<PAGE>
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UNITED STATES NORMAN H. BIRDLANDERUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-11033
GULF SOUTHWEST BANCORP, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0045946
(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
4200 WESTHEIMER, SUITE 210 77027
HOUSTON, TEXAS (ZIP CODE)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 622-0042
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------------
NONE N/A
Securities registered pursuant to Section 12(g) of the Act and the outstanding
number of shares of each class of capital stock as of December 31, 1995:
CLASS OF STOCK SHARES OUTSTANDING
-------------- --------------------------
Common Stock, Par Value $1.00 1,942,970
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
("Act") during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check if disclosure of delinquent filers pursuant to Item 405 of
Regulations S-K (17 CFR 229.405) is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
There is no established market for the registrant's common stock. Accordingly,
the registrant is unable to estimate the value of shares held by non-affiliates.
On March 1, 1996, there were 1,942,970 shares of common stock issued and
outstanding. See Item 5, entitled "Market for the Registrant's Common Equity
and Related Shareholder Matters" for additional information concerning the
market for the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE: Proxy Statement for the Annual Meeting of
Shareholders to be held June 11, 1996 (Part III).
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<PAGE>
PART I.
ITEM 1. BUSINESS
- ------- --------
Gulf Southwest Bancorp, Inc. ("Gulf Southwest" or "Company") is a Texas bank
holding company organized in 1982 under the Bank Holding Company Act of 1956, as
amended (the "Holding Company Act"). Gulf Southwest maintains its principal
offices at 4200 Westheimer, Suite 210, Houston, Texas 77027 (telephone: (713)
622-0042).
As of December 31, 1995, Gulf Southwest owned all of the outstanding capital
stock of Gulf Southwest Nevada Bancorp, Inc. ("Nevada Bancorp"), a Nevada
corporation and intermediate bank holding company (unless otherwise indicated,
all references herein to Gulf Southwest include Nevada Bancorp). Nevada Bancorp
owns 100.0% of the outstanding capital stock of Merchants Bank and First Bank
Mainland, 99.47% of the outstanding capital stock of First Bank Pearland and
97.13% of Texas City Bank (hereinafter such banks may be referred to
collectively as the "Subsidiary Banks" and individually as a "Subsidiary Bank").
Effective January 1, 1996, First Bank Mainland, First Bank Pearland and Texas
City Bank were merged with and into Merchants Bank, which was the surviving
bank. Gulf Southwest continued to own 100% of the outstanding capital stock of
Merchants Bank. The banking facilities of the three merged banks will operate as
branch facilities of Merchants Bank.
Gulf Southwest's principal activity is the ownership and management of the
Subsidiary Banks. All Subsidiary Banks are state banks organized in the State of
Texas. Each of the Subsidiary Banks offers a full range of banking services to
its customers, including demand and time deposits and various types of
commercial and consumer loans. The Subsidiary Banks draw substantially all of
their deposits and a majority of their loans from the Galveston County/Harris
County area. In addition, Gulf Southwest has two wholly owned non-banking
subsidiaries which 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. The banking
activities of Gulf Southwest are conducted by the Subsidiary Banks. The officers
and directors of the Subsidiary Banks direct its operations. The principal role
of Gulf Southwest is to provide management assistance with respect to various
aspects of the Subsidiary 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.
BANKING SERVICES
- ----------------
The Subsidiary Banks 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.
Other than the Subsidiary Banks' charters 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.
1
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SUBSIDIARY BANKS
- ----------------
The following table sets forth certain balance sheet and operating
information at December 31, 1995, with respect to the Subsidiary Banks:
SUBSIDIARY BANKS
----------------
(IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
- --------------------
<S> <C>
Balance Sheet:
Assets $484,522
Deposits 434,073
Loans 237,564
Allowance for Credit Losses 2,411
Total Equity 46,487
Results of Operations:
Interest Income $ 29,155
Interest Expense 9,359
Provision for Credit Losses 135
Net Earnings 5,969
</TABLE>
First Bank Mainland, First Bank Pearland, Merchants Bank and Texas City Bank are
state-chartered banking associations organized in 1947, 1976, 1970 and 1907,
respectively. The services offered by the Subsidiary Banks are generally those
offered by commercial banks of comparable size in their trade areas. The
Subsidiary Banks do not engage in international operations or trust activities.
Effective January 1, 1996, the Subsidiary Banks were merged with and into
Merchants Bank. Currently, Merchants Bank's main office is at 999 North
Shepherd, Houston, Texas with eleven branches located in Houston, and the
surrounding communities.
NON-BANKING ACTIVITIES
- ----------------------
G.S.W. Data Processing, Inc. ("GSWDP"), a Texas corporation, and Central Data
Processing, Inc. ("CDP"), a Texas corporation, perform certain data processing
services for the Subsidiary Banks. In addition, the Board of Governors of the
Federal Reserve System (the "Board") has authorized GSWDP to furnish data
processing services to banks in Texas which are not affiliated with Gulf
Southwest. As of December 31, 1995, GSWDP was furnishing these services for one
non-affiliated bank. As of December 31, 1995, Nevada Bancorp owned 100.0% of
the outstanding capital stock of each of GSWDP and CDP.
Effective January 31, 1996, the operations of GSWDP and CDP were acquired by
Merchants Bank and the two subsidiaries were liquidated into Nevada Bancorp.
SUBSIDIARY BANK HOLDING COMPANY
- -------------------------------
Nevada Bancorp is a Nevada corporation organized in 1994, and is wholly owned
by Gulf Southwest. The only activities of Nevada Bancorp relate to holding the
stock of the Subsidiary Banks, CDP and GSWDP. Nevada Bancorp currently has no
employees.
2
<PAGE>
EXPANSION
- ---------
ACQUISITION OF TEXAS GULF COAST BANCORP, INC. On May 1,1995, Nevada Bancorp
consummated its acquisition of Texas Gulf Coast Bancorp, Inc. ("Texas Gulf").
Texas Gulf was a holding company which owned 100% of the stock of First Bank
Mainland in Lamarque, Texas and over 95% of the stock of each of Texas City Bank
in Texas City, Texas and First Bank Pearland, Pearland, Texas. As of May 1,
1995, Texas Gulf had consolidated assets of approximately $203 million.
BRANCH EXPANSION. On October 10,1995, an application to establish a branch
facility at the corner of West Rittenhouse and Interstate 45 North in Houston,
Texas was approved by the Texas Department of Banking and the Federal Deposit
Insurance Corporation ("FDIC"). It is anticipated that the branch facility will
commence operations in April, 1996.
An application to establish a branch facility at 5005 Woodway, Houston, Texas
has been filed with the Texas Department of Banking and the FDIC. Approval was
received in March, 1996, and operations at this branch facility are expected to
commence in June, 1996.
SUPERVISION AND REGULATION
- --------------------------
GULF SOUTHWEST. As a bank holding company, Gulf Southwest is subject to
regulation by the Board and is required to file with the Board an annual report
and to furnish such additional information as the Board may require pursuant to
the Holding Company Act. The Board may conduct examinations of Gulf Southwest
and each of its subsidiaries.
Gulf Southwest is required to obtain the prior approval of the Board 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 considers the expected benefits to the public, including
greater convenience, identifying and meeting the credit needs of the applicant's
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, a copy of
such application must be submitted to the Texas Banking Commissioner
("Commissioner") pursuant to the Texas Banking Act of 1995, as amended ("Act").
Prior to September 29, 1995, no application to acquire shares of a bank located
outside Texas could be approved by the Board unless such acquisition was
expressly authorized by the statutes of the state where the bank whose shares or
assets are to be acquired was located.
Bank holding companies are prohibited by law, except in certain instances
prescribed 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 service to its subsidiaries. Bank holding companies, however, may
engage in, and may own shares of companies engaged in certain activities found
by the Board to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. When an application concerning these
activities is filed with the Board, a copy of such application also must be
submitted to the Commissioner pursuant to the Act for a determination as to
whether the application should be approved. The Commissioner is required to
oppose the application if the proposed activities would be detrimental to the
public's interest as the result of probable effects, such as undue concentration
of resources, competition, conflicts of interest or unsound banking practices.
Under the Holding Company Act and the Board's regulations, 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 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.
3
<PAGE>
THE INTERSTATE BANKING AND BRANCHING EFFICIENCY ACT OF 1994. On September
29, 1994, the Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA")
was enacted into law. The IBBEA authorizes adequately capitalized and
adequately managed bank holding companies to acquire banks in any state
beginning September 29, 1995 subject to certain restrictions. In addition,
IBBEA authorizes interstate branching. Beginning June 1, 1997, a bank may merge
with a bank located in another state so long as one or both of the states have
not opted out of interstate branching. 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. The State of Texas has elected to opt out of interstate
branching.
SUBSIDIARY BANKS. As Texas State Chartered Banks, the Subsidiary Banks are
subject to regulation, supervision and periodic examination by the Texas
Department of Banking. Effective January 1, 1996, First Bank Mainland, First
Bank Pearland and Texas City Bank were merged with and into Merchants Bank.
Because the resultant bank is not a member of the Federal Reserve System (i.e.,
a "non-member bank") and its' deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC") to the extent authorized by law, it is also
subject to supervision and regulation, as well as examination by the FDIC.
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 the amount of loans which may
be made and the interest that may be charged thereon and restrictions relating
to investments and other activities.
Cash revenues derived from dividends paid by the Subsidiary Banks represent
the primary source of revenues for Gulf Southwest. Under the Act, a state bank
may not reduce its capital and surplus through dividends without the prior
written approval of the Commissioner. Dividends may be paid out of the
undivided profits. At December 31, 1995, there was an aggregate amount of
$25,424,000 available for the payment of dividends by the Subsidiary Banks under
these restrictions. 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 and the Subsidiary Banks, reference should be made to the "Government
Fiscal and Monetary Policies" discussion below.
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 foreclosure on the property until an
environmental study has been performed.
COMPETITION
- -----------
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. At December 31, 1995, the Subsidiary Banks had
deposits of $434,073,000.
4
<PAGE>
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 government and private issues of
debt obligations and other investment alternatives for depositors such as money
market funds and mutual funds.
CUSTOMERS. The Subsidiary Banks are not dependent upon any single customer
or few customers; the loss of any one or more of which would have a materially
adverse effect upon their business.
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. 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. 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 and the Subsidiary Banks cannot be predicted.
The Board 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 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 is empowered to assess civil penalties
against companies or individuals who violate the 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 impose 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 is an "affiliate" of the Subsidiary Bank and,
therefore, these restrictions are applicable to transactions by the Subsidiary
Bank with Gulf Southwest. 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 Bank is 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 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 the "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Capital Management" presentation beginning
on page 23 of this report.
5
<PAGE>
In 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was enacted. The provisions of FDICIA include a plan to recapitalize
the Bank Insurance Fund ("BIF") that is the source of deposit insurance coverage
to FDIC-insured institutions, authority to ultimately fund such recapitalization
plan through increased deposit insurance premiums, various supervisory reforms
which will increase the frequency of on-site examinations by federal banking
regulators, changes in the deposit insurance system, an array of new consumer
lending requirements, and 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. Under FDICIA, the FDIC is 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. During 1995,
the FDIC determined that the BIF was adequately funded and that banks which are
adequately or well capitalized would not be assessed premiums for deposit
insurance. Currently, Gulf Southwest and its Subsidiary Bank are deemed to be
well capitalized.
EFFECTS OF INTEREST RATES AND USURY LAWS. Texas usury laws limit the rate
of interest that may be charged by the Subsidiary Bank. Certain federal laws
provide a limited preemption of texas usury laws. The maximum rate of interest
that the Subsidiary Bank 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 the Subsidiary Bank
which are secured by first liens on residential real property.
EMPLOYEES. Gulf Southwest and its subsidiaries had approximately 305
employees as of December 31, 1995. None of the employees are represented by any
collective bargaining unit, and management believes it has excellent relations
with its employees.
ITEM 2. PROPERTIES
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The executive offices of Gulf Southwest are located at 4200 Westheimer, Suite
210, Houston, Texas 77027. Merchants Bank owns the 27,000 square foot branch
facility located at 1111 Spencer Highway, South Houston, Texas, which consists
of a two-story building and adjacent fourteen-window drive-in facility. The
branch facilities located at 2051 West Main in League City, Texas and 3409
Spencer Highway, Pasadena, Texas are owned by Merchants Bank and consist of
13,000 and 4,400 square feet, respectively, of office and lobby space. The
other banking quarters and drive-in facilities of Merchants Bank are leased.
The banking facilities of First Bank Mainland and First Bank Pearland are owned
by the respective banks. First Bank Mainland has two bank lobbies and drive-in
facilities located at 920 First Street, LaMarque, Texas and 2801 Main,
Dickinson, Texas. First Bank Pearland's bank facilities are located at 3102
East Broadway and 2624 McHard in Pearland, Texas.
Texas City Bank owns the banking and drive-in facilities located at 701 Sixth
Street, North and 1110 25th Street, North in Texas City, Texas. The banking
lobby located at 9300 Emmet Lowry Expressway in Texas City is a leased facility.
ITEM 3. LEGAL PROCEEDINGS
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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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
Since the annual shareholders' meeting held on May 16, 1995, no matters have
been submitted to a vote of the shareholders of Gulf Southwest.
6
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PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
- ------- ---------------------------------------------
RELATED SHAREHOLDER MATTERS
---------------------------
There is no established public trading market for shares of the Company's common
stock, par value $1.00 per share (the "Common Stock"). The Board of Directors
of Gulf Southwest has no present intention to arrange for the listing of the
Common Stock on any stock exchange. Notwithstanding the foregoing, a limited
market for the shares of the Common Stock exists, and such shares are traded on
a sporadic basis. During 1995, 46,703 shares of the Common Stock were presented
for transfer on the books of Gulf Southwest.
The following table sets forth the number of shares of the Common Stock
presented for transfer on the books of Gulf Southwest for each quarterly period
within the last two calendar years.
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
First Quarter 10,338 6,322
Second Quarter 3,021 290
Third Quarter 5,581 21,842
Fourth Quarter 2,652 18,249
</TABLE>
Because there is no public trading market for the Common Stock, the trading
price is determined by private negotiations between the buyer and the seller.
HOLDERS
- -------
At March 1, 1996, the Common Stock was owned of record by approximately 960
shareholders. On such date, no shares of Gulf Southwest's preferred stock were
issued and outstanding. The officers and directors of Gulf Southwest
collectively owned 21.0% of the Common Stock as of such date.
DIVIDENDS AND DIVIDEND POLICY
- -----------------------------
DIVIDEND POLICY. Holders of 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 consider prior to declaring a dividend include earnings, regulatory
capital requirements, general business conditions and the capital needs of its
subsidiaries, as well as other factors which the Board of Directors may deem
relevant.
DIVIDENDS FOR SUBSIDIARY BANKS. Since Gulf Southwest is a bank holding
company, it is dependent upon receipt of dividends from its subsidiaries
(primarily the Subsidiary Banks) for payment of dividends to shareholders. The
payment of dividends by the Subsidiary Banks is limited by applicable banking
laws.
DIVIDEND HISTORY. Gulf Southwest paid quarterly cash dividends on the
Common Stock from 1983 through December 31, 1986. Effective March 31, 1987,
Gulf Southwest suspended the payment of dividends to holders of the 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 the Common Stock by declaring a
quarterly cash dividend of $.05 per share and a special cash dividend of $.05
per share. During 1994, regular quarterly dividends of $.05 per share of Common
Stock were paid. On March 14, 1995, the Board of Directors declared a cash
dividend of $.08 per share of Common Stock to shareholders of record on March
14, 1995, payable on March 28, 1995 and on June 15, 1995, payable on June 30,
1995. On September 26, 1995, the Board of Directors increased the quarterly
cash dividend to $.10 per share of Common Stock, payable October 4, 1995 to
shareholders of record on September 26, 1995. Concurrent with increased
earnings, the Board of Directors increased the fourth quarter cash dividend to
$.15 per share, payable on December 21, 1995 to shareholders of record on
December 12, 1995.
7
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
Selected financial data presented below for the fiscal years ended December
31, 1995, 1995, 1993, 1992 and 1991 have been derived from the consolidated
financial statements of the Company. The audited historical financial data for
the fiscal years ended December 31, 1995, 1994 and 1993 are qualified in their
entirety by, and should be read in conjunction with, the financial statements
and the notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
---------------------------------------------------------------
1995 (1) 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET INFORMATION:
Loans $ 237,564 $ 144,459 $ 127,452 $ 123,456 $ 122,842
Allowance for loan losses 2,411 2,063 1,986 1,725 2,079
Investment securities 152,033 56,852 52,329 47,672 40,313
Total assets 486,649 253,027 242,005 228,920 215,299
Deposits 431,381 226,064 218,942 207,968 198,662
Long-term debt 3,083 0 0 350 350
Shareholders' equity 49,322 25,539 21,932 19,637 15,264
INCOME INFORMATION:
Interest income $ 29,174 $ 16,965 $ 15,801 $ 16,317 $ 18,449
Interest expense 9,577 4,796 4,943 5,898 9,048
Net interest income 19,597 12,169 10,858 10,419 9,401
Provision for loan losses 135 50 410 1,165 825
Noninterest income 4,655 3,238 2,979 2,811 3,113
Noninterest expense 15,878 10,393 10,494 9,919 9,921
Income before income taxes 8,239 4,964 2,933 2,146 1,768
Income tax expense 2,332 999 512 242 36
Accounting change 0 0 0 2,470 0
---------- ---------- ---------- ---------- ----------
Net income $ 5,907 $ 3,965 $ 2,421 $ 4,374 $ 1,732
========== ========== ========== ========== ==========
PER SHARE DATA:
Weighted average number of shares
of common stock outstanding 1,718,211 1,258,636 1,261,731 1,261,775 1,261,775
========== ========== ========== ========== ==========
Net income per common share $ 3.44 $ 3.15 $ 1.92 $ 3.47 $ 1.37
========== ========== ========== ========== ==========
Dividends per common share $ 0.41 $ 0.20 $ 0.10 $ 0.00 $ 0.00
========== ========== ========== ========== ==========
Book value per common share $ 25.38 $ 20.29 $ 17.39 $ 15.56 $ 12.10
========== ========== ========== ========== ==========
Return on average assets 1.47% 1.61% 1.03% 1.99% 0.79%
Return on average shareholders'
equity 14.61% 16.93% 11.56% 25.38% 12.03%
Dividend payout ratio 11.92% 6.35% 5.21% N/A N/A
Average equity to average assets 10.04% 9.52% 8.89% 7.85% 6.54%
Allowance for loan losses as a
percentage of nonperforming
assets 60.65% 153.6% 122.4% 78.7% 51.8%
</TABLE>
8
<PAGE>
CONDENSED STATEMENTS OF EARNINGS
- --------------------------------
The following is a comparison of Gulf Southwest's condensed statements of
earnings for the most recent five-year period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 (1) 1994 1993 1992 1991
-------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income (2) $29,174 $16,965 $15,801 $16,317 $18,449
Interest expense 9,577 4,796 4,943 5,898 9,048
------- ------- ------- ------- -------
Net interest income (2) 19,597 12,169 10,858 10,419 9,401
Provision for credit losses 135 50 410 1,165 825
Noninterest income 4,655 3,238 2,979 2,811 3,113
Noninterest expense 15,878 10,393 10,494 9,919 9,921
------- ------- ------- ------- -------
Earnings before income
taxes 8,239 4,964 2,933 2,146 1,768
Income tax expense 2,332 999 512 242 36
------- ------- ------- ------- -------
Earnings before accounting
change 5,907 3,965 2,421 1,904 1,732
Accounting change 0 0 0 2,470 0
------- ------- ------- ------- -------
Net earnings $ 5,907 $ 3,965 $ 2,421 $ 4,374 $ 1,732
======= ======= ======= ======= =======
</TABLE>
9
<PAGE>
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 most recent five years'
consolidated daily average balance sheets for Gulf Southwest.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 (1) 1994 1993 1992 1991
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 20,745 $ 12,445 $ 12,123 $ 12,572 $ 11,609
Loans, net 201,248 135,077 123,605 123,369 121,006
Interest-bearing deposits 1,419 1,372 1,573 2,889 2,693
Investment securities:
Taxable 103,893 52,704 42,795 34,099 29,364
Non-taxable 14,272 5,494 7,600 10,237 13,411
-------- -------- -------- -------- --------
Total Securities 118,165 58,198 50,395 44,336 42,775
-------- -------- -------- -------- --------
Federal funds sold and interest
bearing deposits with Federal
Home Loan Bank 44,066 30,304 36,420 26,094 29,304
Other assets 17,001 8,633 11,509 10,184 12,775
-------- -------- -------- -------- --------
Total Assets $402,644 $246,029 $235,625 $219,444 $220,162
======== ======== ======== ======== ========
Liabilities and Shareholders' Equity:
Deposits
Noninterest bearing demand $101,883 $ 65,909 $ 59,577 $ 52,385 $ 50,398
Interest bearing demand 83,104 46,103 46,643 46,377 45,808
Savings 46,549 29,097 28,035 25,617 19,013
Time 125,123 79,786 78,712 76,195 89,003
-------- -------- -------- -------- --------
Total Deposits 356,659 220,895 212,967 200,574 204,222
-------- -------- -------- -------- --------
Borrowings 2,536 0 321 350 350
Other liabilities 3,011 1,716 1,394 1,284 1,192
-------- -------- -------- -------- --------
Total Liabilities 362,206 222,611 214,682 202,208 205,764
-------- -------- -------- -------- --------
Shareholders' Equity 40,438 23,418 20,943 17,236 14,398
-------- -------- -------- -------- --------
Total Liabilities and
Shareholders' Equity $402,644 $246,029 $235,625 $219,444 $220,162
======== ======== ======== ======== ========
</TABLE>
(1) The Company's financial statements for the fiscal year ended December
31,1995 reflect the acquisition of Texas Gulf, which occurred May 1, 1995.
See note 2 to the Company's Consolidated financial statements.
(2) For the years ended December 31, 1995, 1994, 1993, 1992 and 1991, interest
income would have been $29,565,000, $17,156,000, $16,071,000, 16,688,000,
and $18,960,000, respectively, and net interest income would have been
$19,988,000, $12,360,000, $11,128,000, $10,790,000 and $9,912,000,
respectively, if all such amounts were shown using a comparable fully
taxable equivalent basis (using a tax rate of 34%).
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------- -----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Net earnings increased 49.0% in 1995 to $5,907,000,as compared to $3,965,000 in
1994. The acquisition/merger of Texas Gulf Coast Bancorp, Inc. represented
$1,304,000 of the increase of $1,942,000. In 1995, earnings per common share
were $3.44, as compared to $3.15 in 1994. Highlights of the major components
that affected Gulf Southwest's net earnings are as follows:
Average assets grew $156.6 million, or 63.7% to $402.6 million, with
average deposits totaling, $356.7 million, representing an increase
of 61.5%.
Non-performing assets - loans past due 90 days or more, non-accrual
loans plus other real estate acquired - totaled $5.7 million, or
1.2% of total assets at December 31, 1995, as compared to 1.1% at
December 31, 1994.
Net interest income - the difference between total interest income
on earning assets and total interest expense on deposits and
borrowings - totaled $19.6 million for 1995, as compared to $12.2
million for 1994.
Non-interest income - the fees charged for banking services -
totaled $4.7 million for 1995, as compared to $3.2 million during
1994.
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 - totaled $15.9 million as compared to
$10.4 million in 1994.
Income tax expense - the income tax provision on current year
earnings - totaled $2.3 million in 1995, versus $1.0 million in
1994.
In the following sections, these and other major factors and trends affecting
the components of income and expense are examined in depth. Information
concerning assets and liabilities is subsequently provided so that an evaluation
can be made of capitalization and liquidity as they may affect Gulf Southwest's
future outlook. Balances of the banks acquired in 1995 are only included in the
totals reported for 1995.
NET INTEREST INCOME
- -------------------
Net interest income on a taxable equivalent basis for 1995 was $20.0 million, an
increase of $7.6 million, or 61.3%, from $12.4 million in 1994. Net interest
income for 1994 was $12.4 million, up $1.3 million, or 11.7%, from $11.1 million
in 1993.
Disregarding the acquisition of Texas Gulf Coast, net interest income increased
$1.7 million, or 14.0%, for 1995 as compared to 1994. The improvement in net
interest income for 1995 was primarily due to increases in average earning
assets with higher average yields. The increase in average earning assets was
the result of an increase of 3.8% in average deposits. The increase in 1994 was
mainly due to the same factors, as well as the shift of non-earning assets to
earning assets. Total interest expense increased $1.2 million in 1995 as
compared to the 1994 decrease of $147 thousand. The 1995 increase was primarily
due to an increase in interest bearing deposits with higher interest rates. 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
three-year history of Gulf Southwest's daily average interest-earning assets and
interest-bearing liabilities. Net interest income is developed on a taxable
equivalent basis because management of Gulf Southwest is of the opinion that
such a presentation facilitates the analytical discussion of changes in the
components of earnings. A history of the net interest margin on a taxable
equivalent basis (using a federal income tax rate of 34%) is set forth below (in
thousands), followed by detailed schedules of its components.
11
<PAGE>
SUMMARY OF EARNING ASSETS AND INTEREST-BEARING LIABILITIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993
------------------------------ ----------------------------------- ------------------------------
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 $103,893 $ 6,266 6.03% $ 52,704 $ 3,041 5.77% $ 42,795 $ 2,642 6.17%
Non-taxable 14,272 1,149 8.05% 5,494 562 10.23% 7,600 795 10.46%
Due from CD's 1,419 76 5.36% 1,372 62 4.52% 1,573 46 2.92%
Interest bearing deposits
with banks 13,515 1,780 5.83% 0 0 0.00% 0 0 0.00%
Federal Funds Sold 30,551 793 5.87% 30,304 1,216 4.01% 36,420 1,076 2.95%
Net loans 201,248 19,501 9.69% 135,077 12,275 9.09% 123,605 11,513 9.31%
-------- ------- ---- -------- ------- ----- -------- ------- -----
Total Interest earning
assets 364,898 29,565 8.10% 224,951 17,156 7.63% 211,993 16,072 7.58%
-------- ------- ---- -------- ------- ----- -------- ------- -----
Cash and due from banks 20,745 12,445 12,123
Premises, equipment and
other 17,001 8,633 11,509
-------- -------- --------
$402,644 $246,029 $235,625
======== ======== ========
Deposits:
Demand - interest
bearing $ 83,104 $ 2,031 2.44% $ 46,103 $ 954 2.07% $ 46,643 $ 1,082 2.32%
Savings 46,549 1,336 2.87% 29,097 736 2.53% 28,035 758 2.70%
Time 125,123 5,990 4.79% 79,786 3,106 3.89% 78,712 3,066 3.90%
Borrowings 2,536 220 8.68% 0 0 0.00% 321 37 11.53%
-------- ------- ---- -------- ------- ----- -------- ------- -----
Total interest bearing
liabilities 257,312 9,577 3.72% 154,986 4,796 3.09% 153,711 4,943 3.22%
-------- ------- ---- -------- ------- ----- -------- ------- -----
Deposits - non-interest
bearing 101,883 65,909 59,577
Other liabilities 3,011 1,716 1,394
Shareholders' equity 40,438 23,418 20,943
-------- -------- --------
$402,644 $246,029 $235,625
======== ======== ========
Net interest earnings $19,988 $12,360 $11,129
======= ======= =======
Net yield on interest
earning
assets 5.48% 5.49% 5.25%
==== ===== =====
Interest rate spread 4.38% 4.54% 4.36%
==== ===== =====
</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 investments.
12
<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%.
RATE/VOLUME ANALYSIS
CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------------------------- ---------------------------------------------
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 $ 3,225 $2,954 $ 271 $ 399 $ 610 $(211)
Non-taxable securities 587 898 (311) (233) (220) (13)
Due from CD's 14 2 12 16 (6) 22
Federal funds sold 564 10 554 140 (181) 321
Deposits with financial
institutions 793 0 793 0 0 0
Loans 7,226 6,013 1,213 762 1,059 (297)
------- ------ ------ ------ ------ -----
Total interest income 12,409 9,877 2,532 1,084 1,262 (178)
------- ------ ------ ------ ------ -----
Interest expense:
Deposits:
Demand - interest bearing 1,077 766 311 (128) (13) (115)
Savings 600 441 159 (22) 27 (49)
Time 2,884 1,765 1,119 40 48 (8)
Borrowings 220 0 220 (37) (37) 0
------- ------ ------ ------ ------ -----
Total interest expense 4,781 2,972 1,809 (147) 25 (172)
------- ------ ------ ------ ------ -----
Net interest income $ 7,628 $6,905 $ 723 $1,231 $1,237 $ (6)
======= ====== ====== ====== ====== =====
</TABLE>
13
<PAGE>
LOAN PORTFOLIO
- --------------
The following tables show the composition of the loan portfolio at the end of
the last five years and the loan maturity distribution as of December 31, 1995
(dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial and industrial $ 44,651 $ 28,593 $ 27,935 $ 26,047 $ 25,715
Real estate - construction 8,626 7,205 2,997 2,145 2,690
Real estate - other 123,130 80,472 68,837 65,842 64,958
Installment 59,765 27,786 27,428 29,322 29,216
Other 1,392 403 255 100 263
-------- -------- -------- -------- --------
Total loans, net of
unearned discount $237,564 $144,459 $127,452 $123,456 $122,842
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------
1 YEAR 1 - 5 AFTER
DUE IN: OR LESS YEARS 5 YEARS
-------- -------- --------
<S> <C> <C> <C>
Commercial and industrial loans $ 22,779 $ 18,579 $ 3,293
Real estate construction 4,709 3,917 0
-------- -------- --------
Total $ 27,488 $ 22,496 $ 3,293
======== ======== ========
Loans due after 1 year which have
Predetermined interest rates $ 15,122
Floating or adjustable rates 10,667
--------
Total $ 25,789
========
</TABLE>
LOAN PORTFOLIO COMPOSITION
- --------------------------
Total loans increased 64.5% from December 31, 1994 to December 31, 1995.
Commercial and industrial loans increased $16,058,000, or 56.2%, real estate
related loans increased $44,079,000, or 50.3%, and installment loans increased
$31,979,000, or 115.1%. Eliminating the loans acquired through the acquisition
of Texas Gulf Coast, total loans increased $16,231,000, or 11.2%.
The composition of the loan portfolio at the end of the last three years is
displayed in the following table:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Commercial and industrial 18.8% 19.8% 21.9%
Real estate - construction 3.6% 5.0% 2.4%
Real estate - other 51.8% 55.7% 54.0%
Individuals for household and
other consumer purposes 25.2% 19.2% 21.5%
Other .6% .3% .2%
</TABLE>
Non-accrual loans and past due loans (90 days or more) totaled $3,125,000 and
$850,000, respectively at December 31, 1995, as compared to $1,215,000 and
$128,000, respectively at December 31, 1994.
14
<PAGE>
PROVISION FOR CREDIT LOSSES
- ---------------------------
The allowance for credit losses at December 31, 1995 was $2,411,000,
representing 1.01% of outstanding loans. A year earlier, this ratio was 1.43%.
The provision for credit losses charged against earnings was $135,000 in 1995,
$50,000 in 1994, and $410,000 in 1993. For the year 1995, the Company had net
losses totaling $525,000 as compared to net recoveries of $27,000 in 1994 and
net losses of $149,000 in 1993. Included in the net losses of $525,000, loans
totaling approximately $300,000 are expected to be recovered through litigation.
During 1995, the net charge-off ratio to average loans was .26% as compared to a
net recovery ratio to average loans of .02% in 1994 and a net charge-off of .12%
in 1993.
To a very large extent, the Subsidiary 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.
The transactions occurring in the allowance for credit losses for the five years
ended December 31, 1995, including a breakdown of net charge-offs by type of
loan, are as follows:
15
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1995 1994 1993 1992 1991
--------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Average loans outstanding $201,248 $135,077 $125,476 $125,199 $123,056
======== ======== ======== ======== ========
Loans outstanding at year-end $237,564 $144,459 $127,452 $123,456 $122,842
======== ======== ======== ======== ========
Allowance at beginning of period $ 2,063 $ 1,986 $ 1,725 $ 2,079 $ 2,213
-------- -------- -------- -------- --------
Allowance of acquired banks 738 0 0 0 0
Provision charged to expense 135 50 410 1,165 825
-------- -------- -------- -------- --------
Loans charged off:
Commercial and industrial (499) (175) (197) (441) (583)
Real estate - construction 0 0 0 0 0
Real estate - other (14) (159) (54) (1,002) (291)
Installment (211) (103) (136) (201) (277)
Other (18) 0 0 0 0
-------- -------- -------- -------- --------
Total (742) (437) (387) (1,644) (1,151)
-------- -------- -------- -------- --------
Loans recovered:
Commercial and industrial 101 155 150 54 86
Real estate - construction 0 0 0 0 0
Real estate - other 64 296 44 20 54
Installment 50 13 44 51 52
Other 2 0 0 0 0
-------- -------- -------- -------- --------
Total 217 464 238 125 192
-------- -------- -------- -------- --------
Net loans (charged-off) recovered (525) 27 (149) (1,519) (959)
-------- -------- -------- -------- --------
Allowance at end of period $ 2,411 $ 2,063 $ 1,986 $ 1,725 $ 2,079
======== ======== ======== ======== ========
Ratios:
Allowance as a percent of loans
outstanding at year-end 1.01% 1.43% 1.56% 1.40% 1.69%
Allowance as a percent of
average loans 1.20% 1.53% 1.58% 1.38% 1.69%
Net loans charged-off (recovered)
as a percent of average loans
outstanding .26% (.02%) 0.12% 1.20% 0.80%
Allowance as a percentage
of nonperforming loans 60.65% 153.60% 122.40% 78.70% 51.80%
</TABLE>
16
<PAGE>
Management of the Subsidiary 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 Subsidiary Banks' procedures for reviewing
the adequacy of their 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, the Subsidiary Banks'
internal loan review staff and independent auditors.
The allocation of the Subsidiary Banks' allowance for credit losses by loan
category for the five years ended December 31, 1995 is presented in the
following table (dollars in thousands).
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------------- -------------- -------------- -------------- --------------
% OF % OF % OF % OF % OF
AMOUNT LOAN AMOUNT LOAN AMOUNT LOAN AMOUNT LOAN AMOUNT LOAN
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
industrial $1,621 18.8% $ 826 19.8% $1,010 21.9% $ 463 21.1% $1,424 20.9%
Real estate -
construction * 3.6% * 5.0% * 2.4% * 1.7% 4 2.2%
Real estate -
other 50 51.8% 751 55.7% 277 54.0% 1,051 53.3% 314 52.9%
Installment 740 25.2% 486 19.2% 699 21.5% 211 23.8% 337 23.8%
Other * .6% * .3% * . 2% * .1% * .2%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $2,411 100.0% $2,063 100.0% $1,986 100.0% $1,725 100.0% $2,079 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
* Less than $1,000
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;
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 Subsidiary 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 Company had no material
renegotiated or troubled debt restructuring loans during the years 1991 through
1995.
The following table discloses information regarding non-performing assets for
each of the last five years (in thousands):
17
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $3,125 $1,215 $1,455 $1,737 $3,394
Past due 90 days or
more 850 128 168 456 621
------ ------ ------ ------ ------
Total non-
performing loans 3,975 1,343 1,623 2,193 4,015
Other real estate
owned 1,697 1,461 1,578 3,037 5,090
------ ------ ------ ------ ------
Total non-
performing assets $5,672 $2,804 $3,201 $5,230 $9,105
====== ====== ====== ====== ======
</TABLE>
The Subsidiary Banks included in reported income for 1995, $61,858 of interest
received on non-accrual loans. Had these loans paid interest at their original
rates, the Subsidiary Banks would have reported $262,583 of interest on these
non-accrual loans.
NON-INTEREST INCOME
- -------------------
Non-interest income increased 43.8% in 1995 compared to an increase of 8.7% in
1994. Service charges on deposits, the largest component of non-interest
income, increased by 47.6% in 1995 as compared to a decrease of 1.40% in 1994.
Disregarding the acquisition of Texas Gulf Coast, non-interest income decreased
by 10.3%
The components of other charges and fees consist of 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. Other operating income
increased $264,000, or 39.8%, from 1994 to 1995. The majority of the increase
is attributable to the acquisition of the mortgage operation of Texas Gulf
Coast. Income from the mortgage operation includes origination fees, as well as
fees charged for servicing the underlying mortgages.
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>
(IN THOUSANDS)
1995 1994 1993
---------------- ---------------- ----------------
% % %
AMOUNT CHANGE AMOUNT CHANGE AMOUNT CHANGE
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Service charges on deposit
accounts $3,472 47.6% $2,353 (1.4)% $2,387 5.4%
Other service charges and
fees 256 15.3% 222 11.0% 200 (4.8)%
Other operating income 927 39.8% 663 82.6% 363 12.8%
Securities transactions 0 0.0% 0 0.0% 29 81.3%
------ ----- ------ ----- ------ -----
Total $4,655 43.76% $3,238 8.7% $2,979 6.0%
====== ===== ====== ===== ====== =====
</TABLE>
18
<PAGE>
NON-INTEREST EXPENSE
- --------------------
Total non-interest expense increased by 52.8% for 1995 as compared to a decrease
of 1.0% in 1994. All categories had significant increases due to the Texas Gulf
Coast acquisition. Disregarding the acquisition, total non-interest expenses
decreased $340,000, or 3.1%. Decreases in occupancy and furniture and equipment
expenses ($139,000, or 8.3%), other real estate ($196,000, or 43.2%) and other
operating expenses ($494,000, or 14.4%) were partially offset by an increase of
$489,000 (10.1%) in salaries and benefits.
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>
1995 1994 1993
----------------- ----------------- ----------------
% % %
AMOUNT CHANGE AMOUNT CHANGE AMOUNT CHANGE
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee
benefits $ 8,317 72.4% $ 4,825 1.2% $ 4,770 10.8%
Occupancy expense 1,666 44.4% 1,154 25.4% 920 15.9%
Furniture and equipment
expense 824 55.5% 530 10.7% 479 4.6%
Other real estate expense 290 (36.1)% 454 (52.3)% 951 (21.1)%
Other operating expense 4,781 39.4% 3,430 1.7% 3,374 7.0%
------- ------ ------- ------ ------- ------
Total $15,878 52.8% $10,393 (1.0)% $10,494 5.8%
======= ====== ======= ====== ======= ======
</TABLE>
INCOME TAXES
- ------------
At December 31,1995, the Company has for tax reporting purposes, $302,000 of
alternative minimum tax credit carryforward. Footnote 10 to the financial
statements on page 47 sets forth the components of the income tax provision and
the amounts of deferred tax assets and liabilities of the Company.
BALANCE SHEET MANAGEMENT
- ------------------------
During 1995, total average earning assets increased $139.9 million or 62.2%.
Average loans increased $66.2 million, average investment securities increased
$60.0 million and average short-term money market instruments increased $13.8
million (these investments include federal funds sold and interest bearing
deposits in financial institutions and the Federal Home Loan Bank). The
acquisition of Texas Gulf Coast accounts for approximately 75.2% of the increase
in average earning assets.
During 1994, total average earning assets increased $13.0 million or 6.1% from
1993. Average loans increased $11.5 million or 9.3% and average investment
securities increased $7.8 million or 15.5%. These increases were partially
funded by a decrease of $6.3 million or 19.9% in average short-term money market
investments, which include federal funds sold and interest-bearing deposits in
financial institutions. The remaining growth in average assets was funded by
deposits and shareholders' equity, which expanded by an average balance of $7.9
million and $2.5 million, respectively.
The following table presents the Company's average balance sheet composition on
a percentage basis:
19
<PAGE>
BALANCE SHEET COMPOSITION - PERCENTAGE OF TOTAL ASSETS
- ------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Investment securities:
Taxable 25.8% 21.4% 18.2%
Non-taxable 3.5 2.2 3.2
Due from CD's .4 .6 .7
Federal funds sold 11.0 12.3 15.4
Net loans 50.0 54.9 52.5
----- ----- -----
Total earning assets 90.7 91.4 90.0
Cash and due from banks 5.1 5.1 5.1
Premises, equipment and other 4.2 3.5 4.9
----- ----- -----
Total Assets 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
PERCENTAGE OF TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Deposits - interest bearing 63.3% 63.0% 65.1%
Borrowings .6 .0 .1
----- ----- -----
Total interest bearing liabilities 63.9 63.0 65.2
Deposits - non-interest bearing 25.3 26.8 25.3
Other liabilities .8 .7 .6
Shareholders' Equity 10.0 9.5 8.9
----- ----- -----
Total Liabilities and
Shareholders' Equity 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
INVESTMENT SECURITIES
- ---------------------
The book and market values of investment securities held by the Company as of
dates indicated are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1994 1993
-------- ------- --------
<S> <C> <C> <C>
Book Value:
U. S. Treasury & Agencies $129,110 $50,340 $44,096
States and Political Subdivisions 21,382 6,505 8,226
Other 227 7 7
-------- ------- -------
Total $150,719 $56,852 $52,329
======== ======= =======
Market Value $152,447 $55,766 $54,107
======== ======= =======
</TABLE>
On January 1, 1994, all bank holding companies were required to adopt the
Financial Accounting Standard Board ("FASB") Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." FASB No. 115 requires
institutions to divide their securities holdings among three categories: held-
to-maturity, available-for-sale and trading securities. The accounting standard
provides a different accounting treatment for each category.
Held-to-maturity securities are those debt securities which an institution has
the positive intent and ability to hold to maturity. These debt securities are
reported at amortized cost.
20
<PAGE>
Trading securities are those debt and equity securities that an institution buys
and holds principally for the purpose of selling in the near term. Trading
securities are reported at fair value, with unrealized changes in value reported
directly in the income statement as a part of the institution's earnings.
Available-for-sale securities are those debt securities which the institution
does not have the positive intent and ability to hold to maturity, yet does not
intend to trade actively as part of its trading account. Available-for-sale
securities must be reported at fair value with any unrealized appreciation or
depreciation in the value of these securities, net of tax effects, reported
directly as a separate component of equity capital. Thus, unrealized changes in
the value of these securities will have no effect on the reported earnings of
the bank holding company.
The following table shows as of December 31, 1995, the distribution of
maturities and the weighted average interest yields to maturity of the Company's
investment securities (dollars in thousands).
<TABLE>
<CAPTION>
HELD TO MATURITY
----------------------------------------------------------------
STATES & POLITICAL SUBDIVISIONS
U. S. TREASURY --------------------------------
& AGENCIES TAXABLE NON-TAXABLE TOTAL
--------------- --------- ----------- -------
<S> <C> <C> <C> <C>
Due within one year:
Book Value $ 0 $ 935 $1,590 $2,525
Market Value 0 934 1,604 2,538
Yield 0 5.66% 10.26% 8.56%
Due after one but within five years:
Book Value $ 0 $1,395 $8,407 $9,802
Market Value 0 1,405 8,508 9,913
Yield 0 5.91% 7.06% 6.90%
Due after five but within ten years:
Book Value $ 0 $ 599 $8,180 $8,779
Market Value 0 626 8,441 9,067
Yield 0 7.16% 7.73% 7.69%
Due after ten years:
Book Value $ 0 $ 0 $ 276 $ 276
Market Value 0 0 278 278
Yield 0 0 6.83% 6.83%
</TABLE>
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
--------------------------------------------
U. S. TREASURY
& AGENCIES OTHER TOTAL
-------------- ------- --------
<S> <C> <C> <C>
Due within one year:
Book Value $38,552 $ 0 $38,552
Market Value 38,677 0 38,677
Yield 5.82% 0 5.82%
Due after one but within five years:
Book Value 89,313 0 89,313
Market Value 90,441 0 90,441
Yield 6.13% 0 6.13%
Due after five but within ten years:
Book Value 1,153 0 1,153
Market Value 1,213 0 1,213
Yield 7.43% 0 7.43%
Due after ten years:
Book Value 92 227 319
Market Value 93 227 320
Yield 8.32% 6.00% 6.67%
</TABLE>
The interest on non-taxable investment securities has been calculated on a fully
taxable equivalent basis incorporating an effective tax rate of 34%.
21
<PAGE>
LIQUIDITY MANAGEMENT
- --------------------
Like any commercial bank, the liability structure of the Subsidiary Banks
requires 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. The liquidity of Gulf Southwest is provided primarily by
dividends from the Subsidiary Banks and GSWDP, income tax benefits and interest
on time deposits in financial institutions. Sources of liquidity for the
Subsidiary Banks 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, 1995, the Subsidiary Banks had
$29,486,000 in cash, $51,704,000 in federal funds sold and interest bearing
deposits with the Federal Home Loan Bank, $898,000 in time deposits with other
financial institutions and a $150,719,000 investment securities portfolio in
which the market value was $1,728,000 more than the carrying value. The loan-
to-deposit ratio was 55.1% at December 31, 1995 compared to 63.9% at December
31, 1994.
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 on page 32 indicates the
sources of these cash flows.
CAPITAL COMMITMENTS
- -------------------
Gulf Southwest believes that it has sufficient capital and financial resources
to meet its current and anticipated capital commitments.
DEPOSITS
- --------
The most important source of the Subsidiary Bank's funds is deposits. The type
of deposits that were in the Subsidiary Bank on a daily average basis and the
related average rate paid during each of the last three years are broken down as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
--------------- -------------- --------------
RATE RATE RATE
AMOUNT PAID AMOUNT PAID AMOUNT PAID
-------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Demand - non-interest bearing $101,883 0.00% $65,909 0.00% $59,577 0.00%
Demand - interest bearing 83,104 2.44% 46,103 2.07% 46,643 2.32%
Savings 46,549 2.87% 29,097 2.53% 28,035 2.70%
Time 125,123 4.79% 79,786 3.89% 78,712 3.90%
</TABLE>
The following table provides certain information regarding certificates of
deposit issued by the Subsidiary Bank in amounts equal to or exceeding $100,000
at December 31, 1995 (dollars in thousands):
<TABLE>
<S> <C>
Three (3) months or less $18,155
Over three (3) months through six (6) months 5,662
Over six (6) months through twelve (12) months 7,641
Over twelve (12) months 5,367
-------
Total $36,825
=======
</TABLE>
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.
22
<PAGE>
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.
The following table presents the interest sensitivity position of the Company at
December 31, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
RATE SENSITIVE WITHIN NONRATE
-------------------------------------------- -------------------------------
30-DAY 90-DAY 180-DAY ONE YEAR TOTAL SENSITIVE TOTAL
----------- ---------- -------- --------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loan, Net of Unearned
Discount $ 51,555 $ 13,205 $23,580 $ 86,042 $174,382 $ 63,182 $237,564
Investment Securities 8,807 7,421 14,982 54,689 85,899 66,134 152,033
Federal Funds Sold 28,175 0 0 0 28,175 0 28,175
Interest Deposits in Bank 23,530 0 0 0 23,530 0 23,530
Other Earning Assets 798 100 0 0 898 0 898
-------- -------- ------- -------- -------- -------- --------
Total Earning Assets 112,865 20,726 38,562 140,731 312,884 129,316 442,200
-------- -------- ------- -------- -------- -------- --------
Interest Bearing Liabilities:
Interest-Bearing Deposits 204,306 30,864 27,263 31,144 293,577 17,746 311,323
-------- -------- ------- -------- -------- -------- --------
Total Interest-Bearing
Liabilities 204,306 30,864 27,263 31,144 293,577 17,746 311,323
-------- -------- ------- -------- -------- -------- --------
Interest Sensitivity Gap $(91,441) $(10,138) $11,299 $109,587 $ 19,307
======== ======== ======= ======== ========
Ratio of Earning Assets to
Interest-Bearing Liabilities 55.24% 67.15% 141.44% 451.87% 106.58%
======== ======== ======= ======== ========
</TABLE>
The Company had a negative interest rate sensitive gap position in the 30-day
period of $91.4 million. The cumulative rate sensitive gap position was a
positive $19.3 million, which indicates that the Company may benefit from rising
interest rates; conversely falling interest rates may have a negative impact
upon the Company.
CAPITAL MANAGEMENT
- ------------------
The Board 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 them to 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
percent of "Tier 1." For bank holding companies, "Tier 1" capital includes,
with certain restrictions, common Shareholders' 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.
23
<PAGE>
At December 31, 1995, the Company's ratio of "Tier 1" and total capital to risk-
weighted assets were approximately 18.85% and 19.79%, respectively. Both ratios
significantly exceed regulatory minimums.
The following table summarizes the Company's Tier 1 and Total Capital (dollars
in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------
AMOUNT RATIO
--------- -------
<S> <C> <C>
Tier 1 Capital $ 48,409 18.85%
Tier 1 Capital Minimum Requirement 10,272 4.00%
-------- -----
Excess Tier 1 Capital $ 38,137 14.85%
======== =====
Total Capital $ 50,820 19.79%
Total Capital Minimum Requirement 20,544 8.00%
-------- -----
Excess Total Capital $ 30,276 11.79%
======== =====
Risk Adjusted Assets, Net of Goodwill $256,803
========
</TABLE>
In addition to the risk-based capital guidelines, the Board 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 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 banks with a CAMEL rating of
1 or for bank holding companies with a BOPEC rating of 1. All other
institutions will be expected to maintain at least 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%. The Company's leverage ratio at December 31, 1995 was 9.92%,
which also exceeds the regulatory minimum.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
INDEX TO FINANCIAL STATEMENTS
-----------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................... 26
Gulf Southwest Bancorp, Inc. and Subsidiaries :
Consolidated Balance Sheet - December 31, 1995 and 1994. 27
Consolidated Statement of Income -
For each of the three years in the period
ended December 31, 1995............................ 29
Consolidated Statement of Stockholders' Equity -
For each of the three years in the period
ended December 31, 1995............................ 31
Consolidated Statement of Cash Flows -
For each of the three years in the period
ended December 31, 1995............................ 32
Gulf Southwest Bancorp, Inc. (Parent Company Only):
Balance Sheet - December 31, 1995 and 1994.............. 35
Statement of Income -
For each of the three years in the period
ended December 31, 1995............................ 36
Statement of Stockholders' Equity -
For each of the three years in the period
ended December 31, 1995............................ 31
Statement of Cash Flows -
For each of the three years in the period
ended December 31, 1995............................ 37
Notes to Financial Statements................................ 38
</TABLE>
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.
25
<PAGE>
HIDALGO, BANFILL, ZLOTNIK & KERMALI, P.C.
C E R T I F I E D P U B L I C A C C O U N T A N T S
(Originally Founded in 1949)
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, 1995 and 1994, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1995, and the balance sheet
of Gulf Southwest Bancorp, Inc. (parent company only) as of December 31, 1995
and 1994, and the related statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the
respective results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
Hidalgo, Banfill, Zlotnik & Kermali, P.C.
Houston, Texas
February 21, 1996
3555 TIMMONS LANE, SUITE 460 - HOUSTON, TEXAS 77027 - (713) 963-8008
26
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
ASSETS
------
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash and due from banks (Note 3) $ 29,848,206 $ 14,962,004
Interest bearing deposits with bank 23,529,402 -
Time deposits with financial institutions 898,000 1,994,000
Federal funds sold 28,175,000 26,950,000
Investment securities (Note 4):
Held-to-maturity (Market value
1995 - $ 21,796,181
1994 - $ 47,802,547) 21,381,584 48,888,543
Available-for-sale 130,650,980 7,963,020
Loans (Note 5):
Loans, net of unearned income
of $ 6,263,627 in 1995 and
$ 2,945,396 in 1994 237,564,299 144,459,176
Less allowance for possible
loan losses 2,410,815 2,062,786
------------ ------------
Total loans, net 235,153,484 142,396,390
Bank premises and equipment (Note 6) 8,692,194 4,620,923
Accrued interest receivable 3,929,904 2,009,835
Real estate and other loan-related assets 1,770,207 1,469,272
Other assets 2,619,917 1,772,856
------------ ------------
Total Assets $486,648,878 $253,026,843
============ ============
</TABLE>
See notes to financial statements
27
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Deposits:
Non-interest bearing $120,058,131 $ 71,983,647
Interest bearing (Note 7) 311,322,873 154,080,631
------------ ------------
431,381,004 226,064,278
Accrued interest, taxes and other
liabilities 2,576,113 1,423,467
Borrowings (Note 8) 3,082,960 -
Minority interest 286,697 -
------------ ------------
Total Liabilities 437,326,774 227,487,745
------------ ------------
Commitments and Contingencies (Note 11) - -
Stockholders' Equity (Notes 9 and 12):
Preferred stock $ 20 par value,
authorized 2,000,000 shares - -
Common stock, $ 1 par value,
authorized 10,000,000 shares,
issued 1,977,855 shares in 1995
and 1,281,650 in 1994 1,977,855 1,281,650
Paid-in capital 25,766,675 8,630,862
Retained earnings 21,166,586 16,002,758
Net unrealized gain (loss) on
securities available-for-sale
(net of income taxes) 859,555 (62,728)
------------ ------------
49,770,671 25,852,542
Less cost of stock held in treasury:
Common, 34,885 shares in 1995 and
23,014 in 1994 (448,567) (313,444)
------------ ------------
Total Stockholders' Equity 49,322,104 25,539,098
------------ ------------
Total Liabilities and
Stockholders' Equity $486,648,878 $253,026,843
============ ============
</TABLE>
See notes to financial statements.
28
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Interest Income:
Interest and fees
on loans $19,500,532 $12,274,698 $11,512,713
Investment securities:
Taxable interest 6,265,941 3,041,308 2,641,958
Non-taxable interest 758,059 370,726 524,996
Interest bearing deposits with bank 793,023 - -
Time deposits with financial
institutions 76,140 62,363 45,730
Federal funds sold 1,780,062 1,216,142 1,076,099
----------- ----------- -----------
Total Interest Income 29,173,757 16,965,237 15,801,496
----------- ----------- -----------
Interest Expense:
Deposits 9,356,469 4,796,133 4,906,504
Long-term borrowings 220,418 - 36,534
----------- ----------- -----------
Total Interest Expense 9,576,887 4,796,133 4,943,038
----------- ----------- -----------
Net interest income 19,596,870 12,169,104 10,858,458
Provision for possible loan
losses (Note 5) 135,000 50,000 410,000
----------- ----------- -----------
Net interest income after
provision for possible
loan losses 19,461,870 12,119,104 10,448,458
----------- ----------- -----------
Noninterest Income:
Service charges on deposit
accounts 3,472,492 2,353,282 2,387,457
Other service charges
and fees 256,110 222,001 200,414
Other operating income 926,841 662,771 362,421
Securities transactions
(Note 4) (40) - 28,793
----------- ----------- -----------
Total Noninterest Income 4,655,403 3,238,054 2,979,085
----------- ----------- -----------
Noninterest Expense:
Salaries and employee
benefits 8,316,752 4,825,183 4,769,640
Occupancy expense 1,665,812 1,153,620 919,686
Furniture and equipment
expense 824,168 529,730 479,420
Other real estate expense 290,364 454,216 950,786
Other operating expense
(Note 15) 4,780,721 3,430,091 3,374,888
----------- ----------- -----------
Total Noninterest Expense 15,877,817 10,392,840 10,494,420
----------- ----------- -----------
</TABLE>
See notes to financial statements.
29
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENT OF INCOME (CONTINUED)
--------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1995 1994 1993
---------- ----------- ----------
<S> <C> <C> <C>
Income before provision for
income taxes 8,239,456 4,964,318 2,933,123
Provision for income taxes
(Note 10) 2,332,700 999,300 512,500
---------- ---------- ----------
Net Income $5,906,756 $3,965,018 $2,420,623
========== ========== ==========
Weighted Average Number
of Common Shares
Outstanding 1,718,211 1,258,636 1,261,731
========== ========== ==========
Net Income per Common Share $ 3.44 $ 3.15 $ 1.92
========== ========== ==========
</TABLE>
See notes to financial statements.
30
<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 (Loss)
on
Securities
Preferred Common Paid-In Retained Available- Treasury
Stock Stock Capital Earnings for-Sale Stock
--------- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1993 $ - $1,281,650 $ 8,630,862 $ 9,994,968 $ - $(270,226)
Net income - - - 2,420,623 - -
Cash dividend declared -
common stock,
$.10 per share - - - (126,124) - -
Acquired 532 shares
of treasury stock - - - - - -
--------- ---------- ----------- ----------- ---------- ---------
Balance at
December 31, 1993 - 1,281,650 8,630,862 12,289,467 - (270,226)
Net income - - - 3,965,018 - -
Cash dividend declared -
common stock,
$.20 per share - - - (251,727) - -
Change in accounting
method (Note 4) - - - - 49,656 -
Net change in
unrealized gain (loss)
on investment securities
available-for-sale - - - - (112,384) -
Acquired 2,607 shares
of treasury stock - - - - - (43,218)
--------- ---------- ----------- ----------- ---------- ---------
Balance at
December 31, 1994 - 1,281,650 8,630,862 16,002,758 (62,728) (313,444)
Net income - - - 5,906,756 - -
Cash dividend declared -
common stock,
$.41 per share - - - (742,928) - -
Net change in
unrealized gain (loss)
on investment securities
available-for-sale - - - - 1,001,073 -
Common stock issued - 696,205 17,135,813 - (78,790) -
Acquired 15,328 shares
of treasury stock - - - - - (174,256)
Sold 3,457 shares
of treasury stock - - - - - 39,133
--------- ---------- ----------- ----------- ---------- ---------
Balance at
December 31, 1995 $ - $1,977,855 $25,766,675 $21,166,586 $ 859,555 $(448,567)
========= ========== =========== =========== ========== =========
</TABLE>
See notes to financial statements.
31
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Cash Flows From Operating
Activities:
Net income $ 5,906,756 $3,965,018 $2,420,623
----------- ---------- ----------
Adjustments to Reconcile Net
Income to Cash Flows
from Operating Activities:
Provision for possible
loan losses 135,000 50,000 410,000
Discount (accretion) amortized to
income 246,698 465,510 383,578
Loss (Gain) on sale or maturity of
investment securities 40 - (28,793)
Origination of mortgage loans for sale (7,419,281) - -
Proceeds from mortgage loans sold 7,336,361 - -
Depreciation and amortization 888,835 520,777 428,566
Loss (Gain) on sale of premises
and equipment 24,216 (10,475) 50,689
Provision for losses on real
estate and other loan-related
assets 109,900 245,343 654,438
(Gain) Loss on sale of real estate
and other loan-related assets 11,528 1,571 (42,798)
(Increase) Decrease in accrued
interest receivable (164,755) (322,899) (32,006)
Decrease (Increase) in other
assets (110,580) 876,537 153,948
Increase (Decrease) in accrued
interest, taxes and other
liabilities 219,740 292,418 166,310
----------- ---------- ----------
Total Adjustments 1,277,702 2,118,782 2,143,932
----------- ---------- ----------
Net Cash Flows From
Operating Activities 7,184,458 6,083,800 4,564,555
----------- ---------- ----------
</TABLE>
See notes to financial statements.
32
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows From Investing Activities:
Net decrease (increase) in time
deposits in financial institutions 1,096,000 (700,000) 648,000
Proceeds from sales of held-to-maturity
investment securities - - 745,000
Proceeds from the maturities of
held-to-maturity investment securities 19,036,859 6,830,000 13,548,450
Proceeds from the sales of
available-for-sale investment securities - - -
Proceeds from the maturities of
available-for-sale investment securities 19,311,807 7,500,000 -
Purchase of held-to-maturity
investment securities (24,717,436) (17,924,547) (19,305,243)
Purchase of available-for-sale
investment securities (20,152,737) (1,488,750) -
Net (increase) decrease in loans (13,919,914) (17,417,795) (3,259,252)
Rebates paid to customers (1,033,599) (470,934) (594,272)
Recoveries of loans charged-off 216,986 464,273 237,664
Proceeds from sale of premises
and equipment 24,738 28,300 62,887
Capital expenditures (599,288) (946,806) (724,762)
Proceeds from sale of real
estate and other loan-related
assets 423,356 305,600 318,704
------------ ------------ ------------
Net Cash Flows From Investing
Activities (20,313,228) (23,820,659) (8,322,824)
------------ ------------ ------------
Cash Flows From Financing Activities:
Net increase in deposits 24,291,803 7,122,140 10,974,419
Repayment of long-term borrowings (374,045) - (350,000)
Proceeds from sale of treasury stock 39,133 - -
Purchase of treasury stock (174,256) (43,218) -
Dividends paid (742,928) (251,727) (126,124)
------------ ------------ ------------
Net Cash Flows From
Financing Activities 23,039,707 6,827,195 10,498,295
------------ ------------ ------------
Net Increase (decrease) in
Cash and Cash Equivalents 9,910,937 (10,909,664) 6,740,026
Cash and Cash Equivalents at
Beginning of Period 41,912,004 52,821,668 46,081,642
Cash received in acquisition of banks 29,729,667 - -
------------ ------------ ------------
Cash and Cash Equivalents at
End of Period $ 81,552,608 $ 41,912,004 $ 52,821,668
============ ============ ============
Interest Paid $ 9,489,152 $ 4,814,583 $ 4,907,871
============ ============ ============
Federal Income Taxes Paid $ 1,635,366 $ 289,000 $ 12,000
============ ============ ============
</TABLE>
See notes to financial statements.
33
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1993 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Non-Cash Transactions:
Bank loans for real estate
and other loan-related
assets sold $ 607,832 $ 749,330 $ 971,700
Foreclosed properties
transferred to real
estate and other loan
related assets $ 736,956 $ 1,216,352 $ 4,449,828
Investment securities
transferred to securities
available-for-sale $ - $14,185,179 $ -
Issued 696,205 shares of
common stock for the
merger with Texas Gulf
Coast Bancorp, Inc. $17,753,228 $ - $ -
</TABLE>
See notes to financial statements.
34
<PAGE>
GULF SOUTHWEST BANCORP, INC.
----------------------------
(PARENT COMPANY ONLY)
----------------------
BALANCE SHEET
-------------
ASSETS
------
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash $ 2,341,817 $ 213,062
Certificates of deposit - 500,000
Due from non-bank subsidiary 59,000 104,256
Due from bank subsidiary 1,750,000 841,800
Investment in bank subsidiary 44,568,002 23,021,849
Equipment 23,850 -
Excess of cost of subsidiaries over
equity in net assets acquired, net
of accumulated amortization of
$ 278,466 in 1995 and $ 264,076
in 1994 297,200 311,590
Deferred tax asset 301,679 728,679
----------- -----------
Total Assets $49,341,548 $25,721,236
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Accrued expenses $ 19,444 $ 138,666
Due to Bank subsidiary - 43,472
----------- -----------
Total Liabilities 19,444 182,138
----------- -----------
Commitments and Contingencies (Note 11) - -
Stockholders' Equity (Notes 9 and 12):
Preferred stock, $ 20 par value,
authorized 2,000,000 shares - -
Common stock, $ 1 par value,
authorized 10,000,000 shares,
issued 1,977,855 shares in 1995
and 1,281,650 in 1994 1,977,855 1,281,650
Paid-in capital 25,766,675 8,630,862
Retained earnings 21,166,586 16,002,758
Net unrealized gain (loss) on
securities available-for-sale
(net of income taxes) 859,555 (62,728)
----------- -----------
49,770,671 25,852,542
Less cost of stock held in treasury:
Common, 34,885 shares in 1995 and
23,014 in 1994 (448,567) (313,444)
----------- -----------
Total Stockholders' Equity 49,322,104 25,539,098
----------- -----------
Total Liabilities and Stockholders' Equity $49,341,548 $25,721,236
=========== ===========
</TABLE>
See notes to financial statements.
35
<PAGE>
GULF SOUTHWEST BANCORP, INC.
----------------------------
(PARENT COMPANY ONLY)
----------------------
STATEMENT OF INCOME
-------------------
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1995 1994 1993
---------- ----------- -----------
<S> <C> <C> <C>
Income:
Cash dividends from subsidiary $3,000,000 $ - $ -
Interest income 13,072 14,097 5,140
---------- ---------- ----------
3,013,072 14,097 5,140
---------- ---------- ----------
Expenses:
Interest - - 36,534
Other operating
expenses 197,568 177,276 50,175
---------- ---------- ----------
197,568 177,276 86,709
---------- ---------- ----------
Income (loss) before
income tax benefit and
equity in undistributed
income of subsidiary 2,815,504 (163,179) (81,569)
Income tax benefit 299,400 621,900 328,000
---------- ---------- ----------
Income before equity
in undistributed income
of subsidiary 3,114,904 458,721 246,431
Equity in undistributed
income of subsidiary 2,791,852 3,506,297 2,174,192
---------- ---------- ----------
Net income $5,906,756 $3,965,018 $2,420,623
========== ========== ==========
</TABLE>
See notes to financial statements.
36
<PAGE>
GULF SOUTHWEST BANCORP, INC.
----------------------------
(PARENT COMPANY ONLY)
----------------------
STATEMENT OF CASH FLOWS
-----------------------
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating
Activities:
Net Income $ 5,906,756 $ 3,965,018 $ 2,420,623
Adjustments to Reconcile Net
Income to Cash Flows From
Operating Activities:
Equity in undistributed
income of subsidiary (2,791,852) (3,506,297) (2,174,192)
Amortization and depreciation 17,040 14,390 14,391
Increase (Decrease) in
accrued expenses (119,222) 89,319 49,346
(Increase) in due from subsidiary (862,944) (449,300) (216,501)
Decrease in deferred tax asset 427,000 499,400 547,154
----------- ----------- -----------
Net Cash Flows From Operating Activities 2,576,778 612,530 640,821
----------- ----------- -----------
Cash Flows From Investing Activities:
(Decrease) in due to Bank subsidiary (43,472) - -
Purchase of equipment (26,500) - -
----------- ----------- -----------
Net Cash Flows From Investing Activities (69,972) - -
----------- ----------- -----------
Cash Flows From Financing Activities:
Payments on long-term
borrowings - - (350,000)
Proceeds from sale of treasury stock 39,133 - -
Purchase of treasury stock (174,256) (43,218) -
Dividends paid (742,928) (251,727) (126,124)
----------- ----------- -----------
Net Cash Flows From Financing Activities (878,051) (294,945) (476,124)
----------- ----------- -----------
Net Increase (Decrease) in Cash
and Cash Equivalents 1,628,755 317,585 164,697
Cash and Cash Equivalents at
Beginning of Year 713,062 395,477 230,780
----------- ----------- -----------
Cash and Cash Equivalents at
End of Year $ 2,341,817 $ 713,062 $ 395,477
=========== =========== ===========
Interest Paid $ - $ - $ 36,534
=========== =========== ===========
Taxes Paid $ 1,635,366 $ 289,000 $ 12,000
=========== =========== ===========
Non-Cash Transactions:
Issued 696,205 shares of common stock
for the merger with Texas Gulf
Coast Bancorp, Inc. $17,753,228 $ - $ -
=========== =========== ===========
</TABLE>
See notes to financial statements.
37
<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 which require the use of estimates by
management in the preparation of financial statements.
The Company and its subsidiaries offer a full range of financial services to
commercial, industrial, financial and individual customers in the greater
Houston, Texas and surrounding area, 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. 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 subsidiary, Gulf Southwest Nevada Bancorp, Inc. and its
wholly-owned subsidiaries Merchants Bank, First Bank Mainland, Central Data
Processing, Inc. and G.S.W. Data Processing, Inc. and its majority owned
subsidiaries Texas City Bank and First Bank Pearland. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Investment in subsidiary is accounted for on the equity method of accounting in
the Parent Company Only financial statements.
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.
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, real estate and
other 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 commitment fees are being deferred and
amortized into income over the term of the loan as an adjustment of the yield.
Nonaccrual loans are those on which the accrual of interest has ceased. Loans
are placed on nonaccrual status if in the opinion of management, principal or
interest is not likely to be paid in accordance with the terms of the loan or
when principal or interest is past due 90 days or more and collateral is
insufficient to cover principal and interest. Interest accrued but not
collected at the date a loan is placed on nonaccrual status is reversed against
interest income. All cash receipts, whether
38
<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 (CONTINUED)
- ---------------------------------------------------------------
LOANS (CONTINUED)
- -----------------
designated as principal or interest are used to reduce the carrying value of the
loan when it is in the nonaccrual status. Loans are restored to accrual status
when principal and interest payments are brought current and future payments in
accordance with loan terms are reasonably assured.
Impaired loans are carried at the fair value of the loan's collateral. Changes
in these values are reflected as adjustments to the allowance for loan losses.
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. 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 15 to 40 years.
39
<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 (CONTINUED)
- ---------------------------------------------------------------
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 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 and alternative minimum 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, interest bearing deposits with bank and federal funds sold.
Generally, federal funds are purchased and sold for one-day periods.
RECLASSIFICATIONS
- -----------------
Certain amounts in the 1994 and 1993 financial statements have been reclassified
to conform with the 1995 presentation.
NOTE 2 - ACQUISITION AND MERGERS
- --------------------------------
On May 1, 1995, the Company through its wholly owned subsidiary Gulf Southwest
Nevada Bancorp, Inc. acquired all of the outstanding common stock of Texas Gulf
Coast Bancorp, Inc. by issuing 696,205 (with a fair value of $25.50 per share)
shares of Gulf Southwest Bancorp, Inc. common stock plus cash of $52,231 for
fractional and dissenter shares to effect the merger. The acquisition and
merger was accounted for as a purchase transaction. The excess of cost of the
acquired Company over the sum of the amounts assigned to identifiable assets
acquired less liabilities assumed of $194,650 was recorded as excess of cost
over the net equity in net assets acquired and is being amortized over 15 years.
The operations of Texas Gulf Coast Bancorp, Inc. since May 1, 1995 are included
in the accompanying financial statements. If the Companies had been combined
for all of 1995 and 1994 the results of operations would have been as follows:
<TABLE>
<CAPTION>
Pro forma
Year Ended December 31,
-----------------------------------------
1995 1994
-----------------------------------------
[In thousands, except per share]
<S> <C> <C>
Net interest income $22,533 $20,551
Net income $ 6,343 $ 4,991
Net income per share $ 3.25 $ 2.55
</TABLE>
40
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
---------------------------------------------
AND
---
GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY)
--------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 2 - ACQUISITION AND MERGERS (CONTINUED)
- --------------------------------------------
On January 1, 1996, Gulf Southwest Nevada Bancorp, Inc. a wholly owned
subsidiary of the Company merged all of its subsidiary Banks into its Merchants
Bank subsidiary and the former subsidiary Banks became branches of Merchants
Bank.
Effective November 30, 1994, the Company contributed its investment in Merchants
Bank and G.S.W. Data Processing, Inc., wholly owned subsidiaries to Gulf
Southwest Nevada Bancorp, Inc., a newly formed, wholly owned, multi bank holding
company subsidiary.
NOTE 3 - RESERVE REQUIREMENTS
- -----------------------------
Cash and due from banks of approximately $8,344,000 and $5,245,000 at December
31, 1995 and 1994, respectively, were maintained to satisfy regulatory reserve
and other requirements.
NOTE 4 - INVESTMENT SECURITIES
- ------------------------------
On January 1, 1994, the Company adopted SFAS 115, which addresses the accounting
for investments in debt and equity securities. See Note One for a further
discussion with respect to SFAS 115.
In December of 1995 the Company reassessed the appropriateness of the
classifications of investment securities in accordance with the Special Report
on A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities. The Company transferred all U.S.
Treasury and U.S. Government Agencies investment securities in the held-to-
maturity classification to the available-for-sale classification. This transfer
will enable the Company to more easily control their interest rate risks and
liquidity as part of its overall asset/liability management.
U. S. Treasury securities at their amortized cost of $45,194,977 and U.S.
Government Agencies securities at their amortized cost of $55,250,854 were
transferred to the available-for-sale classification at their fair value of
$45,129,601 and $56,058,300, respectively.
HELD-TO-MATURITY INVESTMENT SECURITIES:
- ---------------------------------------
The amortized cost and estimated fair value of held-to-maturity investment
securities were as follows:
<TABLE>
<CAPTION>
Unrealized Gross
Amortized ------------------- Fair
Cost Gains Losses Value
----------- ---------- ------- -----------
<S> <C> <C> <C> <C>
December 31, 1995:
U.S. Treasury and other
U.S. Government agencies $ - $ - $ - $ -
State, county and
municipal obligations 21,381,584 462,228 47,631 21,796,181
----------- -------- ------- -----------
$21,381,584 $462,228 $47,631 $21,796,181
=========== ======== ======= ===========
</TABLE>
41
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
---------------------------------------------
AND
---
GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY)
--------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 4 - INVESTMENT SECURITIES (CONTINUED)
- ------------------------------------------
HELD-TO-MATURITY INVESTMENT SECURITIES (CONTINUED):
- ---------------------------------------------------
<TABLE>
<CAPTION>
Unrealized Gross
Amortized ------------------------- Fair
Cost Gains Losses Value
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
December 31, 1994:
U.S. Treasury and other
U.S. Government agencies $ 42,383,642 $ 12,367 $1,173,439 $ 41,222,570
State, county and
municipal obligations 6,504,901 147,533 72,457 6,579,977
------------ ---------- ---------- ------------
$ 48,888,543 $ 159,900 $1,245,896 $ 47,802,547
============ ========== ========== ============
</TABLE>
AVAILABLE-FOR-SALE INVESTMENT SECURITIES:
- -----------------------------------------
The amortized cost and estimated fair value of available-for-sale
investment securities were as follows:
<TABLE>
<CAPTION>
Unrealized Gross
Amortized ------------------------- Fair
Cost Gains Losses Value
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
December 31, 1995:
U.S. Treasury and other
U.S. Government agencies $129,110,288 $1,662,989 $ 349,464 $130,423,813
Other 227,167 - - 227,167
------------ ---------- ---------- ------------
$129,337,455 $1,662,989 $ 349,464 $130,650,980
============ ========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
Unrealized Gross
Amortized ------------------------- Fair
Cost Gains Losses Value
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
December 31, 1994:
U.S. Treasury and other
U.S. Government agencies $ 8,051,563 $ - $ 95,043 $ 7,956,520
Other 6,500 - - 6,500
------------ ---------- ---------- ------------
$ 8,058,063 $ - $ 95,043 $ 7,963,020
============ ========== ========== ============
</TABLE>
Cash proceeds from the maturity of held-to-maturity investment securities
during 1995, 1994 and 1993 were $19,036,859, $6,830,000 and $14,293,450,
respectively. Cash proceeds from the maturity and sales of available-for-sale
investment securities during 1995 and 1994 was $19,311,807 and $7,500,000,
respectively. During 1995 the Company had a net loss of $40 on the call of
held-to-maturity investment securities (gross gains of $53 and gross losses of
$93.) The Company had no gross gains or losses from matured or sold held-to-
maturity or available-for-sale securities during 1994. Net gains from
investment securities matured or sold in 1993 amounted to $28,793 (gross gains
of $61,419 and gross losses of $32,626).
42
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
---------------------------------------------
AND
---
GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY)
--------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 4 - INVESTMENT SECURITIES (CONTINUED)
- ------------------------------------------
AVAILABLE-FOR-SALE INVESTMENT SECURITIES:
- -----------------------------------------
The amortized cost and estimated fair value of investment securities at
December 31, 1995 by contractual maturity were as follows:
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
----------------------------- -------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Due in one year or less $ 2,525,545 $ 2,538,029 $ 38,551,671 $ 38,677,799
Due after one year through
five years 9,802,248 9,913,321 89,312,707 90,439,475
Due after five years through
ten years 8,777,967 9,066,875 1,153,173 1,213,266
Due after ten years 275,824 277,956 319,904 320,440
----------- ----------- ------------ ------------
Total Investment Securities $21,381,584 $21,796,181 $129,337,455 $130,650,980
=========== =========== ============ ============
</TABLE>
Investment securities with amortized costs of $74,309,085 and $6,220,306 at
December 31, 1995 and 1994, were pledged to secure public deposits and for other
purposes as required by law.
NOTE 5 - LOANS
- --------------
The loan portfolio was comprised of the following categories at December 31:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Commercial and industrial $ 44,650,607 $ 28,592,898
Real estate - construction 8,626,413 7,205,357
Real estate - other 123,129,892 80,471,985
Installment loans 66,029,009 30,731,534
Mortgage loans held for resale 299,665 -
Other loans 1,092,340 402,798
------------ ------------
Total loans 243,827,926 147,404,572
Less:
Unearned income (6,263,627) (2,945,396)
Allowance for possible
loan losses (2,410,815) (2,062,786)
------------ ------------
Net Loans $235,153,484 $142,396,390
============ ============
</TABLE>
43
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
---------------------------------------------
AND
---
GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY)
--------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 5 - LOANS (CONTINUED)
- --------------------------
Loans on which interest was not being accrued and past due loans (90 days or
more) amounted to $3,125,506 and $849,588, respectively at December 31, 1995,
compared to $1,215,347 and $127,984, respectively at December 31, 1994.
The allowance for loan losses related to these loans was $226,208 and $111,938
in 1995 and 1994, respectively.
Interest income lost on impaired loans and the average balance of impaired loans
was as follows for the year ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Interest income that would have
been recorded $ 262,583 $ 105,740 $ 197,689
Interest income recognized 61,858 1,059 24,094
---------- ---------- ----------
Interest income lost $ 200,725 $ 104,681 $ 173,595
========== ========== ==========
Average balance $2,179,898 $1,433,000 $1,908,000
========== ========== ==========
</TABLE>
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, exclusive of loans to such persons that
in the aggregate do not exceed $60,000, is as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Balance at beginning of year $ 4,083,674 $ 3,294,546
New loans 9,784,932 2,815,617
Amounts collected (6,722,794) (2,010,980)
Loans to customers no longer or new
related parties and other 4,622,252 (15,509)
----------- -----------
Balance at end of year $11,768,064 $ 4,083,674
=========== ===========
</TABLE>
Transactions in the allowance for possible loan losses were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year $2,062,786 $ 1,986,438 $ 1,725,384
Allowance of acquired banks 737,941 - -
Provision charged to expense 135,000 50,000 410,000
Loan losses:
Charge-offs (741,898) (437,925) (386,610)
Recoveries 216,986 464,273 237,664
---------- ----------- -----------
Net loan losses (524,912) 26,348 (148,946)
---------- ----------- -----------
Balance at end of year $2,410,815 $ 2,062,786 $ 1,986,438
========== =========== ===========
</TABLE>
44
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
---------------------------------------------
AND
---
GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY)
--------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 5 - LOANS (CONTINUED)
- --------------------------
The Company adopted the Financial Accounting Standards Boards Financial
Accounting Standard No. 114, Accounting by Creditors for Impairment of a Loan
and No. 118, Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures on January 1, 1995. The adoption of these standards
had no material effect on the Company's financial position or results of
operations.
NOTE 6 - BANK PREMISES AND EQUIPMENT
- ------------------------------------
Bank premises and equipment were comprised of the following at December 31:
<TABLE>
<CAPTION>
Estimated
Useful Lives 1995 1994
------------- ----------- -----------
<S> <C> <C> <C>
Land $ 1,700,175 $ 831,304
Bank premises and leasehold improvements 5 to 40 yrs. 8,512,827 4,616,478
Furniture and equipment 3 to 10 yrs. 5,722,127 3,624,676
Automobiles 3 to 5 yrs. 492,601 273,144
Construction in progress 599,788 -
Less - accumulated depreciation
and amortization (8,335,324) (4,724,679)
----------- -----------
Net balance at end of year $ 8,692,194 $ 4,620,923
=========== ===========
</TABLE>
Depreciation and amortization charged to operating expense was $814,045 in 1995,
$506,385 in 1994, and $414,175 in 1993.
NOTE 7 - INTEREST BEARING DEPOSITS
- ----------------------------------
Interest bearing deposits were comprised of the following categories at December
31:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Interest bearing demand $108,598,126 $ 45,897,535
Savings 52,680,765 28,481,431
Time 113,219,057 63,158,385
Time over $100,000 36,824,925 16,543,280
------------ ------------
$311,322,873 $154,080,631
============ ============
</TABLE>
45
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
---------------------------------------------
AND
---
GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY)
--------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 8 - BORROWINGS
- -------------------
The Company had the following indebtedness at December 31, 1995:
Subsidiaries
- ------------
<TABLE>
<S> <C>
Note payable in the original amount of $3,400,000.
Principal payments of $175,000 a quarter beginning
June 30, 1995, and quarterly thereafter until maturity
at March 31, 1997. Interest was payable quarterly
beginning June 30, 1995, at the prime rate (8.5% at
December 31, 1995). The note is collateralized by
all the shares of common stock of three bank
subsidiaries owned by Gulf Southwest Nevada Bancorp, Inc. $3,050,000
Note payable in monthly installments of $2,441
including interest at 8%. The note is collateralized
by computer equipment. 32,960
----------
$3,082,960
==========
</TABLE>
In January of 1996 the above borrowings were repaid.
NOTE 9 - 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 regulatory agencies.
46
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
---------------------------------------------
AND
---
GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY)
--------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 10 - 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 $2,469,500.
Deferred income taxes result from differences between amounts of assets and
liabilities as measured for income tax and financial reporting purposes. The
significant components of Federal deferred tax assets and liabilities as of
December 31, are as follows:
<TABLE>
<CAPTION>
1995 1994
--------- -----------
<S> <C> <C>
Deferred Tax Assets:
Carrying value of other real estate owned $212,000 $ 283,500
Allowance for possible loan losses 266,200 176,500
Unrealized investment securities losses - 32,300
Net operating loss carryforward - 227,200
Investment tax credit - 95,800
Alternative minimum tax credit 301,700 406,000
-------- -----------
779,900 1,221,300
-------- -----------
Deferred Tax Liabilities:
Accretion on municipal bonds 42,400 51,900
Accumulated depreciation 285,900 -
Unrealized investment securities gains 446,600 -
-------- -----------
774,900 51,900
-------- -----------
Net Deferred Tax $ 5,000 $1,169,400
======== ===========
</TABLE>
The consolidated provision for income taxes for the years ended December 31,
consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
---------- -------- -----------
<S> <C> <C> <C>
Currently payable $1,556,600 $330,000 $ 68,000
Deferred 776,100 669,300 444,500
---------- -------- -----------
$2,332,700 $999,300 $ 512,500
========== ======== ===========
</TABLE>
The income tax expense applicable to securities gains and losses for the years
1995, 1994 and 1993 was $(12), $(-0-) and $5,760, 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>
1995 1994 1993
---------- ---------- ---------
<S> <C> <C> <C>
Federal income tax
provision at statutory rate $2,801,400 $1,687,900 $ 997,000
Tax exempt income (257,800) (126,000) (178,500)
Additional deductible expense (115,100) (162,800) (96,000)
Tax benefits and tax rate differences (95,800) (399,800) (210,000)
---------- ---------- ---------
$2,332,700 $ 999,300 $ 512,500
========== ========== =========
</TABLE>
47
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
---------------------------------------------
AND
---
GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY)
--------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 10 - FEDERAL INCOME TAXES (CONTINUED)
- ------------------------------------------
Deferred income taxes result from temporary differences between the carrying
value of assets and liabilities for financial reporting and tax reporting
purposes. The sources and related tax effects of these differences are as
follows:
<TABLE>
<CAPTION>
Tax effect of temporary differences: 1995 1994 1993
--------- --------- ----------
<S> <C> <C> <C>
Other real estate owned $ 73,900 $199,700 $ 53,500
Allowance for loan losses (24,800) (17,000) (139,000)
Accumulated depreciation 36,500 - -
Accretion on municipal bonds (9,500) (12,400) (17,000)
Use of net operating loss 282,900 499,000 547,000
Use of alternative minimum tax credit 321,300 - -
Use of investment tax credit 95,800 - -
-------- -------- ---------
$776,100 $669,300 $ 444,500
======== ======== =========
</TABLE>
At December 31, 1995, the Company has, for tax reporting purposes, alternative
minimum tax credits of approximately $301,700.
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.
Financial instruments whose contract amounts represent potential credit risk are
as follows at December 31:
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
Commitments to extend credit $38,592,479 $19,075,185
Standby and commercial letters of credit $ 691,349 $ 623,122
Letters of guaranty $ 94,000 $ 65,000
</TABLE>
48
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
---------------------------------------------
AND
---
GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY)
--------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
- ---------------------------------------------------
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, 1995:
<TABLE>
<CAPTION>
Year Ending December 31, Buildings Equipment
- -------------------------- ---------- ---------
<S> <C> <C>
1996 $ 366,136 $103,967
1997 366,521 99,567
1998 366,521 73,575
1999 310,363 -
2000 310,363 -
2001 and after 2,327,721 -
---------- --------
$4,047,625 $277,109
========== ========
</TABLE>
Rent expense incurred under operating leases amounted to $519,882, $402,859
and $305,460 for the years ended December 31, 1995, 1994 and 1993,
respectively.
At December 31, 1995, the Company's subsidiary banks had contracts for
construction of new branch facilities and purchase of land and equipment of
$1,400,150.
Various lawsuits are pending against the Company's subsidiary banks.
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 - 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, 1995 no options have been granted under the plan.
49
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
---------------------------------------------
AND
---
GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY)
--------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 13 - EMPLOYEE BENEFIT PLANS
- --------------------------------
The Company has a noncontributory defined benefit pension plan covering
substantially all full time employees. Benefits are based on an employee's years
of service and compensation. 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 common trust investment funds managed by
the trustee bank.
The Company's pension plan was adopted on September 1, 1994. The Texas Gulf
Coast Bancorp, Inc. noncontributory defined benefit pension plan was merged with
the Company's pension plan on December 31, 1995.
Unrecognized prior service cost of the Company's pension plan is being amortized
on a straight line basis over fifteen years.
Net periodic pension cost for the pension plan was as follows for 1995:
<TABLE>
<S> <C>
Service cost-benefit earned during the year $ 400,863
Interest cost on projected benefit obligation 189,701
Actual gain on plan assets (148,629)
Net amortization and deferrals 9,127
-----------
Net pension cost $ 451,062
===========
Significant assumptions used in determining pension cost for the Company are as follows:
Discount rate 7.0%
Expected rate of increase in compensation 4.0%
Expected long-term rate of return on plan assets 8.0%
Funded status of the pension plan at December 31, 1995 is as follows:
Projected benefit obligation $(2,756,095)
Plan assets at fair value 2,033,964
-----------
Plan assets (less) than projected
benefit obligation (722,131)
Unrecognized net (gains) loss (362,190)
Unrecognized net (assets) obligation
being amortized over 15 years (258,701)
Unrecognized prior service cost 638,948
-----------
(Accrued) prepaid pension cost $ (704,074)
===========
</TABLE>
50
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
---------------------------------------------
AND
---
GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY)
--------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 13 - EMPLOYEE BENEFIT PLANS (CONTINUED)
- --------------------------------------------
The Company has a qualified employee benefit plan under section 401(k) of the
Internal Revenue Code. Employees can contribute up to 15% of their compensation
to the plan on a pretax basis subject to regulatory limits and the Company at
its discretion can match up to 100 percent of 6 percent of the participant's
compensation. The administrative cost of the plan is paid by the Company at no
cost to the participants.
NOTE 14 - 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, interest bearing
deposits with bank, 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. See Note
One for valuation methodologies used for investment 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 -- The fair value of borrowings is estimated based upon current
market interest rates for Companies with like credit ratings and similar
maturities.
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.
51
<PAGE>
GULF SOUTHWEST BANCORP, INC. AND SUBSIDIARIES
---------------------------------------------
AND
---
GULF SOUTHWEST BANCORP, INC. (PARENT COMPANY ONLY)
--------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 14 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
- -------------------------------------------------------------------
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
------------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 82,450,608 $ 82,450,608 $ 43,906,004 $ 43,906,004
Investment securities $152,032,564 $152,447,161 $ 56,851,563 $ 55,765,567
Loans, net $235,153,484 $232,867,020 $142,396,390 $142,067,103
Liabilities:
Deposits $431,381,004 $431,836,141 $226,064,278 $226,207,860
Borrowings $ 3,082,960 $ 3,082,960 $ - $ -
Off-balance sheet instruments
Letters of credit fees $ - $ 7,776 $ - $ 4,965
</TABLE>
NOTE 15 - OTHER OPERATING EXPENSE
- ---------------------------------
Other operating expense for the years ended December 31, are as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ -------------
<S> <C> <C> <C>
Stationery, supplies and printing $ 357,924 $ 277,648 $ 232,033
Legal, accounting and professional 542,437 464,815 374,657
Data processing 729,121 486,560 601,313
Advertising 297,435 225,532 178,036
Insurance 418,856 539,192 578,045
Postage and freight 420,876 244,703 263,411
Other 2,014,072 1,191,641 1,147,393
------------ ------------ -------------
$ 4,780,721 $ 3,430,091 $ 3,374,888
============ ============ =============
</TABLE>
52
<PAGE>
ITEM 9. ACCOUNTING AND FINANCIAL DISCLOSURE
- ------- -----------------------------------
None
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
(Incorporated by reference to the section entitled "Nominees for Election as
Directors" of Gulf Southwest's Proxy Statement for its 1996 annual meeting of
shareholders.)
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
(Incorporated by reference to the section entitled "Executive Compensation" of
Gulf Southwest's Proxy Statement for its 1996 annual meeting of shareholders.)
ITEM 12. SECURITY OWENRSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
(Incorporated by reference to the section entitled "Ownership of Common Stock"
of Gulf Southwest's Proxy Statement for its 1996 annual meeting of
shareholders.)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
(Incorporated by reference to the section entitled "Certain Relationships and
Related Transactions" of Gulf Southwest's Proxy Statement for its 1996 annual
meeting of shareholders.)
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
- -------- ------------------------------------------------------
FORM 8-K
--------
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) Financial Statements
See index to financial statements at Item 8 of this report.
(2) Exhibits
(B) REPORTS ON FORM 8-K.
No reports were filed.
<TABLE>
<CAPTION>
(IF APPLICABLE)
INCORPORATED BY REFERENCE FROM
--------------------------------------
(C) EXHIBIT NUMBER AND DESCRIPTION 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 Reorganization S-4 11/25/94 33-86750 2.1
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
(IF APPLICABLE)
INCORPORATED BY REFERENCE FROM
----------------------------------------
EXHIBIT NUMBER AND DESCRIPTION FORM DATE FILE NO. EXHIBIT
------ ------ --------- --------
<S> <C> <C> <C> <C>
(3) Articles of Incorporation and Bylaws
------------------------------------
3.1 Articles of Incorporation, together
with amendments thereto 10-K 12/31/90 0-11033 3.1
3.2 Bylaws of the Registrant 10 03/31/83 0-11033 3.2
(4) Instruments defining rights of security
---------------------------------------
holders, including indentures
-----------------------------
4.1 Form of specimen certificate representing
the Common Stock, par value $1.00 per
share of the Registrant S-4 07/06/90 33-35767 4.1
(9) Voting trust agreement
----------------------
9.1 Voting Trust Agreement naming J. W.
Lander, Jr. as Voting Trustee 10-K 12/31/91 0-11033 9.1
(10) Material contracts
------------------
10.1 Profit sharing plan of Gulf Southwest
Bancorp, Inc. 10-K 12/31/83 0-11033 10.1
10.2 Gulf Southwest Bancorp, Inc. Flexible
Stock Option Plan 10-K 12/31/86 0-11033 10.2
10.3 Gulf Southwest Bancorp, Inc.
401 (k) Plan 10-K 12/31/89 0-11033 10.3
10.4 Gulf Southwest Bancorp, Inc.
Defined Benefit Pension Plan N/A N/A N/A N/A
(21) Subsidiaries of the Registrant
------------------------------
21.1 List of Subsidiaries N/A N/A N/A N/A
(27) Financial Data Schedule
-----------------------
27.1 Financial Data Schedule N/A N/A N/A N/A
</TABLE>
54
<PAGE>
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GULF SOUTHWEST BANCORP, INC.
BY: /s/ J. W. Lander, Jr.
--------------------
J. W. Lander, Jr.
Chief Executive Officer
Date: March 21, 1996
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Norman H. Bird Director, Secretary, March 21, 1996
- ------------------ and Vice President
Norman H. Bird
/s/ A. Harrel Blackshear Director March 21, 1996
- ------------------------
A. Harrel Blackshear
/s/ Donald Harding Director March 21, 1996
- ------------------
Donald Harding
Director, Chairman,
/s/ J. W. Lander, Jr. and Chief Executive March 21, 1996
- --------------------- Officer
J. W. Lander, Jr.
Director, President and
/s/ J. W. Lander, III Principal Financial and March 21, 199
- --------------------- Accounting Officer
J. W. Lander, III
</TABLE>
55
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
COMMISSION FILE NUMBER 0-11033
GULF SOUTHWEST BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
(IF APPLICABLE)
INCORPORATED BY REFERENCE FROM
------------------------------
EXHIBIT NUMBER AND DESCRIPTION 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 Reorganization S-4 11/25/94 33-86750 2.1
(3) Articles of Incorporation and Bylaws
------------------------------------
3.1 Articles of Incorporation, together
with amendments thereto 10-K 12/31/90 0-11033 3.1
3.2 Bylaws of the Registrant 10 03/31/83 0-11033 3.2
(4) Instruments defining rights of security
---------------------------------------
holders, including indentures
-----------------------------
4.1 Form of specimen certificate representing
the Common Stock, par value $1.00 per
share of the Registrant S-4 07/06/90 33-35767 4.1
(9) Voting trust agreement
----------------------
9.1 Voting Trust Agreement naming J. W.
Lander, Jr. As Voting Trustee 10-K 12/31/91 0-11033 9.1
(10) Material contracts
------------------
10.1 Profit sharing plan of Gulf Southwest
Bancorp, Inc. 10-K 12/31/83 0-11033 10.1
10.2 Gulf Southwest Bancorp, Inc. Flexible
Stock Option Plan 10-K 12/31/86 0-11033 10.2
10.3 Gulf Southwest Bancorp, Inc.
401 (k) Plan 10-K 12/31/89 0-11033 10.3
10.4 Gulf Southwest Bancorp, Inc.
Defined Benefit Pension Plan 10-K 12/31/94 0-11033 10.4
(21) Subsidiaries of the Registrant
------------------------------
21.1 List of Subsidiaries N/A N/A N/A N/A
(27) Financial Data Schedule
-----------------------
27.1 Financial Data Schedule N/A N/A N/A N/A
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
AS OF DECMEBER 31, 1995
<TABLE>
<CAPTION>
PERCENTAGE OF JURISDICTION
NAME OF SUBSIDIARY STOCK OWNED OF INCORPORATION
------------------ ----------- ----------------
<S> <C> <C>
1. Gulf Southwest Nevada Bancorp, Inc. 100.0% Nevada
<CAPTION>
SUBSIDIARIES OF GULF SOUTHWEST PERCENTAGE OF JURISDICTION
NEVADA BANCORP, INC. STOCK OWNED OF INCORPORATION
- ------------------------------ -------------- ----------------
<S> <C> <C>
1. Merchants Bank 100.0% Texas
2. G.S.W. Data Processing, Inc. 100.0% Texas
3. Central Data Processing, Inc. 100.0% Texas
4. First Bank Mainland 100.0% Texas
5. First Bank Pearland 99.5% Texas
6. Texas City Bank 97.1% Texas
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
1995 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 29,848,206
<INT-BEARING-DEPOSITS> 24,427,402
<FED-FUNDS-SOLD> 28,175,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 130,650,980
<INVESTMENTS-CARRYING> 21,381,584
<INVESTMENTS-MARKET> 21,796,181
<LOANS> 237,564,299
<ALLOWANCE> 2,410,815
<TOTAL-ASSETS> 486,648,878
<DEPOSITS> 431,381,004
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,862,810
<LONG-TERM> 3,082,960
0
0
<COMMON> 1,977,855
<OTHER-SE> 47,344,249
<TOTAL-LIABILITIES-AND-EQUITY> 486,648,878
<INTEREST-LOAN> 19,500,532
<INTEREST-INVEST> 7,024,000
<INTEREST-OTHER> 2,649,225
<INTEREST-TOTAL> 29,173,757
<INTEREST-DEPOSIT> 9,356,469
<INTEREST-EXPENSE> 9,576,887
<INTEREST-INCOME-NET> 19,596,870
<LOAN-LOSSES> 135,000
<SECURITIES-GAINS> (40)
<EXPENSE-OTHER> 15,877,817
<INCOME-PRETAX> 8,239,456
<INCOME-PRE-EXTRAORDINARY> 8,239,456
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,906,756
<EPS-PRIMARY> 3.44
<EPS-DILUTED> 3.44
<YIELD-ACTUAL> 5.48
<LOANS-NON> 3,125,000
<LOANS-PAST> 850,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,801,000
<CHARGE-OFFS> 742,000
<RECOVERIES> 217,000
<ALLOWANCE-CLOSE> 2,411,000
<ALLOWANCE-DOMESTIC> 2,411,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
