is established by a charge to income as a
provision for loan losses. Actual loan losses or recoveries are charged or
credited directly to this allowance. The amount of the allowance is determined
based upon evaluation of the loan portfolio, a review of past loan loss
experience and management's judgment with respect to current and expected
economic conditions and their potential impact on the loan portfolio.
Bank Premises and Equipment
- ---------------------------
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation expense is computed on the straight-line method based upon the
estimated useful lives of the assets. Amortization of leasehold improvements is
based on the estimated useful lives of the improvements or the term of the
respective lease, whichever is shorter. At the time of a retirement or sale,
the related cost and accumulated depreciation are removed from the accounts, and
any resulting gain or loss is recorded in income. Maintenance and repairs are
charged to expense as incurred. Renewals and betterments, expenditures which
generally increase the value of the property or extend its useful life, are
capitalized.
Real Estate and Other Loan-Related Assets
- -----------------------------------------
Real estate and other loan-related assets are stated at the lower of cost or
estimated fair value, less the estimated costs to sell. Any reduction from cost
(loan value) to estimated fair value at the time of foreclosure is charged to
the allowance for possible loan losses. Subsequent valuation adjustments are
charged to current earnings through the provision for revaluation of real estate
and other loan-related assets or are charged directly to expense in the period
in which they are identified. Losses on dispositions are recognized in the
period of occurrence while gains are not recognized until all criteria for
income recognition have been met. Also, any income received or expense incurred
during the period the assets are owned is recognized as income or expense during
the period in which it is received or incurred and is included in other real
estate expense.
Excess of Cost Over Equity in Net Assets Acquired
- -------------------------------------------------
The fair value of the net assets acquired in transactions accounted for as
purchases is recorded as an investment by the parent company. The excess of the
cash or market value of the consideration given in the transaction over the fair
value of the net assets acquired is recorded as the excess of cost over fair
value of assets acquired, which is amortized into other operating expenses on a
straight-line basis over a period of 40 years.
Income Taxes
- ------------
The Company and its subsidiaries file a consolidated Federal income tax return.
The subsidiaries record income tax expense by applying the statutory tax rate to
their income as adjusted for tax exempt interest and other temporary differences
and remit the portion of Federal income taxes currently due to the parent
company. The parent company records, as a tax benefit,
F-16
<PAGE>
the difference between total taxes reflected by the subsidiaries and the
consolidated provision for income taxes. Deferred tax assets and liabilities
are recognized for balance sheet basis differences for tax and financial
reporting purposes. The deferred taxes represent future tax return consequences
of those differences. Investment tax credits are recognized as a reduction of
Federal income taxes when such credits are utilized.
Earnings Per Share
- ------------------
Earnings per share of common stock are computed by dividing earnings by the
weighted average number of shares outstanding during the year.
Cash and Cash Equivalents
- -------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks and federal funds sold. Generally, federal funds are purchased
and sold for one-day periods.
Reclassifications
- -----------------
Certain amounts in the 1992 and 1991 financial statements have been reclassified
to conform with the 1993 presentation.
Note 2 - Reserve Requirements
- -----------------------------
Cash and due from banks of approximately $4,530,000 and $4,361,000 at December
31, 1993 and 1992, respectively, were maintained to satisfy regulatory reserve
and other requirements.
Note 3 - Investment Securities
- ------------------------------
On January 1, 1994, the Company adopted SFAS 115, which addresses the accounting
for investments in debt and equity securities. Such securities are classified
in three categories and accounted for as follows: debt securities that the
Company has the intent and ability to hold to maturity are classified as held-
to-maturity and are carried at amortized cost; debt and equity securities bought
and held principally for the purpose of reselling, of which the Company has
none, are classified as trading securities and are carried at fair value, with
unrealized gains and losses included in income; debt or equity securities not
classified as either held-to-maturity or trading securities are deemed
available-for-sale and are carried at fair value, with unrealized gains and
losses, net of applicable income taxes, reported as a separate component of
stockholders' equity.
Prior to the adoption of SFAS 115, all investment securities were carried at
amortized cost.
As a result of the adoption of SFAS 115, debt securities in the amount of
$14,185,179 that were previously carried at amortized cost are measured at fair
value.
Investment Securities
- ---------------------
The amortized cost and estimated fair value of investment securities were as
follows:
F-17
<PAGE>
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ------------------------- Fair
Cost Gains Losses Value
----------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
December 31, 1993:
U.S.Treasury and other
U.S. Government
agencies $44,096,000 $1,408,000 $ 18,000 $45,486,000
State, county and
municipal
obligations 8,226,000 391,000 3,000 8,614,000
Other 7,000 - - 7,000
----------- ---------- -------- -----------
$52,329,000 $1,799,000 $ 21,000 $54,107,000
=========== ========== ======== ===========
December 31, 1992:
U.S.Treasury and other
U.S. Government
agencies $37,731,000 $1,022,000 $118,000 $38,635,000
State, county and
municipal
obligations 9,934,000 443,000 38,000 10,339,000
Other 7,000 - - 7,000
----------- ---------- -------- -----------
$47,672,000 $1,465,000 $156,000 $48,981,000
=========== ========== ======== ===========
</TABLE>
Cash proceeds from the maturity and sales of investment securities during 1993,
1992 and 1991 were $14,293,000, $16,303,000, and $10,603,000, respectively. Net
gains from investment securities sold or matured in 1993 amounted to $29,000
(gross gains of $61,000 and gross losses of $32,000), a net gain of $16,000
(gross gains of $19,000 and gross losses of $3,000) in 1992, and no gain or loss
in 1991.
F-18
<PAGE>
The maturities of investment securities at December 31, 1993 were as follows:
<TABLE>
<CAPTION>
Amortized Market
Cost Value
----------- -----------
<S> <C> <C>
Due in one year or less $11,992,000 $12,162,000
Due after one year through five years 34,332,000 35,453,000
Due after five years through ten years 5,945,000 6,431,000
Due after ten years 60,000 61,000
----------- -----------
Total Investment Securities $52,329,000 $54,107,000
=========== ===========
</TABLE>
Investment securities with amortized costs of $3,729,000 and $5,281,000 at
December 31, 1993 and 1992, were pledged to secure public deposits and for
other purposes as required by law.
Note 4 - Loans
- --------------
The loan portfolio was comprised of the following categories at December 31:
<TABLE>
<CAPTION>
1993 1992
------------ ------------
<S> <C> <C>
Commercial and industrial $ 27,935,000 $ 26,047,000
Real estate - construction 2,997,000 2,145,000
Real estate - other 68,837,000 65,843,000
Installment loans 30,327,000 32,682,000
Other loans 256,000 244,000
------------ ------------
Total loans 130,352,000 126,961,000
Less:
Unearned income (2,900,000) (3,505,000)
Allowance for possible
loan losses (1,986,000) (1,725,000)
------------ ------------
Net Loans $125,466,000 $121,731,000
============ ============
</TABLE>
Loans on which interest was not being accrued amounted to $1,455,000 and
$1,737,000 at December 31, 1993 and 1992, respectively. Interest income loss on
non-performing loans was $174,000, $309,000 and $430,000 for the years ended
December 31, 1993, 1992 and 1991, respectively.
Some of the directors and executive officers of the Company and its subsidiaries
and their related parties are loan customers at the Company's subsidiary bank.
In management's judgment, such borrowings were on substantially the same terms,
F-19
<PAGE>
including interest rates and collateral, as those prevailing at the time for
comparable transactions with others and do not involve other than normal risk of
collectibility.
An analysis of loans to these parties, exclusive of loans to such persons that
in the aggregate do not exceed $60,000, is as follows:
<TABLE>
<CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
Balance at beginning of year $ 2,867,000 $ 4,067,000
New loans 2,211,000 339,000
Amounts collected (1,783,000) (1,525,000)
Loans to customers no
longer related
parties and other - (14,000)
----------- -----------
Balance at end of year $ 3,295,000 $ 2,867,000
=========== ===========
</TABLE>
Transactions in the allowance for possible loan losses were as follows:
<TABLE>
<CAPTION>
1993 1992 1991
----------- ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year $1,725,000 $ 2,079,000 $ 2,213,000
Provision charged to expense 410,000 1,165,000 825,000
Loan losses:
Charge-offs (387,000) (1,644,000) (1,151,000)
Recoveries 238,000 125,000 192,000
---------- ----------- -----------
Net loan losses (149,000) (1,519,000) (959,000)
---------- ----------- -----------
Balance at end of year $1,986,000 $ 1,725,000 $ 2,079,000
========== =========== ===========
</TABLE>
F-20
<PAGE>
Note 5 - Bank Premises and Equipment
- ------------------------------------
Bank premises and equipment were comprised of the following at December 31:
<TABLE>
<CAPTION>
Estimated
Useful Lives 1993 1992
------------- ------------ ------------
<S> <C> <C> <C>
Land $ 831,000 $ 936,000
Bank premises and leasehold
improvements 5 to 40 yrs. 4,113,000 4,053,000
Furniture and equipment 3 to 10 yrs. 3,568,000 3,753,000
Automobiles 3 to 5 yrs. 248,000 253,000
Construction in progress 410,000 -
Less - accumulated depreciation
and amortization (4,972,000) (4,994,000)
----------- -----------
Net balance at end of year $ 4,198,000 $ 4,001,000
=========== ===========
</TABLE>
Depreciation and amortization charged to operating expense was $429,000 in 1993,
$381,000 in 1992, and $482,000 in 1991.
Note 6 - Interest Bearing Deposits
- ----------------------------------
Interest bearing deposits were comprised of the following categories at
December 31:
<TABLE>
<CAPTION>
1993 1992
------------ -----------
<S> <C> <C>
Interest bearing demand $ 49,000,000 $ 47,013,000
Savings 28,611,000 27,427,000
Time 66,366,000 59,719,000
Time over $100,000 13,346,000 15,104,000
------------ ------------
$157,323,000 $149,263,000
============ ============
</TABLE>
F-21
<PAGE>
Note 7 - Borrowings
- -------------------
<TABLE>
<CAPTION>
The Company had the following indebtedness at
December 31: 1993 1992
------------ -----------
<S> <C> <C>
Note payable November 30, 1993, with
interest payable quarterly at 10%.
Collateralized by 8,235 shares of the $10,
par value common stock of Merchants Bank,
a wholly-owned subsidiary of the Company.
The debt is payable to a trustee acting
on behalf of the Company's two largest
shareholders. The debt is subject to
various restrictive covenants of which
the Company was in compliance with at
December 31, 1992. $ - $350,000
--------- --------
$ - $350,000
========= ========
</TABLE>
Note 8 - Dividends from Subsidiaries
- ------------------------------------
Substantially all of the retained earnings of the Company represent
undistributed net income of subsidiaries. Dividends paid by the Company's
subsidiary bank are subject to restrictions by certain regulatory agencies.
Note 9 - Federal Income Taxes
- -----------------------------
The Company adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, effective January 1, 1992. The cumulative
adjustment resulted in a tax benefit of $2,470,000. The significant components
of Federal deferred tax assets and liabilities as of December 31 are as follows:
F-22
<PAGE>
<TABLE>
<CAPTION>
1993 1992
---------- -----------
<S> <C> <C>
Deferred Tax Assets:
Carrying value of other real estate
owned less than tax basis $ 483,000 $ 537,000
Allowance for possible loan loss more
than tax basis 159,000 20,000
Net operating loss carryforward 1,140,000 1,687,000
Investment tax credit 96,000 96,000
---------- ----------
1,878,000 2,340,000
Deferred Tax Liability:
Accretion on municipal bonds 64,000 81,000
---------- ----------
Net Cumulative Adjustment $1,814,000 $2,259,000
========== ==========
</TABLE>
No valuation allowance was recognized in that the deferred tax assets should be
realized in future years.
The consolidated provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1993 1992 1991
-------- ---------- ---------
<S> <C> <C> <C>
Current $ 67,000 $ 33,000 $ 45,000
Deferred 445,000 209,000 (9,000)
-------- --------- ---------
$512,000 $ 242,000 $ 36,000
======== ========= =========
</TABLE>
The income tax expense applicable to securities gains and losses for the years
1993, 1992 and 1991 was $6,000, $3,000 and $0, respectively.
The difference between the effective tax rate on consolidated income before
income taxes and the statutory rate is attributed to the following:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Federal income tax
provision at statutory rate $ 997,000 $ 730,000 $ 601,000
Tax exempt income (179,000) (245,000) (343,000)
Utilization of net operating loss
deferred asset 547,000 63,000 (222,000)
Change in deferred tax assets (79,000) 176,000 -
Reversal of deferred tax liability (17,000) (30,000) -
Tax difference on alternative
minimum taxable income and
regular taxable income (757,000) (452,000) -
--------- --------- ---------
$ 512,000 $ 242,000 $ 36,000
========= ========= =========
</TABLE>
F-23
<PAGE>
For 1993 and 1992, deferred income taxes result from temporary differences
between the carrying value of assets and liabilities for financial reporting and
tax reporting purposes. During 1991, deferred income taxes resulted from
temporary differences in the recognition of income and expense for financial and
tax reporting purposes. The sources and related tax effects of these
differences are as follows:
<TABLE>
<CAPTION>
Tax effect of temporary differences: 1993 1992 1991
---------- --------- --------
<S> <C> <C> <C>
Tax over book depreciation $ - $ - $(9,000)
Use of net operating loss 547,000 63,000 -
Other real estate owned charged down
for book and not tax 54,000 96,000 -
Allowance for loan loss in excess
of tax (139,000) 80,000 -
Accretion on municipal bonds
over tax (17,000) (30,000) -
--------- -------- -------
$ 445,000 $209,000 $(9,000)
========= ======== =======
</TABLE>
At December 31, 1993, the Company has, for tax reporting purposes, investment
tax credit carryforwards of approximately $96,000 and net operating loss
carryforwards of approximately $5,750,000 that expire on or before 2004.
Note 10 - Commitments and Contingencies
- ---------------------------------------
In the normal course of business, the Company's subsidiary bank is a party to
financial instruments with off balance sheet risk to meet the financing needs of
its customers. These financial instruments include commitments to extend credit
and standby letters of credit. These instruments involve, to varying degrees,
elements of credit risk in excess of the amounts recognized in the Consolidated
Balance Sheet.
The Company's subsidiary bank uses the same credit policies in making
commitments as it does for on-balance sheet instruments. Collateral is required
to support the off-balance sheet instruments when it is deemed necessary.
Collateral held varies, but may include: deposits held in financial
institutions, accounts receivable, inventory and property, plant and equipment.
Financial instruments whose contract amounts represent potential credit risk are
as follows at December 31:
<TABLE>
<CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
Commitments to extend credit $ 24,016,000 $ 14,440,000
Standby and commercial letters of credit $ 628,000 $ 971,000
</TABLE>
F-24
<PAGE>
The Company and subsidiaries have non-cancelable operating leases covering
certain equipment and buildings. The following is a schedule of future minimum
lease payments as of December 31, 1993:
<TABLE>
<CAPTION>
Year Ending December 31, Buildings Equipment
- ------------------------ --------- ---------
<S> <C> <C>
1994 $ 385,000 $ 10,000
1995 377,000 2,000
1996 361,000 -
1997 361,000 -
1998 361,000 -
1999 and after 3,435,000 -
---------- ---------
$5,280,000 $ 12,000
========== =========
</TABLE>
Rent expense incurred under operating leases amounted to $305,000, $213,000 and
$287,000 for the years ended December 31, 1993, 1992 and 1991, respectively.
Various lawsuits are pending against the Company's subsidiary bank. Management,
after reviewing these suits with legal counsel, considers that the aggregate
liability, if any, would not have a material adverse effect on the Company's
financial position.
Note 11 - Flexible Stock Option Plan
- ------------------------------------
In 1986, the Company adopted a Flexible Stock Option Plan, pursuant to which two
hundred thousand (200,000) shares of the authorized, but unissued, or reacquired
common stock were reserved for issuance. The plan provides for both incentive
and nonstatutory stock options.
Options may be granted to any key employee, including officers and directors who
are also employees, of the Company or of subsidiary corporations of the Company.
Options granted under the plan generally become exercisable in installments of
25 percent per year beginning one year after the date of grant.
The exercise price of the stock options granted under the plan will be
determined by the Board of Directors at the time of grant, and said exercise
price must be at least equal to the fair market value of the common stock on the
date of grant. The exercise price to any participant who owns stock possessing
more than 10 percent of the total combined voting power of all classes of the
stock of the Company, must be at least 110 percent of the fair market value of
the common stock on the date of grant.
The maximum number of shares of common stock for which options may be granted to
members of the Board of Directors under the plan is one hundred thousand
(100,000) shares. No individual member of the Board of Directors may be granted
options to purchase more than an aggregate of ten thousand (10,000) shares of
common stock.
As of December 31, 1993 no options have been granted under the plan.
F-25
<PAGE>
Note 12 - Estimated 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, Disclosure about Fair
Value of Financial Instruments. The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily required
to interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Cash and cash equivalents --- For cash and due from banks, time deposits in
financial institutions and federal funds sold, the carrying amount is a
reasonable estimate of fair value.
Investment securities --- Investment securities fair value equals quoted market
price, if available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Loans --- 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.
Deposits --- 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.
Borrowings --- Rates currently available to the Company for debt with similar
terms and remaining maturities are used to estimate fair value of existing debt.
Commitments to extend credit and standby letters of credit --- The fair value of
commitments is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
present creditworthiness of the counter parties. For fixed-rate commitments,
fair value also considers the difference between current levels of interest
rates and committed rates. The fair value of letters of credit is based on fees
currently charged for similar letters of credit.
F-26
<PAGE>
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1993
-----------------------------
Carrying Fair
Amount Value
---------- ------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 54,116,000 $ 54,116,000
Investment securities $ 52,329,000 $ 54,106,000
Loans, net $ 125,466,000 $ 127,183,000
Liabilities:
Deposits $ 218,942,000 $ 219,745,000
Off-balance sheet instruments
(unrealized gains [losses]) $ 6,000
<CAPTION>
December 31, 1992
-----------------------------
Carrying Fair
Amount Value
---------- ------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 48,024,000 $ 48,024,000
Investment securities $ 47,672,000 $ 48,981,000
Loans, net $ 121,731,000 $ 122,913,000
Liabilities:
Deposits $ 207,968,000 $ 208,154,000
Borrowings $ 350,000 $ 350,000
Off-balance sheet instruments
(unrealized gains [losses]): $ 7,000
</TABLE>
Note 13 - Other Operating Expense
- ------------------------------------------
Other operating expense for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---------- ---------- ------------
<S> <C> <C> <C>
Stationery, supplies and
printing $ 232,000 $ 242,000 $ 211,000
Legal, accounting and
professional 375,000 379,000 474,000
Settlement of lawsuits - - 85,000
Data processing 601,000 568,000 563,000
Advertising 178,000 66,000 66,000
Insurance 578,000 599,000 660,000
Postage and freight 263,000 230,000 261,000
Other 1,148,000 1,071,000 1,097,000
----------- ----------- -----------
$ 3,375,000 $ 3,155,000 $ 3,417,000
=========== =========== ===========
</TABLE>
F-27
<PAGE>
Board of Directors and Shareholders
Texas Gulf Coast Bancorp, Inc.
Houston, Texas
Independent Auditors' Report
----------------------------
We have audited the accompanying consolidated balance sheet of Texas Gulf Coast
Bancorp, Inc. and subsidiaries as of December 31, 1993, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended, and the balance sheet of Texas Gulf Coast Bancorp, Inc. (parent
company only) as of December 31, 1993, and the related statements of income,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of Texas Gulf Coast Bancorp, Inc. and
subsidiaries and Texas Gulf Coast Bancorp, Inc. (parent company only) as of
December 31, 1992 and 1991, were audited by other auditors, whose report dated
March 19, 1993, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1993 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Texas Gulf
Coast Bancorp, Inc. and subsidiaries and the financial position of Texas Gulf
Coast Bancorp, Inc. (parent company only) as of December 31, 1993, and the
respective results of their operations and their cash flows for the year ended
December 31, 1993, in conformity with generally accepted accounting principles.
As discussed in Note 9 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes, effective January 1, 1993. The cumulative effect of the change in
accounting principle is included in determining net income for 1993.
Consolidated financial statements of prior years have not been restated. The
Company also adopted the provisions of Statement of Financial Accounting
Standards No. 107, Disclosure about Fair Value of Financial Instruments, as set
forth in Note 12 to the consolidated financial statements.
Hidalgo, Banfill, Zlotnik & Kermali, P.C.
Houston, Texas
March 3, 1994
F-28
<PAGE>
Board of Directors and Shareholders
Texas Gulf Coast Bancorp, Inc.
Houston, Texas
Independent Auditors' Report
----------------------------
We have audited the accompanying consolidated balance sheet of Texas Gulf Coast
Bancorp, Inc. and subsidiaries as of December 31, 1992, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the two years in the period ended December 31, 1992 and the
balance sheet of Texas Gulf Coast Bancorp, Inc. (parent company only) as of
December 31, 1992, and the related statements of income, changes in
shareholders' equity, and cash flows for each of the two years ended December
31, 1992. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Texas Gulf Coast
Bancorp, Inc. and subsidiaries and the financial position of Texas Gulf Coast
Bancorp, Inc. (parent company only) as of December 31, 1992 and the respective
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1992, in conformity with generally accepted
accounting principles.
Griffin, Iles, Masel & Duvall, P.C.
Texas City, Texas
March 19, 1993
F-29
<PAGE>
TEXAS GULF COAST BANCORP, INC. AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
ASSETS
------
<TABLE>
<CAPTION>
December 31, September 30,
-------------------------- ---------------------------
1993 1992 1994 1993
------------ ------------ -------------- ------------
(unaudited)
<S> <C> <C> <C> <C>
Cash and due from banks $ 14,887,000 $ 13,480,000 $ 15,773,000 $ 11,307,000
Time deposits in financial institutions 100,000 120,000 - 700,000
Federal funds sold and deposits
with Federal Home Loan Bank 38,302,000 35,675,000 15,510,000 31,275,000
Investment securities:
Held-to-Maturity (market value:
1993 - $81,905,000
1992 - $78,206,000):
U.S. Treasury and other U.S. Government
agencies 62,765,000 61,499,000 50,877,000 56,408,000
Mortgage-backed securities 619,000 4,464,000 - 13,334,000
State, county and municipal obligations 16,552,000 10,402,000 16,148,000 15,947,000
Other 220,000 299,000 421,000 435,000
------------ ------------ ------------ ------------
Total Held-to-Maturity 80,156,000 76,664,000 67,446,000 86,124,000
Available-for-Sale
U.S. Treasury and other U.S. Government agencies - - 20,268,000 -
------------ ------------ ------------ ------------
Total Available-for-Sale - - 20,268,000 -
------------ ------------ ------------ ------------
Total investment securities 80,156,038 76,664,000 87,714,000 86,124,000
Loans:
Loans, net of unearned income of
$3,574,000 in 1993 and $3,383,000
in 1992 78,137,000 84,367,000 79,145,000 78,332,000
Less allowance for possible loan losses 1,022,000 1,060,000 792,000 992,000
------------ ------------ ------------ ------------
Net loans 77,115,000 83,307,000 78,353,000 77,340,000
Bank premises and equipment 3,174,000 4,021,000 3,693,000 3,908,000
Accrued interest receivable 1,590,000 1,773,000 1,536,000 1,638,000
Excess of cost of subsidiaries over
equity in net assets acquired,
net of amortization of $2,085,000
in 1993 and $1,812,000 in 1992 877,000 1,150,000 709,000 1,019,000
Real estate and other loan related assets 1,477,000 1,207,000 796,000 668,000
Other assets 766,000 343,000 1,342,000 1,073,000
------------ ------------ ------------ ------------
Total Assets $218,445,000 $217,740,000 $205,426,000 $215,052,000
============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-30
<PAGE>
TEXAS GULF COAST BANCORP, INC. AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
December 31, September 30
---------------------------- ----------------------------
1993 1992 1994 1993
------------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Deposits:
Non-interest bearing $ 44,699,000 $ 42,375,000 $ 41,709,000 $ 43,209,000
Interest bearing 150,793,000 151,537,000 141,729,000 146,607,000
------------ ------------ ------------ ------------
195,492,000 193,912,000 183,438,000 189,816,000
Accrued interest, taxes and other
liabilities 2,367,000 812,000 1,067,000 1,094,000
Borrowings 1,105,000 1,350,000 978,000 1,185,000
Minority interest in subsidiaries 248,000 276,000 254,000 282,000
------------ ------------ ------------ ------------
Total Liabilities 199,212,000 196,350,000 185,737,000 192,377,000
------------ ------------ ------------ ------------
Commitments and Contingencies - - - -
Stockholders' Equity:
Preferred stock 8% cumulative,
$16 par value,
authorized 1,000,000 shares,
issued 155,050 shares 2,481,000 2,481,000 2,481,000 2,481,000
Common stock, $1 par value,
authorized 1,000,000 shares,
issued 381,939 shares 382,000 382,000 382,000 382,000
Paid-in Capital 5,207,000 5,207,000 5,207,000 5,207,000
Retained earnings 14,385,000 13,528,000 15,025,000 14,000
Unrealized investment securities losses - - (183,000) -
------------ ------------ ------------ ------------
22,455,000 21,598,000 22,912,000 22,744,000
Less cost of stock held in treasury:
Preferred, -0- shares in 1993
and 1,967 in 1992 - (32,000) - -
Common, 52,201 shares in 1993
and 8,773 in 1992 (3,223,000) (176,000) (3,223,000) (69,000)
------------ ------------ ------------ ------------
(3,223,000) (208,000) (3,223,000) (69,000)
------------ ------------ ------------ ------------
Total Stockholders' Equity 19,232,000 21,390,000 19,689,000 22,675,000
------------ ------------ ------------ ------------
Total Liabilities and
Stockholders' Equity $218,444,000 $217,740,000 $205,426,000 $215,052,000
============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-31
<PAGE>
TEXAS GULF COAST BANCORP, INC. AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
<TABLE>
<CAPTION>
For Nine Months
Year Ended December 31, Ended September 30,
---------------------------------------------------- -----------------------------
1993 1992 1991 1994 1993
------------ ------------ ------------ ------------ ------------
[Unaudited]
<S> <C> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $ 7,049,000 $ 7,791,000 $ 8,482,000 $5,151,000 $ 5,425,000
Investment securities:
Taxable interest 4,552,000 5,466,000 5,832,000 2,894,000 3,499,000
Non-taxable interest 765,000 729,000 962,000 590,000 565,000
Time deposits with financial
institutions 20,000 23,000 38,000 - 15,000
Federal funds sold and deposits with
Federal Home Loan Bank 940,000 900,000 1,490,000 833,000 693,000
----------- ----------- ----------- ---------- -----------
Total Interest Income 13,326,000 14,909,000 16,804,000 9,468,000 10,197,000
----------- ----------- ----------- ---------- -----------
Interest Expense:
Deposits 4,310,000 5,815,000 8,833,000 3,049,000 3,285,000
Borrowings 79,000 113,000 126,000 52,000 65,000
----------- ----------- ----------- ---------- -----------
Total Interest Expense 4,389,000 5,928,000 8,959,000 3,101,000 3,350,000
----------- ----------- ----------- ---------- -----------
Net Interest income 8,937,000 8,981,000 7,845,000 6,367,000 6,847,000
Provision for possible loan losses (475,000) (263,000) (235,000) (129,000) (193,000)
----------- ----------- ----------- ---------- -----------
Net interest income after provision
for possible loan losses 8,462,000 8,718,000 7,610,000 6,238,000 6,654,000
----------- ----------- ----------- ---------- -----------
Non-interest Income:
Service charges on deposit accounts 2,031,000 1,942,000 1,734,000 1,399,000 1,573,000
Other service charges and fees 137,000 110,000 51,000 130,000 122,000
Other operating income 1,130,000 858,000 781,000 730,000 652,000
Securities transactions 11,000 32,000 - 3,000 -
----------- ----------- ----------- ---------- -----------
Total Non-interest Income 3,309,000 2,942,000 2,566,000 2,262,000 2,347,000
----------- ----------- ----------- ---------- -----------
Non-interest Expenses:
Salaries and employee benefits 4,702,000 4,355,000 3,612,000 3,371,000 3,432,000
Occupancy expense 604,000 579,000 678,000 440,000 456,000
Furniture and equipment expense 517,000 458,000 443,000 369,000 354,000
Other real estate expense 243,000 288,000 511,000 115,000 122,000
Other operating expense 4,369,000 3,419,000 3,278,000 3,084,000 2,953,000
----------- ----------- ----------- ---------- -----------
Total Non-interest Expenses 10,435,000 9,099,000 8,522,000 7,379,000 7,317,000
----------- ----------- ----------- ---------- -----------
</TABLE>
See notes to financial statements.
F-32
<PAGE>
TEXAS GULF COAST BANCORP, INC. AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENT OF INCOME (Continued)
--------------------------------------------
<TABLE>
<CAPTION>
For Nine Months
Year Ended December 31, Ended September 30,
-------------------------------------- -----------------------
1993 1992 1991 1994 1993
---------- ---------- ---------- ----------- ----------
[Unaudited]
<S> <C> <C> <C> <C> <C>
Income before income taxes
and cumulative effect of an
accounting change 1,336,000 2,561,000 1,654,000 1,121,000 1,684,000
Provision for income taxes 211,000 474,000 296,000 184,000 376,000
---------- ---------- ---------- ---------- ----------
Income before cumulative effect
of an accounting change 1,125,000 2,087,000 1,358,000 937,000 1,308,000
Cumulative effect of an accounting
change 158,000 - - - 158,000
---------- ---------- ---------- ---------- ----------
Net Income $1,283,000 $2,087,000 $1,358,000 $ 937,000 $1,466,000
========== ========== ========== ========== ==========
Weighted Average Number of Common
Shares Outstanding 372,759 379,156 379,554 329,738 373,166
========== ========== ========== ========== ==========
Net Income per Common Share:
Income before cumulative effect
of an accounting change $ 2.49 $ 4.98 $ 3.05 $ 2.39 $ 3.11
Accounting change $ .42 $ - $ - $ - $ .42
---------- ---------- ---------- ---------- ----------
Net Income $ 2.91 $ 4.98 $ 3.05 $ 2.39 $ 3.53
========== ========== ========== ========== ==========
</TABLE>
See notes to financial statements.
F-33
<PAGE>
TEXAS GULF COAST BANCORP, INC. AND SUBSIDIARIES (Consolidated)
--------------------------------------------------------------
AND
---
TEXAS GULF COAST BANCORP, INC. (Parent Company Only)
----------------------------------------------------
STATEMENT OF STOCKHOLDERS' EQUITY
---------------------------------
<TABLE>
<CAPTION>
Net Unrealized Gain
Preferred Common Paid-In Retained (Loss) on Securities Treasury
Stock Stock Capital Earnings Available for Sale Stock
---------- -------- ---------- ------------ ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1991 $2,481,000 $382,000 $5,207,000 $10,935,000 - $ (69,000)
Net income - - - 1,358,000 - -
Treasury stock acquisition:
461 shares common - - - - - (3,000)
Cash dividends:
Preferred stock,
$1.28 per share - - - (198,000) - -
Common stock,
$.60 per share - - - (228,000) - -
---------- -------- ---------- ----------- ------------- -----------
Balance at
December 31, 1991 2,481,000 382,000 5,207,000 11,867,000 - (72,000)
Net income - - - 2,087,000 -
Treasury stock acquired:
Preferred, 1,967 shares - - - - - (32,000)
Common, 6,273 shares - - - - - (104,000)
(Note A)
Cash dividends:
Preferred, $1.28 per share - - - (198,000) - -
Common, $.60 per share - - - (228,000) - -
---------- -------- ---------- ----------- -----------
Balance at
December 31, 1992 2,481,000 382,000 5,207,000 13,528,000 (208,000)
Net income - - - 1,283,000 - -
Treasury stock acquired:
Common, 50,162 shares
(Note A) - - - - - (3,154,000)
Treasury stock sold:
Preferred, 1,967 shares - - - - - 32,000
Common, 6,734 shares - - - - - 107,000
Cash dividends:
Preferred, $1.28 per share - - - (198,000) - -
Common, $.60 per share - - - (228,000) - -
---------- -------- ---------- ----------- ------------- -----------
Balance at
December 31, 1993 2,481,000 382,000 5,207,000 14,385,000 - (3,223,000)
Net income (unaudited) - - - 937,000 - -
Change in accounting method
(Note 4) - - - - 162,000 -
</TABLE>
See notes to financial statements.
F-34
<PAGE>
<TABLE>
<CAPTION>
Net Unrealized Gain
Preferred Common Paid-In Retained (Loss) on Securities Treasury
Stock Stock Capital Earnings Available for Sale Stock
---------- -------- ---------- ------------ ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net change in unrealized losses
on investment securities
Available-for-Sale - - - - (345,000) -
Cash dividends:
Preferred, $.96 per share - - - (149,000) - -
Common, $.45 per share - - - (148,000) - -
---------- -------- ---------- ----------- ------------- -----------
Balance at
September 30, 1994 $2,481,000 $382,000 $5,207,000 $15,025,000 $(183,000) $(3,223,000)
========== ======== ========== =========== ============= ===========
</TABLE>
Note A - In November of 1993 the Company acquired the common stockholding of
the former Chairman of the Board and Chief Executive Officer of two of
the Company's subsidiary banks upon his retirement.
See notes to financial statements.
F-35
<PAGE>
TEXAS GULF COAST BANCORP, INC. AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
<TABLE>
<CAPTION>
For Nine Months
Year Ended December 31, Ended September 30,
------------------------------------------ ---------------------------
1993 1992 1991 1994 1993
------------ ------------ ----------- ------------ ------------
[Unaudited]
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating
Activities:
Net Income $ 1,283,000 $ 2,087,000 $ 1,358,000 $ 937,000 $ 1,466,000
------------ ------------ ----------- ------------ ------------
Adjustments to Reconcile Net
Income to Cash Flows
from Operating Activities:
Provision for possible loan losses 475,000 263,000 235,000 129,000 193,000
Discount (accretion) amortized to
income 241,000 21,000 87,000 182,000 152,000
(Gain) loss on sale of investment
securities (11,000) (32,000) - (3,000) -
Origination of mortgage loans
for sale (17,176,000) (13,165,000) (3,733,000) (10,319,000) (11,017,000)
Proceeds from mortgage
loans sold 17,114,000 12,047,000 3,392,000 11,541,000 11,825,000
Depreciation and amortization 842,000 750,000 514,000 433,000 436,000
Loss (gain) on sale and abandonment
of premises and equipment 86,000 (9,000) (9,000) (4,000) (5,000)
Provision for charge off for
possible losses on real estate
and other assets 108,000 - - 197,000 63,000
(Gain) loss on sale of real estate
and other loan-related assets 106,000 100,000 (14,000) (3,000) 3,000
Decrease (increase) in accrued
interest receivable 184,000 337,000 114,000 54,000 135,000
(Increase) decrease in other assets (424,000) 101,000 72,000 (481,000) (730,000)
(Decrease) increase in accrued interest,
taxes and other liabilities 36,000 (21,000) (398,000) (185,000) 288,000
------------ ------------ ----------- ------------ ------------
Total Adjustments 1,581,000 392,000 260,000 1,541,000 1,343,000
------------ ------------ ----------- ------------ ------------
Net Cash Flows From
Operating Activities 2,864,000 2,479,000 1,618,000 2,478,000 2,809,000
------------ ------------ ----------- ------------ ------------
</TABLE>
See notes to financial statements.
F-36
<PAGE>
TEXAS GULF COAST BANCORP, INC. AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
------------------------------------------------
<TABLE>
<CAPTION>
For Nine Months
Year Ended December 31, Ended September 30,
------------------------------------------- ---------------------------
1993 1992 1991 1994 1993
------------ ------------ ------------ ------------ ------------
[Unaudited]
<S> <C> <C> <C> <C> <C>
Cash Flows From Investing
Activities:
Net Decrease (increase) in time
deposits in financial institutions 20,000 - - 100,000 (580,000)
Proceeds from sales of investment
securities 18,198,000 - - -
Proceeds from maturities of investment
securities 30,607,000 36,055,000 28,956,000 16,815,000 26,933,000
Purchase of investment securities (52,526,000) (24,475,000) (41,946,000) (24,651,000) (36,545,000)
Net decrease (increase) in loans 6,268,000 (339,000) (2,829,000) (2,031,000) 5,453,000
Rebates paid to customers (863,000) - - (436,000) (610,000)
Recoveries of loans charged-off 57,000 66,000 89,000 40,000 44,000
Proceeds from sale of premises
and equipment - 111,000 34,000 36,000 62,000
Capital expenditures (359,000) (650,000) (307,000) (817,000) (249,000)
Proceeds from sale of real estate
and other loan-related assets 384,000 358,000 116,000 529,000 552,000
------------ ------------ ------------ ------------ ------------
Net Cash Flows From Investing
Activities 1,786,000 11,126,000 (15,887,000) (10,415,000) (4,940,000)
------------ ------------ ------------ ------------ ------------
Cash Flows From Financing
Activities:
Net increase (decrease) in deposits 1,580,000 7,887,000 7,425,000 (12,054,000) (4,096,000)
Proceeds from borrowings 110,000 - - - -
Repayment of borrowings (355,000) (250,000) (100,000) (127,000) (165,000)
Cash dividends paid (426,000) (426,000) (426,000) (297,000) (320,000)
Purchase of treasury stock (1,664,000) (136,000) (3,000) (1,491,000) -
Proceeds from sale of treasury stock 139,000 - - - 139,000
------------ ------------ ------------ ------------ ------------
Net Cash Flows From
Financing Activities (616,000) 7,075,000 6,896,000 (13,969,000) (4,442,000)
------------ ------------ ------------ ------------ ------------
Net Increase (decrease) in
Cash and Cash Equivalents 4,034,000 20,680,000 (7,373,000) (21,906,000) (6,573,000)
Cash and Cash Equivalents at
Beginning of Period 49,155,000 28,475,000 35,848,000 53,189,000 49,155,000
------------ ------------ ------------ ------------ ------------
Cash and Cash Equivalents at
End of Period $ 53,189,000 $ 49,155,000 $ 28,475,000 $ 31,283,000 $ 42,582,000
============ ============ ============ ============ ============
Interest Paid $ 4,476,000 $ 5,931,000 $ 9,154,000 $ 2,084,000 $ 3,410,000
============ ============ ============ ============ ============
Federal Income Taxes Paid $ 620,000 $ 359,000 $ 203,000 $ 100,000 $ 616,000
============ ============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-37
<PAGE>
TEXAS GULF COAST BANCORP, INC. AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
------------------------------------------------
<TABLE>
<CAPTION>
For Nine Months
Year Ended December 31, Ended September 30,
------------------------------------ ---------------------
1993 1992 1991 1994 1993
---------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Non-Cash Transactions:
Bank loans for real estate and
other loan-related assets sold $ 346,000 $ - $ - $188,000 $ 42,000
Foreclosed properties transferred
to real estate and other loan
related assets $ 663,000 $247,000 $114,000 $279,000 $305,000
Bank-owned land transferred to
real estate and other loan-related
assets $ 550,000 $ - $ - $ - $ -
Treasury stock acquired and purchase
price currently payable $1,491,000 $ - $ - $ - $ -
</TABLE>
See notes to financial statements.
F-38
<PAGE>
TEXAS GULF COAST BANCORP, INC.
------------------------------
(Parent Company Only)
---------------------
BALANCE SHEET
-------------
ASSETS
------
<TABLE>
<CAPTION>
December 31, September 30,
------------------------- -------------------------
1993 1992 1994 1993
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Cash $ 1,497,000 $ 762,000 $ 265,000 $ 869,000
Due from bank subsidiaries 326,000 568,000 95,000 295,000
Due from non-bank subsidiary 14,000 23,000 - -
Investment in subsidiaries:
Bank 18,411,000 20,035,000 18,969,000 21,110,000
Non-bank 224,000 401,000 123,000 243,000
Equipment 25,000 33,000 20,000 27,000
Excess of cost of subsidiaries over
equity in net assets acquired, net
of amortization of $2,085,000 in 1993
and $1,812,000 in 1992 877,000 1,150,000 709,000 1,020,000
Other assets 402,000 - 488,000 229,000
----------- ----------- ----------- -----------
Total Assets $21,776,000 $22,972,000 $20,669,000 $23,793,000
=========== =========== =========== ===========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Accrued expenses and other liabilities $ 1,544,000 $ 232,000 $ 80,000 $ 43,000
Borrowings 1,000,000 1,350,000 900,000 1,075,000
----------- ----------- ----------- -----------
Total Liabilities 2,544,000 1,582,000 980,000 1,118,000
Commitments and Contingencies - - - -
Stockholders' Equity:
Preferred stock, 8% cumulative, $16 par value,
authorized 1,000,000 shares,
issued 155,050 shares 2,481,000 2,481,000 2,481,000 2,481,000
Common stock, $1 par value,
authorized 1,000,000 shares,
issued 381,939 shares 382,000 382,000 382,000 382,000
Paid-in capital 5,207,000 5,207,000 5,207,000 5,207,000
Retained earnings 14,385,000 13,528,000 15,025,000 14,674,000
Unrealized investment securities losses - - (183,000) -
----------- ----------- ----------- -----------
22,455,000 21,598,000 22,912,000 22,744,000
Less cost of stock held in treasury:
Preferred, -0- shares in 1993 and
1,967 in 1992 - (32,000) - -
Common, 52,201 shares in 1993 and
8,773 in 1992 (3,223,000) (176,000) (3,223,000) (69,000)
----------- ----------- ----------- -----------
(3,223,000) (208,000) (3,223,000) (69,000)
----------- ----------- ----------- -----------
Total Stockholders' Equity 19,232,000 21,390,000 19,689,000 22,675,000
----------- ----------- ----------- -----------
Total Liabilities and Stockholders' Equity $21,776,000 $22,972,000 $20,669,000 $23,793,000
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-39
<PAGE>
TEXAS GULF COAST BANCORP, INC.
------------------------------
(Parent Company Only)
---------------------
STATEMENT OF INCOME
-------------------
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31st Ended September 30,
------------------------------------- ---------------------
1993 1992 1991 1994 1993
----------- ---------- ---------- -------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Income
Dividends from bank subsidiaries $ 3,222,000 $1,045,000 $ 923,000 $565,000 $ 662,000
Interest income 16,000 17,000 150,000 - 12,000
----------- ---------- ---------- -------- ----------
3,238,000 1,062,000 1,073,000 565,000 674,000
----------- ---------- ---------- -------- ----------
Expenses:
Interest 72,000 111,000 125,000 46,000 59,000
Amortization 273,000 213,000 213,000 168,000 166,000
Other operating expenses 237,000 109,000 117,000 139,000 167,000
----------- ---------- ---------- -------- ----------
582,000 433,000 455,000 353,000 392,000
----------- ---------- ---------- -------- ----------
Income before income tax benefit and
equity in undistributed income of
subsidiaries and cumulative effect
of an accounting change 2,656,000 629,000 618,000 212,000 282,000
Income tax benefit 199,000 193,000 86,000 85,000 37,000
----------- ---------- ---------- -------- ----------
Income before equity in undistributed
income of subsidiaries and cumulative
effect of an accounting change 2,855,000 822,000 704,000 297,000 319,000
Equity in undistributed income
of subsidiaries (1,801,000) 1,265,000 654,000 640,000 918,000
----------- ---------- ---------- -------- ----------
Income before cumulative effect of an
accounting change 1,054,000 2,087,000 1,358,000 937,000 1,237,000
Cumulative effect of an accounting
change 229,000 - - - 229,000
----------- ---------- ---------- -------- ----------
Net Income $ 1,283,000 $2,087,000 $1,358,000 $937,000 $1,466,000
=========== ========== ========== ======== ==========
</TABLE>
See notes to financial statements.
F-40
<PAGE>
TEXAS GULF COAST BANCORP, INC.
------------------------------
(Parent Company Only)
---------------------
STATEMENT OF CASH FLOWS
-----------------------
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31st Ended September 30,
--------------------------------------- ------------------------
1993 1992 1991 1994 1993
----------- ----------- ----------- ----------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 1,283,000 $ 2,087,000 $ 1,358,000 $ 937,000 $ 1,466,000
Adjustments to Reconcile Net Income to
Cash Flows from Operating Activities:
Equity in undistributed income of
subsidiaries 1,801,000 (1,265,000) (654,000) (640,000) (918,000)
Amortization and depreciation 282,000 216,000 214,000 173,000 137,000
(Increase) decrease in due from
subsidiaries 251,000 (392,000) 148,000 245,000 297,000
(Increase) decrease in other assets (402,000) 339,000 264,000 (86,000) (229,000)
Increase (decrease) in accrued expenses
and other liabilities (179,000) (39,000) (467,000) 28,000 (189,000)
----------- ----------- ----------- ----------- -----------
Net Cash Flows From Operating Activities 3,036,000 946,000 863,000 657,000 564,000
----------- ----------- ----------- ----------- -----------
Cash Flows From Investing Activities:
Addition to Equipment - (34,000) - - -
----------- ----------- ----------- ----------- -----------
Net Cash Flow From Investing Activities - (34,000) - - -
----------- ----------- ----------- ----------- -----------
Cash Flows From Financing Activities:
Payments on borrowings (350,000) (250,000) (100,000) (100,000) (275,000)
Dividends paid (426,000) (426,000) (426,000) (297,000) (320,000)
Purchase of treasury stock (1,664,000) - (3,000) (1,491,000) -
Proceeds from sale of treasury stock 139,000 - - - 138,000
----------- ----------- ----------- ----------- -----------
Net Cash Flows From Financing Activities (2,301,000) (676,000) (529,000) (1,888,000) (457,000)
----------- ----------- ----------- ----------- -----------
Net Increase in Cash and Cash Equivalents 735,000 236,000 334,000 (1,231,000) 107,000
Cash and Cash Equivalents at
Beginning of Year 762,000 526,000 192,000 1,496,000 762,000
----------- ----------- ----------- ----------- -----------
Cash and Cash Equivalents at
End of Year $ 1,497,000 $ 762,000 $ 526,000 $ 265,000 $ 869,000
=========== =========== =========== =========== ===========
Interest Paid $ 75,000 $ 116,000 $ 131,000 $ 46,000 $ 59,000
=========== =========== =========== =========== ===========
Taxes Paid $ 620,000 $ 359,000 $ 203,000 $ 100,000 $ 616,000
=========== =========== =========== =========== ===========
Non-Cash Transactions:
Treasury stock acquired and
purchase price still payable $ 1,491,000 $ - $ - $ - $ -
=========== =========== =========== =========== ===========
Subsidiary banks unrealized
investment securities losses
included in investment in
subsidiaries and stockholders' equity $ - $ - $ - $ 183,000 $ -
=========== =========== =========== =========== ==========
</TABLE>
See notes to financial statements.
F-41
<PAGE>
TEXAS GULF COAST BANCORP, INC. AND SUBSIDIARIES
-----------------------------------------------
AND
---
TEXAS GULF COAST BANCORP, INC. (PARENT COMPANY ONLY)
----------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
Note 1 - Summary of Significant Accounting Policies
- ---------------------------------------------------
The accounting and reporting policies of Texas Gulf Coast Bancorp, Inc.
(Company) and its subsidiaries conform to generally accepted accounting
principles and practices within the banking industry. The Company and its
subsidiaries provide banking and data processing services to its customers in
the greater Galveston and Harris Counties, Texas metropolitan area. A summary
of the more significant accounting policies follows:
Financial Statement Presentation
- --------------------------------
The consolidated financial statements include the accounts of the parent company
and its wholly-owned subsidiaries, First Bank Mainland and Central Data
Processing, Inc. and its majority-owned subsidiaries First Bank Pearland and
Texas City Bank. All significant intercompany accounts and transactions have
been eliminated in consolidation. Investments in subsidiaries are accounted for
on the equity method of accounting in the Parent Company Only financial
statements.
Investment Securities
- ---------------------
Effective January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115). Investment securities that may be sold in response to
or in anticipation of changes in interest rates or other factors are classified
as available-for-sale and carried at fair value. The unrealized gains and
losses on these securities are reported net of applicable income taxes in a
separate component of stockholders' equity. Securities that the Company has the
intent and ability to hold to maturity continue to be carried at amortized cost.
At December 31, 1993 and 1992 investment securities were carried at amortized
cost.
Interest income on investment securities, including amortization of premiums and
accretion of discounts, is recognized using the interest method. The specific
identification method is used to determine realized gains and losses on sales of
securities, which are reported in securities transactions.
Loans
- -----
Loans are stated at the principal amount outstanding, net of unearned income.
Interest on commercial and real estate loans is accrued over the term of the
loan based on the amount of principal outstanding except where serious doubt
exists as to the collectibility of a loan, in which case the accrual of interest
is discontinued. Interest income on installment loans is computed primarily on
sum-of-the-months-digit method which, in the aggregate, does not differ
materially
F-42
<PAGE>
from the interest method. Net loan origination and commitment fees
are included in unearned income and are being deferred over the contractual life
of the loans as an adjustment of the yield.
Allowance For Possible Loan Losses
- ----------------------------------
The allowance for possible loan losses is established by a charge to income as a
provision for loan losses. Actual loan losses or recoveries are charged or
credited directly to this allowance. The amount of the allowance is determined
based upon evaluation of the loan portfolio, a review of past loan loss
experience and management's judgment with respect to current and expected
economic conditions and their potential impact on the loan portfolio.
Bank Premises and Equipment
- ---------------------------
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation expense is computed on the straight-line method based upon the
estimated useful lives of the assets. Amortization of leasehold improvements is
based on the estimated useful lives of the improvements or the term of the
respective lease, whichever is shorter. At the time of a retirement or sale,
the related cost and accumulated depreciation are removed from the accounts, and
any resulting gain or loss is recorded in income. Maintenance and repairs are
charged to expense as incurred. Renewals and betterments, expenditures which
generally increase the value of the property or extend its useful life, are
capitalized.
Real Estate and Other Loan-Related Assets
- -----------------------------------------
Real estate and other loan-related assets are stated at the lower of cost or
estimated fair value, less the estimated costs to sell. Any reduction from cost
(loan value) to estimated fair value at the time of foreclosure is charged to
the allowance for possible loan losses. Subsequent valuation adjustments are
charged to current earnings through the provision for revaluation of real estate
and other loan-related assets or are charged directly to expense in the period
in which they are identified. Losses on dispositions are recognized in the
period of occurrence while gains are not recognized until all criteria for
income recognition have been met. Also, any income received or expense incurred
during the period the assets are owned is recognized as income or expense during
the period in which it is received or incurred and is included in other real
estate expense.
Excess of Cost Over Equity in Net Assets Acquired
- -------------------------------------------------
The fair value of the net assets acquired in transactions accounted for as
purchases is recorded as an investment by the parent company. The excess of the
cash or market value of the consideration given in the transaction over the fair
value of the net assets acquired is recorded as the excess of cost over fair
value of assets acquired, which is amortized into other operating expenses on a
straight-line basis over a period of 10 to 40 years.
Income Taxes
- ------------
The Company and its subsidiaries file a consolidated Federal Income tax return.
The subsidiaries record income tax expense by applying the statutory tax rate to
their income as adjusted for tax exempt interest and other temporary differences
and remit the portion of Federal Income taxes currently due to the parent
company. The parent company records, as a tax benefit, the
F-43
<PAGE>
difference between total taxes reflected by the subsidiaries and the
consolidated provision for income taxes. Deferred tax assets and liabilities are
recognized for balance sheet basis differences for tax and financial reporting
purposes. The deferred taxes represent future tax return consequences of those
differences. Investment tax credits are recognized as a reduction of Federal
Income taxes when such credits are utilized.
Earnings Per Share
- ------------------
Earnings per share of common stock are computed by dividing earnings, net of
dividends on preferred stock for the year, by the weighted average number of
shares outstanding during the year.
Cash and Cash Equivalents
- -------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks, federal funds sold and deposits with the Federal Home Loan Bank.
Generally, federal funds are purchased and sold for one-day periods.
Reclassifications
- -----------------
Certain amounts in the 1992 and 1991 financial statements have been reclassified
to conform with the 1993 presentation.
Note 2 - Reserve Requirements
- -----------------------------
Cash and due from banks of approximately $2,198,000 at December 31, 1993 was
maintained to satisfy regulatory reserve and other requirements.
Note 3 - Investment Securities
- ------------------------------
On January 1, 1994, the Company adopted SFAS 115, which addresses the accounting
for investments in debt and equity securities. Such securities are classified
in three categories and accounted for as follows: debt securities that the
Company has the intent and ability to hold to maturity are classified as held-
to-maturity and are carried at amortized cost; debt and equity securities bought
and held principally for the purpose of reselling, of which the Company has
none, are classified as trading securities and are carried at fair value, with
unrealized gains and losses included in income; debt or equity securities not
classified as either held-to-maturity or trading securities are deemed
available-for-sale and are carried at fair value, with unrealized gains and
losses, net of applicable income taxes, reported as a separate component of
stockholders' equity.
Prior to the adoption of SFAS 115, all investment securities were carried at
amortized cost.
As a result of the adoption of SFAS 115, debt securities in the amount of
$11,651,000 that were previously carried at amortized cost are measured at fair
value.
F-44
<PAGE>
Investment Securities
- ---------------------
The amortized cost and estimated fair value of investment securities were as
follows:
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ---------------------- Fair
Cost Gains Losses Value
----------- ---------- --------- -----------
<S> <C> <C> <C> <C>
December 31, 1993:
- -----------------
U.S. Treasury and other
U.S. Government
agencies $62,765,000 $1,413,000 $ 98,000 $64,080,000
Mortgaged-backed
securities 619,000 2,000 36,000 585,000
State, county and
municipal
obligations 16,552,000 483,000 15,000 17,020,000
Other 220,000 - - 220,000
----------- ---------- -------- -----------
$80,156,000 $1,898,000 $149,000 $81,905,000
=========== ========== ======== ===========
December 31, 1992:
- -----------------
U.S. Treasury and other
U.S. Government
agencies $61,499,000 $1,312,000 $272,000 $62,539,000
Mortgage-backed
securities 4,464,000 5,000 36,000 4,433,000
State, county and
municipal
obligations 10,402,000 555,000 22,000 10,935,000
Other 299,000 - - 299,000
----------- ---------- -------- -----------
$76,664,000 $1,872,000 $330,000 $78,206,000
=========== ========== ======== ===========
</TABLE>
Cash proceeds from the maturity and sale of investment securities during 1993,
1992 and 1991 were $48,805,000, $36,055,000 and $28,956,000, respectively. Net
gains from investment securities sold or matured in 1993 amounted to $11,000
(gross gains of $84,000 and gross losses of $73,000), a gross gain of $32,000 in
1992 and $0 in 1991.
F-45
<PAGE>
The maturities of investment securities at December 31, 1993 were as follows:
<TABLE>
<CAPTION>
Amortized Market
Cost Value
------------- -------------
<S> <C> <C>
Due in one year or less $ 15,539,000 $ 15,790,000
Due after one year through five years 51,383,000 52,681,000
Due after five years through ten years 12,264,000 12,480,000
Due after ten years 970,000 954,000
------------ ------------
Total Investment Securities $ 80,156,000 $ 81,905,000
============ ============
</TABLE>
Investment securities with an amortized cost of $37,178,000 and $33,426,000 at
December 31, 1993 and 1992, were pledged to secure public deposits and for other
purposes as required by law.
Note 4 - Loans
- --------------
The loan portfolio was comprised of the following categories at December 31:
<TABLE>
<CAPTION>
1993 1992
------------ ------------
<S> <C> <C>
Commercial and industrial $10,574,000 $14,371,000
Real estate - construction 1,733,000 3,210,000
Real estate - other 29,994,000 32,392,000
Installment 37,316,000 36,165,000
Mortgage loans held for resale 1,521,000 1,459,000
Other loans 573,000 153,000
----------- -----------
Total loans 81,711,000 87,750,000
Less:
Unearned income (3,574,000) (3,383,000)
Allowance for possible loan losses (1,022,000) (1,060,000)
----------- -----------
Net Loans $77,115,000 $83,307,000
=========== ===========
</TABLE>
F-46
<PAGE>
Loans on which interest was not being accrued amounted to $1,151,000, $1,240,000
and $1,472,000 at December 31, 1993, 1992 and 1991, respectively. Interest
income lost on non-performing loans was $174,000, $309,000 and $336,000 for the
years ended December 31, 1993, 1992 and 1991, respectively.
Some of the directors and executive officers of the Company and its subsidiaries
and their related parties are loan customers at the Company's subsidiary banks.
In management's judgment, such borrowings were on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with others and do not involve other than normal risk of
collectibility.
An analysis of loans to these parties is as follows:
<TABLE>
<CAPTION>
1993 1992
------------ -----------
<S> <C> <C>
Balance at beginning of year $ 4,589,000 $ 4,797,000
New loans 1,587,000 915,000
Amounts collected (2,428,000) 1,123,000)
Loans to customers no
longer related parties and other (303,000) -
----------- -----------
Balance at end of year $ 3,445,000 $ 4,589,000
----------- -----------
</TABLE>
Transactions in the allowance for possible loan losses were as follows:
<TABLE>
<CAPTION>
1993 1992 1991
----------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year $ 1,060,000 $1,152,000 $1,297,000
Provision charged to expense 475,000 263,000 235,000
Loan losses:
Charge-offs (569,000) (421,000) (469,000)
Recoveries 56,000 66,000 89,000
----------- ---------- ----------
Net loan losses (513,000) (355,000) (380,000)
----------- ---------- ----------
Balance at end of year $ 1,022,000 $1,060,000 $1,152,000
=========== ========== ==========
</TABLE>
F-47
<PAGE>
Note 5 - Bank Premises and Equipment
- ------------------------------------
Bank premises and equipment were comprised of the following at December 31:
<TABLE>
<CAPTION>
Estimated
Useful Lives 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Land $ 905,000 $ 1,473,000
Bank premises and leasehold
improvements 5 to 40 yrs. 3,232,000 3,160,000
Furniture and equipment 3 to 10 yrs. 2,232,000 2,623,000
Automobiles 3 to 5 yrs. 193,000 212,000
Construction in progress 45,000 -
Less - accumulation depreciation
and amortization (3,433,000) (3,447,000)
----------- -----------
Net balance at end of year $ 3,174,000 $ 4,021,000
=========== ===========
</TABLE>
Depreciation and amortization charged to operating expense was $569,000,
$353,000 and $301,000 for the years ended December 31, 1993, 1992 and 1991,
respectively.
Note 6 - Interest-Bearing Deposits
- ----------------------------------
Interest-bearing deposits were comprised of the following categories at
December 31:
<TABLE>
<CAPTION>
1993 1992
------------ ------------
<S> <C> <C>
Interest-bearing demand $ 49,576,000 $ 43,512,000
Savings 36,013,000 36,904,000
Time 53,302,000 56,284,000
Time over $100,000 11,902,000 14,837,000
------------ ------------
$150,793,000 $151,537,000
============ ============
</TABLE>
F-48
<PAGE>
Note 7 - Borrowings
- -------------------
The Company had the following indebtedness at December 31:
<TABLE>
<CAPTION>
1993 1992
------------ ------------
<S> <C> <C>
Texas Gulf Coast Bancorp, Inc.
- ------------------------------
Note payable in quarterly installments
of $50,000 plus interest at the prime
rate (6% at December 31, 1993), through
July of 1994. The note is collateralized
by 194,264 shares of common stock of
Texas City Bank owned by the Company. $ 1,000,000 $ 1,350,000
------------ ------------
1,000,000 1,350,000
Subsidiaries
- ------------
Note payable in monthly installments of
$2,441 including interest at 8%. The note
is collateralized by computer equipment. 95,000 -
Term note payable March 28, 1994 plus
interest at 9.5%. The loan is collateralized
by computer equipment 10,000 -
------------ ------------
$ 1,105,000 $ 1,350,000
============ ============
</TABLE>
Maturities of borrowings at December 31, 1993, on a consolidated basis are
as follows:
<TABLE>
<S> <C>
1994 $ 1,033,000
1995 24,000
1996 25,000
1997 23,000
</TABLE>
Note 8 - Dividends from Subsidiaries
- ------------------------------------
Substantially all of the retained earnings of the Company represent
undistributed net income of subsidiaries. Dividends paid by the Company's
subsidiary banks are subject to restrictions by certain agencies.
Note 9 - Federal Income Taxes
- -----------------------------
The Company adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, effective January 1, 1993. The cumulative
adjustment resulted in a tax benefit of $158,000 from the following sources:
F-49
<PAGE>
<TABLE>
Deferred Tax Assets:
<S> <C>
Alternative minimum tax credit carryforward $229,000
Recognition of additional temporary differences 120,000
--------
349,000
Deferred Tax Liability:
Recognition of additional temporary differences 191,000
--------
Net Cumulative Adjustment $158,000
========
</TABLE>
No valuation allowance was recognized in that the deferred tax assets should
be realized in future years.
The consolidated provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Current $253,000 $538,000 $262,000
Deferred (42,000) (63,000) 34,000
-------- -------- --------
$211,000 $475,000 $296,000
======== ======== ========
</TABLE>
The tax expense applicable to securities gains and losses for 1993, 1992 and
1991 was $4,000, $11,000 and $-0-, respectively.
The difference between the effective tax rate on consolidated income before
income taxes and the statutory rate is attributed to the following:
<TABLE>
<CAPTION>
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Federal income tax provision
at statutory rate $ 454,000 $ 881,000 $ 335,000
Tax exempt income (260,000) (244,000) (210,000)
Alternative minimum tax credit 14,000 (160,000) 152,000
Other 3,000 (2,000) 19,000
--------- --------- ---------
$ 211,000 $ 475,000 $ 296,000
========= ========= =========
</TABLE>
F-50
<PAGE>
For 1993, deferred income taxes result from temporary differences between the
carrying value of assets and liabilities for financial reporting and tax
reporting purposes. During 1992 and 1991, deferred income taxes resulted from
temporary differences in the recognition of income and expense for financial and
tax reporting purposes. The sources and related tax effects of these
differences are as follows:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Tax effect of temporary differences:
Alternative minimum tax credit $(14,000) $ - $ -
Tax over book depreciation (13,000) 2,000 (86,000)
Other real estate owned charged down
for book and not tax 37,000 (84,000) -
Allowance for loan loss in excess of tax 9,000 110,000 (1,000)
Write-down of bank premise and equipment (37,000) -
Deferred loan fees (39,000) (63,000) 74,000
Other 15,000 (28,000) 47,000
-------- -------- --------
$(42,000) $(63,000) $ 34,000
======== ======== ========
</TABLE>
At December 31, 1993, the Company has, for tax reporting purposes, alternative
minimum tax credit carryforwards of $242,000.
Note 10 - Employee Pension Plan
- -------------------------------
The Company has a defined benefit pension plan covering substantially all
employees. The plan is non-contributory and benefits are based on an employee's
years of service and earnings. The Company makes contributions to the plan
annually based upon actuarial valuations. The plan assets are managed and
invested by the trust division of a commercial bank. The plan assets are
invested in several equity, bond and cash common trust investment funds managed
by the trustee bank.
Total pension expense for 1993, 1992 and 1991 was $83,000, $57,000 and $47,000,
respectively. Net periodic pension cost for the Company-sponsored plan was as
follows:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Service cost-benefit earned
during the year $ 260,000 $ 256,000 $ 222,000
Interest cost on projected
benefit obligation 168,000 150,000 153,000
Actual gain on plan assets (254,000) (196,000) (191,000)
Net amortization 33,000 (29,000) (29,000)
--------- --------- ---------
$ 207,000 $ 181,000 $ 155,000
========= ========= =========
</TABLE>
F-51
<PAGE>
Significant assumptions for 1993, 1992 and 1991 used in determining pension cost
for the Company are as follows:
<TABLE>
<S> <C>
Discount rate 6.0%
Expected rate of increase in compensation 4.0%
Expected long-term rate of return on plan assets 8.0%
</TABLE>
Funded status of the pension plan is as follows:
<TABLE>
<CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
Projected benefit obligation:
Vested benefits $(2,506,000) $(2,103,000)
Non-vested benefits (48,000) (32,000)
----------- -----------
Accumulated benefit obligation (2,554,000) (2,135,000)
Effect of projected future
compensation level (448,000) (662,000)
----------- -----------
(3,002,000) (2,797,000)
Plan assets at fair value 2,727,000 2,511,000
----------- -----------
Plan assets (less) than projected
benefit obligation (275,000) (286,000)
Unrecognized net (gains) loss 319,000 513,000
Unrecognized net (assets) obligation being
amortized over 15 years (316,000) (345,000)
----------- -----------
Prepaid (accrued) pension cost $ (272,000) $ (118,000)
=========== ===========
</TABLE>
Note 11 - Commitments and Contingencies
- ---------------------------------------
In the normal course of business, the Company's subsidiary banks are a party to
financial instruments with off balance sheet risk to meet the financing needs of
its customers. These financial instruments include commitments to extend credit
and standby letters of credit. These instruments involve, to varying degrees,
elements of credit risk in excess of the amounts recognized in the Consolidated
Balance Sheet.
The Company's subsidiary banks use the same credit policies in making
commitments as it does for on-balance sheet instruments. Collateral is required
to support the off-balance sheet instruments when it is deemed necessary.
Collateral held varies, but may include: deposits held in financial
institutions, accounts receivable, inventory and property, plant and equipment.
F-52
<PAGE>
Financial instruments whose contract amounts represent potential credit risk are
as follows at December 31:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Commitments to extend credit $8,387,000 $3,048,000
Standby and commercial letters of credit 448,000 1,090,000
</TABLE>
The Company and subsidiaries have non-cancelable operating leases covering
certain equipment. The following is a schedule of future minimum lease payments
as of December 31, 1993:
<TABLE>
<CAPTION>
Year Ending December 31, Equipment
------------------------ ---------
<S> <C>
1994 $ 99,000
1995 81,000
1996 78,000
1997 43,000
1998 28,000
1999 and after -
--------
$329,000
========
</TABLE>
Rent expense incurred under operating leases amounted to $90,000 and $71,000 for
the years ended December 31, 1993, and 1992, respectively.
Various lawsuits are pending against the Company's subsidiaries. Management,
after reviewing these suits with legal counsel, considers that the aggregate
liability, if any, would not have a material adverse effect on the Company's
financial position.
Note 12 - 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, Disclosure about Fair
Value of Financial Instruments. The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily required
to interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Cash and cash equivalents --- For cash and due from banks, time deposits in
financial institutions and federal funds sold, the carrying amount is a
reasonable estimate of fair value.
Investment securities --- Investment securities fair value equals quoted market
price, if available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
F-53
<PAGE>
Loans --- 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.
Deposits --- 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.
Borrowings --- Rates currently available to the Company for debt with similar
terms and remaining maturities are used to estimate fair value of existing debt.
Commitments to extend credit and standby letters of credit --- The fair value of
commitments is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
present creditworthiness of the counter parties. For fixed-rate commitments,
fair value also considers the difference between current levels of interest
rates and committed rates. The fair value of letters of credit is based on fees
currently charged for similar letters of credit.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1993
----------------------------
Carrying Fair
Amount Value
-------- -------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 53,289,000 $ 53,289,000
Investment securities $ 80,156,000 $ 81,905,000
Loans, Net $ 77,115,000 $ 77,061,000
Liabilities:
Deposits $ 195,492,000 $ 195,812,000
Borrowings $ 1,105,000 $ 1,105,000
Off-balance sheet instruments
(unrealized gains [losses]): $ 1,000
</TABLE>
F-54
<PAGE>
Note 13 - Other Operating Expense
- ---------------------------------
Other operating expense for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Stationery, supplies and printing $ 327,000 $ 403,000 $ 368,000
Legal, accounting and professional 514,000 169,000 187,000
Data processing 929,000 899,000 735,000
Advertising 101,000 123,000 149,000
Insurance 519,000 521,000 464,000
Postage and freight 198,000 146,000 260,000
Amortization 273,000 234,000 244,000
Directors' fees 178,000 193,000 220,000
Telephone 143,000 144,000 122,000
Other 1,187,000 587,000 529,000
---------- ---------- ----------
$4,369,000 $3,419,000 $3,278,000
========== ========== ==========
</TABLE>
F-55
<PAGE>
Board of Directors and Shareholders
Gulf Southwest Bancorp, Inc.
Houston, Texas
Independent Auditors' Report
----------------------------
We have reviewed the pro forma adjustments reflecting the transaction described
in notes to pro forma consolidating financial statements and the application of
those adjustments to the historical amounts in the accompanying pro forma
consolidating balance sheet of Gulf Southwest Bancorp, Inc. as of September 30,
1994, and the related proforma consolidating statement of income for the year
ended December 31, 1993 and the nine months ended September 30, 1994. The
historical financial statements of Gulf Southwest Bancorp, Inc. as of December
31, 1993 and for the year then ended were audited by us, on which we have issued
our report dated January 26, 1994. The historical financial statements of Texas
Gulf Coast Bancorp, Inc. as of December 31, 1993 and for the year then ended
were audited by us, on which we have issued our report dated March 3, 1994. The
historical financial statements of Gulf Southwest Bancorp, Inc. and Texas Gulf
Coast Bancorp, Inc. as of September 30, 1994, and for the nine months then ended
were unaudited. Such pro forma adjustments are based on management's
assumptions as described in notes to pro forma consolidating financial
statements. Our review was conducted in accordance with standards established
by the American Institute of Certified Public Accountants.
A review is substantially less in scope than an examination, the objective of
which is the expression of an opinion on management's assumptions, the pro forma
adjustments and the application of those adjustments to historical financial
information. Accordingly, we do not express such an opinion.
The objective of this pro forma financial information is to show what the
significant effects on the historical information might have been had the
transaction occurred at an earlier date. However, the pro forma consolidating
financial statements are not necessarily indicative of the results of operations
or related effects on financial position that would have been attained had the
above-mentioned transaction actually occurred earlier.
Based on our review, nothing came to our attention that caused us to believe
that management's assumptions do not provide a reasonable basis for presenting
the significant effects directly attributable to the above-mentioned transaction
described in notes to pro forma consolidating financial statements, that the
related pro forma adjustments do not give appropriate effect to those
assumptions, or that the pro forma column does not reflect the proper
application of those adjustments to the historical financial statement amounts
in the pro forma consolidating balance sheet of Gulf Southwest Bancorp, Inc. as
of September 30, 1994, and the related pro forma consolidating statement of
income for the year ended December 31, 1993 and the nine months ended
September 30, 1994.
Hidalgo, Banfill, Zlotnik & Kermali, P.C.
Houston, Texas
November 1, 1994
F-56
<PAGE>
GULF SOUTHWEST BANCORP, INC.
PRO FORMA CONSOLIDATING FINANCIAL STATEMENTS OBJECTIVES
YEAR ENDED DECEMBER 31, 1993
(Unaudited)
The following pro forma balance sheet as of September 30, 1994 and the
related statements of income for the year ended December 31, 1993 and the nine
months ended September 30, 1994 have been derived from the historical financial
statements of Gulf Southwest Bancorp, Inc. and Texas Gulf Coast Bancorp, Inc.
and have been adjusted to give effect of the merger of the Companies as if the
merger had occurred on September 30, 1994 as to the pro forma consolidating
balance sheet and as of January 1, 1993 as to the pro forma consolidating
statements of income. The pro forma financial statements are presented for
informational purposes only and do not purport to be indicative of the financial
condition and results of operations that actually would have resulted if the
merger had been consummated at January 1, 1993. The pro forma financial
statements should be read in conjunction with the notes thereto and the
financial statements and notes thereto of Gulf Southwest Bancorp, Inc. and Texas
Gulf Coast Bancorp, Inc. contained elsewhere in this Prospectus.
F-57
<PAGE>
GULF SOUTHWEST BANCORP, INC.
PRO FORMA CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1994
(Unaudited)
<TABLE>
<CAPTION>
Gulf Southwest Texas Gulf Coast Pro forma
Bancorp, Inc. Bancorp, Inc. Adjustments
and and -----------
Assets Subsidiaries Subsidiaries Total Debit Credit Pro Forma
------ ------------ ------------ ----- ----- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Cash and due from banks $ 12,099,000 $ 15,773,000 $ 27,872,000 $ $150,000 /(4)/ $ 27,722,000
Time deposits in financial
institutions 2,144,000 -- 2,144,000 2,144,000
Federal fund sold and deposits
with Federal Home Loan Bank 17,675,000 15,510,000 33,185,000 33,185,000
Investment securities:
U.S. Treasury and other U.S.
Government agencies 54,744,000 71,145,000 125,889,000 1,109,000 /(2)/ 124,780,000
State, County and Municipal
obligations 6,756,000 16,148,000 22,904,000 339,000 /(2)/ 22,565,000
Other 7,000 421,000 428,000 5,000 /(2)/ 433,000
------------ ------------ ------------ ------------
Total Investment Securities 61,507,000 87,714,000 149,221,000 147,778,000
Net loans 138,028,000 78,353,000 216,381,000 57,000 /(2)/ 216,438,000
Bank premise and equipment 4,701,000 3,693,000 8,394,000 8,394,000
Accrued interest receivable 1,977,000 1,536,000 3,513,000 3,513,000
Excess of cost of subsidiaries
over equity in net assets
acquired, net of accumulated
amortization 315,000 709,000 1,024,000 2,245,000 /(2)/ 3,269,000
Other assets 2,370,000 2,138,000 4,508,000 4,508,000
------------ ------------ ------------ ------------
Total Assets $240,816,000 $205,426,000 $446,242,000 $446,951,000
============ ============ ============ ============
</TABLE>
See accountants' review report and notes to pro forma consolidating financial
statements.
F-58
<PAGE>
GULF SOUTHWEST BANCORP, INC.
PRO FORMA CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1994
(Unaudited)
<TABLE>
<CAPTION>
Gulf Southwest Texas Gulf Coast Pro forma
Liabilities and Bancorp, Inc. Bancorp, Inc. Adjustments
--------------- and and -----------
Stockholders' Equity Subsidiaries Subsidiaries Total Debit Credit Pro Forma
- -------------------- ------------ ------------ ----- ----- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Deposits:
Non interest bearing $ 62,668,000 $ 41,709,000 $104,377,000 $104,377,000
Interest bearing 152,679,000 141,729,000 294,408,000 261,000/(2)/ 294,669,000
------------ ------------ ------------ ------------
Total Deposits 215,347,000 183,438,000 398,785,000 399,046,000
Accrued interest, taxes
and other liabilities 1,199,000 1,067,000 2,266,000 2,266,000
Borrowings -- 978,000 978,000 2,481,000/(1)/ 3,459,000
Minority interest -- 254,000 254,000 254,000
------------ ------------ ------------ ------------
Total Liabilities 216,546,000 185,737,000 402,283,000 405,025,000
------------ ------------ ------------ ------------
Stockholders Equity:
Preferred stock, $16 par
value, 8% cumulative,
155,050 shares issued and
outstanding -- 2,481,000 2,481,000 2,481,000/(1)/ --
Common stock, $1 par value,
1,281,650 shares issued 1,281,000 -- 1,282,000 698,000/(2)/ 1,980,000
Common stock, $1 par value,
381,939 shares issued -- 382,000 381,000 381,000/(2)/ --
Paid in capital 8,631,000 5,207,000 13,838,000 150,000/(4)/ 11,900,000/(2)/ 25,588,000
Retained earnings 14,665,000 14,842,000 29,507,000 14,842,000/(2)/ 14,665,000
------------ ------------ ------------ ------------
24,577,000 22,912,000 47,489,000 42,233,000
Less cost of stock held in
treasury:
Common stock, $1 par value (307,000) -- (307,000) (307,000)
Common stock, $1 par value -- (3,223,000) (3,223,000) 3,223,000/(2)/ --
------------ ------------ ------------ ------------
Total Stockholders' Equity 24,270,000 19,689,000 43,959,000 41,926,000
------------ ------------ ------------ ------------
Total Liabilities and
Stockholders' Equity $240,816,000 $205,426,000 $446,242,000 $446,951,000
============ ============ ============ ============
</TABLE>
See accountants' review report and notes to pro forma consolidating financial
statements.
F-59
<PAGE>
GULF SOUTHWEST BANCORP, INC.
PRO FORMA CONSOLIDATING STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1993
(Unaudited)
<TABLE>
<CAPTION>
Gulf Southwest Texas Gulf Coast Pro forma
Bancorp, Inc. Bancorp, Inc. Adjustments
and and -----------
Subsidiaries Subsidiaries Total Debit Credit Pro Forma
-------------- ---------------- ------------- ----- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income $15,802,000 $13,326,000 $29,128,000 $29,128,000
Interest expense 4,943,000 4,389,000 9,332,000 $198,000/(5)/ 9,530,000
----------- ----------- ----------- -----------
Net interest income 10,859,000 8,937,000 19,796,000 19,598,000
Provision for loan losses 410,000 475,000 885,000 885,000
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 10,449,000 8,462,000 18,911,000 18,713,000
----------- ----------- ----------- -----------
Non interest income:
Service charges and fees 2,588,000 2,168,000 4,756,000 4,756,000
Other operating income 362,000 1,130,000 1,492,000 1,492,000
Securities transactions 29,000 11,000 40,000 40,000
----------- ----------- ----------- -----------
Total non interest income 2,979,000 3,309,000 6,288,000 6,288,000
----------- ----------- ----------- -----------
Non interest expense:
Salaries and employee benefits 4,770,000 4,702,000 9,472,000 9,472,000
Occupancy expense 920,000 604,000 1,524,000 1,524,000
Furniture and equipment expense 479,000 517,000 996,000 996,000
Other operating expense 4,326,000 4,612,000 8,938,000 473,000/(3)/ 9,411,000
----------- ----------- ----------- -----------
Total non interest expense 10,495,000 10,435,000 20,930,000 21,403,000
----------- ----------- ----------- -----------
Income before income taxes 2,933,000 1,336,000 4,269,000 67,000/(5)/ 3,598,000
Provision for income taxes 512,000 211,000 723,000 161,000/(3)/ 495,000
----------- ----------- ----------- -----------
Net Income $ 2,421,000 $ 1,125,000 $ 3,546,000 $ 3,103,000
=========== =========== =========== ===========
Weighted average number of common
shares outstanding 1,959,984
===========
Net Income per share $1.59
=====
</TABLE>
See accountants' review report and notes to pro forma consolidating financial
statements.
F-60
<PAGE>
GULF SOUTHWEST BANCORP, INC.
PRO FORMA CONSOLIDATING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994
(Unaudited)
<TABLE>
<CAPTION>
Gulf Southwest Texas Gulf Coast Pro forma
Bancorp, Inc. Bancorp, Inc. Adjustments
and and -----------
Subsidiaries Subsidiaries Total Debit Credit Pro Forma
------------ ------------ ----- ----- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income $12,318,000 $9,468,000 $21,786,000 $ $ $21,786,000
Interest expense 3,564,000 3,101,000 6,665,000 149,000/(5)/ 6,814,000
----------- ---------- ----------- -----------
Net interest income 8,754,000 6,367,000 15,121,000 14,972,000
Provision for loan losses 50,000 129,000 179,000 179,000
----------- ---------- ----------- -----------
Net interest income after provision
for loan losses 8,704,000 6,238,000 14,942,000 14,793,000
----------- ---------- ----------- -----------
Non interest income:
Service charges and fees 1,933,000 1,529,000 3,462,000 3,462,000
Other operating income 460,000 733,000 1,193,000 1,193,000
----------- ---------- ----------- -----------
Total non interest income 2,393,000 2,262,000 4,655,000 4,655,000
----------- ---------- ----------- -----------
Non interest expense:
Salaries and employee benefits 3,588,000 3,371,000 6,959,000 6,959,000
Furniture, fixtures and occupancy 1,158,000 809,000 1,967,000 1,967,000
Other operating expense 2,893,000 3,199,000 6,092,000 355,000/(3)/ 6,447,000
----------- ---------- ----------- -----------
Total non interest expense 7,639,000 7,379,000 15,018,000 15,373,000
----------- ---------- ----------- -----------
Income before income taxes 3,458,000 1,121,000 4,579,000 4,075,000
51,000/(5)/
Provision for income taxes 850,000 184,000 1,034,000 121,000/(3)/ 862,000
----------- ---------- ----------- -----------
Net Income $ 2,608,000 $ 937,000 $ 3,545,000 $ 3,213,000
=========== ========== =========== ===========
Weighted average number of common
shares outstanding 1,956,889
===========
Net Income per common share $1.64
=====
</TABLE>
See accountants' review report and notes to pro forma consolidating financial
statements.
F-61
<PAGE>
GULF SOUTHWEST BANCORP, INC.
----------------------------
NOTES TO PROFORMA CONSOLIDATING FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
-----------
Gulf Southwest Bancorp, Inc., through a wholly owned subsidiary, has entered
into definitive agreements to merge Texas Gulf Coast Bancorp, Inc. into the
wholly owned subsidiary of Gulf Southwest Bancorp, Inc. Gulf Southwest Bancorp,
Inc. will make offers to purchase all of the outstanding common shares of Texas
Gulf Coast Bancorp, Inc. The pro forma consolidating balance sheet at September
30, 1994 and the statements of income for the year ended December 31, 1993 and
the nine months ended September 30, 1994, reflect the financial position and
results of operations of the entities as if they were consolidated at September
30, 1994 as to the balance sheet and as of January 1, 1993 as to the statements
of income. The acquisition discussed herein will be accounted for as a purchase
transaction. Gulf Southwest Bancorp, Inc. will record the assets and
liabilities at their fair value. The excess of cost of the acquired enterprise
over the sum of the amounts assigned to identifiable assets acquired less
liabilities assumed shall be recorded as excess of cost over the net equity in
net assets acquired.
Following are explanations of the pro forma adjustments reflected in the
financial statements:
(1) The outstanding shares of Texas Gulf Coast Bancorp, Inc. 8%, $16 par value,
preferred stock will be redeemed for cash prior to the merger. Funds to be
used for the redemption will be borrowed from a commercial bank.
(2) To effect the acquisition, Gulf Southwest Bancorp, Inc. will issue 698,253
shares of its common stock (with a fair value of $25.50 per share) for the
329,738 outstanding shares of Texas Gulf Coast Bancorp, Inc. common stock
(with a fair value of $54.00 per share). Fractional shares will be
purchased for cash. All common stock of Texas Gulf Coast Bancorp, Inc.
held as treasury shares will be cancelled.
(3) The excess of cost over the net equity in net assets acquired will be
amortized over periods ranging from 3 to 15 years.
(4) The cost of registration will be charged to stockholders' equity as a
reduction in the fair value of securities issued.
(5) Interest expense at 8% on the new borrowing would be incurred, net of the
related income tax benefit.
F-62
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
Among
GULF SOUTHWEST BANCORP, INC.
(a Texas corporation)
and
GULF SOUTHWEST NEVADA BANCORP, INC.
(a Nevada corporation)
and
TEXAS GULF COAST BANCORP, INC.
(a Texas corporation)
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Section Page
------- ----
ARTICLE I
THE MERGER
<C> <S> <C>
Section 1.1 The Merger..................................................... 1
Section 1.2 Effect of the Merger........................................... 1
Section 1.3 Consummation of the Merger..................................... 1
Section 1.4 Articles of incorporation and bylaws; directors and officers... 1
Section 1.5 Conversion of securities; issuance of Gulf Southwest
Common Stock.................................................. 2
Section 1.6 Closing of TGC's transfer books................................ 2
Section 1.7 Mechanics of exchange of certificates.......................... 2
Section 1.8 Letters of transmittal......................................... 3
Section 1.9 Lost, stolen or destroyed certificates......................... 4
Section 1.10 Further action................................................. 4
<CAPTION>
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF GULF SOUTHWEST
<C> <S> <C>
Section 2.1 Organization and qualification................................. 4
Section 2.2 Authority relative to this Agreement........................... 4
Section 2.3 Gulf Southwest SEC Documents................................... 5
Section 2.4 Certain corporate matters...................................... 6
Section 2.5 No Material Adverse Change..................................... 6
<CAPTION>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF TGC
<C> <S> <C>
Section 3.1 Organization and authority to conduct business................. 6
Section 3.2 Capital structure.............................................. 7
Section 3.3 Subsidiaries................................................... 8
Section 3.4 Financial statements........................................... 8
Section 3.5 Absence of certain changes or events........................... 9
Section 3.6 Litigation and proceedings..................................... 10
Section 3.7 Material contract defaults..................................... 10
Section 3.8 No conflict with other instruments............................. 10
Section 3.9 Governmental authorizations.................................... 10
</TABLE>
-i-
<PAGE>
<TABLE>
<C> <S> <C>
Section 3.10 Approval of agreements......................................... 11
Section 3.11 Title to properties and assets................................. 11
Section 3.12 Tax returns and payments....................................... 11
Section 3.13 Agreements and commitments..................................... 12
Section 3.14 Investment securities.......................................... 12
Section 3.15 Assets......................................................... 12
Section 3.16 Loan loss reserves............................................. 12
Section 3.17 Brokers and finders............................................ 13
Section 3.18 TGC Disclosure Statement....................................... 13
<CAPTION>
ARTICLE IV
COVENANTS OF TGC
<C> <S> <C>
Section 4.1 Conduct of business............................................ 13
Section 4.2 Access to properties and records............................... 14
Section 4.3 Information.................................................... 15
Section 4.4 Shareholders' meeting.......................................... 15
Section 4.5 Bank reports and other information............................. 15
Section 4.6 New loans...................................................... 16
Section 4.7 Dividends...................................................... 16
Section 4.8 Execution and delivery of Plan of Merger....................... 16
Section 4.9 Indemnification................................................ 16
Section 4.10 Redemption of TGC Preferred Stock.............................. 17
<CAPTION>
ARTICLE V
COVENANTS OF GULF SOUTHWEST
<C> <S> <C>
Section 5.1 Conduct of business............................................ 17
Section 5.2 Access to properties and records............................... 18
Section 5.3 Bank reports and other information............................. 19
Section 5.4 Dividends...................................................... 19
Section 5.5 Execution and delivery of Plan of Merger....................... 19
Section 5.6 Indemnification................................................ 19
<CAPTION>
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF
GULF SOUTHWEST AND TGC
<C> <S> <C>
Section 6.1 Approval by shareholders....................................... 20
Section 6.2 Other approvals and consents................................... 20
Section 6.3 Litigation..................................................... 20
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF TGC
<C> <S> <C>
Section 7.1 Representations, warranties and covenants...................... 20
Section 7.2 Officer's certificate.......................................... 21
Section 7.3 Adverse changes................................................ 21
Section 7.4 Classified assets and other real estate........................ 21
Section 7.5 Loan and asset examination..................................... 21
Section 7.6 Dissenter's Rights............................................. 21
<CAPTION>
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF GULF SOUTHWEST
<C> <S> <C>
Section 8.1 Representations, warranties and covenants...................... 21
Section 8.2 Adverse changes................................................ 22
Section 8.3 Officer's certificate.......................................... 22
Section 8.4 Classified assets and other real estate........................ 22
Section 8.5 Loan and asset examination..................................... 22
<CAPTION>
ARTICLE IX
MISCELLANEOUS
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Section 9.1 Expenses....................................................... 22
Section 9.2 Closing........................................................ 23
Section 9.3 Amendment...................................................... 23
Section 9.4 Termination.................................................... 23
</TABLE>
EXHIBITS
EXHIBIT A - Agreement and Plan of Merger
ANNEXES
ANNEX I Gulf Southwest SEC Documents
ANNEX II TGC Disclosure Schedule
ANNEX III TGC Financial Statements
-iii-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
------------------------------------
This Agreement and Plan of Reorganization ("Agreement"), dated as of
November 9, 1994, by and among Gulf Southwest Bancorp, Inc., a Texas corporation
("Gulf Southwest"), Gulf Southwest Nevada Bancorp, Inc., a Nevada corporation
("Merger Sub"), and Texas Gulf Coast Bancorp, Inc., a Texas corporation ("TGC"
and together with Merger Sub, the "Constituent Corporations"), provides for the
merger of TGC with and into Merger Sub pursuant to the Agreement and Plan of
Merger between Merger Sub and TGC attached hereto as Exhibit A ("Plan of
Merger").
ARTICLE I
THE MERGER
----------
Section 1.1 The Merger. At the Effective Time (as defined in Section
----------
1.3), in accordance with this Agreement, the Texas Business Corporation Act
("TBCA") and the Nevada General Corporation Law (the "NGCL"), TGC shall be
merged with and into Merger Sub (the "Merger"), the separate existence of TGC
(except as may be continued by operation of law) shall cease and Merger Sub
shall continue as the surviving corporation under the corporate name it
possesses immediately prior to the Effective Time. Merger Sub, in its capacity
as the corporation surviving the Merger, sometimes is referred to herein as the
"Surviving Corporation."
Section 1.2 Effect of the Merger. The Merger shall have the effects set
--------------------
forth in Article 5.06 of the TBCA and Section 78.459 of the NGCL.
Section 1.3 Consummation of the Merger. As soon as is practicable after
--------------------------
the satisfaction or waiver of the conditions set forth in Articles VI, VII and
VIII of this Agreement, the parties hereto will cause Articles of Merger, in
such form as is required by, and executed, acknowledged and certified in
accordance with, the relevant provisions of the TBCA and the NGCL, to be filed
with the Secretary of State of the State of Nevada and the Secretary of State of
the State of Texas, which shall include, as an exhibit, the Plan of Merger. The
Merger shall be effective when Articles of Merger have been filed with each of
the Secretary of State of the State of Nevada and the Secretary of State of the
State of Texas (the "Effective Time").
Section 1.4 Articles of incorporation and bylaws; directors and officers.
------------------------------------------------------------
The articles of incorporation and bylaws of Merger Sub shall be the articles of
incorporation and bylaws of the Surviving Corporation immediately after the
Effective Time and shall thereafter continue to be its articles of incorporation
and bylaws until further amended. The directors of Merger Sub holding office
immediately prior to the Effective Time and Mr. A. Harrel Blackshear shall be
the directors of the Surviving Corporation immediately after the Effective Time
and shall serve until their successors are duly elected and shall
<PAGE>
qualify. The officers of Merger Sub holding office immediately prior to the
Effective Time shall be the officers (holding the same offices as they held with
Merger Sub) of the Surviving Corporation immediately after the Effective Time
and shall serve until their successors are duly elected and shall qualify.
Section 1.5 Conversion of securities; issuance of Gulf Southwest Common
-----------------------------------------------------------
Stock.
- -----
(a) At the Effective Time, by virtue of the Merger and without any action
on the part of Merger Sub, TGC, or the holders ("TGC Stockholders") of TGC
Common Stock (as hereinafter defined), each share of common stock of TGC, par
value $1.00 per share (the "TGC Common Stock"), issued and outstanding
immediately prior to the Effective Time shall, subject to Section 1.5(b) below,
be automatically converted into and become a right to receive 2.1176 shares of
common stock, $1.00 par value per share, of Gulf Southwest (the "Gulf Southwest
Common Stock").
(b) No fraction of a share of Gulf Southwest Common Stock will be issued to
TGC Stockholders, but in lieu thereof each TGC Stockholder who would otherwise
be entitled to receive a fractional share will be paid an amount in cash equal
to the product of (i) the fractional share of Gulf Southwest Common Stock to
which such TGC Stockholder is otherwise entitled and (ii) $25.50.
Section 1.6 Closing of TGC's transfer books. At the Effective Time, the
-------------------------------
stock transfer books of TGC shall be closed with respect to shares of TGC Common
Stock issued and outstanding immediately prior to the Effective Time and no
further transfer of such shares shall thereafter be made on such stock transfer
books. If, after the Effective Time, valid certificates previously representing
such shares are presented to the Surviving Corporation, such certificates shall
be exchanged as provided in Section 1.7 of this Agreement.
Section 1.7 Mechanics of exchange of certificates.
-------------------------------------
(a) After the Effective Time, each holder of an outstanding certificate
that prior thereto represented shares of TGC Common Stock shall be entitled,
upon surrender thereof to Gulf Southwest, to receive in exchange therefor (i) a
certificate or certificates representing the number of whole shares of Gulf
Southwest Common Stock into which the shares of TGC Common Stock so surrendered
shall have been converted and exchanged as aforesaid, in such denominations and
registered in such names as such holder may request and (ii) any cash to which
such holder may be entitled pursuant to Section 1.5(b). Until so surrendered,
each such outstanding certificate that, prior to the Effective Time, represented
shares of TGC Common Stock will be deemed from and after the Effective Time, for
all corporate purposes, other than the payment of dividends or other
distributions, to evidence the ownership of the number of full shares of Gulf
Southwest Common Stock into which such shares of TGC Common Stock shall have
been so converted and exchanged pursuant to Section 1.5(a) of this Agreement and
the
-2-
<PAGE>
right to receive an amount in cash in lieu of the issuance of any fractional
share of Gulf Southwest Common Stock in accordance with Section 1.5(b) of this
Agreement. Unless and until any such outstanding certificates representing
shares of TGC Common Stock shall be so surrendered, no dividends or other
distributions payable to the holders of Gulf Southwest Common Stock, as of any
time on or after the Effective Time, will be paid to the holder of such
outstanding certificates which prior to the Effective Time represented such
shares of TGC Common Stock; provided, however, that, upon surrender and exchange
of such outstanding certificates that prior to the Effective Time represented
such shares of TGC Common Stock, there will be paid to the record holders of the
certificates issued and exchanged therefor the amount, without interest thereon,
of dividends and other distributions, if any, that theretofore became payable
with respect to the number of full shares of Gulf Southwest Common Stock issued
to such holders.
(b) All shares of Gulf Southwest Common Stock into which shares of TGC
Common Stock shall have been converted and exchanged pursuant to Section 1.5(a)
of this Agreement and any cash paid in lieu of any fractional shares of Gulf
Southwest Common Stock in accordance with Section 1.5(b) of this Agreement will
be issued in full satisfaction of all rights pertaining to such converted and
exchanged shares.
(c) If any certificate for shares of Gulf Southwest Common Stock is to be
issued in a name other than that in which the certificate surrendered in
exchange therefor is registered, it will be a condition of the issuance thereof
that the certificate so surrendered be properly endorsed and otherwise in proper
form for transfer and that the person requesting such conversion and exchange
will have paid to Gulf Southwest any transfer or other taxes required by reason
of the issuance of a certificate for shares of Gulf Southwest Common Stock in
any name other than that of the registered holder of the certificate
surrendered, or established to the satisfaction of Gulf Southwest that such tax
has been paid or is not payable.
(d) No fraction of a share of Gulf Southwest Common Stock will be issued,
but in lieu thereof, each TGC Stockholder who would otherwise be entitled to a
fractional share of Gulf Southwest Common Stock will, upon surrender of a share
of TGC Common Stock to Gulf Southwest, be paid an amount in cash equal the
product of (i) the fractional share of Gulf Southwest Common Stock to which such
holder would otherwise be entitled and (ii) $25.50. No interest shall be paid
on such amounts.
Section 1.8 Letters of transmittal. Not later than the date three (3)
----------------------
business days subsequent to the Effective Time, Gulf Southwest will mail to each
holder of record (other than Gulf Southwest or any direct or indirect subsidiary
of Gulf Southwest) of a certificate or certificates which immediately prior to
the Effective Time represented outstanding shares of TGC Common Stock, a letter
of transmittal and instructions for such holder's use in effecting the surrender
of such certificates in exchange for certificates representing shares of Gulf
Southwest Common Stock and cash in lieu of fractional shares, if applicable.
Gulf Southwest will use its best efforts to promptly process letters of
-3-
<PAGE>
transmittal. Gulf Southwest will begin issuing shares of Gulf Southwest Common
Stock and cash, if applicable, to holders of TGC Common Stock who tender
certificates representing such shares and appropriately completed letters of
transmittal immediately following receipt thereof.
Section 1.9 Lost, stolen or destroyed certificates. In the event any
--------------------------------------
certificates evidencing shares of TGC Common Stock shall have been lost, stolen
or destroyed, Gulf Southwest shall issue in exchange for such lost, stolen or
destroyed certificate(s), upon the making of an affidavit of that fact by the
holder thereof, such shares of Gulf Southwest Common Stock and cash for
fractional shares, if any, as may be required pursuant to Section 1.5 of this
Agreement; provided, however, that Gulf Southwest may, in its discretion and as
a condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate(s) to deliver a bond in such sum as Gulf
Southwest may reasonably direct as indemnity against any claim that may be made
against Gulf Southwest with respect to the certificate(s) alleged to have been
lost, stolen or destroyed.
Section 1.10 Further action. If, at any time after the Effective Time,
--------------
any further action is necessary or desirable to carry out the purposes of this
Agreement or to vest the Surviving Corporation with full right, title and
possession to all assets, property, rights, privileges, immunities and
franchises of either or both of the Constituent Corporations, the officers and
directors of the Surviving Corporation are fully authorized in the name of
either or both of the Constituent Corporations or otherwise to take, and shall
take, all such action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF GULF SOUTHWEST
------------------------------------------------
Gulf Southwest hereby represents and warrants to TGC as follows:
Section 2.1 Organization and qualification. Gulf Southwest has been duly
------------------------------
incorporated and is validly existing as a corporation and in good standing under
the laws of the State of Texas and has the requisite corporate power to carry on
its business as now conducted. Merger Sub has been duly incorporated and is
validly existing as a corporation and in good standing under the laws of the
State of Nevada and has the requisite corporate power to carry on its business
as now conducted.
Section 2.2 Authority relative to this Agreement. Each of Gulf Southwest
------------------------------------
and Merger Sub has the requisite corporate power and authority to enter into
this Agreement and to carry out their respective obligations hereunder. The
execution and delivery of this Agreement by Gulf Southwest and Merger Sub and
the consummation by Gulf Southwest and Merger Sub of the transactions
contemplated hereby have been duly authorized by the respective Boards of
Directors of Gulf Southwest and Merger Sub and by Gulf Southwest as the sole
stockholder of Merger Sub, and no other corporate proceedings
-4-
<PAGE>
on the part of Gulf Southwest or Merger Sub are necessary to authorize this
Agreement and the transactions contemplated hereby. This Agreement has been duly
executed and delivered by Gulf Southwest and Merger Sub and, upon receipt of all
requisite regulatory approvals and the expiration of all applicable waiting
periods, will constitute the valid and binding obligation of each such company,
enforceable in accordance with its terms, except as such enforcement may be
limited by bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights generally or by general principles of equity.
None of the execution and delivery of this Agreement by Gulf Southwest or Merger
Sub, the performance by Gulf Southwest or Merger Sub of its obligations
hereunder or the consummation by Gulf Southwest or Merger Sub of the
transactions contemplated hereby will require any consent, approval or notice
under, or violate, breach, be in conflict with or constitute a default (or an
event that, with notice or lapse of time or both, would constitute a default)
under, or permit the termination of, or result in the creation or imposition of
any lien upon any properties, assets or business of Gulf Southwest or Merger Sub
under, any note, bond, indenture, mortgage, deed of trust, lease, franchise,
permit, authorization, license, contract, instrument or other agreement or
commitment or any order, judgment or decree to which Gulf Southwest or Merger
Sub is a party or by which Gulf Southwest or Merger Sub or any of their
respective assets or properties is bound or encumbered, except those that have
already been given, obtained or filed. Other than in connection with filing
Articles of Merger with the Secretary of State of the State of Texas and the
Secretary of State of the State of Nevada, filings under the Securities Act of
1933, as amended (the "Securities Act"), necessary to effect the registration
under the Securities Act of the shares of Gulf Southwest Common Stock to be
issued pursuant to this Agreement, filings to be made under state securities
laws to effect the registration/qualification under such laws of the shares of
Gulf Southwest Common Stock to be issued pursuant to this Agreement, filings
made with the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") and the Texas Department of Banking, no authorization, consent
or approval of, or filing with, any public body, court or authority is necessary
on the part of Gulf Southwest or Merger Sub for the consummation by Gulf
Southwest and Merger Sub of the transactions contemplated by this Agreement.
Section 2.3 Gulf Southwest SEC Documents. Gulf Southwest has furnished
----------------------------
TGC with a true and complete copy of each report, schedule, registration
statement and definitive proxy statement filed by Gulf Southwest with the
Securities and Exchange Commission ("SEC") since January 1, 1994 (the "Gulf
Southwest SEC Documents"), which are all the documents (other than preliminary
materials) that Gulf Southwest was required to file with the SEC since such date
and all of which documents are listed on Annex I attached hereto. As of its
-------
date, each Gulf Southwest SEC Document was in compliance, in all material
respects, with the requirements of its form and contained no untrue statement of
a material fact and did not omit any statement of a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of Gulf Southwest included in the Gulf Southwest SEC Documents
complied, at the time
-5-
<PAGE>
of filing with the SEC, as to form, in all material respects, with applicable
accounting requirements and published rules and regulations of the SEC with
respect thereto, were prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the periods involved, and fairly
presented, in all material respects (subject, in the case of unaudited interim
statements, to normal, recurring year-end audit adjustments) the consolidated
financial position of Gulf Southwest as at the dates thereof and the
consolidated results of its operations and changes in financial position for the
periods then ended. Since September 30, 1994, there have been no changes in Gulf
Southwest's method of accounting for tax purposes or any other purposes. The
financial statements of Gulf Southwest as of September 30, 1994, included in the
Gulf Southwest SEC Documents disclose all liabilities of Gulf Southwest required
to be disclosed therein and contained adequate reserves for taxes and all other
material accrued liabilities as on the date thereof.
Section 2.4 Certain corporate matters. Each of Gulf Southwest and Merger
-------------------------
Sub is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction in which the ownership of its properties, the
employment of its personnel or the conduct of its business requires it to be so
qualified. Gulf Southwest has full corporate power and authority and all
authorizations, licenses and permits necessary to carry on the business in which
it engages or in which it proposes presently to engage and to own and use the
properties owned and used by it.
Section 2.5 No Material Adverse Change. Except as disclosed in writing to
--------------------------
TGC, since September 30, 1994, there has not been any material adverse change in
the consolidated financial condition, results of operations or business of Gulf
Southwest and no event or condition has occurred or exists that will result in
such a material adverse change other than changes directly resulting from
general economic conditions.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF TGC
-------------------------------------
To induce Gulf Southwest to enter into this Agreement and to consummate the
transactions contemplated herein, except as set forth in the TGC Disclosure
Schedule (herein so called) attached hereto as Annex II, TGC hereby represents
--------
and warrants to Gulf Southwest as follows:
Section 3.1 Organization and authority to conduct business.
----------------------------------------------
(a) TGC. TGC is a corporation duly organized, validly existing and in good
---
standing under the laws of the State of Texas and has full corporate power and
authority to own and lease its properties and to carry on its business as
presently conducted. TGC is qualified to do business and is in good standing in
every jurisdiction in which the
-6-
<PAGE>
character and location of the assets owned or leased by it or the nature of the
business transacted by it require such qualification.
(b) Subsidiary Banks. Each of First Bank Mainland (herein so called),
----------------
Texas City Bank (herein so called), and First Bank Pearland (herein so called
and together with First Bank Mainland and Texas City Bank, the "Subsidiary
Banks") is a subsidiary of TGC, is a Texas banking corporation duly organized,
chartered, validly existing and in good standing under the laws of Texas and has
full power and authority to own and lease its properties and to carry on its
business as presently conducted. Each Subsidiary Bank is qualified to do
business and is in good standing in every jurisdiction in which the character
and location of the assets owned or leased by it or the nature of the business
transacted by it require such qualification. Each of the Subsidiary Banks is
operating and has operated in compliance with the Texas Banking Code of 1943 and
all other applicable statutes, regulations and orders.
Section 3.2 Capital structure.
-----------------
(a) TGC. The authorized capital stock of TGC consists of 1,000,000 shares
---
of TGC Common Stock, of which 329,738 shares are issued and outstanding,
1,000,000 shares of the preferred stock, $16.00 par value per share (the "TGC
Preferred Stock"), of which 155,050 shares are issued and outstanding and
5,000,000 shares of the Class A preferred stock, $10.00 par value per share, of
which no shares are issued and outstanding. All such outstanding shares are
fully paid and nonassessable, and none of such shares was issued in violation of
the preemptive rights of any person. Except for the shares of TGC Common Stock
and TGC Preferred Stock referenced in the immediately preceding sentence, TGC
does not have any securities issued and outstanding. TGC does not have any
outstanding subscriptions, options, warrants, rights or other agreements,
commitments or understandings obligating TGC to issue additional shares of its
capital stock or any securities convertible into or having the right to purchase
shares of its capital stock.
(b) Subsidiary Banks. The authorized capital stock of Texas City Bank,
----------------
First Bank Mainland and First Bank Pearland consists of 200,000 shares, $5.00
par value ("Texas City Bank Common Stock"), 30,000 shares, $20.00 par value
("First Bank Mainland Common Stock"), and 130,367 shares, $4.00 par value
("First Bank Pearland Common Stock" and together with the First Bank Mainland
Common Stock and the Texas City Bank Common Stock, the "Subsidiary Bank Common
Stock"), respectively, all of which are issued and outstanding. All of such
shares are validly issued, fully paid and nonassessable, and none of such shares
was issued in violation of the preemptive rights of any person. Except for the
issued and outstanding shares of Subsidiary Bank Common Stock, none of the
Subsidiary Banks have any securities issued and outstanding. None of the
Subsidiary Banks have any outstanding subscriptions, options, warrants, rights
or other agreements, commitments or understandings obligating such
-7-
<PAGE>
Subsidiary Bank to issued additional shares of its capital stock or any
securities convertible into or having the right to purchase shares of its
capital stock.
Section 3.3 Subsidiaries. TGC owns beneficially and of record 194,264
------------
shares, 30,000 shares and 129,671 shares of Texas City Bank Common Stock, First
Bank Mainland Common Stock, and First Bank Pearland Common Stock, respectively.
Such shares are owned by TGC free and clear of any liens, security interests or
encumbrances. The Subsidiary Banks neither have, nor are obligated to make, any
equity investment, direct or indirect, in any person, corporation or other
entity. Except for its investment in the Subsidiary Bank Common Stock, TGC
neither has, nor is obligated to make, any equity investment, direct or
indirect, in any person, corporation or other entity.
Section 3.4 Financial statements.
--------------------
(a) TGC Financial Statements. TGC has delivered to Gulf Southwest true
------------------------
and complete copies of its financial statements listed on Annex III attached
---------
hereto (all such financial statements being hereinafter referred to as the "TGC
Financial Statements"). The TGC Financial Statements have been examined and
reported upon by independent certified public accountants to the extent and for
the periods indicated in the reports relating thereto.
(b) Accuracy. The TGC Financial Statements and the notes thereto and all
--------
other financial statements delivered or to be delivered to Gulf Southwest
pursuant to this Agreement, except in each case as noted in such financial
statements or the notes thereto,
(i) are and will be consistent with the books and records of TGC and
the Subsidiary Banks,
(ii) present and will present fairly (subject, in the case of
unaudited interim statements, to normal, recurring year-end audit
adjustments) the financial position and results of operations of TGC and
the Subsidiary Banks as of the dates and for the periods indicated, and
(iii) have been and will be prepared in accordance with generally
accepted accounting principles consistently applied throughout the periods
involved.
(c) Material liabilities. Except as and to the extent reflected or fully
--------------------
reserved against in the balance sheets (consolidated and parent only) of TGC as
of September 30, 1994, or the notes thereto, neither TGC nor the Subsidiary
Banks had at such date any material liabilities or obligations (absolute or
contingent).
-8-
<PAGE>
Section 3.5 Absence of certain changes or events. Neither TGC nor any of
------------------------------------
the Subsidiary Banks has since September 30, 1994,
(a) issued, delivered or agreed to issue or deliver any stock, bonds or
other corporate securities, whether authorized or unissued or held in the
treasury, or granted or agreed to grant any subscriptions, options, warrants,
rights or other agreements or commitments obligating such entity to issue
additional shares of such entity's capital stock or any securities convertible
into or having the right to purchase shares of such entity's capital stock;
(b) sold, transferred or otherwise disposed of, or agreed to sell, transfer
or otherwise dispose of, in any single transaction or series of transactions,
any of such entity's material assets or assets of material value; or entered, or
agreed to enter, into any agreement, arrangement or understanding granting any
rights to purchase any of such entity's material assets, properties or rights or
requiring the consent of any party to the transfer and assignment of any such
assets, property or rights;
(c) canceled or compromised, or agreed to cancel or compromise, any
material debts owed to such entity or claims in favor of such entity;
(d) declared, set aside or paid, directly or indirectly, any dividend or
other distribution with respect to shares of such entity's capital stock nor
made any agreement to do so;
(e) changed the compensation of any director, officer or employee of such
entity, paid or accrued any bonus or similar payment or entered into a new or
amended an existing agreement, transaction or relationship with any officer,
director, shareholder or other affiliate of such entity;
(f) changed any accounting policy of such entity;
(g) incurred or become subject to any direct, indirect or contingent
obligation or liability, other than current obligations or liabilities incurred
in the ordinary course of business;
(h) suffered any material adverse change in such entity's affairs, assets,
liabilities, business or condition (financial or otherwise);
(i) sustained any damage, destruction or loss, whether or not covered by
insurance, of any of the physical properties of such entity carried on the
accounts of such entity at more than $50,000; or
-9-
<PAGE>
(j) had any event or condition occur or exist which materially adversely
affected or which may have a materially adverse effect upon the business,
property, condition or prospects of such entity.
Section 3.6 Litigation and proceedings.
--------------------------
(a) Pending Litigation. There are no actions, suits or proceedings pending
------------------
or, to the knowledge of TGC, threatened against or affecting TGC or the
Subsidiary Banks or any of their respective properties or assets, at law or in
equity, before or by any governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or before any arbitrator of any
kind, which involve the possibility of any judgment or liability in excess of
$5,000 or which might result in any materially adverse change in the
consolidated business, operations, properties, or assets or in the condition,
financial or otherwise, of TGC.
(b) Default. Neither TGC nor any of the Subsidiary Banks is in default
-------
with respect to any judgment, order, writ, injunction, decree, award, rule or
regulation of any court, arbitrator or governmental department, commission,
board, bureau, agency or instrumentality.
Section 3.7 Material contract defaults. Neither TGC nor any of the
--------------------------
Subsidiary Banks is in material default under the terms of any contract,
agreement, lease or other commitment, or under their respective charter or
bylaws, and no event has occurred which, with notice or lapse of time, or both,
may be or become an event of default under any such contract, agreement, lease
of other commitment or under such charter or bylaws.
Section 3.8 No conflict with other instruments. The execution, delivery,
----------------------------------
and performance of this Agreement and the Plan of Merger and the consummation of
the transactions contemplated herein and therein does not and will not result in
the breach of any term or provision of or constitute a default under any
material indenture, mortgage, deed of trust, contract, agreement, lease or other
commitment or instrument to which TGC or any of the Subsidiary Banks is a party
or by which they or their respective assets or properties are bound, does not
and will not conflict with any provisions of their respective charter or bylaws,
and does not and will not constitute an event which with the lapse of time or
action by a third party (except for the exercise of a right to dissent) could
result in default under any of the foregoing or result in the creation of any
lien, charge or encumbrance upon any of the assets or properties or TGC or any
of the Subsidiary Banks or upon the TGC Common Stock or the Subsidiary Bank
Common Stock or which could have a materially adverse impact upon the
consolidated business, operations or prospects of TGC.
Section 3.9 Governmental authorizations. TGC and each of the Subsidiary
---------------------------
Banks have all licenses, franchises, permits, charters and other governmental
authorizations and
-10-
<PAGE>
approvals legally required to conduct their respective
businesses as they are presently conducted and TGC and each of the Subsidiary
Banks are in compliance with all applicable federal, state and local laws,
rules, regulations and orders relating to the conduct of their respective
businesses as they are presently conducted. Subject to appropriate state and
federal regulatory approval and shareholder approval, the execution, delivery,
and performance of this Agreement and the Plan of Merger, and the consummation
of the transactions contemplated herein and therein, will not violate any
provision of, or constitute a default under, any applicable law, rule or
regulation, or any order, writ, injunction or decree of any court or other
governmental agency or instrumentality applicable to or binding upon TGC or the
Subsidiary Banks or their respective properties or any note, bond, indenture,
mortgage, deed of trust, lease, franchise, permit, authorization, license,
contract, instrument or other agreement or commitment to which TGC or any of the
Subsidiary Banks are a party or by which they or their respective assets are
bound.
Section 3.10 Approval of agreements. TGC has full power, authority and
----------------------
legal right to enter into this Agreement and the Plan of Merger and, upon
appropriate vote of its shareholders approving this Agreement and the Plan of
Merger and receipt of all required regulatory approvals and the lapse of all
required waiting periods, to consummate the transactions contemplated herein and
therein. Upon execution and delivery of this Agreement and the Plan of Merger,
this Agreement and the Plan of Merger will be valid and binding obligations of
TGC enforceable in accordance with their terms. Other than in connection with
filing Articles of Merger with the Secretary of State of the State of Texas and
the Secretary of State of the State of Nevada, no authorization, consent or
approval or filing with any public body, court or authority is necessary on the
part of TGC or the Subsidiary Banks for the consummation by TGC of the
transactions contemplated by this Agreement and the Plan of Merger.
Section 3.11 Title to properties and assets. Except for assets disposed
------------------------------
of in the ordinary course of business, consistently with past practices, TGC and
the Subsidiary Banks have good and indefeasible title to their respective
properties (real and personal) and assets reflected in the consolidated balance
sheet of TGC dated as of September 30, 1994, or acquired since that date.
Section 3.12 Tax returns and payments. All federal, state and other tax
------------------------
returns and reports of TGC and the Subsidiary Banks required by law to be filed
have been prepared in accordance with applicable laws and regulations and duly
and timely filed. All federal, state and other taxes, assessments, fees or
other governmental charges owed by or due from TGC or the Subsidiary Banks or on
any of their properties, assets or income (other than current ad valorem taxes
which are not overdue) have been paid. TGC and the Subsidiary Banks have
furnished Gulf Southwest copies of all federal income tax returns filed by them
since January 1, 1990. There presently exists no dispute between TGC or any of
the Subsidiary Banks with any taxing authority as to any matter.
-11-
<PAGE>
Neither TGC nor any of the Subsidiary Banks has executed or filed any agreement
extending the period for assessment and collection of any taxes.
Section 3.13 Agreements and commitments. Neither TGC nor any of the
--------------------------
Subsidiary Banks is a party to or bound by any oral or written (i) bonus,
deferred compensation, savings, stock option, retirement, pension, profit-
sharing or severance pay agreement, plan or arrangement; (ii) material guaranty
of any obligation for the borrowing of money or otherwise, excluding
endorsements made for collection and guaranties made in the ordinary course of
business; (iii) management agreement, consulting or other similar contract or
arrangement; (iv) collective bargaining agreement; (v) agreement with any
present or former officer, director or shareholder; (vi) material contract or
commitment for the purchase of materials or supplies or for the performance of
services; (vii) contract, agreement or other commitment not made in the ordinary
course of business; (viii) contract or commitment providing for contingent
liability of TGC or any of the Subsidiary Banks, including letters of credit of
all types, in excess of $100,000; (ix) contract to purchase or sell securities
of any type; (x) contract or commitment for capital expenditures in excess of
$50,000; (xi) contract or option to purchase, sell or lease any real property or
any material personal property, other than in the ordinary course of business
and not having a term longer than six months or providing for total payments of
more than $50,000; or (xii) any other contract, agreement or commitment which is
material to the business, operations, prospects, properties or assets or to the
condition, financial or otherwise, of TGC or the Subsidiary Banks (for purposes
of this Section 3.13(xii) no contract, agreement or commitment which has a term
of six months or less and which provides for total payments of $50,000 or less
will be deemed to be material).
Section 3.14 Investment securities. Except for pledges to secure
---------------------
deposits, none of the investments reflected in TGC's consolidated balance sheet
as of September 30, 1994, under the heading "Investment Securities", and none of
the investments made since said date is subject to any "investment" or other
restriction, whether contractual or statutory, which materially impairs the
ability of the holder thereof freely to dispose of such investment at any time.
Section 3.15 Assets. Excluding assets disposed of in the ordinary course
------
of business, consistently with past practices, to the best knowledge of TGC each
evidence of indebtedness in excess of $50,000 reflected as an asset ("TGC
Asset") in TGC's consolidated balance sheet as of September 30, 1994, or
acquired since that date is the legal, valid and binding obligation of the
obligor named therein, enforceable in accordance with its terms (subject, as to
enforcement of remedies, to applicable bankruptcy, insolvency, reorganization,
moratorium and similar laws from time to time in effect), and no TGC Asset
having an unpaid balance (principal and accrued interest) in excess of $10,000
is subject to any defense, offset or counterclaim known to TGC.
Section 3.16 Loan loss reserves. The reserves for loan losses as shown in
------------------
TGC's consolidated balance sheet at September 30, 1994, are adequate in all
respects to
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provide for all losses, net of recoveries relating to loans previously charged
off, on loans outstanding at such date.
Section 3.17 Brokers and finders. There is no agent's, broker's or
-------------------
finder's fee or commission payable in connection with the Merger by virtue of or
resulting from any action or agreement by TGC, or any of its affiliates or
associates. TGC hereby agrees to indemnify Gulf Southwest against any claim,
demand, liability, loss, cost or expense (including court costs and attorney's
fees) on account of or in connection with any such agent's, broker's or finder's
fee or commission.
Section 3.18 TGC Disclosure Statement. The representations and warranties
------------------------
set forth in this Article III, as qualified by the TGC Disclosure Schedule, are
true, accurate, and complete as of the date of this Agreement and do not omit
any material information required to make the information contained therein, in
light of the circumstances under which it was furnished, not misleading.
Section 3.19 Regulatory agreements/orders. Neither TGC nor any of the
----------------------------
Subsidiary Banks has entered into any agreement with any federal or state
regulatory agency which restricts the manner in which such entity conducts or
proposes to conduct its business. Neither TGC nor any of the Subsidiary Banks is
subject to any order issued by any federal or state regulatory agency.
ARTICLE IV
COVENANTS OF TGC
----------------
TGC hereby covenants and agrees with Gulf Southwest as follows:
Section 4.1 Conduct of business. Prior to the Closing Date and except as
-------------------
contemplated herein, TGC will conduct its business and will cause the Subsidiary
Banks to conduct their respective businesses only in the ordinary course
consistent with their present business practices and policies. TGC also will:
(a) use its best efforts to preserve intact its and the Subsidiary Banks'
present business organizations,
(b) use its best efforts to keep available the services of its and the
Subsidiary Banks' present officers and employees (to the extent consistent with
efficient and prudent management),
(c) use its best efforts to preserve its and the Subsidiary Banks' present
business relationships with depositors, borrowers and others having business
dealings with them,
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(d) use its best efforts to maintain and keep its and the Subsidiary Banks'
material properties in good repair and condition except for deterioration due to
ordinary wear and tear and damage due to casualty,
(e) use its best efforts to maintain in full force and effect insurance
comparable in amount and in scope of coverage to that now maintained by it and
the Subsidiary Banks,
(f) use its best efforts to pay and perform and cause the Subsidiary Banks
to pay and perform, when due, all of their material obligations under contracts,
leases and documents relating to or affecting its and the Subsidiary Banks'
assets, properties and businesses,
(g) use its best efforts to comply with and perform and to cause the
Subsidiary Banks to comply with and perform all material obligations and duties
imposed upon it or the Subsidiary Banks, as applicable, by federal, state and
local laws, and all rules, regulations and orders imposed by federal, state or
local governmental authorities, except as the same may be contested in good
faith by appropriate proceedings,
(h) not amend or permit the Subsidiary Banks to amend their respective
charter or bylaws, as applicable,
(i) not and will not permit the Subsidiary Banks to take any action that
would cause the failure of any of the conditions or covenants set forth in this
Article IV, Article VI or Article VIII,
(j) not and will not permit the Subsidiary Banks to reduce, except as
contractually obligated, the principal amount of any indebtedness existing as of
September 30, 1994, and
(k) not and will not permit the Subsidiary Banks to incur any indebtedness,
in addition to that existing on September 30, 1994, except as incurred in the
ordinary course of business.
Section 4.2 Access to properties and records. To the extent legally
--------------------------------
permitted, TGC will afford to the officers and authorized representatives of
Gulf Southwest full access at all reasonable times to the properties, books and
records (including tax returns filed and those in preparation) of TGC and the
Subsidiary Banks in order that Gulf Southwest may have full opportunity to make
such investigation as it may desire of the affairs and business of TGC and the
Subsidiary Banks, and will furnish Gulf Southwest and its representatives with
such additional financial and operating data and other information relating to
the business and properties of TGC and the Subsidiary Banks as Gulf Southwest
from time to time may reasonably request. As soon as practicable after they
become available, TGC will deliver to Gulf Southwest all audited or unaudited
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financial statements prepared by and for TGC or the Subsidiary Banks prior to
the Closing Date. All information obtained by Gulf Southwest pursuant hereto
will be deemed confidential information and will not be disclosed to any person
or entity for any reason or purpose whatsoever except as necessary to comply
with the legal requirements referenced in Section 2.2. Any and all documents
(or copies thereof) of TGC or the Subsidiary Banks furnished to Gulf Southwest
pursuant hereto will be returned in the event that this Agreement and the Plan
of Merger are not consummated.
Section 4.3 Information.
-----------
(a) Furnishings of certain information. TGC will furnish to
----------------------------------
Gulf Southwest all information concerning TGC and the Subsidiary Banks
permitted by law, including information required for inclusion in:
(i) any applications filed or to be filed by Gulf Southwest with the
Board of Governors of the Federal Reserve System for authority to
consummate the Merger;
(ii) any registration statement to be filed with the SEC and/or any
state securities regulators in connection with the Merger; and
(iii) all other applications or statements made by Gulf Southwest
to any federal or state governmental body in connection with the Merger.
The use of such information and the manner of presentation will be subject to
the approval of TGC, which approval will not be unreasonably withheld.
(b) Accuracy of information. TGC represents and warrants that none of
-----------------------
the information pertaining to TGC and/or the Subsidiary Banks furnished for use
in such statements and applications contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
required to be stated therein in order to make such information, in light of the
circumstances under which it was furnished, not misleading.
Section 4.4 Shareholders' meeting. On or before March 31, 1995, TGC will
---------------------
cause a special meeting of its shareholders to be duly called and held to
authorize, approve and adopt this Agreement and the transactions contemplated
herein, including, without limitation, the Plan of Merger and the transactions
contemplated therein.
Section 4.5 Bank reports and other information. TGC will keep Gulf
----------------------------------
Southwest fully advised with respect to material loans, investments and
transactions made or proposed to be made by it and/or the Subsidiary Banks and
will not take or permit the Subsidiary Banks to take any action with respect to
such loans, investments and transactions without the prior written approval of
Gulf Southwest. Concurrently with the
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execution and delivery of this Agreement, to the extent legally permitted, TGC
has made available to Gulf Southwest the most recent report of examination of
the Subsidiary Banks by federal and/or state banking authorities, and from the
date hereof through the Effective Time, TGC will make available to Gulf
Southwest as soon as practicable after such documents become available to TGC,
to the extent legally permitted, all reports of examinations of the Subsidiary
Banks made by federal and/or state banking authorities.
Section 4.6 New loans. TGC will advise Gulf Southwest on a weekly basis
---------
of the loans made by the Subsidiary Banks in excess of $50,000 from the date
hereof through the Effective Time. In addition, TGC will cause the Subsidiary
Banks to obtain the prior approval of Gulf Southwest before making any loans in
excess of $250,000. Approval by Gulf Southwest will be deemed given if Gulf
southwest does not object to any proposed loan in writing within three (3)
business days of receipt of notice describing such loans in reasonable detail.
Section 4.7 Dividends. After the execution of this Agreement, TGC will
---------
neither declare nor pay any dividends with respect to the TGC Common Stock or
the TGC Preferred Stock in excess of the dividends paid with respect to such TGC
Common Stock and TGC Preferred Stock during the comparable periods of 1993. TGC
will not permit the Subsidiary Banks to declare or pay any dividends in excess
of the amounts required by TGC to service its interest on debt obligations, to
pay the dividends permitted to be paid with respect to TGC Common Stock and TGC
Preferred Stock or to pay TGC's ordinary and necessary expenses and expenses
incurred in connection with this Agreement and the transactions contemplated
herein.
Section 4.8 Execution and delivery of Plan of Merger. Concurrently with
----------------------------------------
the execution and delivery of this Agreement, TGC will execute, acknowledge and
deliver to Gulf Southwest the Plan of Merger.
Section 4.9 Indemnification. TGC will indemnify Gulf Southwest, its
---------------
officers, directors, shareholders, and controlling persons, and hold them
harmless from and against any and all losses, claims, damages, expenses or
liabilities to which they or any of them may become subject under applicable
laws, including, without limitation, the Securities Act, the Securities Exchange
Act of 1934 (the "Exchange Act"), the Securities Act of Texas ("Texas Securities
Act"), and the Bank Holding Company Act of 1956 ("Bank Holding Company Act"),
and the rules and regulations promulgated under any of such statutes, and will
reimburse Gulf Southwest, its officers, directors, shareholders and controlling
persons for any legal or other expenses reasonably incurred by any of them in
connection with investigating or defending any actions whether or not resulting
in liability, insofar as such losses, claims, damages, expenses, liabilities or
actions arise out of or are based upon any untrue or alleged untrue statement of
a material fact or arise out of or are based upon or are alleged to arise out of
or to be based upon the omission to state a material fact required to be stated
in order to make the statements made, in light
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<PAGE>
of the circumstances under which they were made, not misleading, but only
insofar as any such statement or omission was made in reliance upon and in
conformity with information furnished to Gulf Southwest by TGC.
Section 4.10 Redemption of TGC Preferred Stock. Notwithstanding the
---------------------------------
foregoing provisions of this Agreement, on or before December 31, 1994, TGC will
redeem all of the issued and outstanding shares of TGC Preferred Stock at a
price of $16.00 per share plus all accumulated but unpaid dividends thereon, in
accordance with the provisions of its Articles of Incorporation and will borrow
up to an aggregate of $3.4 million to extend and renew its existing indebtedness
to Texas Commerce Bank and to fund such redemption.
ARTICLE V
COVENANTS OF GULF SOUTHWEST
---------------------------
Gulf Southwest hereby covenants and agrees with TGC as follows:
Section 5.1 Conduct of business. Prior to the Closing Date, Gulf
-------------------
Southwest will and will cause its subsidiaries to conduct their respective
businesses only in the ordinary course consistent with their present business
practices and policies. Gulf Southwest also will:
(a) use its best efforts to preserve intact its and its subsidiaries'
present business organizations,
(b) use its best efforts to keep available the services of its and its
subsidiaries' present officers and employees (to the extent consistent with
efficient and prudent management),
(c) use its best efforts to preserve its and its subsidiaries' present
business relationships with depositors, borrowers and others having business
dealings with them,
(d) use its best efforts to maintain and keep its and its subsidiaries'
material properties in good repair and condition except for deterioration due to
ordinary wear and tear and damage due to casualty,
(e) use its best efforts to maintain in full force and effect insurance
comparable in amount and in scope of coverage to that now maintained by it and
its subsidiaries,
(f) use its best efforts to pay and perform, when due, all of its material
obligations under contracts, leases and documents relating to or affecting its
and its subsidiaries' assets, properties and businesses,
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(g) use its best efforts to cause its subsidiaries to pay and perform, when
due, all of their material obligations under contracts, leases and documents
relating to or affecting their assets, properties and businesses,
(h) use its best efforts to comply with and perform and cause its
subsidiaries to comply with and perform all material obligations and duties
imposed upon it and its subsidiaries, as applicable, by federal, state and local
laws, and all rules, regulations and orders imposed by federal, state or local
governmental authorities, except as the same may be contested in good faith by
appropriate proceedings,
(i) not amend or permit its subsidiaries to amend their respective charter
or bylaws, as applicable,
(j) not take or permit its subsidiaries to take any action that would cause
the failure of any of the conditions or covenants set forth in this Article V,
Article VI or Article VII,
(k) not reduce or permit its subsidiaries to reduce, except as
contractually obligated, the principal amount of any indebtedness existing as of
September 30, 1994, and
(l) not incur or permit its subsidiaries to incur any indebtedness, in
addition to that existing on September 30, 1994, except as incurred in the
ordinary course of business.
Section 5.2 Access to properties and records. To the extent legally
--------------------------------
permitted, Gulf Southwest will afford to the officers and authorized
representatives of TGC full access at all reasonable time to the properties,
books and records (including tax returns filed and those in preparation) of Gulf
Southwest and its subsidiaries in order that TGC may have full opportunity to
make such investigation as it may desire of the affairs and business of Gulf
Southwest and its subsidiaries, and will furnish TGC and its representatives
with such additional financial and operating data and other information relating
to the business and properties of Gulf Southwest and its subsidiaries as TGC
from time to time may reasonably request. As soon as practicable after they
become available, Gulf Southwest will deliver to TGC all audited or unaudited
financial statements prepared by and for Gulf Southwest or its subsidiaries
prior to the Closing Date. All information obtained by TGC pursuant hereto will
be deemed confidential information and will not be disclosed to any person or
entity for any reason or purpose whatsoever. Any and all documents (or copies
thereof) of Gulf Southwest or its subsidiaries furnished TGC pursuant hereto
will be returned in the event that this Agreement and the Plan of Merger are not
consummated.
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<PAGE>
Section 5.3 Bank reports and other information. Gulf Southwest will keep
----------------------------------
TGC fully advised with respect to material loans, investments and transactions
made or proposed to be made by its subsidiaries. Concurrently with the
execution and delivery of this Agreement, to the extent legally permitted, Gulf
Southwest has made available to TGC the most recent report of examination of its
subsidiaries by federal and state banking authorities, and from the date hereof
through the Effective Time, Gulf Southwest will make available to TGC as soon as
practicable after such documents become available to Gulf Southwest, to the
extent legally permitted, all reports of examinations of its subsidiaries made
by Federal and state banking authorities.
Section 5.4 Dividends. After the execution of this Agreement, Gulf
---------
Southwest will neither declare nor pay any dividends with respect to the Gulf
Southwest Common Stock in excess of the dividends paid with respect to such
stock during the comparable periods of 1993. Gulf Southwest will not permit its
subsidiaries to declare or pay any dividends in excess of the amounts required
by Gulf Southwest to pay the dividends permitted to be paid with respect to Gulf
Southwest Common Stock or to pay Gulf Southwest's ordinary and necessary
expenses and expenses incurred in connection with this Agreement and the
transactions contemplated herein.
Section 5.5 Execution and delivery of Plan of Merger. Concurrently with
----------------------------------------
the execution and delivery of this Agreement, Gulf Southwest will cause Merger
Sub to execute, acknowledge and deliver to TGC the Plan of Merger.
Section 5.6 Indemnification. Gulf Southwest will indemnify TGC, its
---------------
officers, directors, shareholders, and controlling persons, and hold them
harmless from and against any and all losses, claims, damages, expenses or
liabilities to which they or any of them may become subject under applicable
laws, including, without limitation, the Securities Act, the Exchange Act, the
Texas Securities Act, and the Bank Holding Company Act, and the rules and
regulations promulgated under any of such statutes, and will reimburse TGC, its
officers, directors, shareholders and controlling persons for any legal or other
expenses reasonably incurred by any of them in connection with investigating or
defending any actions whether or not resulting in liability, insofar as such
losses, claims, damages, expenses, liabilities or actions arise out of or are
based upon any untrue or alleged untrue statement of a material fact or arise
out of or are based upon or are alleged to arise out of or to be based upon the
omission to state a material fact required to be stated in order to make the
statements made, in light of the circumstances under which they were made, not
misleading, but only insofar as any such statement or omission was made in
reliance upon and in conformity with information furnished to TGC by Gulf
Southwest.
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ARTICLE VI
CONDITIONS TO OBLIGATIONS OF
GULF SOUTHWEST AND TGC
----------------------
The obligations of Gulf Southwest and TGC to cause the Merger to be
consummated will be subject to the satisfaction on or before the Closing Date of
all of the following conditions, except as such parties may waive such
conditions in writing:
Section 6.1 Approval by shareholders. At a meeting of the shareholders of
------------------------
TGC duly called and held for such purpose, this Agreement and the Plan of Merger
will have been duly approved by the requisite vote of such shareholders.
Section 6.2 Other approvals and consents. All orders, consents and
----------------------------
approvals, in form and substance reasonably satisfactory to the parties hereto
and their respective counsel, necessary for the lawful consummation of the
Merger will have been entered by each regulatory authority having jurisdiction,
including, without limitation, the Board of Governors of the Federal Reserve
System, and all applicable statutory waiting periods will have expired.
Section 6.3 Litigation. At the Closing Date, there will not be pending or
----------
threatened litigation in any court or any proceeding by any governmental
commission, board or agency, seeking to restrain or prohibit consummation of the
Merger or in which it is sought to obtain divestiture, rescission or damages in
connection with the Merger or the consummation of the Merger, and no
investigation by any governmental agency will be pending or threatened which
might result in any such suit, action or other proceeding.
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF TGC
--------------------------------
The obligation of TGC to cause the Merger to the consummated will be
subject to the satisfaction on or before the Closing Date of all of the
following conditions, except as TGC may waive such conditions in writing:
Section 7.1 Representations, warranties and covenants. All
-----------------------------------------
representations and warranties of Gulf Southwest contained in this Agreement and
the Plan of Merger will be true in all material respects on and as of the
Closing Date as if such representations and warranties were made on and as of
the Closing Date (with appropriate modification of tense in the case of
representations and warranties relating to states of facts as of specified
dates), and Gulf Southwest will have performed all agreements and covenants
required by this Agreement and the Plan of Merger to be performed by it on or
prior to the Closing Date.
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Section 7.2 Officer's certificate. Gulf Southwest will furnish to TGC a
---------------------
certificate, dated the Closing Date, signed by the President or any Vice
President of Gulf Southwest to the effect that to the best of the knowledge and
belief of such officer, the conditions set forth in Articles VI and VII, insofar
as they relate to Gulf Southwest, have been satisfied.
Section 7.3 Adverse changes. Except as contemplated in this Agreement and
---------------
the Plan of Merger, there will have been no changes after September 30, 1994, in
the consolidated results of operations (as compared with the prior fiscal year),
assets, liabilities, financial condition or affairs of Gulf Southwest which, in
the aggregate, are materially adverse, nor will there have occurred any other
event or condition of any character which materially and adversely affected or
which could materially and adversely affect the consolidated results of
operations, financial condition, business, operations, prospects or properties
of Gulf Southwest.
Section 7.4 Classified assets and other real estate. The aggregate amount
---------------------------------------
of assets carried on the balance sheet of Merchants Bank, Houston, Texas
classified as "substandard" and "doubtful," by federal or state banking
authorities plus the carrying value on the books of Merchants Bank of all real
estate and other assets acquired by Merchants Bank through foreclosure of loans
will not exceed two percent of the total assets of Merchants Bank as of the
Closing Date.
Section 7.5 Loan and asset examination. An examination of the loans and
--------------------------
assets of Merchants Bank to be conducted not later than the date twenty (20)
days preceding the Closing Date will have shown to the reasonable satisfaction
of TGC that no material loans of Merchants Bank are carried on its books at
amounts in excess of their respective fair market values and that, except for
declines in value attributable to general market conditions, no material assets
of Merchants Bank are carried on its books at amounts in excess of their
respective fair market values.
Section 7.6 Dissenter's Rights. The holders of no more than 10% of the
------------------
TGC Common Stock shall have elected to dissent from the approval of the Merger
and/or to seek to exercise their rights of appraisal under the TBCA.
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF GULF SOUTHWEST
-------------------------------------------
The obligation of Gulf Southwest to cause the Merger to be consummated will
be subject to the satisfaction on or before the Closing Date of all of the
following conditions, except as Gulf Southwest may waive all or any part of such
conditions in writing:
Section 8.1 Representations, warranties and covenants. Except as
-----------------------------------------
contemplated herein, all representations and warranties of TGC contained in this
Agreement and the Plan of Merger will be true in all material respects on and as
of the Closing Date as if
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such representations and warranties were made on and as of the Closing Date
(with appropriate modification of tense in the case of representations and
warranties relating to facts as of specified dates), and TGC will have complied
in all material respects with all agreements and covenants required by this
Agreement and the Plan of Merger to be performed by it on or prior to the
Closing Date.
Section 8.2 Adverse changes. Except as contemplated in this Agreement and
---------------
the Plan of Merger, there will have been no changes after September 30, 1994, in
the consolidated results of operations (as compared with the prior fiscal year),
assets, liabilities, financial condition or affairs of TGC which, in the
aggregate, are materially adverse, nor will there have occurred any other event
or condition of any character which materially and adversely affected or which
could materially and adversely affect the consolidated results of operations,
financial condition, business, operations, prospects or properties of TGC.
Section 8.3 Officer's certificate. TGC will have furnished Gulf Southwest
---------------------
a certificate, dated the Closing Date, signed by the President or any Vice
President of TGC of the effect that, to the best of the knowledge and belief of
such officer, the conditions set forth in Articles VI and VIII, insofar as they
relate to TGC, have been satisfied.
Section 8.4 Classified assets and other real estate. The aggregate amount
---------------------------------------
of assets carried on the balance sheet of each Subsidiary Bank classified as
"substandard" and "doubtful," by federal or state banking authorities plus the
carrying value on the books of such Subsidiary Bank of all real estate and other
assets acquired by such Subsidiary Bank through foreclosure of loans will not
exceed two (2) percent of the total assets of such Subsidiary Bank as of the
Closing Date.
Section 8.5 Loan and asset examination. An examination of the loans and
--------------------------
assets of the Subsidiary Banks to be conducted not later than the date twenty
(20) days preceding the Closing Date will have shown to the reasonable
satisfaction of Gulf Southwest that no material loans of the Subsidiary Banks
are carried on their books at amounts in excess of their respective fair market
values and that, except for declines in value attributable to general market
conditions, no material assets of the Subsidiary Banks are carried on their
books at amounts in excess of their respective fair market values.
ARTICLE IX
MISCELLANEOUS
-------------
Section 9.1 Expenses. Each of the parties hereto will bear their own
--------
expenses including, without limitation, fees and expenses of legal counsel,
whether or not the transactions contemplated herein are consummated.
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Section 9.2 Closing.
-------
(a) Place. The closing ("Closing") of this Agreement and the transactions
-----
contemplated hereby and by the Plan of Merger will be held at 10:00 a.m.,
Houston, Texas time, on the Closing Date (as hereinafter defined) at the offices
of Gulf Southwest or at such other time and place as the parties hereto may
mutually agree upon.
(b) Date. The closing date (the "Closing Date") will be the earlier of the
----
business day next following the day on which:
(i) the waiting period prescribed by 12 U.S.C. (S) 1849 expires;
(ii) approval of the transactions contemplated in this Agreement and
the Plan of Merger is obtained from shareholders of TGC; or
(iii) the satisfaction or waiver of all conditions set forth in
Articles VI, VII and VIII occurs.
(c) Other documents. Subject to the terms and upon satisfaction on or
---------------
before the Closing Date of all requirements of law and conditions specified in
this Agreement and in the Plan of Merger, Merger Sub and TGC will execute,
acknowledge and deliver such other documents and instruments and take such
further action as may be necessary or appropriate to consummate the Merger,
including, without limitation, preparing and filing Articles of Merger with the
Secretary of State of the State of Texas and the Secretary of State of the State
of Nevada.
Section 9.3 Amendment. This Agreement may be amended at any time by
---------
written agreement of the parties hereto on or prior to the Closing Date,
provided that after the meeting of shareholders of TGC at which this Agreement
and the Plan of Merger are considered and approved, no amendment hereto will be
made which would alter the exchange ratio and cash amount set forth in Article I
hereof. Any of the terms or conditions of this Agreement and the Plan of Merger
may be waived in writing at any time prior to the Closing Date by the party
which is entitled to the benefits thereof.
Section 9.4 Termination. This Agreement will terminate:
-----------
(a) by the mutual consent of TGC and Gulf Southwest;
(b) by notice sent by Gulf Southwest to TGC, if any of the representations
and warranties of TGC contained in this Agreement are false in any material
respect as of the Closing Date, or TGC, as of the Closing Date, has failed, in
any material respect, to comply with any of its agreements contained herein to
be performed at or prior to the Closing Date, or any conditions to the
obligations of Gulf Southwest contained in this
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Agreement have not been satisfied or waived in writing by Gulf Southwest at the
Closing Date;
(c) by notice sent by TGC to Gulf Southwest, if any of the representations
and warranties of Gulf Southwest contained in this Agreement are false in any
material respect as of the Closing Date, or Gulf Southwest, as of the Closing
Date, has failed, in any material respect, to comply with any of its agreements
contained herein to be performed at or prior to the Closing Date, or any
conditions to the obligations of TGC contained in this Agreement have not been
satisfied or waived in writing by TGC as the Closing Date; or
(d) at any time on or after June 30, 1995 by notice from Gulf Southwest or
TGC, if at the time such notice is given the party giving such notice is not in
default under this Agreement and has complied with all its obligations
hereunder.
Section 9.5 Notices. All notices, requests, demands and other
-------
communications under this Agreement will be in writing and will be deemed to
have been duly given at the time either personally delivered or sent by
certified mail, postage prepaid, as follows:
If to TGC: 4200 Westheimer, Suite 210
Houston, Texas 77027
Attention: J. W. Lander, Jr.
If to Gulf Southwest: 4200 Westheimer, Suite 210
Houston, Texas 77027
Attention: J. W. Lander, Jr.
Section 9.6 Miscellaneous. This Agreement may be executed in multiple
-------------
counterparts, each of which will be deemed an original and all of which together
will constitute one agreement. This Agreement and the documents and instruments
referred to herein constitute the entire agreement between the parties hereto
and supersede all other understandings with respect to the subject matter
hereof. This Agreement will be governed by and construed in accordance with the
laws of the State of Texas.
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Note: Under certain circumstances this Agreement imposes indemnification
obligations upon the parties hereto.
IN WITNESS WHEREOF, this Agreement has been signed effective as of the date
first above written.
GULF SOUTHWEST BANCORP, INC.
By: __________________________________________
Name: __________________________________
Title: _________________________________
GULF SOUTHWEST NEVADA BANCORP, INC.
By: __________________________________________
Name: __________________________________
Title: _________________________________
TEXAS GULF COAST BANCORP, INC.
By: __________________________________________
Name: __________________________________
Title: _________________________________
-25-
<PAGE>
EXHIBIT B
---------
PROVISIONS OF THE TEXAS BUSINESS CORPORATION ACT
RELATING TO DISSENTING SHAREHOLDERS
EXHIBIT B
- ---------
<PAGE>
TEXAS BUSINESS CORPORATION ACT
Art 5.11. Rights of Dissenting Shareholders in the Event of Certain Corporate
Actions
A. Any shareholder of a domestic corporation shall have the right to
dissent from any of the following corporate actions:
(1) Any plan of merger to which the corporation is a party if shareholder
approval is required by Article 5.03 or 5.16 of this Act and the shareholder
holds shares of a class or series that was entitled to vote thereon as a class
or otherwise;
(2) Any sale, lease, exchange or other disposition (not including any
pledge, mortgage, deed of trust or trust indenture unless otherwise provided in
the articles of incorporation) of all, or substantially all, the property and
assets, with or without good will, of a corporation requiring the special
authorization of the shareholders as provided by this Act;
(3) Any plan of exchange pursuant to Article 5.02 of this Act in which the
shares of the corporation of the class or series held by the shareholder are to
be acquired.
B. Notwithstanding the provisions of Section A of this Article, a
shareholder shall not have the right to dissent from any plan of merger in which
there is a single surviving or new domestic or foreign corporation, or from any
plan of exchange, if (1) the shares held by the shareholder are part of a class
shares of which are listed on a national securities exchange, or are held of
record by not less than 2,000 holders, on the record date fixed to determine the
shareholders entitled to vote on the plan of merger or the plan of exchange, and
(2) the shareholder is not required by the terms of the plan of merger or the
plan of exchange to accept for his shares any consideration other than (a)
shares of a corporation that, immediately after the effective time of the merger
or exchange, will be part of a class or series of shares of which are (i)
listed, or authorized for listing upon official notice of issuance, on a
national securities exchange, or (ii) held of record by not less than 2,000
holders, and (b) cash in lieu of fractional shares otherwise entitled to be
received.
Art. 5.12. Procedure for Dissent by Shareholders as to Said Corporate Actions
A. Any shareholder of any domestic corporation who has the right to
dissent from any of the corporate actions referred to in Article 5.11 of this
Act may exercise that right to dissent only by complying with the following
procedures:
(1)(a) With respect to proposed corporate action that is submitted to a
vote of shareholders at a meeting, the shareholder shall file with the
corporation, prior to the meeting, a written objection to the action, setting
out that the shareholder's right to dissent will be exercised if the action is
effective and giving the shareholder's address, to which notice thereof shall be
delivered or mailed in that event. If the action is effected and the
shareholder shall not have voted in favor of the action, the corporation, in the
case of action other than a merger, or the surviving or new corporation (foreign
or domestic) or other entity that is liable to discharge the shareholder's right
of dissent, in the case of a merger, shall, within ten (10) days after the
B-1
<PAGE>
action is effected, deliver or mail to the shareholder written notice that the
action has been effected, and the shareholder may, within ten (10) days from the
delivery or mailing of the notice, make written demand on the existing,
surviving, or new corporation (foreign or domestic) or other entity, as the case
may be, for payment of the fair value of the shareholder's shares. The fair
value of the shares shall be the value thereof as of the day immediately
preceding the meeting, excluding any appreciation or depreciation in
anticipation of the proposed action. The demand shall state the number and
class of the shares owned by the shareholder and the fair value of the shares as
estimated by the shareholder. Any shareholder failing to make demand within the
ten (10) day period shall be bound by the action.
(b) With respect to proposed corporate action that is approved pursuant to
Section A of Article 9.10 of this Act, the corporation, in the case of action
other than a merger, and the surviving or new corporation (foreign or domestic)
or other entity that is liable to discharge the shareholder's right of dissent,
in the case of a merger, shall, within ten (10) days after the date the action
is effected, mail to each shareholder of record as of the effective date of the
action notice of the fact and date of the action and that the shareholder may
exercise the shareholder's right to dissent from the action. The notice shall
be accompanied by a copy of this Article and any articles or documents filed by
the corporation with the Secretary of State to effect the action. If the
shareholder shall not have consented to the taking of the action, the
shareholder may, within twenty (20) days after the mailing of the notice, make
written demand on the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, for payment of the fair value of
the shareholder's shares. The fair value of the shares shall be the value
thereof as of the date the written consent authorizing the action was delivered
to the corporation pursuant to Section A of Article 9.10 of this Act, excluding
any appreciation or depreciation in anticipation of the action. The demand
shall state the number and class of shares owned by the dissenting shareholder
and the fair value of the shares as estimated by the shareholder. Any
shareholder failing to make demand within the twenty (20) day period shall be
bound by the action.
(2) Within twenty (20) days after receipt by the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, of a
demand for payment made by a dissenting shareholder in accordance with
Subsection (1) of this Section, the corporation (foreign or domestic) or other
entity shall deliver or mail to the shareholder a written notice that shall
either set out that the corporation (foreign or domestic) or other entity
accepts the amount claimed in the demand and agrees to pay that amount within
ninety (90) days after the date on which the action was effected, and, in the
case of shares represented by certificates, upon the surrender of the
certificates duly endorsed, or shall contain an estimate by the corporation
(foreign or domestic) or other entity of the fair value of the shares, together
with an offer to pay the amount of that estimate within ninety (90) days after
the date on which the action was effected, upon receipt of notice within sixty
(60) days after that date from the shareholder that the shareholder agrees to
accept that amount and, in the case of shares represented by certificates, upon
the surrender of the certificates duly endorsed.
(3) If, within sixty (60) days after the date on which the corporate action
was effected, the value of the shares is agreed upon between the shareholder and
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, payment for the shares
B-2
<PAGE>
shall be made within ninety (90) days after the date on which the action was
effected and, in the case of shares represented by certificates, upon surrender
of the certificates duly endorsed. Upon payment of the agreed value, the
shareholder shall cease to have any interest in the shares or in the
corporation.
B. If, within the period of sixty (60) days after the date on which the
corporate action was effected, the shareholder and the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, do
not so agree, then the shareholder or the corporation (foreign or domestic) or
other entity may, within sixty (60) days after the expiration of the sixty (60)
day period, file a petition in any court of competent jurisdiction in the county
in which the principal office of the domestic corporation is located, asking for
a finding and determination of the fair value of the shareholder's shares. Upon
the filing of any such petition by the shareholder, service of a copy thereof
shall be made upon the corporation (foreign or domestic) or other entity, which
shall, within ten (10) days after service, file in the office of the clerk of
the court in which the petition was filed a list containing the names and
addresses of all shareholders of the domestic corporation who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the corporation (foreign or domestic) or other
entity. If the petition shall be filed by the corporation (foreign or domestic)
or other entity, the petition shall be accompanied by such a list. The clerk of
the court shall give notice of the time and place fixed for the hearing of the
petition by registered mail to the corporation (foreign or domestic) or other
entity and to the shareholders named on the list at the addresses therein
stated. The forms of the notices by mail shall be approved by the court. All
shareholders thus notified and the corporation (foreign or domestic) or other
entity shall thereafter be bound by the final judgment of the court.
C. After the hearing of the petition, the court shall determine the
shareholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment for their shares, and shall
appoint one or more qualified appraisers to determine that value. The
appraisers shall have power to examine any of the books and records of the
corporation the shares of which they are charged with the duty of valuing, and
they shall make a determination of the fair value of the shares upon such
investigation as to them may seem proper. The appraisers shall also afford a
reasonable opportunity to the parties interested to submit to them pertinent
evidence as to the value of the shares. The appraisers shall also have such
power and authority as may be conferred on Masters in Chancery by the Rules of
Civil Procedure or by the order of their appointment.
D. The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to dissent was
effected to the date of such judgment, to the shareholders entitled to payment.
The judgment shall be payable to the
B-3
<PAGE>
holders of uncertificated shares immediately but to the holders of shares
represented by certificates only upon, and simultaneously with, the surrender to
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, of duly endorsed certificates for those shares.
Upon payment of the judgment, the dissenting shareholders shall cease to have
any interest in those shares or in the corporation. The court shall allow the
appraisers a reasonable fee as court costs, and all court costs shall be
allotted between the parties in the manner that the court determines to be fair
and equitable.
E. Shares acquired by the existing, surviving, or new corporation
(foreign or domestic) or other entity, as the case may be, pursuant to the
payment of the agreed value of the shares or pursuant to payment of the judgment
entered for the value of the shares, as in this Article provided, shall, in the
case of a merger, be treated as provided in the plan of merger and, in all other
cases, may be held and disposed of by the corporation as in the case of other
treasury shares.
F. The provisions of this Article shall not apply to a merger if, on the
date of the filing of the articles of merger, the surviving corporation is the
owner of all the outstanding shares of the other corporations, domestic or
foreign, that are parties to the merger.
G. In the absence of fraud in the transaction, the remedy provided by
this Article to a shareholder objecting to any corporate action referred to in
Article 5.11 of this Act is the exclusive remedy for the recovery of the value
of his shares or money damages to the shareholder with respect to the action.
If the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this Article, any
shareholder who fails to comply with the requirements of this Article shall not
be entitled to bring suit for the recovery of the value of his shares or money
damages to the shareholder with respect to the action.
Art. 5.13. Provisions Affecting Remedies of Dissenting Shareholders
A. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act shall not thereafter be entitled to
vote or exercise any other rights of a shareholder except the right to receive
payment for his shares pursuant to the provisions of those articles and the
right to maintain an appropriate action to obtain relief on the ground that the
corporate action would be or was fraudulent, and the respective shares for which
payment has been demanded shall not thereafter be considered outstanding for the
purposes of any subsequent vote of shareholders.
B. Upon receiving a demand for payment from any dissenting shareholder,
the corporation shall make an appropriate notation thereof in its shareholder
records. Within twenty (20) days after demanding payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act, each holder of
certificates representing shares so demanding payment shall submit such
certificates to the corporation for notation thereon that such demand has been
made. The failure of holders of certificated shares to do so shall, at the
option of the corporation, terminate such shareholder's rights under Articles
5.12 and 5.16 of this Act unless a court of competent jurisdiction for good and
sufficient cause shown shall otherwise direct. If uncertificated shares
B-4
<PAGE>
for which payment has been demanded or shares represented by a certificate on
which notation has been so made shall be transferred, any new certificate issued
therefor shall bear similar notation together with the name of the original
dissenting holder of such shares and a transferee of such shares shall acquire
by such transfer no rights in the corporation other than those which the
original dissenting shareholder had after making demand for payment of the fair
value thereof.
C. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act may withdraw such demand at any
time before payment for his shares or before any petition has been filed
pursuant to Article 5.12 or 5.16 of this Act asking for a finding and
determination of the fair value of such shares, but no such demand may be
withdrawn after such payment has been made or, unless the corporation shall
consent thereto, after any such petition has been filed. If, however, such
demand shall be withdrawn as hereinbefore provided, or if pursuant to Section B
of this Article the corporation shall terminate the shareholder's rights under
Article 5.12 or 5.16 of this Act, as the case may be, or if no petition asking
for a finding and determination of fair value of such shares by a court shall
have been filed within the time provided in Article 5.12 or 5.16 of this Act, as
the case may be, or if after the hearing of a petition filed pursuant to Article
5.12 or 5.16, the court shall determine that such shareholder is not entitled to
the relief provided by those articles, then, in any such case, such shareholder
and all persons claiming under him shall be conclusively presumed to have
approved and ratified the corporate action from which he dissented and shall be
bound thereby, the right of such shareholder to be paid the fair value of his
shares shall cease, and his status as a shareholder shall be restored without
prejudice to any corporate proceedings which may have been taken during the
interim, and such shareholder shall be entitled to receive any dividends or
other distributions made to shareholders in the interim.
B-5
<PAGE>
EXHIBIT C
---------
FAIRNESS OPINION OF
ALEX SHESHUNOFF & CO.
INVESTMENT BANKING
EXHIBIT C
- ---------
<PAGE>
November 7, 1994
Board of Directors
Gulf Southwest Bancorp, Inc. and Texas Gulf Coast Bancorp, Inc.
4200 Westheimer, Suite 210
Houston, Texas 77027
Re: Fair market evaluation of 100% of the outstanding common stock of Gulf
Southwest Bancorp, Inc., Houston, Texas and Texas Gulf Coast Bancorp, Inc.,
Houston, Texas and recommendation of a fair and equitable exchange ratio of
common stock to be issued in the proposed merger of the organizations.
Ladies and Gentlemen:
As part of its banking analysis business, Alex Sheshunoff & Co. Investment
Banking is continually involved in rendering valuation opinions of banks, bank
holding companies and thrifts nationwide. These valuation opinions may be
required for a multitude of reasons, including tax and estate planning, employee
stock ownership plans, private placements, buy/sell agreements, collateral
valuation purposes, exchange ratio determinations, dissenters' rights
proceedings, reverse stock splits, public offerings and mergers and
acquisitions. Participation in the field of bank and thrift securities
appraisal has enabled Alex Sheshunoff & Co. Investment Banking to become
knowledgeable with regard to valuation theory and Internal Revenue Service
rulings and guidelines involving valuation methodology, and judicial decisions
regarding bank and thrift stock valuation matters.
In our capacity as an expert in this field, you have asked our opinion as to the
fair market value of 100% of the outstanding common stock of Gulf Southwest
Bancorp, Inc., Houston, Texas and Texas Gulf Coast Bancorp, Inc., Houston, Texas
and recommendation of a fair and equitable exchange ratio of common stock to be
issued in the proposed merger of the organizations.
In order to accomplish our assignment, you have provided us with Statements of
Condition and Income for September 30, 1994. In addition, through
communications both oral and written, information was provided pertaining to the
immediate past operating history of the bank holding companies and their
subsidiary banks and data processing centers, the major shareholdings of the
bank holding companies' common stock, the subsidiary banks' primary competition
within their trade areas, and other information pertinent to this assignment.
In rendering an opinion as to the fair market value of the stock, we have
considered the nature and history of Gulf Southwest Bancorp, Inc. and Texas Gulf
<PAGE>
Coast Bancorp, Inc., the economic outlook for the trade areas and for the
banking industry in general, the book value and financial condition of the bank
holding companies, their subsidiary banks and data processing centers, their
future earnings and dividend paying capacities, previous sales of the bank
holding companies' stock, the size of the block valued and the market price of
similar banks located in the same geographical area. However, we have not
independently verified the asset quality and financial condition of the bank
holding companies and their subsidiaries. Accordingly, we have relied upon the
data provided by or on behalf of the bank holding companies and their
subsidiaries to be true and accurate in all material respects.
As a result of our examination of the information we deem relevant to this
appraisal and as qualified herein, it is our opinion that as of September 30,
1994, a fair and equitable exchange ratio equals 2.1176 shares of Gulf Southwest
Bancorp, Inc. common stock for each share of Texas Gulf Coast Bancorp, Inc.
common stock.
The analysis is provided to you solely for the confidential, internal use of the
Boards of Directors of Gulf Southwest Bancorp, Inc. and Texas Gulf Coast
Bancorp, Inc.; and, without the prior written consent of Alex Sheshunoff & Co.
Investment Banking, it may not be quoted in whole or in part, or otherwise
referred to in any report or document, or furnished or otherwise communicated to
any person outside your organizations, with the exception of your attorneys,
accountants and regulatory authorities.
Respectfully submitted,
ALEX SHESHUNOFF & CO.
INVESTMENT BANKING
AUSTIN, TEXAS
By: /s/ Thomas R. Mecredy
---------------------
Thomas R. Mecredy
Senior Vice President
TRM/prl
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
The Texas Business Corporation Act permits the Company and its
shareholders to indemnify its directors and officers against judgments,
penalties, fines, settlements and reasonable expenses actually incurred in
connection with any action, suit or proceedings against such directors and
officers in their capacity as such, and requires indemnification for reasonable
expenses actually incurred in connection with such a proceeding in which a
director or officer is wholly successful, on the merits or otherwise, in defense
of the proceeding. If a director or officer is found liable to the corporation
or is found liable on the basis that a personal benefit was improperly received,
indemnification is limited to reasonable expenses actually incurred in
connection with the proceeding. Indemnification may not be made in respect of
any proceeding in which the person shall have been found liable for willful or
intentional misconduct in the performance of his or her duty to the corporation.
The Company's Bylaws provide that the Company shall indemnify its
directors and officers against liabilities imposed and expenses reasonably
incurred in connection with any claim, action, suit or proceeding to which a
director or officer is a party by reason of his or her position as a director or
officer. The Company also shall indemnify such persons against such sums as
counsel selected by the Board of Directors shall deem reasonable payment made in
settlement of any such claim, action, suit or proceeding primarily with a view
to avoiding expenses of litigation. However, a director or officer shall not be
indemnified (i) with respect to matters as to which he or she shall be adjudged
in such action, suit or proceeding to be liable for negligence or misconduct in
performance of duty, or (ii) with respect to any matters which shall be settled
by the payment of sums which counsel selected by the board of directors shall
not deem reasonable payment made primarily with a view to avoiding expenses of
litigation, or (iii) with respect to matters for which such indemnification
would be unlawful or against public policy.
The Company has obtained directors' and officers' liability insurance coverage
in the amount of $2.0 million. Directors' and officers' insurance insures (i)
directors and officers of the Company from any claim arising out of an alleged
wrongful act by the directors and officers of the Company in their respective
capacities as directors and officers of the Company, and (ii) the Company, to
the extent that the Company has indemnified the directors and officers for such
loss.
II-1
<PAGE>
<TABLE>
<CAPTION>
Item 21. Exhibits.
Sequen-
tially
Numbered Incorporated by Reference From
Exhibit Number and Description Page (if Applicable)
- -------------------------------- ------------- -------------------------------------
Form Date File No. Exhibit
---- ---- -------- -------
<S> <C> <C> <C> <C>
(a) Exhibits required by Item 601 of Regulation S-K
(2) Plan of acquisition,
reorganization, arrangement,
liquidation or succession
* N/A N/A N/A N/A
2.1 Agreement and Plan of
Reorganization
(3) Articles of incorporation and
bylaws
3.1 Articles of Incorpora- 10-K 12/31/90 0-11033 3.1
tion, together with
amendments thereto
3.2 Bylaws 10 3/31/83 0-11033 3.2
(4) Instruments defining the rights
of security holders, including
debentures
4.1 Specimen GSW Common
Stock Certificate S-4 7/6/90 33-36767 4.1
(5) Opinion regarding legality
5.1 Opinion of Winstead
Sechrest & Minick P.C. * N/A N/A N/A N/A
(8) Opinion regarding tax matters
8.1 Opinion of Winstead ____ N/A N/A N/A N/A
Sechrest & Minick P.C.
(9) Voting trust agreement
9.1 Gulf Southwest Bancorp,
Inc. Voting Trust 10-K 12/31/91 0-11033 9.1
Agreement
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Sequen-
tially
Numbered Incorporated by Reference From
Exhibit Number and Description Page (if Applicable)
- -------------------------------- ------------- -------------------------------------
Form Date File No. Exhibit
---- ---- -------- -------
<S> <C> <C> <C> <C>
(10) Material Contracts
10.1 Profit sharing plan of Gulf 10-K 12/31/83 0-11033 10.1
Southwest Bancorp, Inc.
10.2 Gulf Southwest Bancorp,
Inc. Flexible Stock Option 10-K 12/31/86 0-11033 10.2
Plan
10.3 Gulf Southwest Bancorp,
Inc. 401(k) Plan 10-K 12/31/89 0-11033 10.3
(21) Subsidiaries of the registrant
21.1 Subsidiaries of the * N/A N/A N/A N/A
Registrant
(23) Consents of experts and counsel
23.1 Consent of Hidalgo,
Banfill, Zlotnik &
Kermali, P.C. ___ N/A N/A N/A N/A
23.2 Consent of Griffin, Iles,
Masel & Duvall, P.C. ___ N/A N/A N/A N/A
23.3 Consent of Alex Sheshunoff
& Co. Investment Banking * N/A N/A N/A N/A
23.4 Consent of Winstead
Sechrest & Minick P.C. (See
Exhibit 5.1) * N/A N/A N/A N/A
23.5 Consent of Winstead
Sechrest & Minick P.C.
(See Exhibit 8.1) ___ N/A N/A N/A N/A
(24) Power of attorney
24.1 Power of attorney * N/A N/A N/A N/A
(99) Additional exhibits
99.1 Consent of A. Harrel
Blackshear * N/A N/A N/A N/A
</TABLE>
*Previously filed
II-3
<PAGE>
(b) Exhibits required by Regulation S-X and Item 14(e),
Item 17(a) or Item 17(b)(9) of Form S-4
See Index to Financial Statements at Page F-1 of the Joint
Proxy Statement/Prospectus
Item 22. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
Provided, however, that paragraphs (1)(i) and (1)(ii) do not
apply if the registration statement is on Form S-3 or Form S-8, and
---
the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the
registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-4
<PAGE>
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 20, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on February 8, 1995.
GULF SOUTHWEST BANCORP, INC.
By:/s/ J. W. Lander, Jr.
----------------------------------------------
J.W. Lander, Jr., Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature and Title Date
- ------------------- ----
/s/ J. W. Lander, Jr. February 8, 1995
- ----------------------------------------
J.W. Lander, Jr.
Chairman of the Board of Directors and
Chief Executive Officer (Principal
Executive Officer)
/s/ J. W. Lander, III February 8, 1995
- ----------------------------------------
J.W. Lander, III
Director and President,
(Principal Financial and Accounting
Officer)
/s/ Norman H. Bird February 8, 1995
- ----------------------------------------
Norman H. Bird
Director, Secretary and Vice President
/s/ Donald Harding February 8, 1995
- ----------------------------------------
Donald Harding
Director
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequen-
tially
Numbered Incorporated by Reference From
Exhibit Number and Description Page (if Applicable)
- -------------------------------- ------------- -------------------------------------
Form Date File No. Exhibit
---- ---- -------- -------
<S> <C> <C> <C> <C>
(2) Plan of acquisition,
reorganization, arrangement,
liquidation or succession
2.1 Agreement and Plan of * N/A N/A N/A N/A
Reorganization
(3) Articles of incorporation and
bylaws
3.1 Articles of Incorpora- 10-K 12/31/90 0-11033 3.1
tion, together with
amendments thereto
3.2 Bylaws 10 3/31/83 0-11033 3.2
(4) Instruments defining the rights
of security holders, including
debentures
4.1 Specimen GSW Common
Stock Certificate S-4 7/6/90 33-36767 4.1
(5) Opinion regarding legality
5.1 Opinion of Winstead
Sechrest & Minick P.C. * N/A N/A N/A N/A
(8) Opinion regarding tax matters
8.1 Opinion of Winstead ____ N/A N/A N/A N/A
Sechrest & Minick P.C.
(9) Voting trust agreement
9.1 Gulf Southwest Bancorp,
Inc. Voting Trust 10-K 12/31/91 0-11033 9.1
Agreement
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Sequen-
tially
Numbered Incorporated by Reference From
Exhibit Number and Description Page (if Applicable)
- -------------------------------- ------------- -------------------------------------
Form Date File No. Exhibit
---- ---- -------- -------
<S> <C> <C> <C> <C>
(10) Material Contracts
10.1 Profit sharing plan of Gulf 10-K 12/31/83 0-11033 10.1
Southwest Bancorp, Inc.
10.2 Gulf Southwest Bancorp,
Inc. Flexible Stock Option 10-K 12/31/86 0-11033 10.2
Plan
10.3 Gulf Southwest Bancorp,
Inc. 401(k) Plan 10-K 12/31/89 0-11033 10.3
(21) Subsidiaries of the registrant
21.1 Subsidiaries of the * N/A N/A N/A N/A
Registrant
(23) Consents of experts and counsel
23.1 Consent of Hidalgo,
Banfill, Zlotnik &
Kermali, P.C. ___ N/A N/A N/A N/A
23.2 Consent of Griffin, Iles,
Masel & Duvall, P.C. ___ N/A N/A N/A N/A
23.3 Consent of Alex Shesunoff
& Co. Investment Banking * N/A N/A N/A N/A
23.4 Consent of Winstead
Sechrest & Minick P.C.
(See Exhibit 5.1) * N/A N/A N/A N/A
23.5 Consent of Winstead
Sechrest & Minick P.C.
(See Exhibit 8.1) ___ N/A N/A N/A N/A
(24) Power of attorney
24.1 Power of attorney * N/A N/A N/A N/A
(99) Additional exhibits
99.1 Consent of A. Harrel
Blackshear * N/A N/A N/A N/A
</TABLE>
*Previously filed
<PAGE>
EXHIBIT 8.1
745-5342
February 7, 1995
Board of Directors
Gulf Southwest Bancorp, Inc.
4200 Westheimer, Suite 210
Houston, Texas 77027
Gentlemen:
We have acted as counsel to Gulf Southwest Bancorp, Inc., a Texas
corporation ("Gulf Southwest") and Gulf Southwest Nevada Bancorp, Inc., a Nevada
corporation and wholly owned subsidiary of Gulf Southwest (the "Merger Sub"), in
connection with the merger (the "Merger") of Texas Gulf Coast Bancorp, Inc., a
Texas corporation ("Texas Gulf Coast") with and into the Merger Sub pursuant to
(i) that certain Agreement and Plan of Reorganization dated as of November 9,
1994 by and among Texas Gulf Coast, Gulf Southwest and the Merger Sub (the
"Reorganization Agreement"), (ii) that certain Agreement and Plan of Merger
dated as of November 9, 1994 by and among Texas Gulf Coast and the Merger Sub
(the "Merger Agreement"), and (iii) the agreements, documents and instruments
contemplated in the Reorganization Agreement and the Merger Agreement.
In rendering the opinions expressed below, we have examined, and are
relying upon, the completeness, truth and accuracy, at all relevant times, of
the following:
1. the Reorganization Agreement;
2. the Merger Agreement;
3. the Registration Statement on Form S-4 filed by Gulf Southwest with the
Securities and Exchange Commission pursuant to the Securities Act of 1933 in
conjunction with the Merger (the "Registration Statement");
4. the articles of incorporation, certificates of incorporation and such
other corporate records, documents and certificates of Gulf Southwest, the
Merger Sub and Texas Gulf Coast as in our judgment are necessary or desirable to
enable us to render the opinions expressed herein.
<PAGE>
5. certificates containing the following representations made to us by Gulf
Southwest, the Merger Sub and/or Texas Gulf Coast:
(i) The Reorganization Agreement, Merger Agreement and the agreements,
documents and instruments contemplated thereby contain all material terms
of the Merger and there are no agreements or documents which amend, modify
or revise the provisions of the Reorganization Agreement, the Merger
Agreement or the agreements, documents or instruments contemplated thereby
or amend, modify or revise the terms of the Merger or the consideration to
be received by the shareholders of Texas Gulf Coast in connection with the
Merger.
(ii) The shareholders of Texas Gulf Coast are not under any binding
contract or commitment requiring them to sell any of the shares of common
stock of Gulf Southwest to be received pursuant to the Merger. The
shareholders of Texas Gulf Coast do not have any plan or intent to sell or
otherwise dispose of more than twenty percent (20%) of the shares of common
stock of Gulf Southwest to be received pursuant to the Merger.
(iii) After the Merger, the Merger Sub will continue to be a wholly
owned subsidiary of Gulf Southwest with substantially the same business as
is currently being conducted by Texas Gulf Coast and the Merger Sub, and
Gulf Southwest has no plan or intention to sell or otherwise dispose of the
stock of the Merger Sub, to liquidate the Merger Sub or to cause the Merger
Sub to sell or otherwise dispose of any of the Merger Sub's assets except
for dispositions in the ordinary course of business.
(iv) Texas Gulf Coast has not sold any assets other than in the ordinary
course of its business for the two year period ending on the date hereof.
(v) Gulf Southwest, the Merger Sub, Texas Gulf Coast and the
shareholders of Texas Gulf Coast will pay their respective expenses related
to the Merger, if any.
(vi) Pursuant to the Merger, the Merger Sub will acquire 100% of the
assets of Texas Gulf Coast.
(vii) Immediately after the Merger, the Merger Sub will own assets
representing at least 90% of the fair market value of Texas Gulf Coast's
net assets and at least 70% of the fair market value of Texas Gulf Coast's
gross assets held immediately before the Merger.
(viii) The method of converting shares of Texas Gulf Coast common stock
into shares of Gulf Southwest common stock set forth in the Reorganization
Agreement and Merger Agreement (collectively, the "Acquisition Agreements")
is a result of arm's length negotiations. Accordingly, at the time the
method of exchange was determined, the
<PAGE>
aggregate fair market value of the shares of Gulf Southwest common stock to
be received by the Texas Gulf Coast shareholders in exchange for Texas Gulf
Coast common stock was approximately equal to the fair market value of the
shares of Texas Gulf Coast common stock to be surrendered in exchange
therefor.
(ix) The Merger Sub has no liabilities, or any liability that the Merger
Sub has on the date hereof is a liability incurred in the ordinary course
of business.
(x) There is no intercorporate indebtedness between (i) Gulf Southwest
and Texas Gulf Coast, or (ii) the Merger Sub and Texas Gulf Coast, which
was issued or acquired or will be settled at a discount.
(xi) The terms of the Acquisition Agreements providing for the payment
of cash in lieu of fractional share interests are solely for the purpose of
saving Gulf Southwest the expense and inconvenience of issuing and
transferring the fractional share interests and such payment is not
separately bargained for consideration.
(xii) There is no plan or intention on the part of Gulf Southwest to
redeem or otherwise reacquire any of the Gulf Southwest common stock to be
issued pursuant to the Merger.
(xiii) No stock of the Merger Sub will be issued to Texas Gulf Coast or
the shareholders of Texas Gulf Coast.
(xiv) Compensation, if any, to be paid by the consolidated Merger
Sub/Texas Gulf Coast entity to shareholder/employees of Texas Gulf Coast
will be for services actually rendered and will be commensurate with
amounts paid to third parties bargaining at arm's length for similar
services, and no part of such compensation represents consideration for
their shares of Texas Gulf Coast common stock.
(xv) Except for cash received in lieu of fractional shares, shareholders
of Texas Gulf Coast shall receive solely voting common stock of Gulf
Southwest in exchange for their shares of Texas Gulf Coast common stock
pursuant to the Merger.
(xvi) The business purposes of the Merger are those set forth in the
Registration Statement.
(xvii) Substantially more than 50% in value of the assets of Texas Gulf
Coast consist of assets which are not stock or securities held for
investment and substantially more than 20% of Texas Gulf Coast's assets are
not held for investment.
<PAGE>
(xviii) As of the date hereof, Texas Gulf Coast does not have
outstanding any warrants, options, convertible securities or any other type
of right pursuant to which any person could acquire stock in Texas Gulf
Coast.
(xix) Gulf Southwest does not own, nor has it owned during the past
five years, any shares of the stock of Texas Gulf Coast.
(xx) On the date hereof, the fair market value of the assets of Texas
Gulf Coast exceeds the sum of Texas Gulf Coast's liabilities, plus the
amount of liabilities, if any, to which the assets are subject.
(xxi) On the date hereof, the fair market value of the assets of the
Merger Sub exceeds the sum of the Merger Sub's liabilities, plus the amount
of liabilities, if any, to which the assets are subject.
(xxii) Neither the Merger Sub nor Texas Gulf Coast is under the
jurisdiction of a court in a Title 11 or similar case within the meaning of
(S)368(a)(3)(A) of the Internal Revenue Code of 1986, as amended (the
"Code").
(xxiii) Neither Gulf Southwest nor the Merger Sub has any plan or
intention to cause the Merger Sub to issue any capital stock in such amount
as would cause Gulf Southwest to fail to be in control (as defined in
(S)368(c) of the Code) of the Merger Sub after the Merger.
In connection with rendering this opinion, we have assumed to be true and
are relying upon, without any independent investigation or review thereof, the
following:
1. The authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as copies, and
the authenticity of the originals of such documents.
2. The genuineness of all signatures, the due authorization, execution and
delivery of all documents by all parties thereto and the due authority of all
persons executing such documents.
Based on our examination of the foregoing items and subject to the
assumptions, limitations, qualifications and representations set forth herein,
and based on the provisions of the Code and Treasury Regulations, administrative
pronouncements and rulings promulgated thereunder, we are of the opinion that:
1. The Merger will constitute a "reorganization" within the meaning of
(S)368(a) of the Code.
<PAGE>
2. No gain or loss (except with respect to cash received in lieu of
fractional shares) will be recognized by holders of shares of Texas Gulf Coast
common stock on the exchange of their Texas Gulf Coast common stock shares
solely for shares of Gulf Southwest common stock pursuant to the Merger.
3. The tax basis of the shares of Gulf Southwest common stock received by
the holders of shares of Texas Gulf Coast common stock will be the same as the
tax basis of the shares of Texas Gulf Coast common stock exchanged therefor,
decreased by the amount of any cash received and increased by the amount of any
gain recognized on the exchange.
4. The holding period of shares of Gulf Southwest common stock received by
holders of shares of Texas Gulf Coast common stock will include the holding
period of the shares of Texas Gulf Coast common stock exchanged therefor,
provided that such shares of Texas Gulf Coast common stock were held as capital
assets on the date of the consummation of the Merger.
In addition to the matters set forth above, this opinion is subject to the
following exceptions, limitation and qualifications:
1. Our opinions expressed herein are based upon our interpretation of the
existing provisions of the Code and existing judicial decisions, administrative
regulations, revenue rulings and revenue procedures. Our opinions are not
binding upon the Internal Revenue Service or the courts and there is no
assurance that the Internal Revenue Service will not challenge the conclusions
set forth herein. No assurance can be given that future legislative, judicial
or administrative changes, on either a prospective or retroactive basis, will
not adversely affect the accuracy of the opinions stated herein. We undertake
no obligation to advise you of changes in law which may occur after the date
hereof.
2. Our opinions are limited to the United States federal income tax matters
addressed herein, and no other opinions are rendered with respect to any other
matter not specifically set forth in the foregoing opinions.
If any one of the statements, representations or assumptions we have relied
upon to issue this opinion is incorrect in any material respect, our opinion
might be adversely affected and may not be relied upon.
<PAGE>
These opinions are solely for your benefit and may not be relied upon in
any manner by any other person or entity, except that the shareholders of Texas
Gulf Coast may rely upon these opinions in connection with the Merger.
WINSTEAD SECHREST & MINICK P.C.
By: /s/ Scot W. O'Brien
-------------------------------------
Scot O'Brien
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
registration statement (Form S-4 filed November 25, 1994) and related Joint
Proxy Statement/Prospectus of Gulf Southwest Bancorp, Inc. for the registration
of 698,253 shares of its common stock and to our report (a) dated January 26,
1994, with respect to the consolidated financial statements and schedules of
Gulf Southwest Bancorp, Inc. and the financial statements and schedules of Gulf
Southwest Bancorp, Inc. (parent company only), and (b) dated March 3, 1994, with
respect to the consolidated financial statements and schedules of Texas Gulf
Coast Bancorp, Inc. and the financial statements and schedules of Texas Gulf
Coast Bancorp, Inc. (parent company only) included in such registration
statement.
We also consent to the reference to us under the heading "Selected Financial
Data" in such Joint Proxy Statement/Prospectus.
/s/ Hidalgo, Banfill, Zlotnik & Kermali, P.C.
---------------------------------------------
HIDALGO, BANFILL, ZLOTNIK & KERMALI, P.C.
Houston, Texas
February 8, 1995
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
registration statement (Form S-4 filed November 25, 1994) and the related Joint
Proxy Statement/Prospectus of Gulf Southwest Bancorp, Inc. for the registration
of 698,253 shares of its common stock and to our report dated March 19, 1993
with respect to the consolidated financial statements and schedules of Texas
Gulf Coast Bancorp, Inc. and the financial statements and schedules of Texas
Gulf Coast Bancorp, Inc. (parent company only) included in such registration
statement.
We also consent to the reference to us under the heading "Selected Financial
Data" in such Joint Proxy Statement/Prospectus.
/s/ Griffin, Iles, Masel & Duvall, P.C.
---------------------------------------
GRIFFIN, ILES, MASEL & DUVALL, P.C.
Texas City, Texas
February 8, 1995
