<PAGE>
As filed with the Securities and Exchange Commission on September 1, 1999
Registration No. 333-_________
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
WELLS FARGO & COMPANY
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
Delaware 6712 41-0449260
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
Wells Fargo & Company
420 Montgomery Street
San Francisco, California 94163
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Stanley S. Stroup
Executive Vice President and General Counsel
Wells Fargo & Company
420 Montgomery Street
San Francisco, California 94163
415-396-6019
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Copies to:
Robert J. Kaukol Cary P. Kavy
Wells Fargo & Company Cox & Smith Incorporated
1050 17th Street, Suite 120 112 East Pecan Street, Suite 1800
Denver, Colorado 80265 San Antonio, Texas 78205
(303) 899-5802 (210) 554-5250
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this registration statement becomes
effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
============================================================================================================
Proposed Maximum Proposed Maximum Amount Of
Amount To Be Offering Price Aggregate Registration
Title Of Securities To Be Registered Registered Per Share Offering Price Fee
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, $1-2/3 par value (and
associated preferred stock purchase 1,750,000 N/A $32,559,000 (1) $9,051.40 (2)
rights)
============================================================================================================
</TABLE>
(1) Pursuant to Rule 457(f), based on the book value as of June 30, 1999 of all
shares of common stock to be acquired by the registrant in the transaction
described herein.
(2) Based on .000278 of the proposed maximum aggregate offering price.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
________________________________________________________________________________
<PAGE>
TEXAS BANCSHARES, INC.
750 EAST MULBERRY
SAN ANTONIO, TEXAS 78212
__________________________
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON ____________, 1999
__________________________
TO THE SHAREHOLDERS OF TEXAS BANCSHARES, INC.:
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of Texas
Bancshares, Inc., a Texas corporation ("TBI"), will be held on _________,
_________, __, 1999, at ____ _.m., local time, at
______________________________________________________, for the following
purposes:
1. To consider and vote upon a proposal to approve the Agreement and Plan
of Reorganization, dated as of May 28, 1999, and amended and restated
as of August 26, 1999, effective as of May 28, 1999 (the
"Reorganization Agreement"), by and between TBI and Wells Fargo &
Company ("Wells Fargo"), pursuant to which, among other things, a
wholly-owned subsidiary of Wells Fargo will merge with and into TBI
upon the terms and subject to the conditions set forth in the
Reorganization Agreement, as more fully described in the proxy
statement-prospectus which follows this notice.
2. To transact such other business as may properly be brought before the
special meeting and any adjournments or postponements of the special
meeting.
The board of directors of TBI has fixed the close of business on
_______________, 1999 as the record date for determining those shareholders
entitled to vote at the special meeting and any adjournments or postponements of
the special meeting. Only shareholders of record on this date are entitled to
notice of, and to vote at, the special meeting and any adjournments or
postponements of the special meeting.
Shareholders are entitled to assert dissenters' rights under Articles 5.11,
5.12 and 5.13 of the Texas Business Corporation Act in connection with the
merger described in Item 1 above, as more fully described in the proxy
statement-prospectus that follows this notice. Copies of Articles 5.11, 5.12 and
5.13 are attached to the proxy statement-prospectus as Appendix A. Shareholders
who do not satisfy the requirements for asserting dissenters' rights will
forfeit their right to demand and receive cash payment for their shares.
By Order of the Board of Directors
David P. Henneke
Secretary
San Antonio, Texas
__________, 1999
- --------------------------------------------------------------------------------
Please promptly complete, sign, date and return the enclosed proxy sheet whether
or not you plan to attend the special meeting. Failure to return a properly
executed proxy or to vote at the meeting will have the same effect as a vote
against the Reorganization Agreement and the merger. You may still vote at the
special meeting even if you have previously returned your proxy sheet.
- --------------------------------------------------------------------------------
<PAGE>
[Texas Bancshares logo]
================================================================================
The board of directors of Texas Bancshares, Inc. has approved the sale of
TBI to Wells Fargo & Company. The sale requires the approval of TBI's
shareholders. A special meeting of shareholders will be held to vote on the
proposed sale. The date, time and place of the meeting are as follows:
__________ _________, 1999
_____ _.m., local time
___________________________
___________________________
If the sale is completed, Wells Fargo will exchange approximately $34.2988
of its common stock for each outstanding share of TBI common stock.
The exchange ratio, or the number of shares of Wells Fargo common stock you
will receive for each share of TBI common stock you own, will be determined by
dividing the share value of approximately $34.2988 by a measurement price. The
measurement price will be the average of the closing prices of a share of Wells
Fargo common stock as reported on the New York Stock Exchange for the period of
10 trading days ending on the day immediately before the special meeting.
The following table shows the approximate exchange ratios that would result
from four different measurement prices, each based on a share value of $34.2988.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
Measurement Exchange
Price Calculation Ratio
- ---------------------------------------------------------------
<S> <C> <C>
$37.50 $34.2988 divided by $37.50 0.9146
- ---------------------------------------------------------------
$40.00 $34.2988 divided by $40.00 0.8575
- ---------------------------------------------------------------
$42.50 $34.2988 divided by $42.50 0.8070
- ---------------------------------------------------------------
$45.00 $34.2988 divided by $45.00 0.7622
- ---------------------------------------------------------------
</TABLE>
The actual measurement price--and thus the actual exchange ratio--will not
be known until immediately before the special meeting. The closing price of
Wells Fargo common stock on __________ was $__ a share.
This proxy statement-prospectus provides detailed information about the
proposed acquisition. Please read this entire document carefully. You can find
additional information about Wells Fargo from documents filed with the
Securities Exchange Commission.
Whether or not you plan to attend the meeting, please complete and mail the
enclosed proxy sheet. If you sign, date and mail your proxy sheet without
indicating how you want to vote, your proxy will be voted in favor of the
transaction. If you fail to return your proxy sheet, the effect will be the same
as a vote against the transaction.
No vote of Wells Fargo stockholders is required to approve the transaction.
Fredrick Erck
Chairman of the Board and
Chief Executive Officer
______________________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the Wells Fargo common stock to be
issued or determined if this proxy statement-prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
______________________
Proxy Statement-Prospectus dated ___________, 1999.
First mailed to TBI shareholders on or about ___________, 1999.
<PAGE>
Table of Contents
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
Questions and Answers About This Document.......................... v
Summary............................................................ 1
Special Meeting Of Shareholders.................................... 12
Date, Time And Place............................................ 12
Record Date..................................................... 12
Vote Required To Approve Merger................................. 12
Agreement To Vote For The Merger................................ 12
Voting And Revocation Of Proxies................................ 13
Solicitation Of Proxies......................................... 14
Other Matters Considered At The Meeting......................... 14
The Merger......................................................... 15
Purpose And Effect Of The Merger................................ 15
Background Of And Reasons For The Merger........................ 15
Opinion Of TBI's Financial Advisor.............................. 17
Additional Interests Of TBI Management.......................... 23
Dissenters' Rights.............................................. 25
Exchange Of Certificates........................................ 28
Regulatory Approvals............................................ 29
Effect Of Merger On TBI's Employee Benefit Plans................ 30
U.S. Federal Income Tax Consequences Of The Merger.............. 30
Resale Of Wells Fargo Common Stock Issued In The Merger......... 31
Stock Exchange Listing.......................................... 32
Accounting Treatment............................................ 32
The Merger Agreement............................................... 33
Basic Plan Of Reorganization.................................... 33
Representations And Warranties.................................. 34
Certain Covenants............................................... 35
Conditions To The Merger........................................ 36
Termination Of The Merger Agreement............................. 37
Effect Of Termination........................................... 37
Waiver And Amendment............................................ 37
Expenses........................................................ 37
Comparison Of Stockholder Rights................................... 38
General......................................................... 38
Authorized And Outstanding Capital Stock........................ 38
Rights Plan..................................................... 39
Number And Election Of Directors................................ 39
Amendment Of Governing Documents................................ 40
Approval Of Mergers And Assets Sales............................ 40
Preemptive Rights............................................... 41
Appraisal Rights................................................ 41
Special Meetings................................................ 42
Directors' Duties............................................... 42
Action Without A Meeting........................................ 43
Limitations On Directors' Liability............................. 43
Indemnification Of Officers And Directors....................... 44
Dividends....................................................... 46
Corporate Governance Procedures; Nomination Of Directors........ 46
Information About Wells Fargo...................................... 47
General......................................................... 47
Management And Additional Information........................... 47
Information On Wells Fargo's Web Site........................... 48
Regulation And Supervision Of Wells Fargo.......................... 49
General......................................................... 49
Regulatory Agencies............................................. 49
Bank Holding Company Activities................................. 50
Dividend Restrictions........................................... 51
Holding Company Structure....................................... 51
Capital Requirements............................................ 52
FDIC Insurance.................................................. 55
Fiscal And Monetary Policies.................................... 55
Competition..................................................... 56
Experts............................................................ 57
Wells Fargo's Auditors.......................................... 57
TBI's Auditors.................................................. 57
Opinions........................................................... 57
Share Issuance.................................................. 57
Tax Matters..................................................... 57
Where You Can Find More Information................................ 58
SEC Filings..................................................... 58
Registration Statement.......................................... 58
Documents Incorporated By Reference............................. 58
Information About TBI.............................................. 60
General......................................................... 60
Competition..................................................... 60
Regulation And Supervision...................................... 61
Employees....................................................... 64
Properties...................................................... 65
Holders Of TBI Common Stock..................................... 66
Legal Proceedings............................................... 66
Ownership Of TBI Common Stock By TBI Management................. 66
Management's Discussion And Analysis Of TBI's Financial
Condition And Results Of Operations................................ 69
Results Of Operations........................................... 69
Loans........................................................... 76
Provision for Loan Losses and Allowance for Loan Losses......... 78
Non-performing Assets........................................... 79
Investments..................................................... 80
Investment Securities--Maturities and Yields.................... 82
Deposits........................................................ 83
Return on Equity and Assets..................................... 84
Liquidity....................................................... 84
Capital......................................................... 85
Impact Of Inflation, Changing Prices And Monetary Policies...... 86
Year 2000 Compliance............................................ 87
Recent Accounting Pronouncements................................ 88
</TABLE>
iii
<PAGE>
TBI's Financial Statements........................................ F-1
Appendix A Agreement and Plan of Reorganization
Appendix B Opinion of Hoefer & Arnett, Incorporated
Appendix C Articles 5.11, 5.12 and 5.13 of the Texas
Business Corporation Act
iv
<PAGE>
Questions and Answers About This Document
- --------------------------------------------------------------------------------
What is the This document serves as both a proxy statement of TBI and
purpose of this a prospectus of Wells Fargo. As a proxy statement, it's
document? being provided to you because TBI's board of directors is
soliciting your proxy for use at the special meeting. As a
prospectus, it's being provided to you because Wells Fargo
is offering to exchange shares of its common stock for your
shares of TBI common stock.
Do I need to Absolutely. Much of this proxy statement-prospectus
read the entire summarizes information that is in greater detail elsewhere
document? in this document or in the appendices to this document.
Each summary discussion is qualified by reference to the
full text. For example, the summary of the terms of the
merger agreement is qualified by the actual terms of the
merger agreement, a copy of which is attached as Appendix
A. As a result, to fully understand the merger and your
rights as a TBI shareholder, you will need to read
carefully this entire document including the attached
appendices.
Is there other Yes. Much of the business and financial information about
information I Wells Fargo that may be important to you is not included
should consider? in or delivered with this document. Instead, this
information is incorporated by reference to other Wells
Fargo documents. This means that Wells Fargo may satisfy
its disclosure obligations to you by referring you to one
or more documents separately filed by Wells Fargo with the
SEC. For example, Wells Fargo's latest audited financial
statements and the latest description of its business are
incorporated into this proxy statement-prospectus by
reference to Wells Fargo's annual report on Form 10-K for
1998. Wells Fargo's 1998 Form 10-K, in turn, incorporates
financial statements and other information from Wells
Fargo's 1998 annual report to stockholders. The financial
statements and other information incorporated from the 1998
stockholders report are included in Exhibit 13 to the 1998
Form 10-K. As a result, to review Wells Fargo's latest
audited financial statements and the latest description of
its business, you'll need to obtain a copy of Wells Fargo's
Form 10-K
v
<PAGE>
for 1998, including Exhibit 13.
See "Where You Can Find More Information" on page __ for a
list of documents that Wells Fargo has incorporated by
reference into this proxy statement-prospectus and for
instructions on how to obtain copies of these documents.
The documents are available to you without charge.
What about Reports filed by Wells Fargo with the SEC after the date of
future reports this proxy statement-prospectus and before the merger is
filed by Wells completed are automatically incorporated into this
Fargo? document. These reports may update, modify or correct
information in this document or in the documents
incorporated by reference. You should review these reports,
as they could disclose a change in the business prospects,
financial condition or other affairs of Wells Fargo since
the date of this proxy statement-prospectus.
What if there You should rely on the later filed document. Information
is a conflict in this proxy statement-prospectus may update information
between this in one or more of the Wells Fargo documents incorporated
document and by reference. Similarly, information in documents that
the documents Wells Fargo may file after the date of this proxy
incorporated statement-prospectus may update information in this proxy
by reference? statement-prospectus. If there is a conflict or
inconsistency between information in this proxy statement-
prospectus and information in a document that is
incorporated by reference or between information in two
different documents incorporated by reference, you should
rely on the information contained in the document that was
filed most recently.
What if I Information contained in a document that is incorporated
choose not to by reference is part of this proxy statement-prospectus,
read the unless it is superseded by information contained directly
documents in this proxy statement-prospectus or in one or more
incorporated documents filed with the SEC after the date of this proxy
by reference? statement-prospectus. Information that is incorporated
from another document is considered to have been disclosed
to you whether or not you choose to read the document.
vi
<PAGE>
Summary
- --------------------------------------------------------------------------------
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
merger fully, and for a more complete description of the legal terms of the
merger, you should carefully read this document and the other documents to which
this document refers you. See "Where You Can Find More Information."
- --------------------------------------------------------------------------------
The Merger In the proposed transaction, Wells Fargo will acquire
(page __) TBI through the merger of a Wells Fargo subsidiary into
TBI. If the merger is completed, Wells Fargo will
exchange shares of its common stock for shares of TBI
common stock so that after the merger is completed
Wells Fargo will own all of the outstanding stock of
TBI.
The merger agreement is attached to this proxy
statement-prospectus as Appendix A. Please read the
merger agreement as it is the document that governs the
merger.
The Companies Wells Fargo & Company
(pages __ and __) 420 Montgomery Street
San Francisco, California 94163
(800) 411-4932
Wells Fargo & Company is a diversified financial
services company whose subsidiaries and affiliates
provide banking, insurance, investments, and mortgage
and consumer finance through stores located across
North America. At June 30, 1999, Wells Fargo had $205
billion of assets, 7/th/ largest among U.S. bank
holding companies.
Texas Bancshares, Inc.
750 East Mulberry
San Antonio, Texas 78212
(210) 733-3388
Texas Bancshares, Inc. is a bank holding company whose
only activity is the ownership and operation of its two
subsidiary banks, First National Bank of South Texas
and The Bank of South Texas. Both banks provide general
commercial and consumer banking services. At June 30,
1999, TBI and its subsidiary banks had assets of $393
million.
1
<PAGE>
Exchange Of Wells If the merger is completed, Wells Fargo will
Fargo Shares For exchange approximately $34.2988 of Wells Fargo
TBI Shares common stock for each outstanding share of TBI common
(page __) stock. The exchange ratio, or the number of shares of
Wells Fargo common stock you will receive for each
share of TBI common stock you own, will be determined
by dividing the share value of approximately $34.2988
by a measurement price. The measurement price will be
the average of the closing prices of a share of Wells
Fargo common stock as reported on the New York Stock
Exchange for the period of 10 trading days ending on
the day immediately before the special meeting. The
following table shows the approximate exchange ratios
that would result from four different measurement
prices, each based on a share value of $34.2988.
<TABLE>
<CAPTION>
Measurement Price Calculation Exchange Ratio
----------------- ----------- --------------
<S> <C> <C>
$37.50 $34.2988 divided by $37.50 0.9146
$40.00 $34.2988 divided by $40.00 0.8575
$42.50 $34.2988 divided by $42.50 0.8070
$45.00 $34.2988 divided by $45.00 0.7622
</TABLE>
The actual measurement price--and thus the actual
exchange ratio--will not be known until immediately
before the special meeting.
Redemption TBI has agreed to redeem for cash each TBI
Of Unexercised option that has not been exercised as of immediately
Options before the merger. The option redemption price for each
option share will equal $34.2988 minus the exercise
price of the option share. For example, the holder of
an option to purchase 1,000 shares of TBI common stock
at an exercise price of $16.65 a share would receive a
total of $17,648.80 in cash upon redemption of the
option.
Surrender To receive certificates for your shares of Wells
Of TBI Shares Fargo common stock, you will need to surrender your
(page __) TBI share certificates. After the merger is completed,
Wells Fargo's stock transfer agent will send you
written
2
<PAGE>
instructions for exchanging your stock certificates.
Please do not send in your certificates until you
receive these instructions.
Federal TBI shareholders generally will not recognize gain or
Income Tax loss for U.S. federal income tax purposes from the
Consequences exchange of their shares of TBI common stock for shares
(page__) of Wells Fargo common stock. TBI shareholders will be
taxed on cash they receive instead of fractional
shares.
The tax treatment described above may not apply to
every TBI shareholder. Determining the tax consequences
of the merger to you may be complicated. You should
consult your own advisor for a full understanding of
the merger's tax consequences.
If you are a TBI option holder, you should consult your
own advisor for the tax consequences of exercising your
options before the merger or receiving cash upon
redemption of your options by TBI, as this document
does not address the tax consequences of either of
these events.
Fairness Hoefer & Arnett, Incorporated, TBI's financial advisor
Opinion for the merger, has given its opinion to TBI's board
(page __) of directors that the share value of approximately
$34.2988 of Wells Fargo common stock for each share of
TBI common stock is fair to TBI shareholders from a
financial point of view. A copy of the fairness opinion
is attached to this proxy statement-prospectus as
Appendix B.
Recommen- TBI's board of directors believes that the merger is in
dation Of TBI's the best interests of TBI shareholders and recommends
Board that TBI shareholders approve the merger. TBI's board
(page __) believes that, as a result of the merger, TBI
shareholders will have the potential for greater stock
value appreciation than they would if TBI had remained
independent.
Additional In considering TBI's board of directors' recommendation
Benefits To to approve the merger, you should be aware that TBI's
directors and some of its
3
<PAGE>
TBI Manage- officers have interests the merger that are in addition
ment to the interests of TBI shareholders generally. These
(page __) interests include employment and/or non-competition
agreements between Wells Fargo and members of TBI
management. Also, stock options held by officers and
directors of TBI will vest immediately if TBI
shareholders approve the merger. The board of directors
of TBI was aware of these additional interests when it
approved the merger agreement.
Dissenters' TBI shareholders who dissent from the merger have the
Rights right to receive the fair value of their shares of TBI
(page __) common stock. To exercise this right, you must follow
the procedures established by Articles 5.11, 5.12 and
5.13 of the Texas Business Corporation Act. These
procedures are attached as Appendix C.
Special TBI will hold the special meeting of shareholders at
Meeting ____, on __________, __________, 1999, at
(page __) ___________________________. You can vote at the
meeting if you owned TBI common stock at the close of
business on ______________, 1999, the record date for
the meeting.
Vote Required Approval of the merger requires the affirmative vote of
To Approve at least two-thirds of the outstanding shares of TBI
Merger common stock. Not voting will have the same effect as
(page __) voting against the merger.
TBI's directors and some of its officers have agreed to
vote in favor of the merger all shares of TBI common
stock beneficially owned by them at the record date for
the special meeting. At the record date, these
directors and officers beneficially owned a total of
49.5% of the shares of TBI common stock entitled to
vote at the special meeting.
Management Following the merger, Wells Fargo will own all of
Of TBI After the outstanding stock of TBI. Wells Fargo will be able
The Merger to elect or appoint all of the directors and officers
(page __) of TBI. Wells Fargo expects that, after the merger,
TBI's bank subsidiaries will offer products and
services offered by Wells Fargo subsidiaries and
affiliates.
4
<PAGE>
Differences Your rights as a TBI shareholder are currently governed
In The Rights by Texas law and TBI's Of restated articles of
Shareholders incorporation and bylaws. Upon completion of the merger
(page __) you will become a Wells Fargo stockholder, and your
rights will be governed by Delaware law and Wells
Fargo's restated certificate of incorporation and
bylaws.
Regulatory Wells Fargo must obtain the approval of the Board of
Approvals Governors of the Federal Reserve System before it can
(page __) complete the merger. Wells Fargo must also notify the
Texas Department of Banking and comply with other
requirements under Texas law. Wells Fargo filed an
application with the Federal Reserve Board on July 15,
1999. The Federal Reserve Board has notified Wells
Fargo that it expects to act on Wells Fargo's
application by September 16, 1999. In order to receive
Federal Reserve Board approval, Wells Fargo has
proposed to sell all of the loans and substantially all
of the deposits held by the Pleasanton, Texas branch of
First National Bank of South Texas. At July 31, 1999,
the Pleasanton, Texas branch had approximately $13.95
million of deposits and $5.26 million of loans. Wells
Fargo has filed the required notice of merger with the
Texas Department of Banking. Wells Fargo and TBI are
not aware of any other regulatory approvals that are
required to complete the merger.
Conditions To In addition to the receipt of regulatory approvals,
Completing there are a number of other conditions that must be met
The Merger before the merger can be completed. These conditions
(page __) include:
. TBI shareholders must approve the merger
agreement;
. TBI must receive an opinion from its auditors
concerning the tax consequences of the merger;
. TBI's and Wells Fargo's representations in the
merger agreement must continue to be accurate and
their respective covenants must have been
performed; and
. the New York and Chicago Stock Exchanges must
approve the
5
<PAGE>
listing of the shares of Wells Fargo common stock
to be issued in the merger.
Wells Fargo or TBI may waive a condition it is entitled
to assert so long as the law does not require the
condition to be met.
Termination Of Wells Fargo and TBI can agree to terminate the merger
The Merger agreement at any time without completing the merger.
Agreement Also, either company can terminate the merger agreement
(page __) under the following circumstances:
. a court or other governmental authority prohibits
the merger; or
. the merger is not completed by February 29, 2000,
unless the failure to complete the merger on or
before that date is the fault of the company
seeking to terminate.
Accounting Wells Fargo expects to account for the merger under the
Treatment purchase method of accounting. Wells Fargo will record,
(page __) at fair value, the acquired assets and assumed
liabilities of TBI. To the extent the total purchase
price exceeds the fair value of the assets acquired and
liabilities assumed, Wells Fargo will record goodwill.
Market Price Wells Fargo common stock is listed on the New York and
Information Chicago Stock Exchanges under the symbol "WFC." On May
(page __) 27, 1999, the last full trading day before TBI and
Wells Fargo signed the merger agreement, Wells Fargo
common stock closed on the New York Stock Exchange at
$39.25 per share. On __________, 1999, Wells Fargo
common stock closed on the New York Stock Exchange at
$__ per share.
TBI common stock trades on the OTC Bulletin Board.
Because of limited trading volume, however, there is
not an active market for TBI common stock.
Regulation Of Wells Fargo & Company, its banking subsidiaries and
Wells Fargo many of its nonbanking subsidiaries are subject to
(page __) extensive regulation by a number of federal and state
agencies. This regulation, among other things, may
6
<PAGE>
restrict Wells Fargo's ability to diversify into other
areas of financial services, acquire depository
institutions in certain states and pay dividends on its
stock. It may also require Wells Fargo to provide
financial support to one or more of its subsidiary
banks, maintain capital balances in excess of those
desired by management and pay higher deposit premiums
as a result of the deterioration in the financial
condition of depository institutions in general.
7
<PAGE>
Selected The following financial information is to aid you in your
Financial Data analysis of the financial aspects of the merger. The
information for Wells Fargo is derived from audited
financial statements for 1994 through 1998 and unaudited
financial statements for the six months ended June 30, 1999
and 1998. The information for TBI is derived from audited
financial statements for 1994 through 1998 and unaudited
financial statements for the six months ended June 30, 1999
and 1998. The information in the table is only a summary and
should be read with the full financial statements and
related notes of Wells Fargo and TBI. You should not rely on
the information for the six months ended June 30, 1999 as
being indicative of the results expected for the entire
year.
______________________
Wells Fargo & Company and Subsidiaries
(dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999 Years Ended December 31
------------- -----------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 4,577 4,426 8,990 8,648 8,222 5,923 5,414
Net income 1,815 1,403 1,950 2,499 2,228 1,988 1,642
Diluted earnings per share 1.08 0.85 1.17 1.48 1.36 1.62 1.36
Cash dividends per share 0.385 0.330 0.700 0.615 0.525 0.450 0.383
Book value per share 12.67 12.23 12.35 11.92 11.66 10.27 5.86
Total assets 205,421 186,084 202,475 185,685 188,633 122,200 112,674
Long-term debt 21,268 16,730 19,709 17,335 18,142 16,726 12,039
</TABLE>
______________________
Texas Bancshares, Inc. and Subsidiaries
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999 Years Ended December 31
------------- -----------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 7,952 7,081 14,864 13,355 11,842 13,434 12,193
Net income 2,018 1,560 3,327 2,860 611 5,036 2,960
Diluted earnings per share 1.02 0.78 1.68 1.45 0.31 2.56 1.50
Cash dividends per share -- -- -- -- -- -- --
Book value per share 16.55 15.27 16.21 14.54 13.01 12.60 9.25
Total assets 392,894 357,946 390,898 342,054 325,674 311,228 305,299
Long-term debt -- -- -- -- -- -- --
</TABLE>
8
<PAGE>
Comparative The following table shows comparative per share data for
Per Common Wells Fargo common stock on a historical and pro forma
Share Data combined basis and for TBI common stock on a historical and
pro forma equivalent basis. The information in the table
assumes that Wells Fargo will treat the merger as a purchase
and will exchange 0.8575 shares of its common stock for each
share of TBI common stock. This is the exchange ratio that
would result if the measurement price is $40.00. The actual
measurement price--and thus the actual exchange ratio--will
not be known until immediately before the special meeting.
The pro forma equivalent information for TBI is calculated
by multiplying the pro form basic and diluted earnings per
share, the historical cash dividends declared per share of
Wells Fargo common stock and the pro forma stockholders'
equity per share by the assumed exchange ratio of 0.8575.
You should read the data with the historical financial
statements and related notes of Wells Fargo and TBI. TBI's
financial statements are included in this document beginning
on page F-1. Wells Fargo's historical financial statements
are included or incorporated in documents filed by Wells
Fargo with the SEC. See "Where You Can Find More
Information" on page __. Amounts are in U.S. dollars.
<TABLE>
<CAPTION>
Wells Fargo TBI
----------- ---
Pro Forma Pro Forma
Historical Combined Historical Equivalent
---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Earnings Per Share
Basic
June 30, 1999 1.09 1.09 1.03 0.93
December 31, 1998 1.18 1.18 1.69 1.01
Diluted
June 30, 1999 1.08 1.08 1.02 0.92
December 31, 1998 1.17 1.17 1.68 1.00
Cash Dividends Declared Per Share
June 30, 1999 0.385 0.385 -- 0.33
December 31, 1998 0.700 0.700 -- 0.60
Stockholders' Equity Per Share
June 30, 1999 12.67 12.68 16.56 10.87
December 31, 1998 12.35 12.35 16.22 10.59
</TABLE>
9
<PAGE>
Wells Fargo The following table shows the high and low sales prices of
Share Prices Wells Fargo common stock, and the cash dividends paid per
And Dividends share, for the quarterly periods indicated. Wells Fargo
common stock trades on the New York and Chicago Stock
Exchanges under the symbol "WFC." Before November 3, 1998,
the common stock traded under the symbol "NOB." The
information for 1996 and for the first three quarters of
1997 has been adjusted to reflect a 2-for-1 stock split on
October 10, 1997. Amounts are in U.S. dollars.
<TABLE>
<CAPTION>
High Low Dividend
---- --- --------
<S> <C> <C> <C>
1997
First Quarter 26.63 21.63 0.150
Second Quarter 29.63 22.19 0.150
Third Quarter 32.16 28.13 0.150
Fourth Quarter 39.50 29.75 0.165
1998
First Quarter 43.88 34.75 0.165
Second Quarter 43.75 34.00 0.165
Third Quarter 39.75 27.50 0.185
Fourth Quarter 40.88 30.19 0.185
1999
First Quarter 40.44 32.13 0.185
Second Quarter 44.88 34.38 0.200
Third Quarter _____ _____ 0.200
(through September __)
</TABLE>
The timing and amount of future dividends will depend on
earnings, cash requirements, the financial condition of
Wells Fargo and its subsidiaries, applicable government
regulations and other factors deemed relevant by Wells
Fargo's board of directors. As described in "Regulation And
Supervision Of Wells Fargo--Dividend Restrictions," various
federal and state laws limit the ability of affiliate banks
to pay dividends to Wells Fargo.
10
<PAGE>
TBI Share TBI common stock is traded on the OTC Bulletin Board under
Prices And the symbol TXBS. Because of limited trading volume there is
Dividends not an active trading market for TBI common stock. Some of
the transactions in TBI common stock are handled privately;
however, brokerage firms, acting independently of TBI,
handle many of the transactions for buyers and sellers of
TBI common stock on a negotiated basis. The following table
sets forth the approximate high and low trading prices for
TBI common stock as quoted on the OTC Bulletin Board for the
periods presented. Some of the quotations reflect inter-
dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent the actual
transactions or the actual fair market value of TBI common
stock. Amounts are in U.S. dollars.
<TABLE>
<CAPTION>
High Low Dividend
---- --- --------
<S> <C> <C> <C>
1997
First Quarter 12.50 11.25 --
Second Quarter 14.13 13.00 --
Third Quarter 18.00 14.13 --
Fourth Quarter 18.00 16.00 --
1998
First Quarter 19.38 17.00 --
Second Quarter 24.00 19.00 --
Third Quarter 25.00 18.00 --
Fourth Quarter 22.00 16.00 --
1999
First Quarter 24.13 19.00 --
Second Quarter 32.00 23.75 --
Third Quarter --
(through September __) --
</TABLE>
11
<PAGE>
Special Meeting Of Shareholders
- --------------------------------------------------------------------------------
Date, Time The date, time and place of the special meeting of TBI
And Place shareholders are:
________________
________________
________________
________________
Record Date TBI's board of directors has established ______________ as
the record date for the meeting. Only shareholders of record
on that date are entitled to attend and vote at the special
meeting.
Vote Required On the record date, there were ____________ shares of TBI
To Approve common stock outstanding and entitled to vote at the special
Merger meeting. The holders of TBI common stock are entitled to one
vote per share. The presence, in person or by proxy, at the
special meeting of the holders of a majority of the
outstanding shares is necessary for a quorum. Approval of
the merger requires the affirmative vote, in person or by
proxy, of the holders of at least two-thirds of the
outstanding shares of TBI common stock on the record date.
Agreement To TBI's directors and some of its officers have agreed to vote
Vote For The in favor of the merger all shares of TBI common stock
Merger beneficially owned by them at the record date for the
special meeting. At the record date, these directors and
officers beneficially owned a total of 49.5% of the shares
of TBI common stock entitled to vote at the special meeting,
as follows:
<TABLE>
<CAPTION>
Name Number of Shares
---- ----------------
<S> <C>
N.O. Adams, Jr. 21,396
James L. Eakin 191,328
Ann McGill Erck (individually) 14,000
Fredrick Erck (individually) 34,632
Fredrick Erck and Ann McGill Erck (jointly) 397,760
Fredrick Erck and Ann McGill Erck (as
co-trustees for two trusts) 67,620
</TABLE>
12
<PAGE>
James A. Erck 45,530
Abigail Erwin 24,000
David P. Henneke 1,200
Mark M. Johnson 16,788
Jacqueline K. Lloyd 116,062
Stanley A. Tolson 43,472
Total 973,788
See "Information About TBI--"Ownership Of TBI Common Stock
By TBI Management" for more information about share
ownership by TBI's officers and directors.
Voting and All shares of TBI common stock represented at the special
Revocation Of meeting by a properly Proxies executed proxy will be voted
Proxies in accordance with the instructions indicated on the proxy,
unless the proxy is revoked before a vote is taken. If you
sign and return a proxy without voting instructions, and do
not revoke the proxy, the proxy will be voted FOR the
merger.
You may revoke your proxy at any time before it is voted by
(a) filing either an instrument revoking the proxy or a
duly executed proxy bearing a later date with the corporate
secretary of TBI before or at the special meeting or (b)
voting the shares subject to the proxy in person at the
special meeting. Attendance at the special meeting will not
by itself result in your proxy being revoked.
A proxy may indicate that all or a portion of the shares
represented by the proxy are not being voted with respect
to a specific proposal. This could occur, for example, when
a broker is not permitted to vote shares held in the name
of a nominee on certain proposals in the absence of
instructions from the beneficial owner. Shares that are not
voted with respect to a specific proposal will be
considered as not present for that proposal, even though
the shares will be considered present for purposes of
determining a quorum and voting on other proposals.
Abstentions on a specific proposal will be considered as
present but will not be counted as voting in favor of the
proposal.
The proposal to approve the merger must be approved by the
holders of
13
<PAGE>
at least two-thirds of the outstanding shares of TBI common
stock. Because approval of the merger requires the
affirmative vote of a specified percentage of outstanding
shares, not voting on the proposal will have the same
effect as voting against the proposal.
Solicitation Of In addition to solicitation by mail, directors, officers
Proxies and employees of TBI may solicit proxies from TBI
shareholders, either personally or by telephone or other
form of communication. None of the foregoing persons who
solicit proxies will be specifically compensated for such
services. Nominees, fiduciaries and other custodians will
be requested to forward soliciting materials to beneficial
owners and will be reimbursed for their reasonable expenses
incurred in sending proxy material to beneficial owners.
TBI will bear its own expenses in connection with any
solicitation of proxies for the special meeting.
Other Matters If an insufficient number of votes for the merger is
Considered At received before the scheduled At The Meeting meeting date,
The Meeting Wells Fargo and TBI may decide to postpone or adjourn the
special meeting. If this happens, proxies that have been
received that either have been voted for the merger or
contain no instructions will be voted for adjournment.
TBI's board of directors is not aware of any business to be
brought before the special meeting other than the proposals
to approve the merger. If other matters are properly
brought before the special meeting or any adjournments or
postponements of the meeting, the persons appointed as
proxies will have authority to vote the shares represented
by properly executed proxies in accordance with their
discretion and judgment as to the best interests of TBI.
14
<PAGE>
The Merger
- ------------------------------------------------------------------------------
Purpose And Wells Fargo is using the merger to acquire TBI. As a result
Effect Of The of the merger, TBI will Merger become a wholly-owned
Merger subsidiary of Wells Fargo and shareholders of TBI will
receive shares of Wells Fargo common stock for their shares
of TBI common stock. Wells Fargo will own all of the
outstanding shares of TBI common stock. Shareholders of TBI
will become stockholders of Wells Fargo, and their rights
will be governed by Delaware law and Wells Fargo's restated
certificate of incorporation and bylaws rather than Texas
law and TBI's restated articles of incorporation. See
"Comparison Of Stockholder Rights."
Background Of Background of the Merger. During the first quarter of 1999,
And Reasons TBI received unsolicited For The Merger indications of
For The interest by certain financial institutions, including Wells
Merger Fargo. Due to the strong interest in TBI shown by other
financial institutions, TBI held discussions with two
investment banking firms, including Hoefer & Arnett,
Incorporated, regarding the value of TBI.
On April 1, 1999, TBI received a letter of intent from
Wells Fargo presenting a proposal to acquire 100% of the
outstanding capital stock of TBI by a merger or
consolidation of TBI and either Wells Fargo or an affiliate
of Wells Fargo in exchange for common stock of Wells Fargo.
TBI's board of directors held a special meeting on April 7,
1999 to consider and act upon the Wells Fargo letter of
intent. TBI's board of directors engaged in a comprehensive
discussion and analysis of the following factors in
determining whether to enter into the letter of intent with
Wells Fargo:
. prior to any investigation of TBI's books, records
and properties, the requirement that Wells Fargo
enter into a confidentiality agreement;
. TBI's previous discussions with two investment
banking firms regarding the value of TBI;
. TBI's receipt of unsolicited indications of interest
by other financial institutions; and
. the intrinsic value of the Wells Fargo common stock
and enterprise.
After completing its analysis, TBI's board of directors
authorized moving forward with negotiations with Wells
Fargo and authorized and approved the execution and
delivery of a confidentiality agreement and
15
<PAGE>
the letter of intent. TBI's board of directors also
authorized the engagement of Hoefer & Arnett as TBI's
financial advisor to render an opinion with regard to the
fairness, from the perspective of the shareholders of TBI,
of the financial terms of the proposed transaction between
TBI and Wells Fargo.
After negotiating the terms of a definitive agreement,
TBI's board of directors met again on May 28, 1999 to
review the proposed merger agreement and consider the
transaction with Wells Fargo. Based primarily upon an
extensive discussion of the terms of the merger agreement
and of the financial condition and valuation for both TBI
and Wells Fargo, TBI's board of directors determined that
the transaction with Wells Fargo was advisable and in the
best interests of TBI and its shareholders. As a result,
TBI's board of directors authorized the execution and
delivery of the merger agreement.
TBI's Board of Directors' Reasons for the Merger. TBI's
board of directors believes that the merger is advisable
and in the best interests of TBI and its shareholders. In
reaching this determination, TBI's board of directors
considered a number of factors including, without
limitation, the following:
. The transaction would give TBI's shareholders
greater liquidity, as there is currently no active
trading market for their shares of TBI common stock,
while Wells Fargo common stock is listed and traded
on the New York Stock Exchange.
. The transaction is contemplated to be tax-free to
the TBI shareholders and the merger agreement
provides that it is a condition to TBI's obligations
to complete the merger that it shall have received
the opinion of KPMG LLP that no gain or loss will be
recognized by TBI shareholders to the extent they
receive Wells Fargo common stock in the merger. See
"The Merger--U.S. Federal Income Tax Consequences of
the Merger."
. The consideration to be received by TBI shareholders
in the merger, which TBI's board of directors
believed to represent an attractive premium and to
be fair to the TBI shareholders from a financial
point of view. TBI's board of directors'
determination was based on, among other things, a
comparison of the terms of the proposed transaction
with other recent bank mergers and acquisitions, the
evaluation of publicly available information
regarding Wells Fargo, the review and evaluation of
other information concerning the valuation of banks
and analyses of recent bank acquisitions, and the
review and evaluation of financial information and
analyses regarding Wells Fargo and TBI. TBI's board
of directors determined
16
<PAGE>
that the premium to be received by the TBI
shareholders pursuant to the merger agreement is
within the range of premiums in recent comparable
bank transactions in the State of Texas.
. The opinion of Hoefer & Arnett, its financial
advisor, that the consideration to be received by
the TBI shareholders in the merger is fair to the
TBI shareholders from a financial point of view. See
"The Merger--Opinion Of TBI's Financial Advisor."
. The current "favorable" environment for purchase
price premiums in acquisitions of financial
institutions and the likelihood of such favorable
conditions continuing.
. The growth prospects of TBI's subsidiary banks,
First National Bank of South Texas and The Bank of
South Texas and the fact that the present size and
market position of TBI and its subsidiary banks make
acquisitions of other banking institutions
difficult.
. Wells Fargo's successful expansion record, allowing
TBI shareholders who retain Wells Fargo common stock
the opportunity to own stock in an institution that
has demonstrated meaningful and consistent growth in
recent years.
. The state of the banking industry generally and the
increased competition brought about by
consolidation, deregulation and other factors, as
well as the financial size and resources necessary
to compete in this environment.
. Wells Fargo's record in enhancing shareholder value.
TBI's board of directors has unanimously approved the
merger agreement and recommends that TBI shareholders
approve the merger agreement at the special meeting.
Opinion Of The fairness opinion of TBI's financial advisor, Hoefer &
TBI's Financial Arnett, Incorporated, is Advisor described below. The
Advisor description contains Hoefer & Arnett's projections,
estimates and/or other forward-looking statements about the
future earnings or other measures of the future performance
of Wells Fargo and TBI. You should not rely on any of these
statements as having been made or adopted by Wells Fargo or
TBI.
TBI's board of directors retained Hoefer & Arnett,
Incorporated to render, as investment bankers, a written
opinion to TBI's board of directors as to the fairness,
from a financial point of view, to the shareholders of TBI
of the terms of the proposed merger of a wholly-
17
<PAGE>
owned subsidiary of Wells Fargo with and into TBI in
accordance with the terms and conditions of the merger
agreement, as amended. No limitations were imposed by TBI's
board of directors upon Hoefer & Arnett with respect to the
investigations made or procedures followed in rendering the
fairness opinion.
A copy of the fairness opinion of Hoefer & Arnett, dated as
of the date of this proxy statement-prospectus, which sets
forth certain assumptions made, matters considered and
limits on the review undertaken by Hoefer & Arnett, is
attached as Appendix B to this proxy statement-prospectus.
TBI shareholders are urged to read the fairness opinion in
its entirety. The following summary of the procedures and
analysis performed, and assumptions used by Hoefer &
Arnett, is qualified in its entirety by reference to the
text of the fairness opinion. Hoefer & Arnett's fairness
opinion is directed to TBI's board of directors only and is
directed only to the financial terms of the transaction and
does not constitute a recommendation to any TBI shareholder
as to how such shareholder should vote at the special
meeting.
In arriving at its opinion, Hoefer & Arnett reviewed and
analyzed, among other things, the following: (i) the merger
agreement; (ii) annual reports to shareholders of TBI and
Wells Fargo for the years ended December 31, 1997 and
December 31, 1998; (iii) quarterly consolidated financial
statements for bank holding companies on Form FR Y-9C as
filed with the Federal Reserve Board for TBI and Wells
Fargo for the quarters ended March 31, 1999, December 31,
1998, September 30, 1998 and June 30, 1998 and March 31,
1998; (iv) certain other publicly available financial and
other information concerning TBI and Wells Fargo and the
trading markets for the publicly traded securities of Wells
Fargo; and (v) publicly available information concerning
other banks and bank holding companies, the trading markets
for their securities and the nature and terms of certain
other merger transactions we believe relevant to our
inquiry. Hoefer & Arnett held discussions with senior
management of TBI and Wells Fargo concerning their past and
current operations, financial condition and prospects, as
well as the results of regulatory examinations.
Hoefer & Arnett reviewed with senior management of TBI
earnings projections for 1999 through 2003 for TBI as a
stand-alone entity, assuming the merger does not occur. TBI
senior management prepared such projections.
In conducting its review and in arriving at its opinion,
Hoefer & Arnett relied upon and assumed the accuracy and
completeness of the financial and other information
provided to it or publicly available, and did not attempt
to independently verify the same. Hoefer & Arnett relied
upon
18
<PAGE>
the management of TBI as to the reasonableness of the
financial and operating forecasts and projections (and the
assumptions and bases therefor) provided to it, and Hoefer
& Arnett assumed that such forecasts and projections
reflect the best currently available estimates and
judgments of TBI management. Hoefer & Arnett also assumed,
without independent verification, that the aggregate
allowances for loan losses for Wells Fargo and TBI are
adequate to cover such losses. Hoefer & Arnett did not make
or obtain any evaluations or appraisals of the properties
of Wells Fargo or TBI, nor did it examine any individual
loan credit files. For purposes of its opinion, Hoefer &
Arnett assumed that the merger will have the tax,
accounting and legal effects described in the merger
agreement and relied, as to legal matters, exclusively on
counsel to TBI. Hoefer & Arnett's opinion is limited to the
fairness, from a financial point of view, to the holders of
shares of TBI common stock of the terms of the proposed
merger of a wholly-owned subsidiary of Wells Fargo with and
into TBI and does not address TBI's underlying business
decision to proceed with the merger.
As more fully discussed below, Hoefer & Arnett considered
such financial and other factors as Hoefer & Arnett deemed
appropriate under the circumstances, including among others
the following: (i) the historical and current financial
position and results of operations of Wells Fargo and TBI,
including interest income, interest expense, net interest
income, net interest margin, provision for loan losses,
non-interest income, non-interest expense, earnings,
dividends, internal capital generation, book value,
intangible assets, return on assets, return on
shareholders' equity, capitalization, the amount and type
of non-performing assets, loan losses and the reserve for
loan losses, all as set forth in the financial statements
for Wells Fargo and TBI; (ii) the assets and liabilities of
Wells Fargo and of TBI, including the loan, investment and
mortgage portfolios, deposits, other liabilities,
historical and current liability sources and costs and
liquidity; and (iii) the nature and terms of certain other
merger transactions involving banks and bank holding
companies. Hoefer & Arnett also took into account its
assessment of general economic, market and financial
conditions and its experience in other transactions, as
well as its experience in securities valuation and its
knowledge of the banking industry generally. Hoefer &
Arnett's opinion is necessarily based upon conditions as
they existed and can be evaluated on the date of its
opinion and the information made available to it through
that date.
In connection with rendering its fairness opinion to TBI's
board of directors, Hoefer & Arnett performed certain
financial analyses, which are summarized below. Hoefer &
Arnett believes that its analysis must be considered as a
whole and that selecting portions of such analysis and the
factors considered therein, without considering all factors
and
19
<PAGE>
analysis, could create an incomplete view of the analysis
and the processes underlying Hoefer & Arnett's fairness
opinion. The preparation of a fairness opinion is a complex
process involving subjective judgments and is not
necessarily susceptible to partial analysis or summary
description. In its analyses, Hoefer & Arnett made numerous
assumptions with respect to industry performance, business
and economic conditions, and other matters, many of which
are beyond the control of Wells Fargo and TBI. Any
estimates contained in Hoefer & Arnett's analyses are not
necessarily indicative of future results or values, which
may be significantly more or less favorable than such
estimates. Estimates of values of companies do not purport
to be appraisals or necessarily reflect the prices at which
companies or their securities may actually be sold. Except
as described below, none of the financial analyses
performed by Hoefer & Arnett was assigned a greater
significance by Hoefer & Arnett than any other.
The financial forecasts and projections of TBI prepared by
Hoefer & Arnett were based on projections provided by TBI
as well as Hoefer & Arnett's own assessment of general
economic, market and financial conditions. All such
information was reviewed with the respective management of
TBI. TBI does not publicly disclose internal management
financial forecasts and projections of the type provided to
Hoefer & Arnett in connection with its review of the
proposed merger. Such forecasts and projections were not
prepared with a view towards public disclosure. The
forecasts and projections prepared by Hoefer & Arnett were
based on numerous variables and assumptions, which are
inherently uncertain, including, without limitation,
factors related to general economic and market conditions.
Accordingly, actual results could vary significantly from
those set forth in such forecasts and projections.
Summary of Proposal. Hoefer & Arnett reviewed the terms of
the proposed transaction. At April 6, 1999, TBI had
1,966,536 common shares outstanding and 59,500 common stock
options outstanding with an aggregate exercise price of
$990,890. If not exercised, the holder will receive cash.
For purposes of Hoefer & Arnett's analysis, Hoefer & Arnett
assumed that all 59,500 options are exercised resulting in
an "Aggregate Share Amount" or total purchase price, of
$69,490,890. A purchase price of $69,490,890, or
approximately $34.30, per share represents a price to book
value at March 31, 1999 (adjusted for the exercise of the
options) of 2.08, a price to tangible book value of 2.38, a
price to 1998 earnings of 20.89 and a price to assets ratio
of 17.86% (based on March 31, 1999 total assets as adjusted
for the exercise of the options).
Comparable Transaction Analysis. Hoefer & Arnett reviewed
certain
20
<PAGE>
information relating to selected bank mergers announced
between August 1, 1998 and May 26, 1999 in which the
acquired banking organization was located in the state of
Texas. This data was obtained from Sheshunoff Information
Services, Inc.
On the basis of the comparable transactions, Hoefer &
Arnett calculated a range of purchase prices as a multiple
of stated book value for the comparable transactions from a
low of 1.16 to a high of 4.40, with an average of 2.16.
These transactions indicated a range of $19.13 per share to
$72.56 per share, with an average of $35.62 per share for
TBI (based on March 31, 1999 stated equity of $16.49 per
share, as adjusted for the exercise of options).
On the basis of the comparable transactions, Hoefer &
Arnett calculated a range of purchase prices as a multiple
of earnings for the comparable transactions from a low of
9.52 to a high of 29.35, with an average of 17.26. These
transactions indicated a range of $15.61 per share to
$48.13 per share, with an average of $28.34 per share for
TBI (based on fully diluted 1998 earnings of $1.64 per
share).
Finally, Hoefer & Arnett calculated a range of purchase
prices as a percentage of total assets for the comparable
transactions from a low of 5.82% to a high of 28.96%, with
an average of 18.24%. These transactions indicated a range
of $11.18 per share to $55.63 per share, with an average of
$35.04 per share for TBI (based on March 31, 1999 total
assets of $389,158,890, as adjusted for the exercise of
options). The price to book value multiple, the price to
earnings multiple and the price to assets ratio resulting
from the terms of the merger agreement all fall within the
range of purchase prices calculated using the prices paid
in the comparable transactions.
Additionally, Hoefer & Arnett reviewed pricing information
on acquisitions announced by Wells Fargo (known as Norwest
Corporation prior to November 3, 1998) from January 1, 1997
to May 26, 1999, based on data obtained from Sheshunoff
Information Services, Inc. For the 15 transactions
reviewed, the price to book value multiple ranged from 1.46
to 3.89, with an average of 2.31. The price to earnings
multiple ranged from 5.23 to 31.41, with an average of
16.60. The price as a percentage of total assets ranged
from 14.09% to 28.37%, with an average of 20.42%. The price
to book value multiple, the price to earnings multiple and
the price to assets ratio resulting from the terms of the
merger agreement all fall within the range of pricing
multiples paid by Wells Fargo in previous transactions.
Present Value Analysis. Hoefer & Arnett calculated the
present value of TBI assuming that TBI remained
independent. Based on projected
21
<PAGE>
earnings for TBI for 1999 through 2003 and using a discount
rate of 14%, an acceptable discount rate considering the
risk-return relationship most investors would demand for an
investment of this type as of the valuation date, the
present value equaled $21.61 per share, which is below the
transaction value of approximately $34.30 per share.
Discounted Cash Flow Analysis. Hoefer & Arnett performed a
discounted cash flow analysis to determine hypothetical
present values for a share of TBI common stock as a five-
year investment. Under this analysis, Hoefer & Arnett
considered certain scenarios for the performance of TBI
common stock using an asset growth rate of 8.00% and a
return on average assets of ranging from 0.98% to 1.25%.
Hoefer & Arnett used a multiple of 2.16 times book value as
a terminal value for TBI common stock and 17.26 times
earnings as a terminal value for TBI common stock. A
discount rate of 14% was applied to these growth and
terminal value scenarios. This discount rate, growth rate
and terminal values were chosen based upon what Hoefer &
Arnett, in its judgment, considered to be appropriate
taking into account, among other things, TBI's past and
present performance, the general level of inflation, rates
of return for fixed income and equity securities in the
marketplace generally and for companies with similar risk
profiles. Using a terminal value of 2.16 times book value,
the present value of TBI common stock equaled $29.24 per
share. Using a terminal value of 17.26 times earnings, the
present value of TBI common stock equaled $36.40 per share.
The average of these present value figures is less than
that of the Wells Fargo offer. Thus, Hoefer & Arnett's
discounted cash flow analysis indicated that TBI
shareholders would be in a better financial position by
receiving the consideration offered in the merger
transaction rather than continuing to hold TBI common
stock.
Stock Trading History. Hoefer & Arnett reviewed and
analyzed the historical trading prices and volumes for
Wells Fargo common stock on a monthly basis from January
31, 1998 to May 26, 1999. The Wells Fargo common stock
price has ranged from a low of $24.60 to a high of $44.875.
The stock price to trailing 12 months earnings per share
has ranged from a low of 18.8 to a high of 33.5, with an
average of 26.37. The stock price to book value has ranged
from a low of 1.89 to a high of 4.20, with an average of
2.82. The volume of shares traded during a one-month period
has ranged from 4,792,500 to 94,360,900 indicating an
active market for Wells Fargo common stock.
Other Analysis. Hoefer & Arnett also reviewed selected
investment research reports on and earnings estimates for
Wells Fargo. In addition, Hoefer & Arnett prepared an
overview of historical financial performance of both TBI
and Wells Fargo.
22
<PAGE>
The opinion expressed by Hoefer & Arnett was based
upon market, economic and other relevant
considerations as they existed and have been
evaluated as of the date of the opinion. Events
occurring after the date of issuance of the opinion,
including but not limited to, changes affecting the
securities markets, the results of operations or
material changes in the assets or liabilities of TBI
could materially affect the assumptions used in
preparing the opinion.
Financial Advisory Fees. Pursuant to an engagement
letter dated April 9, 1999, TBI engaged Hoefer &
Arnett to review the terms of the transaction and to
render a fairness opinion in connection with the
merger for $50,000 including all out-of-pocket
expenses.
Additional Certain members of TBI's management, including all
Interests Of its directors, have interests TBI Management in the
TBI merger that are in addition to their interests as
Management shareholders of TBI generally. TBI's board of
directors was aware of these interests and
considered them, among other things, when it
approved the merger agreement.
Employment James L. Eakin, Abigail Erwin and Stanley A. Tolson
And/Or Non- have each entered into employment agreements with
Competition Wells Fargo. All three employment agreements become
Agreements With effective as of the day immediately following the
Wells Fargo effective date of the merger and terminate one year
after the effective date. Mr. Eakin's agreement
provides that he will perform duties as President of
The Bank of South Texas, a subsidiary bank of TBI.
Mr. Eakin will receive an annual salary of $150,000.
Ms. Erwin's and Mr. Tolson's agreements provide that
they will perform such duties as assigned by Wells
Fargo's managing officer for San Antonio, Texas. Ms.
Erwin will receive an annual salary of $150,000. Mr.
Tolson will receive an annual salary of $125,000.
All three individuals will be entitled to
participate in Wells Fargo's employee benefits plans
available to other regular Wells Fargo employees,
except that Mr. Eakin will not be eligible to
participate in the Wells Fargo Salary Continuation
Plan.
Fredrick Erck and Mark M. Johnson have each entered
into non-competition agreements with Wells Fargo.
Mr. Eakin has also entered into a non-competition
agreement with Wells Fargo as part of his employment
agreement. All three non-competition agreements
become effective as of the day immediately following
the effective date of the merger and terminate one
year after the effective date. Under their
agreements, Messrs. Eakin, Erck and Johnson have
each agreed not to engage in the financial services
business related to banking in the 21 states where
Wells Fargo currently operates banks, including the
following:
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. directly or indirectly contact or solicit TBI
(The Bank of South Texas in the case of Mr.
Eakin) or Wells Fargo customers to withdraw or
cancel their present business with those
companies or to divert any potential business
from those companies to any other financial
services company;
. aid or assist anyone in engaging in or entering
into the financial services business;
. in any manner become interested directly or
indirectly, as employee, owner, partner,
shareholder, director, officer, consultant or
otherwise, in the business of financial services;
provided, however, the term "shareholder" for
this purpose will not include any investment in
an organization where the person owns less than
5% of the outstanding stock of the organization;
. solicit for employment any person who is an
employee of TBI (The Bank of South Texas in the
case of Mr. Eakin) or Wells Fargo or its
subsidiaries or directly or indirectly solicit
any person who is an employee of TBI (The Bank of
South Texas in the case of Mr. Eakin) or Wells
Fargo or its subsidiaries to leave employment.
In consideration of observing these non-competition
restrictions, Mr. Erck will receive $222,000 and
Messrs. Eakin and Mr. Johnson will each receive
$150,000. Messrs. Eakin's and Erck's payments will
be payable in three equal installments: the first on
the day following the effective date of the merger;
the second six months after the effective date of
the merger; and the third one year after the
effective date of the merger. Mr. Johnson's payment
will be payable in four equal installments: the
first on the day following the effective date of the
merger; the second four months after the effective
date of the merger; the third eight months after the
effective date of the merger; and the fourth one
year after the effective date of the merger.
Vesting of TBI Option issued under the 1996 Texas Bancshares, Inc.
Stock Options Stock Option Plan will vest Options automatically if
the merger is approved by TBI's shareholders. The
following table identifies the members of TBI
management who have options that will vest earlier
than scheduled as a result of the merger. It also
sets forth for each of these individuals the number
of shares of TBI common stock that are subject to
options whose vesting dates will accelerate as a
result of the merger.
Name Shares
---- ------
James L. Eakin 4,000
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Fredrick Erck 8,000
Abigail Erwin 4,000
David P. Henneke 4,000
Mark M. Johnson 5,000
Stanley A. Tolson 5,000
Total 30,000
Indemnification Fargo has agreed to ensure that all rights to
and Insurance indemnification and all Insurance limitations of
liability existing in TBI's restated articles of
incorporation or bylaws in favor of the present and
former directors and officers of TBI with respect to
claims arising from (a) facts or events that
occurred before the effective time of the merger or
(b) the merger agreement or any of the transactions
contemplated thereby will survive the merger and
continue in full force and effect.
Dissenters' The following is a summary of the appraisal rights
Rights of dissenting shareholders under Texas law. It is
based on the provisions of Articles 5.11, 5.12 and
5.13 of the Texas Business Corporation Act (TBCA),
copies of which are attached to this Proxy
Statement-Prospectus as Appendix C. The summary is
qualified in its entirety by the provisions of
Articles 5.11, 5.12 and 5.13 of the TBCA. To
understand your appraisal rights fully, you should
read these provisions carefully.
Meaning Of Dissenters' rights of appraisal (or simply "rights
Dissenters' of appraisal") refer to the right Rights of
Rights shareholders who disagree with a particular
corporate action to receive the cash value of their
shares in lieu of whatever payment is called for by
that corporate action. Under the TBCA, you have this
right in connection with the merger. As a result, in
lieu of receiving shares of Wells Fargo common
stock, you may elect to receive the cash value of
your shares of TBI common stock. The value of your
shares will be measured as of the day immediately
before the special meeting, excluding any increase
or decrease in value in anticipation of the merger.
Exercising You must take a number of specific steps to exercise
Dissenters' your appraisal rights. Failure Rights to take these
steps strictly in the manner required will result in
you losing your appraisal rights. If you lose your
appraisal rights, you will be bound by the merger
and will receive shares of Wells Fargo common stock
for your shares of TBI common stock.
Before the meeting, you must deliver or mail written
notice to TBI of
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your intent to exercise your right to dissent if the
merger is completed. Your notice must give an
address where TBI can notify you if the merger is
completed. Also, you must not vote any of your TBI
shares in favor of the merger. Simply voting against
the merger, however, is not sufficient to exercise
your appraisal rights. You must also notify TBI as
mentioned above and take the other steps described
below.
If TBI's shareholders approve the merger and you
have taken the required steps before the meeting,
TBI will deliver or mail written notice to you of
completion of the merger within 10 days after the
effective time of the merger. You will have 10 days
after delivery or mailing of this notice to you to
make a written demand on TBI, as the surviving
company in the merger, for payment of the fair value
of your TBI shares. You must state in your demand
the number of shares of TBI common stock you own and
your estimate of the fair value of your shares.
Within 20 days after demanding payment for your
shares, you must submit all of your share
certificates to TBI so that TBI can note your demand
on the share certificates.
You will lose your appraisal rights if you fail to
demand payment for your shares within the required
10-day period. Also, if you fail to submit your
share certificates within the required 20-day
period, TBI has the option to terminate your
appraisal rights, unless a court of competent
jurisdiction for good and sufficient cause otherwise
directs.
Determining The Within 20 days after TBI receives your demand for
Fair Value of payment, it will deliver or mail Of Your TBI Shares
your TBI Shares notice to you indicating whether it accepts your
estimate of the fair value of your shares. If TBI
accepts your estimate, it will pay this amount
within 90 days after the date the merger is
completed, upon surrender of your duly endorsed
share certificates. If TBI does not accept your
estimate, it will state in the notice its estimated
fair value of your shares. You will have 60 days
after completion of the merger to accept TBI's
estimated value. If you do, TBI will pay this amount
to you within 90 days after completion of the
merger, upon surrender of your duly endorsed share
certificates. Upon payment to you of the agreed
value, whether based on your estimate or TBI's
estimate, you will cease to have any interest in
your shares or in TBI.
If you do not agree with TBI's estimate of the fair
value of your shares, then either you or TBI may
file a petition in any court of competent
jurisdiction in Bexar County, Texas, asking the
court to determine the fair value of your shares.
The petition must be filed within 120 days after
completion of the merger. The court will notify by
registered mail all shareholders who have demanded
payment for their shares and who have been unable to
reach an agreement with TBI as to the fair value of
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their shares. The court's notice will state the time
and place of the hearing at which the court will
consider the petition.
The court will appoint one or more appraisers to
determine the value of the TBI common stock. The
appraisers may examine the books and records of TBI
and conduct such other investigation as they deem
proper. The appraisers must afford a reasonable
opportunity to the interested parties to submit
pertinent evidence as to the value of the shares.
The appraisers will then determine the fair value of
the shares and report this value to the office of
the clerk of the court. The clerk of the court will
notify all parties of this value. After hearing any
legal or factual exceptions to the report, the court
will then determine the fair value of the shares and
direct TBI to pay that value, together with interest
for the period beginning 91 days after the effective
time of the merger and ending on the date of the
court's judgment, to the shareholders entitled to
payment, upon surrender of their duly endorsed share
certificates. The court's determination of the value
of the TBI common stock will be binding on TBI and
all shareholders who have been so notified. Upon
payment of this amount, dissenting shareholders will
cease to have any interest in their shares or in
TBI. The court allows the appraisers a reasonable
fee as court costs, and all court costs are allotted
between the parties in a manner that the court
determines is fair and equitable.
Withdrawing Your You may withdraw your demand for payment at any time
Demand before payment for your shares For Payment and
Payment before any petition is filed seeking a determination
of the fair value of the shares. With TBI's consent,
you may withdraw your demand after the petition is
filed.
When You Will Be You will be presumed to have approved the merger if
Presumed to (a) you withdraw your demand for To Have Approved
Have Approved The Merger payment within the time allowed, (b) TBI
The Merger has terminated your appraisal rights because you did
not, within the time allowed, submit your share
certificates to TBI for notation of your demand for
payment, (c) no petition for a court hearing was
filed within the time allowed or (d) a petition is
filed but the court determines that you are not
entitled to exercise dissenters' appraisal rights.
If you are presumed to have approved the merger, you
will be bound by the merger and will cease to have
any rights in the shares or in TBI. Upon surrender
of your duly endorsed certificates for your shares
of TBI common stock, you will receive shares of
Wells Fargo common stock and will be entitled to
receive any dividends and other distributions made
to stockholders of Wells Fargo since completion of
the merger.
Dissenters' In the absence of fraud, the remedy provided by
Rights Are your Article 5.12 of the TBCA is the Your Only Remedy If
only Remedy if You exclusive remedy for the recovery of the value
of your shares if you object to the To The Merger
merger. If TBI complies with the
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<PAGE>
You object to requirements of Article 5.12 but you do not, you
The Merger will not be entitled to bring suit for the recovery
of the value of your shares or money damages with
respect to the merger.
Exchange of After completion of the merger, Norwest Bank
Certificates Minnesota, National Association, acting as exchange
agent for Wells Fargo, will mail to each holder of
record of shares of TBI common stock a form of
letter of transmittal, together with instructions
for the exchange of the holder's TBI stock
certificates for a certificate representing Wells
Fargo common stock.
TBI shareholders should not send in their
certificates until they receive the letter of
transmittal form and instructions.
No dividend or other distribution declared on Wells
Fargo common stock after completion of the merger
will be paid to the holder of any certificates for
shares of TBI common stock until after the
certificates have been surrendered for exchange.
When the exchange agent receives a surrendered
certificate or certificates from a shareholder,
together with a properly completed letter of
transmittal, it will issue and mail to the
shareholder a certificate representing the number of
shares of Wells Fargo common stock to which the
shareholder is entitled, plus the amount in cash of
any remaining fractional share and any cash
dividends that are payable with respect to the
shares of Wells Fargo common stock so issued. No
interest will be paid on the fractional share amount
or amounts payable as dividends or other
distributions.
A certificate for Wells Fargo common stock may be
issued in a name other than the name in which the
surrendered certificate is registered if (a) the
certificate surrendered is properly endorsed and
accompanied by all documents required to transfer
the shares to the new holder and (b) the person
requesting the issuance of the Wells Fargo common
stock certificate either pays to the exchange agent
in advance any transfer and other taxes due or
establishes to the satisfaction of the exchange
agent that such taxes have been paid or are not due.
The exchange agent will issue stock certificates for
Wells Fargo common stock in exchange for lost,
stolen or destroyed certificates for TBI common
stock upon receipt of a lost certificate affidavit
and a bond indemnifying Wells Fargo for any claim
that may be made against Wells Fargo as a result of
the lost, stolen or destroyed certificates.
After completion of the merger, no transfers will
be permitted on the
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books of TBI. If, after completion of the merger,
certificates for TBI common stock are presented for
transfer to the exchange agent, they will be
canceled and exchanged for certificates representing
Wells Fargo common stock.
None of Wells Fargo, TBI, the exchange agent or any
other person will be liable to any former holder of
TBI common stock for any amount delivered in good
faith to a public official pursuant to applicable
abandoned property, escheat or similar laws.
Regulatory The merger is subject to the prior approval of the
Approvals Board of Governors of the Federal Reserve System.
The approval of the Federal Reserve Board is
required because Wells Fargo is a bank holding
company registered under the Bank Holding Company
Act. On July 15, 1999, Wells Fargo filed an
application with the Federal Reserve Board
requesting approval of the merger. The Federal
Reserve Board has notified Wells Fargo that it
expects to act on Wells Fargo's application by
September 16, 1999. In order to receive Federal
Reserve Board approval, Wells Fargo has proposed to
sell all of the loans and substantially all of the
deposits held by the Pleasanton, Texas branch of
First National Bank of South Texas. At July 31,
1999, the Pleasanton, Texas branch had approximately
$13.95 million of deposits and $5.26 million of
loans.
The merger is also subject to certain filing and
other requirements of the Texas Department of
Banking. On July 22, 1999, Wells Fargo filed the
required notice of merger with the Texas Department
of Banking.
The approval of an application means only that the
regulatory criteria for approval have been satisfied
or waived. It does not mean that the approving
authority has determined that the consideration to
be received by TBI shareholders is fair. Regulatory
approval does not constitute an endorsement or
recommendation of the merger.
Wells Fargo and TBI are not aware of any
governmental approvals or compliance with banking
laws and regulations that are required for the
merger to become effective other than those
described above. Wells Fargo and TBI intend to seek
any other approval and to take any other action that
may be required to effect the merger. There can be
no assurance that any required approval or action
can be obtained or taken prior to the special
meeting.
The merger cannot be completed unless all necessary
regulatory approvals are granted. In addition, Wells
Fargo may elect not to complete the merger if any
condition under which any regulatory approval is
granted is unreasonably burdensome to Wells Fargo.
See "The Merger Agreement--Conditions To The Merger"
and
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"--Termination Of The Merger Agreement."
Effect of The merger agreement provides that, subject to any
Merger On eligibility requirements Employee applicable to such plans,
TBI's of TBI will be entitled to participate in those Wells Fargo
Employee employee benefit and welfare plans specified in the merger
Benefit Plans agreement. Eligible employees of TBI will enter each of
such plans no later than the first day of the calendar
quarter which begins at least 32 days after completion of
the merger.
U.S. Federal The following is a summary of the anticipated material U.S.
Income Tax federal income tax employees consequences of the merger to
Consequences shareholders who are citizens or residents of the
Of The Merger United States and who, on the date of disposition of their
shares of TBI common stock, hold such shares as capital
assets. This summary does not purport to deal with all
aspects of taxation that may be relevant to particular
investors in light of their personal investment
circumstances, or to certain types of investors, including
insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, "S" corporations, limited
liability corporations, foreign corporations and taxpayers
subject to alternative minimum tax.
The summary is based on the U.S. federal income tax laws as
currently in effect and as currently interpreted. It does
not cover issues of state, local or foreign taxation. Nor
does it address all aspects of U.S. federal income taxation
that may be important to particular shareholders in light
of their personal circumstances or to shareholders subject
to special rules under U.S. federal income tax laws. Future
legislation, regulations, administrative rulings and court
decisions may alter the tax consequences summarized below.
The summary does not address the tax consequences to the
holders of TBI options who, in connection with the merger,
exercise their options or receive cash upon redemption of
their options by TBI.
The anticipated U.S. federal income tax consequences to TBI
shareholders are as follows:
. A shareholder who receives shares of Wells Fargo common
stock in exchange for shares of TBI common stock will
not recognize any gain or loss on the receipt of the
shares of Wells Fargo common stock, except for cash
received in lieu of a fractional share. The
shareholder's gain or loss on the receipt of cash in
lieu of a fractional share will equal the difference
between the cash received and the basis of the
fractional share exchanged.
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. A shareholder's tax basis in the shares of Wells Fargo
common stock received will be the same as the
shareholder's tax basis in the shares of TBI common
stock exchanged in the merger, less any cash received
in lieu of fractional shares.
. The holding period of the shares of Wells Fargo common
stock received by a shareholder will include the
holding period of the shareholder's shares of TBI
common stock exchanged in the merger, but only if the
shares of TBI common stock were held as a capital asset
at the time the merger is completed.
TBI is not required to complete the merger unless it
receives an opinion of KPMG LLP that these will be the U.S.
federal income tax consequences of the merger. The opinion
may make certain assumptions and may rely on
representations of the parties to the merger as to factual
matters. It will reflect KPMG's judgment as to the tax
status of the merger under the Code and will not be binding
on the IRS. There is no assurance that the IRS will not
take a contrary position regarding the tax consequences of
the merger, nor is there any assurance that the IRS would
not prevail in the event the tax consequences of the merger
were litigated.
The U.S. Federal income tax summary set forth above is
included for general information only and may or may not be
applicable depending upon a shareholder's particular
situation. Shareholders should consult their tax advisors
with respect to the tax consequences to them of the merger,
including the tax consequences under state, local, foreign
and other tax laws and the possible effects of changes in
federal or other tax law. TBI option holders should consult
their tax advisers as to the consequences of exercising
their options or receiving cash upon redemption of their
options by TBI.
Resale Of The Wells Fargo common stock issued in the merger will be
Wells Fargo freely transferable under the Securities Act of 1933,
Common except for shares issued to TBI shareholders who are
Stock Issued considered to be "affiliates" of TBI or Wells Fargo under
In The Merger Rule 145 under the Securities Act or of Wells Fargo under
Rule 144 under the Securities Act. The definition of
"affiliate" is complex and depends on the specific facts,
but generally includes directors, executive officers, 10%
stockholders and other persons with the power to direct the
management and policies of the company in question.
Affiliates of TBI may not sell the shares of Wells Fargo
common stock received in the merger except (a) pursuant to
an effective registration statement under the Securities
Act, (b) in compliance with an exemption from the
registration requirements of the Securities Act or (c) in
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compliance with Rule 144 and Rule 145 under the Securities
Act. Generally, those rules permit resales of stock
received by affiliates so long as Wells Fargo has complied
with certain reporting requirements and the selling
stockholder complies with certain volume and manner of sale
restrictions.
TBI has agreed to use its best efforts to deliver to Wells
Fargo signed representations by each person who may be
deemed to be an affiliate of TBI that the person will not
sell, transfer or otherwise dispose of the shares of Wells
Fargo common stock to be received by the person in the
merger except in compliance with the applicable provisions
of the Securities Act and the rules and regulations
promulgated thereunder.
This proxy statement-prospectus does not cover any resales
of Wells Fargo common stock received by affiliates of TBI.
Stock The shares of Wells Fargo common stock to be issued in the
Exchange merger will be listed on the New York Stock Exchange and
Listing the Chicago Stock Exchange.
Accounting Wells Fargo will account for the merger as a purchase.
Treatment Wells Fargo will record, at fair value, the acquired assets
and assumed liabilities of TBI. To the extent the total
purchase price exceeds the fair value of the assets
acquired and liabilities assumed, Wells Fargo will record
goodwill. Wells Fargo will include in its results of
operations the results of TBI's operations after the
merger.
The unaudited pro forma data included in this proxy
statement-prospectus for the merger have been prepared
using the purchase method of accounting. See "Summary--
Comparative Per Common Share Data."
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The Merger Agreement
- -------------------------------------------------------------------------------
The following is a summary of certain provisions of the merger agreement, a copy
of which is attached to this proxy statement-prospectus as Appendix A. The
merger agreement is incorporated by reference into this proxy statement-
prospectus. This summary is qualified in its entirety by reference to the full
text of the merger agreement. TBI shareholders are encouraged to read the merger
agreement carefully and in its entirety. Parenthetical references are to the
relevant paragraph or paragraphs of the merger agreement.
- --------------------------------------------------------------------------------
Basic Plan Of The merger agreement provides that a wholly-owned
Reorganization subsidiary of Wells Fargo will merge by statutory merger
with and into TBI, with TBI as the surviving corporation.
(paragraph 1(a))
Exchange Of TBI In the merger, each share of TBI common stock outstanding
Shares For Wells immediately before the merger, other than shares as to
Fargo Shares which dissenters' rights are exercised, will be exchanged
for the number of shares of Wells Fargo common stock
determined by dividing the Adjusted Wells Fargo Shares by
the number of shares of TBI common stock then outstanding.
(paragraph 1(a)(i))
. The number of Adjusted Wells Fargo Shares will equal
the Aggregate Share Amount divided by the Wells Fargo
Measurement Price.
. The Aggregate Share Amount will equal $68,500,000 plus
the aggregate exercise price of all Options exercised
by cash payments between the date of the merger
agreement and the day immediately before the closing
date of the merger minus the Cash Surrender Amount.
. The Cash Surrender Amount will equal the difference
between (i) the product of (A) the Fair Market Value
Per Share multiplied by (B) the number of Redeemed
Options minus (ii) the aggregate exercise price of all
Redeemed Options.
. Fair Market Value Per Share is $34.2988.
. Option means any option issued under the 1996 Texas
Bancshares, Inc. Stock Option Plan, as amended as of
October 20, 1997.
. Redeemed Option means any Option redeemed by TBI
pursuant to paragraph 4(q) of the merger agreement.
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. The Wells Fargo Measurement Price will equal the
average of the closing prices of a share of Wells Fargo
common stock as reported on the consolidated tape of
the New York Stock Exchange during the period of 10
trading days ending on the day immediately before the
special meeting of TBI shareholders.
The price of Wells Fargo common stock on the effective date
of the merger may be higher or lower than the Wells Fargo
Measurement Price. No adjustment will be made to the number
of shares of Wells Fargo common stock you will receive to
reflect fluctuations in the price of Wells Fargo common
stock occurring after the special meeting.
Redemption Of TBI has also agreed to redeem for cash all that have not
Unexercised TBI been exercised as of TBI Options immediately before the
Options merger. The redemption price for each Option share will
equal the Fair Market Value Per Share minus the exercise
price of the Option share. (paragraph 4(q))
Cash In Lieu Of If the aggregate number of shares of Wells Fargo common
Fractional Shares stock you will receive in the Shares merger does not equal
a whole number, you will receive cash in lieu of the
fractional share. The cash payment will be equal to the
product of the fractional part of the share of Wells Fargo
common stock multiplied by the Wells Fargo Measurement
Price. (paragraph 1(c))
Effective Date The effective date of the merger will be the day on which
And Time Of The articles of merger are The Merger filed with and accepted
Merger by the Texas Secretary of State. The merger agreement
provides that articles of merger will be filed within 10
business days after the satisfaction or waiver of all
conditions to the merger or such other date as Wells Fargo
and TBI may agree. The effective time of the merger will be
11:59 p.m., Austin, Texas time, on the effective date of
the merger. (paragraph 1(d))
Represent- The merger agreement contains various representations and
ations And warranties by Wells Fargo Warranties and TBI concerning (a)
Warrants their organization and legal authority to engage in their
respective businesses; (b) their capitalization; (c) their
corporate authority to enter into the merger agreement and
complete the merger, (d) the absence of certain material
changes; (e) compliance with laws; (f) material contracts;
(g) absence of certain litigation; and (h) undisclosed
liabilities. (paragraphs 2 and 3) Because the
representations and warranties do not survive completion of
the merger, they function primarily as a due diligence
device and a closing condition (that is, they must continue
to be true in all material respects until the merger is
completed).
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<PAGE>
Certain The merger agreement has a number of covenants and
Covenants agreements that govern the actions of TBI and Wells Fargo
pending completion of the merger. Some of the covenants and
agreements are summarized below.
Termination Of TBI has agreed to terminate the 1996 Texas Bancshares, Inc.
TBI Option Plan Stock Option Plan as of Plan the effective time of the
merger. TBI has also agreed to redeem for cash all TBI
options that, as of immediately before the merger, have not
been exercised. See "Basic Plan Of Reorganization" above
for more information on redemption.
Conduct Of TBI. Under the merger agreement, TBI and each TBI
Business subsidiary is required to maintain its corporate existence
in good standing, maintain the general character of its
business, conduct its business in the ordinary and usual
manner, and extend credit in accordance with existing
lending policies. Subject to certain exceptions, TBI and
each TBI subsidiary is required to obtain the consent of
Wells Fargo before it makes (a) any new loan if it would
exceed $500,000 or (b) modifies, restructures or renews any
existing loan if the amount of the resulting loan, when
combined with all other loans to the customer, would exceed
$500,000. The merger agreement places restrictions on the
ability of TBI and each TBI subsidiary to take certain
actions without Wells Fargo's consent, including (u)
incurring indebtedness, (v) granting rights to acquire
shares of its capital stock, (w) issuing shares of its
capital stock, (x) declaring dividends or purchasing its
capital stock, (y) selling its assets and (z) raising the
compensation of its officers and directors. (paragraphs
4(a) and (b)) Some of these restrictions apply only if the
amount in question exceeds a threshold dollar value.
Wells Fargo. Wells Fargo has agreed to conduct its business
and to cause its significant subsidiaries to conduct their
respective businesses in compliance with all material
obligations and duties imposed by laws, regulations, rules
and ordinances or by judicial orders, judgments and decrees
applicable to them or to their businesses or properties.
Competing Neither TBI nor any TBI subsidiary nor any director,
Transactions officer, representative or agent of TBI nor any TBI
subsidiary may, directly or indirectly, solicit, authorize
the solicitation of, or enter into any discussions with,
any third party concerning any offer or possible offer to
(a) purchase its common stock, any security convertible
into its common stock, or any other equity security of TBI
or any TBI subsidiary, (b) make a tender or exchange offer
for any shares of its common stock or other equity security
of TBI or any TBI subsidiary, (c) purchase, lease or
otherwise acquire the assets of TBI or any TBI subsidiary
except in the ordinary course of business or (d) merge,
consolidate or otherwise combine with TBI or any TBI
subsidiary. TBI
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<PAGE>
has also agreed to promptly inform Wells Fargo if any third
party makes an offer or inquiry concerning any of the
foregoing. (paragraph 4(h))
Year 2000 TBI will cooperate with Wells Fargo to assess the impact of
Compliance the merger on TBI's continued compliance with the Year 2000
project management process as set forth in the May 5, 1997
Federal Financial Institutions Examination Council (FFIEC)
Interagency Statement on the Year 2000 and subsequent
guidance documents. TBI will take such action, in
consultation with Wells Fargo, as may be necessary to amend
TBI's Year 2000 project assessment and remediation plan.
TBI will continue its current preparations for compliance
with the FFIEC requirements and will not rely on the
completion of the merger to satisfy its FFIEC requirements.
(paragraph 4(o))
Other Covenants The merger agreement contains various other covenants,
including covenants relating to the preparation and
distribution of this proxy statement-prospectus, access to
information, and the listing on the New York and Chicago
Stock Exchanges of the shares of Wells Fargo common stock
to be issued in the merger. In addition, TBI has agreed to
(a) establish such additional accruals and reserves as are
necessary to conform its accounting and credit loss reserve
practices and methods to those of Wells Fargo and Wells
Fargo's plans with respect to the conduct of TBI's business
after the merger and (b) use its best efforts to deliver to
Wells Fargo prior to completion of the merger signed
representations substantially in the form attached as
Exhibit B to the merger agreement from each executive
officer, director or shareholder of TBI who may reasonably
be deemed an "affiliate" of TBI within the meaning of such
term as used in Rule 145 of the Securities Act. (paragraphs
4(k) and 4(l) and Exhibit B) See "The Merger --Resale Of
Wells Fargo Common Stock Issued In The Merger."
Conditions To Under the merger agreement, various conditions are required
The Merger to be met before the parties are obligated to complete the
merger. These conditions are customary and include such
items as the receipt of shareholder, regulatory and listing
approval, and the receipt by TBI of a favorable tax
opinion. (paragraphs 6 and 7) See "The Merger--U.S. Federal
Income Tax Consequences Of The Merger."
The obligations of the parties are also subject to the
continued accuracy of the other party's representations and
warranties, the performance by the other party of its
obligations under the merger agreement, and, subject to
certain exceptions, the absence of any changes that have
had or might be reasonably expected to have an adverse
effect on TBI. Some of the conditions to the merger are
subject to exceptions and/or a
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"materiality" standard. Certain conditions to the
merger may be waived by the party seeking to
assert the condition. (paragraphs 6 and 7)
Termination Of The Merger Termination by Mutual Consent. Wells Fargo and
Agreement TBI can agree to terminate the merger agreement
at any time before completion of the merger.
(paragraph 9(a)(i))
Termination by Either Wells Fargo or TBI. Either
Wells Fargo or TBI can terminate the merger
agreement if any of the following occurs:
. The merger has not been completed by
February 29, 2000, unless the failure to
complete the merger is due to the failure
of the party seeking to terminate to
perform or observe in all material
respects the covenants and agreements to
be observed or performed by the party.
(paragraph 9(a)(ii))
. A court or governmental authority of
competent jurisdiction has issued a final
order restraining, enjoining or otherwise
prohibiting the transactions contemplated
by the merger agreement. (paragraph
9(a)(iii))
Effect Of Termination Generally, if either party terminates the merger
agreement, it becomes void without any liability
to either party other than for willful and
material breaches occurring before termination;
however, the provisions of the merger agreement
governing confidential information and expenses
incurred in connection with the merger continue
in effect after termination of the merger
agreement. (paragraph 9(b))
Waiver And Amendment Either Wells Fargo or TBI may waive any
inaccuracies in the representations and
warranties of the other party or compliance by
the other party with any of the covenants or
conditions contained in the merger agreement.
(paragraph 16)
Wells Fargo and TBI can amend the merger
agreement at any time before the merger is
completed; however, the merger agreement
prohibits them from amending the merger agreement
after TBI shareholders approve the merger if the
amendment would change in a manner adverse to TBI
shareholders the consideration to be received by
TBI shareholders in the merger. (paragraph 17)
Expenses Wells Fargo and TBI will each pay their own
expenses in connection with the merger, including
fees and expenses of their respective independent
auditors and counsel. (paragraph 10)
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Comparison Of Stockholder Rights
- -------------------------------------------------------------------------------
The following is a summary of material differences between the rights of TBI
shareholders and the rights of Wells Fargo stockholders. It is not a complete
statement of the provisions affecting, and the differences between, the rights
of TBI shareholders and Wells Fargo stockholders. The summary is qualified in
its entirety by reference to the Texas Business Corporation Act (TBCA), the
Delaware General Corporation Law (DGCL), TBI's restated articles of
incorporation and bylaws, and Wells Fargo's restated certificate of
incorporation and bylaws.
- -------------------------------------------------------------------------------
General Upon completion of the merger, holders of TBI
common stock, as well as holders of TBI options
who have agreed to convert their options into
shares of Wells Fargo common stock, will become
stockholders of Wells Fargo. There are material
differences in the rights of TBI shareholders as
compared to the rights of Wells Fargo
stockholders. The rights of TBI shareholders are
governed by Texas law and TBI's restated articles
of incorporation and bylaws and the rights of
Wells Fargo stockholders are governed by Delaware
law and Wells Fargo's restated certificate of
incorporation and bylaws.
A description of Wells Fargo's common stock is
contained in Wells Fargo's current report on Form
8-K filed October 14, 1997. A description of the
preferred stock purchase rights that are attached
to shares of Wells Fargo common stock is included
in Wells Fargo's registration statement on Form
8-A dated October 21, 1998. See "Where You Can
Find More Information." These descriptions may be
updated from time to time by amendments or
reports filed by Wells Fargo with the SEC.
Authorized And Outstanding Wells Fargo. Wells Fargo's restated certificate
Capital Stock of incorporation currently authorizes the
issuance of 4,000,000,000 shares of Wells Fargo
common stock, par value $1-2/3 per share,
20,000,000 shares of preferred stock, without par
value, and 4,000,000 shares of preference stock,
without par value. At June 30, 1999, there were
1,650,629,353 shares of Wells Fargo common stock
outstanding, 6,578,494 shares of Wells Fargo
preferred stock outstanding, and no shares of
Wells Fargo preference stock outstanding.
TBI. TBI's restated articles of incorporation
authorize the issuance of 1,000,000 shares of
cumulative preferred stock, without par value,
none of which are issued and outstanding, and
10,000,000 shares of common stock, without par
value, of which 1,966,536 were issued and
outstanding as of June 30, 1999.
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Rights Plan Wells Fargo. Each share of Wells Fargo common
stock (including shares that will be issued in
the merger) has attached to it one preferred
share purchase right. Once exercisable, each
right allows the holder to purchase a fractional
share of Wells Fargo's Series C Junior
Participating Preferred Stock. A right, by
itself, does not confer on its holder any rights
of a Wells Fargo stockholder, including the right
to vote or receive dividends, until the right is
exercised. The rights trade automatically with
shares of Wells Fargo common stock. The rights
are designed to protect the interests of Wells
Fargo and its stockholders against coercive
takeover tactics. The rights are intended to
encourage potential acquirors to negotiate on
behalf of all stockholders the terms of any
proposed takeover. Although not their purpose,
the rights may deter takeover proposals.
TBI. TBI has no comparable share purchase rights
plan.
Number And Election Of Wells Fargo. Wells Fargo's bylaws provide for a
Directors board of directors consisting of not Directors
less than 10 nor more than 28 persons, each
serving a term of one year or until his or her
earlier death, resignation or removal. The number
of directors of Wells Fargo is currently fixed at
24. Directors of Wells Fargo may be removed with
or without cause by the affirmative vote of the
holders of a majority of the shares of Wells
Fargo capital stock entitled to vote thereon.
Vacancies on Wells Fargo's board of directors may
be filled by majority vote of the remaining
directors or, in the event a vacancy is not so
filled or if no director remains, by the
stockholders. Directors of Wells Fargo are
elected by plurality of the votes of shares of
Wells Fargo capital stock entitled to vote
thereon present in person or by proxy at the
meeting at which directors are elected. Wells
Fargo's restated certificate of incorporation
does not currently permit cumulative voting in
the election of directors.
TBI. TBI's bylaws provide that the number of
directors composing the initial board of
directors is fixed at 10 and that such number of
directors may be increased or decreased upon
resolution of the board of directors. TBI's board
of directors, by resolution, has fixed the number
of directors at eight. Each director is elected
annually and serves until the next annual meeting
and until the director's successor is elected and
qualified. Cumulative voting is not permitted for
the election of directors. At any meeting of
shareholders called expressly for the purpose of
removal, directors of TBI may be removed, with or
without cause, by a vote of the holders of a
majority of the shares entitled to vote for the
election of such directors. Vacancies on the
board of directors may be filled by the
affirmative vote of a majority of the remaining
directors, but any vacancy to be filled by reason
of an increase in the
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number of directors must be filled by election of
the shareholders of TBI. TBI's bylaws also
provide that the board of directors may from time
to time elect any number of advisory directors as
determined to be appropriate, who are elected to
the same term of office as the regular directors
unless otherwise determined by the board of
directors. Advisory directors do not have voting
rights. Currently, there are three advisory
directors of TBI.
Amendment Of Governing Wells Fargo. Wells Fargo's restated certificate
Documents of incorporation may be amended only if the
proposed amendment is approved by Wells Fargo's
board of directors and thereafter approved by a
majority of the outstanding stock entitled to
vote thereon and by a majority of the outstanding
stock of each class entitled to vote thereon as a
class. Wells Fargo's bylaws may be amended by a
majority of Wells Fargo's board of directors or
by a majority of the outstanding stock entitled
to vote thereon. Shares of Wells Fargo preferred
stock and Wells Fargo preference stock currently
authorized in Wells Fargo's restated certificate
of incorporation may be issued by Wells Fargo's
board of directors without amending Wells Fargo's
restated certificate of incorporation or
otherwise obtaining the approval of Wells Fargo's
Stockholders.
TBI. Under the TBCA, amendments to TBI's
restated articles of incorporation require the
affirmative vote of the holders of at least two-
thirds of the outstanding shares entitled to vote
thereon, unless any class or series of shares is
entitled to vote thereon as a class, in which
event the proposed amendment shall be adopted
upon receiving the affirmative vote of the
holders of at least two-thirds of the shares
within each class or series entitled to vote
thereon as a class and of at least two-thirds of
the total outstanding shares entitled to vote
thereon. TBI's bylaws may be amended by a vote of
the majority of TBI board of directors or under
the TBCA by a vote of the holders of a majority
of the shares entitled to vote at a meeting of
shareholders at which a quorum is present.
Approval Of Mergers And Wells Fargo. Except as described below, the
Assets Sales affirmative vote of a majority of the outstanding
shares of Wells Fargo common stock entitled to
vote thereon is required to approve a merger or
consolidation involving Wells Fargo or the sale,
lease or exchange of all or substantially all of
Wells Fargo's corporate assets. No vote of the
stockholders is required, however, in connection
with a merger in which Wells Fargo is the
surviving corporation and (a) the agreement of
merger for the mergers does not amend in any
respect Wells Fargo's restated certificate of
incorporation, (b) each share of capital stock
outstanding immediately before the merger is to
be an identical outstanding or treasury share of
Wells Fargo after the merger and (c) the
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number of shares of capital stock to be issued in
the merger (or to be issuable upon conversion of
any convertible instruments to be issued in the
merger) does not exceed 20% of the shares of
Wells Fargo's capital stock outstanding
immediately before the merger.
TBI. The TBCA requires certain mergers to be
approved by holders of at least two-thirds of the
outstanding shares entitled to vote thereon (if
there is a class of stock that is entitled to
vote as a class, then the merger must be approved
by the holders of two-thirds of the outstanding
shares of each class of stock entitled to vote
thereon). The TBCA similarly requires that a sale
of all or substantially all of the assets of a
corporation not made in the ordinary course of
business be approved by the affirmative vote of
the holders of at least two-thirds of the
outstanding shares entitled to vote thereon. With
respect to the approval of a merger or asset
sale, however, the articles of incorporation may
require a vote of a different number, but not
less than a majority, of the shares outstanding.
TBI restated articles of incorporation do not
provide for a different number of shares for
approval of a merger or asset sale.
Preemptive Rights Wells Fargo. Neither Wells Fargo's restated
certificate of incorporation nor its bylaws
grants preemptive rights to its stockholders.
TBI. TBI restated articles of incorporation deny
preemptive rights to the shareholders.
Appraisal Rights Wells Fargo. Section 262 of the DGCL provides for
stockholder appraisal rights in connection with
consolidations and mergers generally; however,
appraisal rights are not available to holders of
any class or series of stock that, at the record
date fixed to determine stockholders entitled to
receive notice of and to vote at the meeting to
act upon the agreement of consolidation or
merger, were either (a) listed on a national
securities exchange or designated as a national
market system security on an interdealer
quotation system by the National Association of
Securities Dealers, Inc. or (b) held of record by
more than 2,000 stockholders, so long as
stockholders receive shares of the surviving
corporation or another corporation whose shares
are so listed or designated or held by more than
2,000 stockholders. Wells Fargo common stock is
listed on the New York Stock Exchange and the
Chicago Stock Exchange and currently held by more
than 2,000 stockholders. As a result, assuming
that the other conditions described above are
satisfied, holders of Wells Fargo common stock
will not have appraisal rights in connection with
consolidations and mergers involving Wells Fargo.
TBI. Shareholders of Texas corporations are
entitled to exercise certain
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dissenters' appraisal rights in the event of a
sale, lease, exchange, or other disposition of
all, or substantially all, of the property and
assets of the corporation not made in the
ordinary course of business, and with the
exception discussed below, a merger or
consolidation. Under Article 5.11B of the TBCA,
however, shareholders do not have dissenters'
rights if, in connection with a merger, the stock
of the corporation held by the shareholders is
either listed on a national securities exchange
or is held of record by not less than 2,000
shareholders and, pursuant to the plan of merger,
such shareholders are not required to accept for
their shares any consideration other than (a)
shares of stock of a corporation which,
immediately after the effective date of the
merger, (i) are listed on a national securities
exchange, or (ii) are held of record by not less
than 2,000 shareholders, and (b) cash in lieu of
fractional shares otherwise entitled to be
received. Shareholders of TBI will receive merger
consideration that satisfies the provisions of
Article 5.11B described above; however, because
TBI common stock and TBI preferred stock are not
listed on a national securities exchange and are
held of record by fewer than 2,000 holders,
dissenters' appraisal rights will be available to
TBI shareholders. See "The Merger--Dissenters'
Rights."
Special Meetings Wells Fargo: Under the DGCL, special meetings of
stockholders may be called by the board of
directors or by such persons as may be authorized
in the certificate of incorporation or bylaws.
Wells Fargo's bylaws provide that a special
meeting of stockholders may be called only by the
chairman of the board, a vice chairman, the
president or a majority of Wells Fargo's board of
directors. Holders of Wells Fargo common stock do
not have the ability to call a special meeting of
stockholders.
TBI. Under the TBCA, a special meeting of
shareholders of a Texas corporation may be called
by either (a) the president, the board of
directors, or such other person or persons as
authorized by the articles of incorporation or
the bylaws, or (b) the holders of shares entitled
to cast not less than 10% of all shares entitled
to vote at the meeting, unless a different
percentage, not to exceed 50%, as provided for in
the articles of incorporation. TBI's restated
articles of incorporation and bylaws do not alter
the manner in which a special meeting of
shareholders may be called.
Directors' Duties Wells Fargo. The DGCL does not specifically
enumerate directors' duties. In addition, the
DGCL does not contain any provision specifying
what factors a director must and may consider in
determining a corporation's best interests.
However, judicial decisions in Delaware have
established that, in performing their duties,
directors are bound to
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use that degree of care which ordinarily prudent
persons would use in similar circumstances.
TBI. The TBCA does not specifically enumerate the
fiduciary duties of a director. Judicial
decisions have established that the fiduciary
duties of a director include the duty of care and
the duty of loyalty. The duty of care requires
directors to exercise reasonable care in
performing duties, to be diligent and prudent,
and to inform themselves in making decisions and
managing the corporation's affairs. The duty of
loyalty requires directors to act in good faith
and not allow personal interests to prevail over
the interests of the corporation and the
shareholders.
Action Without A Meeting Wells Fargo. As permitted by Section 228 of the
DGCL and Wells Fargo's restated certificate of
incorporation, any action required or permitted
to be taken at a stockholders' meeting may be
taken without a meeting pursuant to the written
consent of the holders of the number of shares
that would have been required to effect the
action at an actual meeting of the stockholders.
TBI. Under the TBCA, shareholders may act without
a meeting if a consent in writing to such action
is signed by all shareholders. However, the TBCA
also allows the articles of incorporation to
provide that any action required or permitted to
be taken at a shareholders' meeting may be taken
without a meeting pursuant to the written consent
of the holders of not less than the number of
shares that would have been required to effect
the action at an actual meeting of the
shareholders. TBI restated articles of
incorporation contain a provision permitting
actions to be taken by the shareholders by a
written consent of the holders of shares having
not less than the minimum number of votes that
would be necessary to take such action at a
meeting at which the holders of all shares
entitled to vote on the action were present and
voted.
Limitations On Directors' Wells Fargo. Wells Fargo's restated certificate
Liability of incorporation provides that a director
(including an officer who is also a director) of
Wells Fargo shall not be liable personally to
Wells Fargo or its stockholders for monetary
damages for breach of fiduciary duty as a
director, except for liability arising out of (a)
any breach of the director's duty of loyalty to
Wells Fargo or its stockholders, (b) acts or
omissions not in good faith or which involve
intentional misconduct or a knowing violation of
law, (c) payment of a dividend or approval of a
stock repurchase in violation of Section 174 of
the DGCL or (d) any transaction from which the
director derived an improper personal benefit.
This provision protects Wells Fargo's directors
against personal liability for monetary damages
from breaches of their duty of care. It does not
eliminate the director's duty of care and has no
effect on the
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availability of equitable remedies, such as an
injunction or rescission, based upon a director's
breach of his duty of care.
TBI. The Texas Miscellaneous Corporations Laws Act
(TMCLA) permits a corporation's articles of
incorporation to set limits on the extent of a
director's liability except liability for monetary
damages cannot be eliminated for: (a) a breach of duty
of loyalty to the corporation or its shareholders, (b)
an act or omission not in good faith that constitutes a
breach of duty to the corporation or an act or omission
that involves intentional misconduct or a knowing
violation of law, (c) a transaction from which the
director receives an improper benefit, whether or not
the benefit resulted from an action taken within the
scope of the director's office, and (d) an act or
omission for which liability is expressly provided for
by statute. TBI's restated articles of incorporation
contain provisions limiting an advisory director's and
a director's liability consistent with the TMCLA and
contain a provision that if the TBCA or TMCLA is
amended to authorize further limitation of the
liability of directors and advisory directors, then the
liability of such persons shall be limited to the
fullest extent permitted by the TBCA and the TMCLA,
each as amended.
Indemnification Of Wells Fargo. Wells Fargo's restated certificate of
Officers And incorporation provides that Wells Fargo must indemnify,
Directors to the fullest extent authorized by the DGCL, each
person who was or is made a party to, is threatened to
be made a party to, or is involved in, any action,
suit, or proceeding because he is or was a director or
officer of Wells Fargo (or was serving at the request
of Wells Fargo as a director, trustee, officer,
employee, or agent of another entity) while serving in
such capacity against all expenses, liabilities, or
loss incurred by such person in connection therewith,
provided that indemnification in connection with a
proceeding brought by such person will be permitted
only if the proceeding was authorized by Wells Fargo's
board of directors. Wells Fargo's restated certificate
of incorporation also provides that Wells Fargo must
pay expenses incurred in defending the proceedings
specified above in advance of their final disposition,
provided that if so required by the DGCL, such advance
payments for expenses incurred by a director or officer
may be made only if he undertakes to repay all amounts
so advanced if it is ultimately determined that the
person receiving such payments is not entitled to be
indemnified. Wells Fargo's restated certificate of
incorporation authorizes Wells Fargo to provide similar
indemnification to employees or agents of Wells Fargo.
Pursuant to Wells Fargo's restated certificate of
incorporation, Wells Fargo may maintain insurance, at
its expense, to protect itself and any directors,
officers, employees or agents of Wells Fargo or another
entity against any expense, liability or loss,
regardless of whether Wells Fargo
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has the power or obligation to indemnify that person
against such expense, liability or loss under the DGCL.
The right to indemnification is not exclusive of any
other right which any person may have or acquire under
any statute, provision of Wells Fargo's restated
certificate of incorporation or Wells Fargo bylaws,
agreement, vote of stockholders or disinterested
directors or otherwise.
TBI. TBI's articles of incorporation provide that TBI,
by action of its board of directors, may indemnify any
director or officer of TBI, or any person who may have
served at the request of TBI as a director or officer
of another corporation in which it owns shares or of
which it is a creditor, against any costs and expenses
including counsel fees, actually and necessarily
incurred (or reasonably expected to be incurred) in
connection with the defense of any civil criminal,
administrative or other claim, action, suit or
proceeding (whether by or in the right of TBI or
otherwise) in which the person may become involved or
with which the person may be threatened, by reason of
the person being or having been such a director or
officer, and against any payments in settlement of such
claim, action, suit or proceeding or in satisfaction of
any related judgment, fine or penalty, provided that
the board of directors shall, in the exercise of its
business judgment, determine that such indemnification
is in the best interests of TBI. TBI's bylaws provide
that TBI shall indemnify its directors and officers
from and against any and all liabilities, costs and
expenses incurred by them in such capacities as and to
the fullest extent permitted by the TBCA and that TBI
shall pay their expenses in defending an action, suit
or proceeding in advance of its final disposition.
The TBCA provides that a corporation may indemnify a
director or officer who was, is or is threatened to be
made a named defendant or respondent in a proceeding
because the person is or was a director or officer if
such person: (a) conducted himself in good faith; (b)
reasonably believed: (i) in the case of conduct in his
official capacity as a director or officer, that his
conduct was in the corporation's best interests and
(ii) in all other cases, that his conduct was at least
not opposed to the corporation's best interests; and
(c) in the case of any criminal proceeding, had no
reasonable cause to believe his conduct was unlawful.
The TBCA also provides that a corporation must
indemnify a director or officer against reasonable
expenses incurred by him in connection with a
proceeding in which such person is a named defendant or
respondent because he is or was a director or officer
if he has been wholly successful, on the merits or
otherwise, in the defense of the proceeding. Certain
other individuals serving at the request of the
corporation may also be indemnified under Texas law.
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Dividends Wells Fargo. Delaware corporations may pay dividends
out of surplus or, if there is no surplus, out of net
profits for the fiscal year in which declared and for
the preceding fiscal year. Section 170 of the DGCL also
provides that dividends may not be paid out of net
profits if, after the payment of the dividend, capital
is less than the capital represented by the outstanding
stock of all classes having a preference upon the
distribution of assets. Wells Fargo is also subject to
Federal Reserve Board policies regarding payment of
dividends, which generally limit dividends to operating
earnings. See "Regulation And Supervision Of Wells
Fargo."
TBI. Under the TBCA, a Texas corporation may make a
distribution to its shareholders if the distribution
does not exceed the corporation's surplus and the
corporation would not become insolvent after giving
effect to the distribution. TBI is also subject to
Federal Reserve Board policies regarding payment of
dividends, which generally limit dividends to operating
earnings.
Corporate Wells Fargo. Wells Fargo's bylaws contain detailed
Governance advance notice and informational procedures which must
Procedures; be complied with in order for a stockholder to
Nomination Of nominate a person to serve as a director. Wells
Directors Fargo's generally require a stockholder to give notice
of a proposed nominee in advance of the stockholders
meeting at which directors will be elected. In
addition, Wells Fargo's bylaws contain detailed advance
notice and informational procedures which must be
followed in order for a Wells Fargo stockholder to
propose an item of business for consideration at a
meeting of Wells Fargo stockholders.
TBI. TBI's restated articles of incorporation and
bylaws do not contain any specific provisions regarding
nomination of directors or shareholder proposals for
items of business at a shareholders' meeting. TBI's
bylaws provide that special meetings of the
shareholders may be called by the president, the board
of directors or the holders of not less than 10% of all
of the outstanding shares of the corporation entitled
to vote at the meeting.
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Information About Wells Fargo
- --------------------------------------------------------------------------------
General Wells Fargo is a diversified financial services
company. Through its subsidiaries and affiliates, Wells
Fargo provides retail, commercial, real estate and
mortgage banking, asset management and consumer
finance, as well as a variety of other financial
services, including equipment leasing, agricultural
finance, securities brokerage and investment banking,
insurance agency services, computer and data processing
services, trust services, mortgage-backed securities
servicing, and venture capital investment.
At June 30, 1999, Wells Fargo had consolidated total
assets of $205 billion, consolidated total deposits of
$133 billion and stockholders' equity of $21 billion.
Based on assets at June 30, 1999, Wells Fargo was the
7th largest commercial banking organization in the
United States.
Wells Fargo expands its business in part by acquiring
banking institutions and other companies engaged in
activities closely related to banking. Wells Fargo
continues to explore opportunities to acquire banking
institutions and other companies permitted by the Bank
Holding Company Act of 1956. Discussions are
continually being carried on related to such
acquisitions. It is not presently known whether, or on
what terms, such discussions will result in further
acquisitions. It is the policy of Wells Fargo not to
comment on such discussions or possible acquisitions
until a definitive agreement with respect thereto has
been signed.
Wells Fargo is a legal entity separate and distinct
from its banking and nonbanking subsidiaries. As a
result, the right of Wells Fargo--and thus the right of
Wells Fargo's creditors--to participate in any
distribution of assets or earnings of any subsidiary,
other than in its capacity as a creditor of such
subsidiary, is subject to the prior payment of claims
of creditors of such subsidiary. The principal sources
of Wells Fargo's revenues are dividends and fees from
its subsidiaries. See "Regulation And Supervision Of
Wells Fargo--Dividend Restrictions" for a discussion of
the restrictions on the subsidiary banks' ability to
pay dividends to Wells Fargo.
Wells Fargo's executive offices are located at 420
Montgomery Street, San Francisco, California 94163, and
its telephone number is (800) 411-4932.
Management Information concerning executive compensation, the
principal holders of
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And Additional voting securities, certain relationships and related
Information transactions, and other related matters concerning
Wells Fargo is included or incorporated by reference in
its annual report on Form 10-K for the year ended
December 31, 1998. Wells Fargo's annual report on Form
10-K is incorporated by reference into this proxy
statement-prospectus. TBI shareholders who want a copy
of this annual report or any document incorporated by
reference into the report may contact Wells Fargo at
the address or phone number indicated below under
"Where You Can Find More Information."
Information On Information on the Internet web site of Wells Fargo or
Wells Fargo's any subsidiary of Wells Fargo is not part of this proxy
Web Site statement-prospectus, and you should not rely on that
information in deciding whether to approve the merger
unless that information is also in this document or in
a document that is incorporated by reference into this
proxy statement-prospectus.
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Regulation And Supervision Of Wells Fargo
- --------------------------------------------------------------------------------
To the extent that the following information describes statutory and regulatory
provisions, it is qualified in its entirety by reference to the full text of
those provisions. Also, such statutes, regulations and policies are continually
under review by Congress and state legislatures and federal and state regulatory
agencies. A change in statutes, regulations or regulatory policies applicable to
Wells Fargo could have a material effect on the business of Wells Fargo.
- --------------------------------------------------------------------------------
General Wells Fargo, its banking subsidiaries and many of its
nonbanking subsidiaries are subject to extensive
regulation by federal and state agencies. The
regulation of bank holding companies and their
subsidiaries is intended primarily for the protection
of depositors, federal deposit insurance funds and the
banking system as a whole and not for the protection of
security holders.
As discussed in more detail below, this regulatory
environment, among other things, may restrict Wells
Fargo's ability to diversify into certain areas of
financial services, acquire depository institutions in
certain states and pay dividends on its capital stock.
It may also require Wells Fargo to provide financial
support to one or more of its banking subsidiaries,
maintain capital balances in excess of those desired by
management and pay higher deposit insurance premiums as
a result of the deterioration in the financial
condition of depository institutions in general.
Regulatory Agencies Bank Holding Company. Wells Fargo & Company, a
Agencies bank holding company, is subject to regulation under
the Bank Holding Company Act of 1956 and to inspection,
examination and supervision by the Board of Governors
of the Federal Reserve System (Federal Reserve Board)
under the Bank Holding Company Act of 1956.
Subsidiary Banks. Wells Fargo's national banking
subsidiaries are subject to regulation and examination
primarily by the Office of the Comptroller of the
Currency (OCC) and secondarily by the Federal Reserve
Board and the Federal Deposit Insurance Corporation
(FDIC). Wells Fargo's state-chartered banking
subsidiaries are subject to primary federal regulation
and examination by the FDIC or the Federal Reserve
Board and, in addition, are regulated and examined by
their respective state banking departments.
Nonbank Subsidiaries. Many of Wells Fargo's nonbank
subsidiaries also are subject to regulation by the
Federal Reserve Board and other
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applicable federal and state agencies. Wells Fargo's
brokerage subsidiaries are regulated by the SEC, the
National Association of Securities Dealers, Inc. and
state securities regulators. Wells Fargo's insurance
subsidiaries are subject to regulation by applicable
state insurance regulatory agencies. Other nonbank
subsidiaries of Wells Fargo are subject to the laws and
regulations of both the federal government and the
various states in which they conduct business.
Bank Holding Banking-Related Requirement. Under the Bank Holding
Company Company Act, bank holding companies generally may not
Activities acquire the beneficial ownership or control of more
than 5% of the voting shares or substantially all of
the assets of any company, including a bank, without
the Federal Reserve Board's prior approval. Also, bank
holding companies generally may engage, directly or
indirectly, only in banking and such other activities
as the Federal Reserve Board determines to be closely
related to banking.
Interstate Banking. Under the Riegle-Neal Interstate
Banking and Branching Act (Riegle-Neal Act), a bank
holding company may acquire banks in states other than
its home state, subject to any state requirement that
the bank has been organized and operating for a minimum
period of time, not to exceed five years, and the
requirement that the bank holding company not control,
prior to or following the proposed acquisition, more
than 10% of the total amount of deposits of insured
depository institutions nationwide or, unless the
acquisition is the bank holding company's initial entry
into the state, more than 30% of such deposits in the
state, or such lesser or greater amount set by the
state.
The Riegle-Neal Act also authorizes banks to merge
across state lines, thereby creating interstate
branches. States may opt out of the Interstate Banking
Act and thereby prohibit interstate mergers in the
state. Wells Fargo will be unable to consolidate its
banking operations in one state with those of another
state if either state in question has opted out of the
Riegle-Neal Act. The state of Montana has opted out
until at least the year 2001.
Regulatory Approval. In determining whether to approve
a proposed bank acquisition, federal banking regulators
will consider, among other factors, the effect of the
acquisition on competition, the public benefits
expected to be received from the acquisition, the
projected capital ratios and levels on a post-
acquisition basis, and the acquiring institution's
record of addressing the credit needs of the
communities it serves, including the needs of low and
moderate income neighborhoods, consistent with the safe
and sound operation of the bank, under the Community
Reinvestment Act of 1977.
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Dividend Wells Fargo & Company is a legal entity separate and distinct
Restrictions from its subsidiary banks and other subsidiaries. Its principal
source of funds to pay dividends on its common and preferred
stock and debt service on its debt is dividends from its
subsidiaries. Various federal and state statutory provisions and
regulations limit the amount of dividends that Wells Fargo's bank
subsidiaries may pay without regulatory approval. Dividends
payable by a national bank without the express approval of the
OCC are limited to the bank's retained net profits for the
preceding two calendar years plus retained net profits up to the
date of any dividend declaration in the current calendar year.
The OCC defines retained net profits as net income, less
dividends declared during the period, both of which are based on
regulatory accounting principles. Wells Fargo's state-chartered
subsidiary banks also are subject to state regulations that limit
dividends.
Before Wells Fargo Bank, National Association can declare
dividends in 1999 without the prior approval of the OCC, it must
have net income of $1.5 billion plus an amount equal to or
greater than the dividends declared in 1999. Because it is not
expected to meet this requirement, Wells Fargo Bank, National
Association must obtain the prior approval of the OCC before it
declares any dividends in 1999.
Federal bank regulatory agencies have the authority to prohibit
Wells Fargo's subsidiary banks from engaging in unsafe or unsound
practices in conducting their businesses. The payment of
dividends, depending on the financial condition of the bank in
question, could be deemed an unsafe or unsound practice. The
ability of Wells Fargo's subsidiary banks to pay dividends in the
future is currently influenced, and could be further influenced,
by bank regulatory policies and capital guidelines.
Holding Transfer of Funds from Banking Subsidiaries. Wells Fargo's
Company banking subsidiaries are subject to restrictions under federal
Structure law that limit the transfer of funds or other items of value from
these subsidiaries to Wells Fargo and its nonbanking
subsidiaries, including affiliates, whether in the form of loans
and other extensions of credit, investments and asset purchases,
or as other transactions involving the transfer of value from a
subsidiary to an affiliate or for the benefit of an affiliate.
Unless an exemption applies, these transactions by a banking
subsidiary with a single affiliate are limited to 10% of the
subsidiary bank's capital and surplus and, with respect to all
covered transactions with affiliates in the aggregate, to 20% of
the subsidiary bank's capital and surplus. Also, loans and
extensions of credit to affiliates generally are required to be
secured in specified amounts.
Source of Strength Doctrine. The Federal Reserve Board has a
policy
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that a bank holding company is expected to act as a source of
financial and managerial strength to each of its subsidiary banks
and, under appropriate circumstances, to commit resources to
support each such subsidiary bank. This support may be required
at times when the bank holding company may not have the resources
to provide it. Capital loans from Wells Fargo to any of its
subsidiary banks are subordinate in right of payment to deposits
and certain other indebtedness of the subsidiary bank. In
addition, in the event of Wells Fargo's bankruptcy, any
commitment by Wells Fargo to a federal bank regulatory agency to
maintain the capital of a subsidiary bank will be assumed by the
bankruptcy trustee and entitled to a priority of payment.
Depositor Preference. The Federal Deposit Insurance Act (FDI Act)
provides that, in the event of the "liquidation or other
resolution" of an insured depository institution, the claims of
depositors of the institution, including the claims of the FDIC
as subrogee of insured depositors, and certain claims for
administrative expenses of the FDIC as a receiver will have
priority over other general unsecured claims against the
institution. If an insured depository institution fails, insured
and uninsured depositors, along with the FDIC, will have priority
in payment ahead of unsecured, nondeposit creditors, including
Wells Fargo.
Liability of Commonly Controlled Institutions. Under the FDI Act,
an insured depository institution is generally liable for any
loss incurred, or reasonably expected to be incurred, by the FDIC
in connection with (a) the default of a commonly controlled
insured depository institution or (b) any assistance provided by
the FDIC to a commonly controlled insured depository institution
in danger of default. "Default" means generally the appointment
of a conservator or receiver. "In danger of default" means
generally the existence of certain conditions indicating that a
default is likely to occur in the absence of regulatory
assistance.
Capital Wells Fargo and each of its subsidiary banks are subject to
Requirements capital adequacy requirements and guidelines administered by the
Federal Reserve Board, the OCC and/or the FDIC.
The Federal Deposit Insurance Corporation Act of 1991 (FDICIA)
required that the Federal Reserve Board, the OCC and the FDIC
adopt regulations defining five capital tiers for banks: well
capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions
by regulators that, if undertaken, could have a material adverse
effect on Wells Fargo's business.
Quantitative measures, established by the regulators to ensure
capital
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adequacy, require that Wells Fargo and each of its bank
subsidiaries maintain minimum ratios of total capital to risk-
weighted assets of at least eight percent (8%) and of Tier 1
capital to risk-weighted assets of at least four percent (4%).
There are two categories of capital under the guidelines. Tier 1
capital includes common stockholders' equity, qualifying
preferred stock and, for bank holding companies, trust preferred
securities, less goodwill and certain other deductions, including
the unrealized net gains and losses, after applicable taxes, on
available-for-sale securities carried at fair value. Tier 2
capital includes preferred stock not qualifying as Tier 1
capital, mandatory convertible debt, subordinated debt, certain
unsecured senior debt issued by Wells Fargo, the allowance for
loans losses and net unrealized gains on marketable securities,
subject to limitations established by the guidelines. At least
half of total capital must be in the form of Tier1 capital.
Under the guidelines, capital is compared to the relative risk
related to the balance sheet. To derive the risk included in the
balance sheet, one of four risk weights (0%, 20%, 50% and 100%)
is applied to different balance sheet and off-balance sheet
assets, primarily based on the relative credit risk of the
counterparty. For example, claims guaranteed by the U.S.
government or one of its agencies are risk-weighted at 0%. Off-
balance sheet items, such as loan commitments and derivative
financial instruments, are also assigned one of the above risk
weights after calculating balance sheet equivalent amounts. For
example, certain loan commitments are converted at 50% and then
risk-weighted at 100%. Derivative financial instruments are
converted to balance sheet equivalents based on notional values,
replacement costs and remaining contractual terms. The capital
amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and
other factors. In addition, the federal banking agencies have
specified minimum "leverage ratio" (the ratio of Tier 1 capital
to quarterly average total assets) guidelines for bank holding
companies and state member banks. The minimum leverage ratio
guideline is three percent (3%) for banking organizations that
meet certain specified criteria, including that they have the
highest regulatory rating. All other banking organizations and
state member banks are required to maintain a leverage ratio of
three percent (3%) plus an additional cushion of at least two
percent (2%).
The Federal Reserve Board's capital guidelines provide that
banking organizations experiencing internal growth or making
acquisitions are expected to maintain strong capital positions
substantially above the minimum supervisory levels, without
significant reliance on intangible assets. Also, the guidelines
indicate that the Federal Reserve Board will
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consider a "tangible Tier 1 leverage ratio" in evaluating
proposals for expansion or new activities. The tangible Tier 1
leverage ratio is the ratio of a banking organization's Tier 1
capital (excluding intangibles) to total assets (excluding
intangibles).
The Federal Reserve Board, the FDIC and the OCC have adopted
rules to incorporate market and interest rate risk components
into their risk-based capital standards. Amendments to the risk-
based capital requirements, incorporating market risk, became
effective January 1, 1998. Under the new market risk
requirements, capital will be allocated to support the amount of
market risk related to a financial institution's ongoing trading
activities.
At June 30, 1999, Wells Fargo's ratio of total capital (the sum
of Tier 1 and Tier 2 capital) to risk-weighted assets was 11.10%
and its ratio of Tier 1 capital to risk-weighted assets was
8.48%. Wells Fargo's leverage ratio at June 30, 1999 was 7.05%.
Wells Fargo's management believes that each of Wells Fargo's
subsidiary banks met all capital requirements to which they are
subject.
As an additional means to identify problems in the financial
management of depository institutions, the FDI Act requires
federal bank regulatory agencies to establish certain non-capital
safety and soundness standards for institutions for which they
are the primary federal regulator. The standards relate generally
to operations and management, asset quality, interest rate
exposure and executive compensation. The agencies are authorized
to take action against institutions that fail to meet such
standards.
Under FDICIA's prompt corrective action provisions applicable to
banks, the most recent regulatory notification from the OCC
concerning each of Wells Fargo's subsidiary banks categorized
them as well capitalized. To be categorized as well capitalized,
the institution must maintain a risk-based total capital ratio of
at least ten percent (10%), a risk-based Tier 1 capital ratio of
at least six percent (6%) and a leverage ratio of at least five
percent (5%), and not be subject to a capital directive order.
There are no conditions or events since that notification that
management believes have changed the risk-based capital category
of our subsidiary banks.
The FDI Act requires federal bank regulatory agencies to take
"prompt corrective action" with respect to FDIC-insured
depository institutions that do not meet minimum capital
requirements. A depository institution's treatment for purposes
of the prompt corrective action provisions will depend upon how
its capital levels compare to various capital measures and
certain other factors, as established by regulation.
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FDIC Through the Bank Insurance Fund (BIF), the FDIC insures the
Insurance deposits of Wells Fargo's depository institution subsidiaries up
to prescribed limits for each depositor. The amount of FDIC
assessments paid by each BIF member institution is based on its
relative risk of default as measured by regulatory capital ratios
and other factors. Specifically, the assessment rate is based on
the institution's capitalization risk category and supervisory
subgroup category. An institution's capitalization risk category
is based on the FDIC's determination of whether the institution
is well capitalized, adequately capitalized or less than
adequately capitalized. An institution's supervisory subgroup
category is based on the FDIC's assessment of the financial
condition of the institution and the probability that FDIC
intervention or other corrective action will be required.
The BIF assessment rate currently ranges from zero to 27 cents
per $100 of domestic deposits. The FDIC may increase or decrease
the assessment rate schedule on a semi-annual basis. An increase
in the BIF assessment rate could have a material adverse effect
on Wells Fargo's earnings, depending on the amount of the
increase. The FDIC is authorized to terminate a depository
institution's deposit insurance upon a finding by the FDIC that
the institution's financial condition is unsafe or unsound or
that the institution has engaged in unsafe or unsound practices
or has violated any applicable rule, regulation, order or
condition enacted or imposed by the institution's regulatory
agency. The termination of deposit insurance for one or more of
Wells Fargo's subsidiary depository institutions could have a
material adverse effect on Wells Fargo's earnings, depending on
the collective size of the particular institutions involved.
All FDIC-insured depository institutions must pay an annual
assessment to provide funds for the payment of interest on bonds
issued by the Financing Corporation, a federal corporation
chartered under the authority of the Federal Housing Finance
Board. The bonds, commonly referred to as FICO bonds, were issued
to capitalize the Federal Savings and Loan Insurance Corporation.
FDIC-insured depository institutions will continue to pay
approximately 1.2 cents per $100 of BIF-assessable deposits until
the earlier of December 31, 1999 or the date the last savings and
loan association ceases to exist.
Fiscal And Wells Fargo's business and earnings are affected significantly by
Monetary the fiscal and monetary policies of the federal government and
Policies its agencies. Wells Fargo is particularly affected by the
policies of the Federal Reserve Board, which regulates the supply
of money and credit in the
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United States. Among the instruments of monetary policy available
to the Federal Reserve are (a) conducting open market operations
in United States government securities, (b) changing the discount
rates of borrowings of depository institutions, (c) imposing or
changing reserve requirements against depository institutions'
deposits, and (d) imposing or changing reserve requirements
against certain borrowing by banks and their affiliates. These
methods are used in varying degrees and combinations to directly
affect the availability of bank loans and deposits, as well as
the interest rates charged on loans and paid on deposits. For
that reason alone, the policies of the Federal Reserve Board have
a material effect on the earnings of Wells Fargo.
Competition The financial services industry is highly competitive. Wells
Fargo's subsidiaries compete with financial services providers,
such as banks, savings and loan associations, credit unions,
finance companies, mortgage banking companies, insurance
companies, and money market and mutual fund companies. They also
face increased competition from non-banking institutions such as
brokerage houses and insurance companies, as well as from
financial services subsidiaries of commercial and manufacturing
companies. Many of these competitors enjoy the benefits of
advanced technology, fewer regulatory constraints and lower cost
structures.
The financial services industry is likely to become even more
competitive as further technological advances enable more
companies to provide financial services. These technological
advances may diminish the importance of depository institutions
and other financial intermediaries in the transfer of funds
between parties.
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Experts
- --------------------------------------------------------------------------------
Wells Fargo's The consolidated financial statements of Wells Fargo and
Auditors subsidiaries as of December 31, 1998 and 1997, and for each of
the years in the three-year period ended December 31, 1998,
incorporated by reference herein, have been incorporated herein
in reliance upon the report of KPMG LLP, independent certified
public accountants, incorporated by reference herein, and upon
the authority of said firm as experts in accounting and
auditing.
TBI's Auditors Bancshares, Inc. and subsidiaries as of December 31, 1998 and
1997, and for each of the years in the three-year period ended
December 31, 1998, have been included herein in reliance upon
the report of KPMG LLP, independent certified public
accountants, included herein, and upon the authority of said
firm as experts in accounting and auditing.
Opinions
- --------------------------------------------------------------------------------
Share Stanley S. Stroup, Executive Vice President and General Counsel
Issuance of Wells Fargo, has rendered a legal opinion that the shares of
Wells Fargo common stock offered hereby, when issued in
accordance with the merger agreement, will be validly issued,
fully paid and nonassessable. Mr. Stroup beneficially owns
shares of Wells Fargo common stock and options to purchase
additional shares of Wells Fargo common stock. As of the date
of this proxy statement-prospectus, the total number of shares
Mr. Stroup owns or has the right to acquire upon exercise of
his options is less than 0.1% of the outstanding shares of
Wells Fargo common stock.
Tax Matters KPMG LLP has given an opinion regarding the U.S. Federal income
tax consequences of the merger. See "The Merger--U.S. Federal
Income Tax Consequences Of The Merger."
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Where You Can Find More Information
- --------------------------------------------------------------------------------
SEC Filings Wells Fargo files annual, quarterly and current reports, proxy
statements and other information with the SEC. Wells Fargo's
SEC filings are available to the public over the Internet at
the SEC's web site at http://www.sec.gov. You can also read
-------------------
and copy any document filed by Wells Fargo with the SEC at the
SEC's public reference rooms located at 450 Fifth Street,
N.W., Washington, D.C. 20549, 7 World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. You can also obtain copies of
Wells Fargo's SEC filings at prescribed rates by writing to
the Public Reference Section of the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549. Wells Fargo's SEC filings are
also available from commercial document retrieval services and
from the New York and Chicago Stock Exchanges. For information
on obtaining copies of Wells Fargo's SEC filings at the New
York Stock Exchange, call (212) 656-5060, and at the Chicago
Stock Exchange, call (312) 663-2423.
Registration Wells Fargo filed a registration statement on Form S-4 to
Statement register with the SEC the Wells Fargo common stock to be
issued to TBI shareholders in the merger. This proxy
statement-prospectus is part of that registration statement.
As allowed by SEC rules, this proxy statement-prospectus does
not contain all of the information you can find in the
registration statement or the exhibits to the registration
statement.
Documents Some of the information you may want to consider in deciding
Incorporated how to vote on the merger is not physically included in this
By Reference proxy statement-prospectus. Instead, the information is
"incorporated by reference" to documents filed as appendixes
to this proxy statement-prospectus or to documents that have
been filed by Wells Fargo with the SEC.
This proxy statement-prospectus incorporates by reference the
Wells Fargo SEC documents set forth below. All of the
documents were filed under SEC File No. 001-2979. Documents
filed before November 3, 1998 were filed under the name
Norwest Corporation.
. Annual Report on Form 10-K for the year ended December 31,
1998, including information specifically incorporated by
reference into the Form 10-K from Wells Fargo's 1998 Annual
Report to Stockholders and Wells Fargo's definitive Notice
and Proxy Statement for Wells Fargo's 1999 Annual Meeting of
Stockholders;
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. Quarterly Reports on Form 10-Q for the quarters ended March
31, 1999 and June 30, 1999;
. Current Reports on Form 8-K filed January 29, 1999, April
21, 1999, April 28, 1999, July 19, 1999 and July 28, 1999;
. The description of Wells Fargo common stock contained in the
Current Report on Form 8-K filed October 14, 1997, including
any amendment or report filed to update such description;
. The description of preferred stock purchase rights contained
in the Registration Statement on Form 8-A dated October 21,
1998, including any amendment or report filed to update such
description; and
. All reports and definitive proxy or information statements
filed by Wells Fargo pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 after the date
of this proxy statement-prospectus and before completion of
the merger and the exchange of Wells Fargo common stock for
TBI common stock.
Wells Fargo will provide, without charge, copies of any report
incorporated by reference into this proxy statement-
prospectus, excluding exhibits other than those that are
specifically incorporated by reference in this proxy
statement-prospectus. You may obtain a copy of any document
incorporated by reference by writing or calling Wells Fargo as
follows:
Wells Fargo & Company
Corporate Secretary
MAC 9305-173
Norwest Center
Sixth and Marquette
Minneapolis, MN 55479-1026
(612) 667-8655
To ensure delivery of the copies in time for the special
meeting, your request should be received by Wells Fargo by
____________, 1999.
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Information About TBI
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General TBI is a bank holding company, registered under the Bank
Holding Company Act, whose sole activity is the ownership
and operation of its subsidiary banks. TBI was incorporated
in 1981 under the name Rio Grande City Bancshares, Inc.
TBI's corporate name was changed to Texas Bancshares, Inc.
in 1992.
First National Bank of South Texas (FNB) is a national bank
which was founded in 1976. First National Bank currently
operates a total of 7 offices in South Texas.
The Bank of South Texas is a Texas state banking association
which was formed in 1902. The Bank of South Texas currently
operates a total of 3 offices in South Texas.
FNB and The Bank of South Texas conduct a general commercial
and consumer banking business, including the acceptance of
deposits from consumers and the origination of commercial
and consumer real estate, installment and other loans.
Deposit services include certificates of deposit, individual
retirement accounts and other time deposits, checking and
other demand deposit accounts, interest-bearing accounts,
savings accounts and money market accounts from customers
principally located in Nueces, Wilson, Bexar, Atascosa and
Jim Wells counties in South Texas. Loans consist of loans to
individuals, commercial loans, commercial real estate loans,
residential mortgages and construction loans.
Competition TBI's subsidiary banks experience competition in attracting
both loans and deposits from other banks and non-bank
financial institutions located in their market area. Non-
bank competitors with respect to deposits and deposit-type
accounts include savings and loan associations, credit
unions, securities firms, money market funds, life insurance
companies and the mutual funds industry. With respect to
loans, TBI's subsidiary banks encounter competition from
other banks, savings and loan associations, finance
companies, insurance companies, small loan and credit card
companies, credit unions, pension trusts and securities
firms.
In Texas, the nature of the competition in the banking
business has changed considerably in recent years, with more
large, out-of-state banking organizations having entered the
banks' markets. While such fundamental changes create
opportunities for well-managed institutions regardless of
size, TBI's subsidiary banks' competition increasingly
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consists of regional, money center institutions which have
capital resources and legal loan limits substantially in
excess of those maintained by the banks. The banks have a
number of competitive advantages over such institutions in
the area of customer service and ability to respond quickly
to customer needs; however, such institutions can perform
certain other functions for their customers, including
trust, securities brokerage and international banking
services, which the banks presently do not offer directly.
Although TBI's subsidiary banks could offer these services
through a correspondent bank or through a joint venture
arrangement with other specialized companies, the inability
to provide such services directly can be a competitive
disadvantage.
Regulation Banking is a complex and highly regulated industry. The
And primary goals of the bank regulatory scheme are to maintain
Supervision a safe and sound banking system and to facilitate the
conduct of monetary policy.
Regulation of TBI. As a bank holding company under the Bank
Holding Company Act, TBI is registered with and subject to
regulation by the Board of Governors of the Federal Reserve
System. TBI is required to file annual and other reports
with, and furnish information to, the Federal Reserve Board,
which may make inspections of TBI.
The Bank Holding Company Act provides that a bank holding
company must obtain the prior approval of the Federal
Reserve Board for the acquisition of more than 5% of the
voting stock or substantially all the assets of any bank or
bank holding company. In addition, the Bank Holding Company
Act restricts the extension of credit to any bank holding
company by its subsidiary bank. The Bank Holding Company Act
also provides that, with certain exceptions, a bank holding
company may not (a) engage in any activities other than
those of banking or managing or controlling banks and other
authorized subsidiaries or (b) own or control more than 5%
of the voting shares of any company that is not a bank. The
Federal Reserve Board has deemed certain limited activities
to be closely related to banking and therefore permissible
for a bank holding company to engage.
In 1994, Congress enacted the Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 (Interstate Banking
Act), which rewrote federal law governing the interstate
expansion of banks in the United States. Effective as of
September 29, 1995, adequately capitalized, well managed
bank holding companies with Federal Reserved Board approval
may acquire banks located in any state in the United States,
provided that the target bank meets the minimum age (up to a
maximum of five years, which is the maximum Texas has
adopted) established by the host state. Under the Interstate
Banking Act, an anti-concentration limit will bar interstate
acquisitions that would give a bank
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holding company control of more than 10% of all deposits
nationwide or 30% of any one state's deposits, or such
higher or lower percentage established by the host state.
The anti-concentration limit in Texas has been set at 20% of
all federally insured deposits in Texas. As of December 31,
1998, many of Texas's largest bank holding companies had
either merged with or been acquired by out-of-state banking
concerns. In addition to providing for interstate
acquisitions of banks by bank holding companies, the
Interstate Banking Act provides for interstate branching by
permitting mergers between banks domiciled in different
states beginning June 1, 1997. The Interstate Banking Act
provides that states may opt out of interstate branching by
enacting non-discriminatory legislation prohibiting
interstate bank mergers before June 1, 1997. In 1995, Texas
passed legislation opting out of the interstate branching
provisions of the Interstate Banking Act until September
1999. In May 1998, the Texas Department of Banking
determined that the Texas opt-out statute was not effective
and the Texas Department of Banking began accepting
applications for interstate branching transactions.
Legislation implementing interstate branching was recently
adopted in the Texas legislature. No accurate prediction can
be made at this time as to how this legislation will affect
TBI and/or its subsidiary banks.
TBI and its bank subsidiaries are currently required to meet
certain minimum regulatory capital guidelines utilizing
total capital-to-risk-weighted assets and Tier 1 capital
elements. At June 30, 1999, TBI's ratio of total capital-to-
risk-weighted assets was 12.89%. The guidelines make
regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations,
take off-balance sheet exposure into account in assessing
capital adequacy, and encourage the holding of liquid, low-
risk assets. At least one-half of the minimum total capital
must be comprised of Tier 1 capital elements. Tier 1 capital
of TBI is comprised of common shareholders' equity. The core
deposit intangibles and goodwill of approximately $4,152,000
booked in connection with all the financial institution
acquisitions of TBI as of June 30, 1999 are deducted from
the sum of core capital elements when determining the
capital ratios of TBI.
In addition, the Federal Reserve Board has established
minimum leverage ratio guidelines for bank holding
companies. These guidelines provide for a minimum leverage
ratio of Tier 1 capital to adjusted average quarterly assets
("leverage ratio") equal to three percent for bank holding
companies that meet certain specified criteria, including
having the highest regulatory rating. All other bank holding
companies will generally be required to maintain a leverage
ratio of at least four to five percent. TBI's leverage ratio
at June 30, 1999 was 7.67%. The guidelines also provide that
bank holding companies experiencing
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internal growth or making acquisitions will be expected to
maintain strong capital positions substantially above the
minimum supervisory levels without significant reliance on
intangible assets. Furthermore, the guidelines indicate that
the Federal Reserve Board will continue to consider a
"tangible Tier 1 leverage ratio" (deducting all intangibles)
in evaluating proposals for expansion or new activity. The
Federal Reserve Board has not advised TBI of any specific
minimum leverage ratio or tangible tier 1 leverage ratio
applicable to it.
For a general discussion of the risk-based capital
guidelines and the criteria applied to calculate the ratios,
see "Regulation And Supervision Of Wells Fargo--Capital
Requirements."
The Federal Reserve Board has cease-and-desist powers over
parent holding companies and nonbanking subsidiaries if
their actions would constitute a serious threat to the
safety, soundness or stability of a subsidiary bank. Federal
regulatory agencies also have authority to regulate debt
obligations (other than commercial paper) issued by bank
holding companies. This authority includes the power to
impose interest ceilings and reserve requirements on such
debt obligations. A bank holding company and its
subsidiaries are also prohibited from engaging in certain
tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services.
Regulation of The Bank of South Texas. As a Texas state
banking association, The Bank of South Texas is principally
supervised, examined and regulated by the Texas Department
of Banking and the Federal Deposit Insurance Corporation
(FDIC). The Bank of South Texas is subject to the power of
the FDIC to enforce compliance with applicable banking
statutes and regulations. Such requirements and restrictions
include requirements to maintain adequate capital and
reserves against deposits, restrictions on the nature and
amount of loans that may be made and the interest that may
be charged thereon and restrictions relating to investments
and other activities of The Bank of South Texas. Because the
Federal Reserve Board regulates TBI, it also has supervisory
authority which affects The Bank of South Texas.
Regulation of FNB. As a national banking association, FNB is
principally supervised, examined and regulated by the Office
of the Comptroller of the Currency (OCC). The OCC regularly
examines such areas as capital adequacy, reserves, loan
portfolio, investments and management practices. FNB must
also furnish quarterly and annual reports to the OCC, and
the OCC may exercise cease and desist and other enforcement
powers over FNB if its actions represent unsafe or unsound
practices or violations of law. Since the deposits of FNB
are insured by the Bank Insurance Fund (BIF) of the FDIC,
FNB is also
63
<PAGE>
subject to certain regulation by the FDIC. Because the
Federal Reserve Board regulates TBI, it also has supervisory
authority which affects FNB.
FDIC Insurance. The capital classification of a bank affects
the frequency of examinations of the bank, impacts the
ability of the bank to engage in certain activities and
affects the deposit insurance premiums paid by such bank.
The Bank of South Texas' and FNB's deposits are insured by
the Bank Insurance Fund of the FDIC. Under applicable law,
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. (Under prior law, the deposit
insurance assessment was a flat rate, regardless of the
likelihood of loss.) In this regard, the FDIC determines the
deposit insurance assessment rates on the basis of the
bank's capital classification and supervisory evaluations.
Each of these categories have three subcategories, resulting
in nine assessment risk classifications. The three
subcategories with respect to capital are "well
capitalized," "adequately capitalized," and "less than
adequately capitalized." The three subcategories with
respect to supervisory concerns are "healthy," "supervisory
concern," and "substantial supervisory concern." A bank is
deemed "healthy" if it is financially sound with only a few
minor weaknesses. A bank is deemed subject to "supervisory
concern" if it has weaknesses that, if not corrected, could
result in significant deterioration of the bank and
increased risk to the Bank Insurance Fund. A bank is deemed
subject to "substantial supervisory concern" if it poses a
substantial probability of loss to the Bank Insurance Fund.
As of June 30, 1999, the Banks were both rated "well
capitalized" and "healthy."
On November 14, 1995, the FDIC approved assessment rates
applicable to BIF-insured institutions to a range of zero to
27 basis points from the previous range of 4 to 31 points.
Deposit insurance premiums for Subgroup A institutions were
reduced to zero beginning with the January 1, 1996
assessment period. Banks within the Subgroup A category will
be required to pay $1,000 per semiannual period as mandated
by statute. TBI's subsidiary banks were within the Subgroup
A category as of June 30, 1999. For a general discussion
concerning the criteria applied by the FDIC to determine an
institution's insurance premium assessment rate, see
"Regulation And Supervision Of Wells Fargo--FDIC Insurance.
Employees TBI is a bank holding company and primarily conducts its
operations through its subsidiary banks. TBI does not have
any full-time employees, and all operations personnel are
employed by the banks. FNB had approximately 148 full-time
employees and 14 part-time
64
<PAGE>
employees as of June 30, 1999. The Bank of South
Texas had approximately 26 full-time employees
and 5 part-time employees as of June 30, 1999.
None of the employees are represented by any
collective bargaining agreement, and management
believes its employee relations are good. TBI and
its subsidiaries are equal opportunity employers
and provide equal employment opportunities to
individuals without regard to race, sex, national
origin, religion, veteran status, handicap or
familial status.
The operations of TBI are conducted primarily at
Properties the offices of its subsidiary Banks. The banks
currently conduct business operations at 10
locations. A description of these properties is
presented below.
<TABLE>
- --------------------------------------------------------------------------------------------------------------------
Bank Location Description
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
FNB 750 E. Mulberry Square footage of space is 20,798; facility is
San Antonio, TX 78212-8700 owned by FNB
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
FNB 1910 E. Main Square footage of space is 13,018; facility is
Alice, TX 78332 owned by FNB
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
FNB 119 W. Chihuahua Square footage of space is 9,084; facility is
La Vernia, TX 78121 owned by FNB
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
FNB 6839 E. Highway 87 Square footage of space is 3,300; facility is
China Grove, TX 78263 owned by FNB
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
FNB 1112 W. Oaklawn Dr. Square footage of space is 3,075; facility is
Pleasanton, TX 78064 owned by FNB
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
FNB 5262 South Staples Square footage of space is 3,307; facility is
Corpus Christi, TX 78411 leased by FNB
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
FNB 615 N.W. Loop 410 Square footage of space is 6,479; facility is
San Antonio, TX 78216 leased by FNB
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Bank of South 4th & B Streets Square footage of space is 15,927; facility is
Texas Floresville, TX 78114 owned by BOST
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Bank of South Dilworth Plaza Square footage of space is 4,557; facility is
Texas Poth, TX 78147 owned by BOST
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Bank of South Hwy. 181 Square footage of space is 3,085; facility is
Texas Plaza Shopping Center owned by BOST
Floresville, Texas 78114
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
65
<PAGE>
Holders Of TBI At June 30, 1999, there were 1,966,536 shares of TBI
Common common stock outstanding, owned of record by 266
Stock shareholders, and options to acquire a total of 59,500
shares were held by 23 employees. There is no
established public market for TBI common stock. TBI
acts as its own transfer agent and registrar with
respect to its common stock.
Legal The banks are periodically involved in legal
Proceedings proceedings arising in the normal course of business,
such as claims to enforce liens, claims involving the
making and servicing of real property loans and other
issues incident to the banks' business. Management of
TBI does not believe there is any proceeding,
threatened or pending against TBI or either of the
banks which, if determined adversely, would have a
materially adverse effect on the financial position or
results of operation of TBI.
Ownership Of The following table sets forth, as of August 1, 1999,
TBI Common (a) the names and addresses of each person known by TBI
Stock By TBI to be the beneficial owner of more than 5% of the
Management outstanding shares of TBI common stock, showing the
amount and nature of such beneficial ownership, (b) the
names of each director and executive officer of TBI,
and the number of shares of TBI common stock
beneficially owned by each director and executive
officer and (c) the number of shares of TBI common
stock owned beneficially by all directors and executive
officers as a group. None of the shareholders listed
herein would own, on a pro forma basis after giving
effect to the merger, more than 1% of the issued and
outstanding shares of Wells Fargo common stock.
66
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Name and Address TBI Common Percent of
of Beneficial Owner Stock Beneficially Owned (1) Class
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------
N. O. Adams, Jr. (2) + 23,896 1.21%
- ------------------------------------------------------------------------------------------------------
James L. Eakin (3) + 197,000 9.99%
- ------------------------------------------------------------------------------------------------------
Ann McGill Erck (4) +
Fredrick Erck (5) + 526,512 26.60%
- ------------------------------------------------------------------------------------------------------
James A. Erck (6) + 48,030 2.44%
- ------------------------------------------------------------------------------------------------------
Mark M. Johnson (7) + 47,388 2.40%
- ------------------------------------------------------------------------------------------------------
Jacqueline K. Lloyd (8) + 118,562 6.02%
- ------------------------------------------------------------------------------------------------------
Stanley A. Tolson (9) + 48,472 2.46%
- ------------------------------------------------------------------------------------------------------
Abigail Erwin (10) 29,000 1.47%
- ------------------------------------------------------------------------------------------------------
David P. Henneke (11) 6,200 *
- ------------------------------------------------------------------------------------------------------
All directors and executive
officers as a group (10 persons)
(12) 1,045,060 51.95%
- ------------------------------------------------------------------------------------------------------
</TABLE>
* Less than 1%
+ Director of TBI
- -----------------------
(1) Unless otherwise indicated, each individual is the record owner of, and has
sole voting and investment power with respect to all shares of TBI of which
he or she is the beneficial owner. Under SEC rules, a person is deemed to
be the beneficial owner of shares if he or she has or shares voting power
or investment power with respect to the shares or has the right to acquire
beneficial ownership within 60 days. For purposes of this table, shares
issuable upon exercise of options that are currently exercisable or will
become exercisable upon approval of the merger by TBI's shareholders have
been included in the amount reported. Shares not outstanding that are
subject to options are deemed outstanding for the purpose of calculating
the percentage outstanding owned by the holder of the options but not for
the purpose of calculating the percentage outstanding owned by any other
person.
(2) The holdings shown for Mr. Adams include 2,500 shares which are issuable
upon the exercise of currently exercisable options.
(3) The holdings shown for Mr. Eakin include (i) 5,000 shares issuable upon the
exercise of outstanding options, which options are currently exercisable
for 1,000 shares and will be exercisable for the remaining 4,000 shares if
the merger is approved by TBI shareholders; and (ii) 672 which are held in
custody by Mr. Eakin's wife for their children, Stacy Eakin and Brent
Eakin.
(4) The holdings shown for Mrs. Erck include (i) 397,760 shares which she and
her husband hold in their names jointly; (ii) 34,632 shares held in the
name of her husband; (iii) 67,620 shares which are held in trusts for
Jefferson F. Erck and James C. Erck, of which Mrs. Erck serves as co-
trustee; (iv) 2,500 shares which are issuable upon the exercise of
currently exercisable options held by Mrs. Erck; (v) 10,000 shares which
are held in the name of her husband of which 2,000 shares are issuable upon
the exercise of currently exercisable options and the remaining 8,000
shares are issuable if the merger is approved by TBI shareholders.
(5) The holdings shown for Mr. Erck include (i) 397,760 shares which he and his
wife hold in their names jointly; (ii) 14,000 shares held in the name of
his wife; (iii) 67,620 shares which are held in trusts for Jefferson F.
Erck and James C. Erck, of which Mr. Erck serves as a co-trustee; (iv)
2,500 shares which are issuable upon the exercise of currently exercisable
options held by his wife; and (v) 10,000 shares issuable upon the exercise
of
67
<PAGE>
outstanding options, which options are currently exercisable for 2,000
shares and will be exercisable for the remaining 8,000 shares if the merger
is approved by TBI shareholders.
(6) The holdings shown for Mr. Erck include 2,500 shares which are issuable
upon the exercise of currently exercisable options.
(7) The holdings shown for Mr. Johnson include (i) 5,000 shares issuable upon
the exercise of outstanding options, which options will be exercisable if
the merger is approved by TBI shareholders; and (ii) 25,600 shares held in
the name of his wife.
(8) The holdings shown for Ms. Lloyd include 2,500 shares which are issuable
upon the exercise of currently exercisable options.
(9) The holdings shown for Mr. Tolson include 5,000 shares issuable upon the
exercise of outstanding options, which options will be exercisable if the
merger is approved by TBI shareholders.
(10) The holdings shown for Mrs. Erwin include 5,000 shares issuable upon the
exercise of outstanding options, which options are currently exercisable
for 1,000 shares and will be exercisable for the remaining 4,000 shares if
the merger is approved by TBI shareholders.
(11) The holdings shown for Mr. Henneke include (i) 5,000 shares issuable upon
the exercise of outstanding options, which options are currently
exercisable for 1,000 shares and will be exercisable for the remaining
4,000 shares if the merger is approved by TBI shareholders; and (ii) 1,200
shares which he and his wife hold in their names jointly.
(12) Shares that are not outstanding that are subject to options held by members
of this group are deemed outstanding for the purpose of calculating the
percentage owned by the members of this group as a whole.
68
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF TBI'S
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section presents an analysis of the consolidated financial condition
of TBI at June 30, 1999 and 1998, and December 31, 1998 and 1997, and the
consolidated results of operations for the six months ended June 30, 1999 and
1998, and for the years ended December 31, 1998, 1997 and 1996. This analysis
should be read in conjunction with the consolidated financial statements and
notes thereto and financial data presented elsewhere in this proxy statement-
prospectus.
Results of Operations
For the Six Months Ended June 30, 1999 and 1998.
Generally. Net income for the six months ended June 30, 1999 was $2,018,000
compared to $1,560,000 for the six months ended June 30, 1998.
A discussion of changes in the major components of net income for the six
months ended June 30, 1999 and 1998 is as follows:
Net Interest Income. Net interest income is the principal source of TBI's
net income and represents the difference between interest income and interest
expense. Net interest income increased approximately $871,000 in 1999 compared
to 1998 as a result of an increase in average interest-earning assets of
$38,667,000 partially offset by an increase in average interest-bearing
liabilities of $27,457,000.
69
<PAGE>
The following schedules provide a summary of net interest income, average
earning asset balances and the related interest rates/yields for the six-month
periods indicated. Nonaccruing loans are included in the interest-earning
assets; interest income on such loans is recorded when received.
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999
-------------
Percent of Interest Average
Average Total Income/ Rate/
(1)Balance Assets Expense (2)Yield
---------- ------ ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 222,906 57.06% $ 9,723 8.72%
Taxable securities 111,590 28.57% 3,147 5.64%
Nontaxable securities 11,984 3.07% 296 4.94%
Federal funds sold 13,006 3.33% 303 4.66%
Other interest earning assets 226 0.06% 6 5.31%
---------------------------------------------------
Total interest-earning assets 359,712 92.09% 13,475 7.49%
Non-interest-earning assets:
Cash and due from banks 15,265 3.91%
Premises and equipment 8,330 2.13%
Other assets 5,195 1.33%
Goodwill 4,266 1.09%
Allowance for possible loan losses (2,139) (0.55)%
-------------------------
Total assets $ 390,629 100.00%
-------------------------
Interest-bearing liabilities:
NOW accounts $ 56,846 14.55% $ 514 1.81%
Savings accounts 24,876 6.37% 271 2.18%
Money market accounts 58,352 14.94% 1,043 3.57%
Certificates of deposits 149,442 38.26% 3,604 4.82%
Notes payable 3,219 0.82% 91 5.65%
---------------------------------------------------
Total interest-bearing liabilities 292,735 74.94% 5,523 3.77%
Non-interest bearing liabilities:
Demand deposits 62,974 16.12%
Other liabilities 2,669 0.68%
-------------------------
Total liabilities Stockholders' equity 358,378 91.74%
32,251 8.26%
-------------------------
Total liabilities and stockholders' equity $ 390,629 100.00%
-------------------------
Net interest income $ 7,952
Interest rate spread 3.72%
Net interest margin 4.42%
<CAPTION>
Six Months Ended
----------------
June 30, 1998
-------------
Percent of Interest Average
Average Total Income/ Rate/
(1)Balance Assets Expense (2)Yield
---------- ------ ------- --------
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 190,703 54.33% $ 8,858 9.29%
Taxable securities 106,699 30.40% 3,122 5.85%
Nontaxable securities 8,552 2.44% 216 5.05%
Federal funds sold 14,950 4.26% 419 5.61%
Other interest earning assets 141 0.03% 3 4.26%
---------------------------------------------------------------
Total interest-earning assets 321,045 91.46% 12,618 7.86%
Non-interest-earning assets:
Cash and due from banks 13,792 3.93%
Premises and equipment 8,383 2.39%
Other assets 4,634 1.32%
Goodwill 4,760 1.36%
Allowance for possible loan losses (1,606) (0.46)%
-------------------------
Total assets $ 351,008 100.00%
-------------------------
Interest-bearing liabilities:
NOW accounts $ 52,298 14.90% $ 581 2.22%
Savings accounts 23,995 6.83% 364 3.03%
Money market accounts 45,509 12.97% 839 3.69%
Certificates of deposits 143,476 40.88% 3,753 5.23%
Notes payable - 0.00% - 0.00%
---------------------------------------------------------------
Total interest-bearing liabilities 265,278 75.58% 5,537 4.17%
Non-interest bearing liabilities:
Demand deposits 53,735 15.31%
Other liabilities 2,662 0.75%
-------------------------
Total liabilities Stockholders' equity 321,675 91.64%
29,333 8.36%
-------------------------
Total liabilities and stockholders' equity $ 351,008 100.00%
-------------------------
Net interest income $ 7,081
Interest rate spread 3.69%
Net interest margin 4.41%
</TABLE>
(Note 1) The average balances for purposes of the above table are calculated on
the basis of month-end balances.
(Note 2) Average rates/yields for these periods have been annualized.
70
<PAGE>
Net interest income is affected both by the interest rate earned and paid
and by changes in volume, principally in loans, investment securities, deposits
and borrowed funds. The following table depicts the dollar effect and rate
changes for interest-earning assets and interest-bearing liabilities and the
resulting change in interest income and interest expense (Note 1):
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
Compared to June 30, 1998
------------------------------------------------
Increase (Decrease) Attributable to Change in:
Total
Volume Rate Change
------ ---- ------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest earning assets:
Loans $ 1,438 $ (573) $ 865
Securities 224 (119) 105
Interest Bearing Due from Banks 2 1 3
Federal Funds Sold (50) (66) (116)
-------- -------- --------
Total interest income 1,614 (757) 857
-------- -------- --------
Interest bearing liabilities:
NOW, Savings, Money Markets 300 (256) 44
Time Deposits 152 (301) (149)
Note payable 91 0 91
-------- -------- --------
Total interest expense 543 (557) (14)
-------- -------- --------
Net interest income $ 1,071 $ (200) $ 871
-------- -------- --------
</TABLE>
(Note 1) The change in interest due to both rate and volume has been allocated
to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each.
Provision for Possible Loan Losses. The provision for possible loan losses
increased by $618,000 for the six months ended June 30, 1999, compared with the
six months ended June 30, 1998, as management determined that the current
exposure for possible loan losses warranted an increase in the allowance for
possible loan losses.
Noninterest Income. Non-interest income increased by $995,000 for the six
months ended June 30, 1999 compared with the six months ended June 30, 1998.
This included an increase of $166,000 in service charge income, an increase of
$210,000 for sales of securities and a gain of $635,000 on sale of a single
piece of land to an unrelated third party.
Noninterest Expense. Non-interest expense increased by $630,000 for the six
months ended June 30, 1999 compared with the six months ended June 30, 1998.
This increase resulted primarily from an aggregate increase of $435,000 in
salaries, occupancy, data processing and communication expense, as a result of
the costs associated with expanding branch operations for growth opportunities
and $121,000 for consulting fees related to the Company's new product, Overdraft
Privilege.
71
<PAGE>
Years Ended December 31, 1998, 1997 and 1996
Generally. Net income was $3,327,000, $2,860,000, and $611,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
The increase in net income for 1998 compared to 1997 was caused primarily
by the increase in interest and fees on loans of $3,614,000 and service charge
income of $1,765,000, primarily, related to the Company's new product, Overdraft
Privilege.
The increase in net income for 1997 compared to 1996 was caused primarily
by the increase in interest and fees on loans of $1,158,000, and the reduction
of litigation expense of $1,000,000.
Following is a discussion of changes in the major components of net income
for the years ending December 31, 1998, 1997 and 1996.
Net Interest Income. Net interest income is the principal source of TBI's
net income and represents the difference between interest income and interest
expense. Net interest income increased approximately $1,509,000 in 1998 compared
to 1997 as a result of an increase in average interest-earning assets of
$36,589,000, partially offset by an increase in average interest-bearing
liabilities of $25,408,000. Net interest income increased approximately
$1,513,000 in 1997 compared to 1996, as a result of an increase in average
interest-earning assets of $19,399,000, partially offset by an increase in
average interest-bearing liabilities of $14,752,000.
72
<PAGE>
The following schedules provide a summary of net interest income, average
earning asset balances and the related interest rates/yields for the periods
indicated. Nonaccruing loans are included in the interest-earning assets;
interest income on such loans is recorded when received.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
----------------- ------------------
Percent of Interest Average Percent of Interest Average
Average Total Income/ Rate/ Average Total Income/ Rate/
(1)Balance Assets Expense Yield (1)Balance Assets Expense Yield
--------- ----------- -------- ------- ---------- ---------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $207,934 56.65% $18,876 9.08% $164,904 50.25% $15,262 9.26%
Taxable securities 104,126 28.37% 6,055 5.82% 115,637 35.24% 7,504 6.49%
Nontaxable securities 10,852 2.96% 525 4.84% 9,606 2.93% 493 5.13%
Federal funds sold 12,531 3.41% 709 5.66% 8,381 2.55% 453 5.41%
Other interest earning assets 238 0.06% 11 4.62% 564 0.18% 26 4.61%
------------------------------------------- ----------------------------------------
Total interest-earning assets $335,681 91.45% $26,176 7.80% $299,092 91.15% $23,738 7.94%
Non-interest-earning assets:
Cash and due from banks 14,904 4.06% 13,032 3.97%
Premises and equipment 8,393 2.29% 8,203 2.50%
Other assets 5,415 1.48% 4,372 1.33%
Goodwill 4,483 1.22% 4,892 1.49%
Allowance for possible loan losses (1,848) (0.50)% (1,448) (0.44)%
------------------ -----------------
Total assets $367,028 100.00% $328,143 100.00%
------------------ -----------------
Interest-bearing liabilities:
NOW accounts $ 55,566 15.14% $ 1,188 2.14% $ 46,584 14.20% $ 1,041 2.23%
Savings accounts 23,945 6.52% 725 3.03% 23,440 7.14% 726 3.10%
Money market accounts 49,804 13.57% 1,843 3.70% 40,320 12.29% 1,393 3.45%
Certificates of deposits 145,211 39.56% 7,533 5.19% 137,905 42.03% 7,122 5.16%
Notes payable 399 0.11% 23 5.76% 1,268 0.39% 101 7.97%
------------------------------------------- ----------------------------------------
Total interest-bearing liabilities 274,925 74.90% $11,312 4.11% 249,517 76.05% $10,383 4.16%
Non-interest bearing liabilities:
Demand deposits 58,524 15.95% 49,532 15.09%
Other liabilities 2,931 0.80% 1,919 0.58%
------------------ -----------------
Total liabilities 336,380 91.65% 300,968 91.72%
Stockholders' equity 30,648 8.35% 27,175 8.28%
------------------ -----------------
Total liabilities and
Stockholders' equity $367,028 100.00% $328,143 100.00%
------------------ -----------------
Net interest income $14,864 $13,355
Interest rate spread 3.69% 3.78%
Net interest margin 4.43% 4.47%
<CAPTION>
Year Ended
December 31, 1996
-----------------
Percent of Interest Average
Average Total Income/ Rate/
(1)Balance Assets Expense Yield
----------- -------- --------- --------
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans $146,328 47.64 % $14,104 9.64%
Taxable securities 107,980 35.16 % 6,201 5.74%
Nontaxable securities 12,834 4.18 % 597 4.65%
Federal funds sold 11,506 3.75 % 629 5.47%
Other interest earning assets 1,045 0.34 % 41 3.92%
------------------------------------------------------
Total interest-earning assets $279,693 91.07 % $21,572 7.71%
Non-interest-earning assets:
Cash and due from banks 11,498 3.74 %
Premises and equipment 8,217 2.68 %
Other assets 4,449 1.45 %
Goodwill 5,551 1.81 %
Allowance for possible loan losses (2,275) (0.75)%
----------------------
Total assets $307,133 100.00 %
----------------------
Interest-bearing liabilities:
NOW accounts $ 43,972 14.32 % $ 945 2.15%
Savings accounts 24,476 7.97 % 790 3.23%
Money market accounts 33,410 10.88 % 1,057 3.16%
Certificates of deposits 130,688 42.55 % 6,745 5.16%
Notes payable 2,219 0.72 % 193 8.70%
------------------------------------------------------
Total interest-bearing liabilities 234,765 76.44 % $ 9,730 4.14%
Non-interest bearing liabilities:
Demand deposits 44,433 14.47 %
Other liabilities 3,028 0.98 %
----------------------
Total liabilities 282,226 91.89 %
Stockholders' equity 24,907 8.11 %
----------------------
Total liabilities and
Stockholders' equity $307,133 100.00 %
----------------------
Net interest income $11,842
Interest rate spread 3.57%
Net interest margin 4.23%
</TABLE>
(Note 1) The average balances for purpose of the above table are calculated on
the basis of quarter-end balances.
73
<PAGE>
Net interest income is affected both by the interest rate ended and paid and
by changes in volume, principally in loans, investments securities, deposits and
borrowed funds. The following table depicts the dollar effect and rate changes
for interest-earning assets and interest-bearing liabilities and the resulting
change in interest income and interest expense (Note 1):
<TABLE>
<CAPTION>
Year Ended December 31, 1998 Year Ended December 31, 1997
Compared to December 31, 1997 Compared to December 31, 1996
Increase (Decrease) Attributable To Increase (Decrease) Attributable To
Changes In Changes In
------------------------------------------------------------------------------------------------
Total Total
Volume Rate Change Volume Rate Change
------ ----- ------ ------ ---- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans 3,697 (83) 3,614 1,439 (281) 1,158
Securities (878) (539) (1,417) 718 481 1,199
Interest bearing due from banks 29 (44) (15) (20) 5 (15)
Federal funds sold 255 1 256 (194) 18 (176)
------ ----- ------- ------- ------ -------
Total interest income $3,103 $(665) $ 2,438 $ 1,943 $ 223 $ 2,166
------ ----- ------- ------- ------ --------
Interest bearing liabilities:
NOW, Savings and Money Markets 493 103 596 269 (1,353) (1,084)
Time Deposits 347 64 411 363 1,466 1,829
Short-term borrowings (75) (26) (101) (74) (18) (92)
Note payable 23 0 23 - - -
------ ----- ------- ------- ------ --------
Total interest expense $ 788 $ 141 $ 929 558 95 653
------ ----- ------- ------- ------ --------
Net interest income $2,315 $(806) $ 1,509 $ 1,385 $ 128 $ 1,513
====== ===== ======= ======= ====== ========
</TABLE>
(Note 1) The change in interest due to both rate and volume has been allocated
to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each.
Noninterest Income. Noninterest income increased by $1,777,000 for the
year ended December 31, 1998 compared with the year ended December 31,
1997. This included an increase of $1,765,000 in service charges from a
new product, Overdraft Privilege.
Noninterest income increased by $297,000 for the year ended December
31, 1997 compared with the year ended December 31, 1996. This included an
increase of $186,000 in service charge income, as the management focused
on fee income products.
Noninterest Expense. Noninterest expense increased by $1,765,000 for
the year ended December 31, 1998, compared with the year ended December
31, 1997. This included an increase of $995,000 in salaries and employee
benefits, a decrease in occupancy expense of $2,000 , and an increase in
other expense of $772,000, resulting from consulting fees of $246,000
related to the new Overdraft Privilege product, advertising fees of
$130,000 related to the new Overdraft Privilege product, an increase in
data processing fees of $151,000, and an increase in operating expenses
of $261,000.
74
<PAGE>
Noninterest expense decreased by $637,600 for the year ended December 31,
1997 compared with the year ended December 31, 1996. This was the direct
result of decreased litigation expense related to lawsuits settled in
1996.
75
<PAGE>
Loans
TBI's loan portfolio has increased by $61,618,000 from December 31, 1994 to
1998. TBI's market area has been positively affected by significant growth in
both the commercial and residential real estate market. Approximately 80% of the
loan growth from December 31, 1994 to December 31, 1998 was from real estate
loans.
The following table sets forth the composition of the loan portfolio for the
periods presented:
<TABLE>
<CAPTION>
Aggregrate Principal
-------------------------------------------------------------------------------------------
June 30, December 31,
-------------------------------------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
(Dollars in Thousands) (Dollars in Thousands)
Types of loans:
<S> <C> <C> <C> <C> <C> <C> <C>
Real Estate $142,995 $129,757 $144,368 $114,712 $ 98,611 $ 91,089 $ 94,842
Commercial and agriculture 45,328 43,812 47,889 39,198 30,498 34,238 46,502
Consumer 29,152 25,353 27,712 23,455 15,884 15,783 16,347
Credit cards and related plans 1,238 1,142 1,286 1,277 1,326 1,435 1,363
Other 1,863 2,675 1,812 2,938 2,024 2,099 2,395
--------- --------- -------- --------- --------- --------- ---------
Total loans $220,576 $202,739 $223,067 $181,580 $148,343 $144,644 $161,449
Percentage of Loans
-------------------------------------------------------------------------------------------
June 30, December 31,
------------------------- -------------------------------------------------------------
Type of loans: 1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
Real Estate 64.83% 64.00% 64.72% 63.17% 66.48% 62.97% 58.74%
Commercial and agriculture 20.55% 21.61% 21.47% 21.59% 20.56% 23.67% 28.80%
Consumer 13.22% 12.51% 12.42% 12.92% 10.71% 10.91% 10.13%
Credit cards and related plans 0.56% 0.56% 0.58% 0.70% 0.89% 0.99% 0.85%
Other 0.84% 1.32% 0.81% 1.62% 1.36% 1.46% 1.48%
--------- --------- -------- --------- --------- --------- ---------
Total loans 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
</TABLE>
76
<PAGE>
The following table sets forth the maturity composition and interest
sensitivity of total loans at June 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
Amount Percentage Amount Percentage
--------------- -------------- --------------- ---------------
(Dollars in Thousands)
Maturing:
<S> <C> <C> <C> <C>
In one year or less $ 66,055 29.95% $ 73,749 33.06%
After one through five years 95,151 43.14% 95,618 42.87%
After five years 59,370 26.91% 53,700 24.07%
--------------- -------------- --------------- ---------------
Total loans $220,576 100.00% $223,067 100.00%
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
Maturing Maturing
---------------------------------------------------------------------------------------------------------
After one After one
Within but within After Within but within After
one year five years five years Total one year five years five years Total
-------- ---------- ---------- --------- -------- ---------- ----------
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate $32,257 $52,976 $ 57,762 $142,995 $36,586 $56,715 $51,067 $144,368
Commercial and 25,919 18,518 891 45,328 29,377 16,519 1,993 47,889
agriculture
Consumer 7,285 21,454 413 29,152 7,164 20,221 327 27,712
Credit cards and - 1,231 - 1,231 - 1,268 - 1,268
related plans
Other 594 972 304 1,870 622 895 313 1,830
---------- ---------- ---------- --------- -------- ---------- ---------- ---------
Total $66,055 $95,151 $ 59,370 $220,576 $73,749 $95,618 $53,700 $223,067
========== ========== ========== ========= ======== ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
Interest sensitivity Interest Sensitivity
------------------------ ----------------------------
Fixed Variable Fixed Variable
rate rate rate rate
----------- --------- ------------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Due after one but within five years $ 70,662 $ 24,489 $ 65,888 $29,730
Due after five years 32,406 26,964 30,987 22,713
----------- --------- ------------- ---------
Total $103,068 $ 51,453 $ 96,875 $52,443
=========== ========= ============= =========
</TABLE>
77
<PAGE>
Provision for Loan Losses and Allowance for Loan Losses
Following is a table of activity for loan losses for the periods presented:
<TABLE>
<CAPTION>
Six Months Ended
June 30, December 31,
-------------------------- --------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------------ ---------- -------- -------- -------- -------- --------
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $2,159 $1,553 $1,553 $2,437 $1,892 $1,454 $1,685
Provision of possible loan losses 1,081 463 931 105 1,088 613 319
Charge-offs:
Real estate 0 111 111 124 36 25 54
Commercial and Agriculture 1,100 95 97 982 409 365 462
Consumer 48 65 99 90 181 277 198
Credit cards 18 56 82 34 61 39 22
All other loans 62 40 94 0 0 0 0
----------- --------- ------- ------- ------ ------- -------
Total charge-offs 1,228 367 483 1,230 687 706 736
Recoveries:
Real estate 1 7 13 14 12 10 9
Commercial and Agriculture 39 60 105 202 86 29 123
Consumer 13 6 15 20 37 59 50
Credit cards 3 8 12 5 9 3 4
All other loans 15 3 13 0 0 0 0
----------- --------- ------- ------- ------ ------- -------
Total recoveries 71 84 158 241 144 101 186
Net charge-offs 1,157 283 325 989 543 605 550
----------- --------- ------- ------- ------ ------- -------
Adjustment for acquisitions and sale of
branches 0 0 0 0 0 430 0
Balance at end of period $2,083 $1,733 $2,159 $1,553 $2,437 $1,892 $1,454
=========== ========= ======= ======= ====== ======= =======
Ratio of net charge-offs to average loans
(Note 1) outstanding during the period 0.52% 0.15% 0.16% 0.60% 0.37% 0.36% 0.95%
</TABLE>
(Note 1) The average balances for purposes of the above table are calculated on
the basis of month-end balances for periods ended June 30, 1999 and 1998 and are
calculated on the basis of quarter-end balances for years ended December 31,
1998, 1997, 1996, 1995, and 1994.
78
<PAGE>
The allowance for loan losses is allocated to specific categories of loans,
and based on TBI's review of remaining collateral and/or financial condition of
identified loans with characteristically more than a normal degree of risk,
historical loan loss percentages, and economic conditions, management believes
the allowance for loan losses at June 30, 1999, is adequate to cover losses
inherent in the portfolio.
<TABLE>
<CAPTION>
At June 30,
1999 1998
------------------------- --------------------------
Percent Percent
Allowance of loans Allowance of Loans
---------- --------- ---------- ---------
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C>
Real Estate $ 311 0.14% $ 178 0.09%
Commercial $ 139 0.06% $ 495 0.24%
Consumer $ 148 0.07% $ 144 0.07%
Other $ 1,485 0.68% $ 916 0.45%
------- ------ --------- ------
Total $ 2,083 0.95% $ 1,733 0.85%
</TABLE>
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996 1995
------------------------ ------------------------ ----------------------- -----------------------
Percent Percent Percent Percent
Allowance of loans Allowance of loans Allowance of loans Allowance of loans
---------- -------- ---------- -------- ---------- -------- ---------- --------
(Dollars in Thousands) (Dollars in Thousands) (Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate $ 311 0.14% $ 214 0.12% $ 120 0.08% $ 135 0.09%
Commercial $ 383 0.17% $ 179 0.10% $ 1,317 0.89% $ 677 0.47%
Consumer $ 165 0.07% $ 197 0.11% $ 198 0.13% $ 207 0.14%
Other $ 1,300 0.59% $ 963 0.53% $ 802 0.54% $ 873 0.61%
------- ------ --------- ------- ----------- -------- ---------- --------
Total $ 2,159 0.97% $ 1,553 0.86% $ 2,437 1.65% $ 1,892 1.32%
<CAPTION>
1994
-------------------------
Percent
Allowance of loans
---------- --------
(Dollars in Thousands)
<S> <C> <C>
Real Estate $ 249 0.15%
Commercial $ 490 0.30%
Consumer $ 106 0.07%
Other $ 609 0.38%
---------- ---------
Total $ 1,454 0.90%
</TABLE>
The reserve for loan losses is established through a provision for
loan losses charged to operations. Loans are charged against the reserve
for loan losses when management believes that the collectibility of the
principal is unlikely. The reserve is an amount that management believes
will be adequate to absorb possible losses on existing loans that may
become uncollectible, based on evaluations of the collectibility of loans
and prior loan loss experience. The evaluations take into consideration
such factors as changes in the nature and volume of the loan portfolio,
overall portfolio quality, review of specific problem loans, and current
economic conditions that may affect the borrower's ability to pay. Accrual
of interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that collection of interest is
doubtful. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to
the extent cash payments are received.
Non-performing Assets
Non-performing assets are defined as loans delinquent 90 or more days,
nonaccrual loans, restructured loans, and foreclosed loans. Such assets do
not necessarily represent future losses to TBI since underlying collateral
may be sold and the financial condition of the borrowers may improve. The
following table sets forth the detail of nonperforming loans.
<TABLE>
<CAPTION>
June 30, December 31,
----------------------- ------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Nonaccrual loans $ 271 $ 232 $ 380 $ 452 $ 2,177 $ 2,521 $ 1,899
Loans past due 90 days or more 296 101 422 439 120 333 361
---------------------------------------------------------------------------
Total nonperforming loans $ 567 $ 333 $ 802 $ 891 $ 2,297 $ 2,854 $ 2,260
===========================================================================
</TABLE>
79
<PAGE>
Total non-performing loans as a percentage of total loans was 0.26% and
0.16% at June 30, 1999 and 1998, respectively, and 0.36%, and 0.49% at December
31, 1998 and 1997, respectively.
Management does not believe there will be any losses associated with the
loans as they have estimated that the underlying collateral could be sold for in
excess of the loan balances.
TBI's policy is to discontinue accruing interest on loans when principal or
interest is due and remains unpaid for 90 days or more, unless the loan is well
secured and in the process of collection. The additional interest income that
TBI would have recognized for the six months ended June 30, 1999 and for the
year ended December 31, 1998, if contractural interest on these loans had been
recognized, is insignificant.
At June 30, 1999, there were no commitments to lend additional funds to
borrowers whose loans were considered non-performing.
Management is not aware of any loans other than those included as non-
performing loans where known information about possible credit problems causes
serious doubts as to the borrower's ability to comply with repayment terms which
may result in such loans becoming non-performing.
The loan portfolio does not include any loans to foreign countries or
highly leveraged transaction loans. Senior management closely monitors
concentrations to individual customers and actively participates within their
lending areas. TBI has written policies that require security for loans
including liens on residential mortgage loans and certain of the other loans
secured by real estate. In addition, policies and procedures are in place to
assess the creditworthiness of borrowers for all loans and commitments. A
borrower's ability to honor loan contracts can be largely dependent upon
economic conditions within TBI's market areas.
Investments
The Company classifies debt securities, including mortgage-backed
securities, as either held-to-maturity or available-for-sale. Debt securities
classified as held-to-maturity are those which the Company has the positive
intent and ability to hold until maturity. These securities are carried at
amortized cost with premiums and discounts being amortized using the effective
interest method over the estimated remaining life of the security. Securities
classified as available-for-sale are carried at fair value with unrealized gains
or losses (net of deferred income taxes) reflected in stockholders' equity.
Gains and losses recognized on the sale of securities are based on the specific
identification method. Mortgage-backed securities represent participating
interests in pools of long-term first mortgage loans originated and serviced by
the issuers of the securities. Mortgage-backed securities are either issued or
guaranteed by the U. S. Government or its agencies. Mortgage-backed securities
that are held-to-maturity are carried at unpaid principal balances, adjusted for
unamortized premiums and unearned discounts. Premiums and discounts are
amortized using the straight-line method over the remaining period to
contractual maturity. The mortgage-backed securities that are available-for-sale
are carried at fair value. Market interest rate fluctuations can affect the
prepayment speed of principal and the market value and yield on the security. As
of December 31, 1998 and June 30, 1999, TBI's securities are classified as
either available for sale or held to maturity.
80
<PAGE>
The following table represents the composition of investment securities for
the periods presented:
<TABLE>
<CAPTION>
June 30, December 31,
---------------------- ------------------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Held-to-Maturity:
Obligations of states and
Political subdivisions $ 3,889 $ 6,461 $ 4,925 $ 9,077 $ 12,084
Mortgage backed securities 2,967 9,814 5,237 12,213 15,511
--------- --------- --------- -------- ---------
$ 6,856 $ 16,275 $ 10,162 $ 21,290 $ 27,595
========= ========= ========= ======== =========
Available-for-Sale:
U.S. Treasury and other U.S. $ 78,501 $ 40,914 $ 50,761 $ 26,736 $ 32,173
Government agencies and
Corporations
Obligations of states and 7,583 5,531 7,897 0 0
Political subdivisions
Mortgage-backed securities 35,187 52,575 46,525 66,470 71,564
Other securities 1,355 1,222 1,222 1,162 1,036
--------- --------- --------- -------- ---------
Total $122,626 $ 100,242 $ 106,405 $ 94,368 $ 104,773
========= ========= ========= ======== =========
</TABLE>
81
<PAGE>
Investment Securities--Maturities and Yields
The following tables show the maturities and yields of the various forms of
investment securities at June 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
June 30, 1999
--------------------------------------------------------------
In one year After one to After five
or less five years years
--------------------------------------------------------------
Amount Yield Amount Yield Amount Yield
------- ------ -------- ------ -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Held-to-Maturity:
Obligations of states and $1,530 7.29% $ 1,685 8.42% $ 674 8.68%
Political subdivisions (1)
Mortgage-backed securities 701 4.95% 2,266 5.34% - -
--------- ------ -------- ------ --------- ------
Total $2,231 6.55% $ 3,951 6.65% $ 674 8.68%
========= ====== ======== ====== ========= ======
Available-for-Sale:
U.S. Treasury and other U.S. $6,034 5.31% $63,312 5.71% $10,508 6.16%
Government agencies and
Corporations
Obligations of states and - - - - 7,780 6.67%
Political subdivisions (1)
Mortgage-backed securities - - 2,801 5.61% 32,848 5.87%
Other securities 1,355 5.04% - - - -
--------- ------ -------- ------ --------- ------
Total $7,389 5.26% $66,113 5.71% $51,136 6.05%
========= ====== ======== ====== ========= ======
December 31, 1998
--------------------------------------------------------------
In one year After one to After five
or less five years years
--------------------------------------------------------------
Amount Yield Amount Yield Amount Yield
------- ----- -------- ----- -------- -----
(Dollars in Thousands)
Held-to-Maturity:
Obligations of states and $1,461 7.56% $ 2,738 8.02% $ 726 8.72%
Political subdivisions (1)
Mortgage-backed securities 1,582 5.77% 3,655 5.28% - -
--------- ------ -------- ------ --------- ------
Total $3,043 6.63% $ 6,393 6.45% $ 726 8.72%
========= ====== ======== ====== ========= ======
Available-for-Sale:
U.S. Treasury and other U.S. $6,012 5.50% $28,373 5.57% $16,058 6.17%
Government agencies and
Corporations
Obligations of states and - - - - 7,782 6.67%
Political subdivisions (1)
Mortgage-backed securities - - 3,853 4.85% 43,067 5.64%
Other securities 1,222 4.78% - - -
--------- ------ -------- ------ --------- ------
Total $7,234 5.37% $32,226 5.48% $66,907 5.89%
========= ====== ======== ====== ========= ======
</TABLE>
(1) Yield presented on a tax-equivalent basis assuming a tax rate of 34.00%
Other equity securities include FHLB stock of $1,301,000 at June 30, 1999
and $1,168,000 at December 31, 1998, Federal Reserve Bank (FRB) stock of $46,000
at June 30, 1999 and December 31, 1998, and Texas Independent Bank stock of
$8,000 at June 30, 1999 and December 31, 1998. The dividends received on the
FHLB stock provided an annualized return of 5.00% and 5.50% for the six months
ended June 30, 1999 and the year ended December 31, 1998, respectively. The
dividends received on the FRB stock provided an annualized return of 6.00% for
the six months ended June 30, 1999 and the year ended December 31, 1998,
respectively.
82
<PAGE>
Deposits
The deposit base provides the major funding source for the interest earning
assets of TBI. In general, TBI's deposits have increased during the period from
December 31, 1997 to December 31, 1998, as well as from June 30, 1998 to June
30, 1999. Management believes that demand, savings and certificates of deposit
less than $100,000 represent a core base of deposits while certificates of
deposit in excess of $100,000 and public funds are more interest rate sensitive
and, thus, not viewed as part of the core deposit base. Because of these
factors, management views the growth of demand, savings and time certificates of
deposit less than $100,000 as more stable growth.
The following table reflects the average balance (Note 1) and average
interest rate paid (Note 2) on deposits for the period presented.
<TABLE>
<CAPTION>
Six Month Ended Six Month Ended
June 30, 1999 June 30, 1998
-------------------- --------------------
Average Average Average Average
Balance (2)Rate Balance (2)Rate
-------------------- --------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Demand deposits $ 62,974 0.00% $ 53,735 0.00%
NOW accounts 56,846 1.81% 52,298 2.22%
Savings accounts 24,876 2.18% 23,995 3.03%
Money market accounts 58,352 3.57% 45,509 3.69%
Time 149,442 4.82% 143,476 5.23%
------------------ ---------------------
$352,490 3.08% $319,013 3.47%
================== =====================
</TABLE>
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------------------------
December 31, 1998 December 31, 1997 December 31, 1996
-------------------- -------------------- -------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-------------------- -------------------- -------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 58,524 0.00% $ 49,532 0.00% $ 44,433 0.00%
NOW accounts 55,566 2.14% 46,584 2.23% 43,972 2.15%
Savings accounts 23,945 3.03% 23,440 3.10% 24,476 3.23%
Money market accounts 49,804 3.70% 40,320 3.45% 33,410 3.16%
Time 145,211 5.19% 137,905 5.16% 130,688 5.16%
-------------------- ------------------- -------------------
$333,050 3.39% $297,781 3.45% $276,979 3.44%
==================== =================== ===================
</TABLE>
(Note 1) The average balances for the purpose of the above tables are
calculated on the basis of month-end balances for periods ended June
30, 1999 and 1998, and are calculated on the basis of quarter-end
balances for years ended December 31, 1998, 1997, and 1996.
(Note 2) Average rates for these periods have been annualized.
83
<PAGE>
The following tables reflect the maturities of certificates of deposits
$100,000 or greater as of June 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
----------------------------------- ----------------------------------
3 Months 3-12 1-5 3 Months 3-12 1-5
or less Months Years or less Months Years
------- ------ ----- ------- ------ -----
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Time $ 22,198 $ 27,336 $ 2,927 $ 15,651 $ 28,270 $ 5,379
</TABLE>
Return on Equity and Assets
The following table sets forth TBI's ratios for the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
------------------- -----------------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Return on average assets (Note 1 and 2) 1.03% 0.89% 0.91% 0.87% 0.20%
Return on average equity (Note 1 and 2) 12.51% 10.64% 10.86% 10.52% 2.45%
Dividend payout ratio on common shares -- -- -- -- --
Average equity to average assets (Note 1) 8.26% 8.36% 8.35% 8.28% 8.11%
</TABLE>
(Note 1) The average balances for the purpose of the above table are calculated
on the basis of month-end balances for periods ended June 30, 1999 and
1998 and are calculated on the basis of quarter-end balances for years
ended December 31, 1998, 1997, and 1996.
(Note 2) Return on average assets and return on average equity for June 30,
1999 and June 30, 1998 have been annualized.
Liquidity
TBI's principal source of funds consists of dividends from its subsidiary
banks, which derive their funds from deposits, interest, and principal payments
on loans and investment securities, sales of investment securities and
borrowings. For the six month period ended June 30, 1999, TBI realized proceeds
from sales and maturities of investments of $27,765,000, a net increase in
deposits of $802,000 and net cash provided by operating activities of
$2,601,000. Funds were used to acquire investment securities of $42,856,000. For
the six month period ended June 30, 1998, TBI realized proceeds from sales and
maturities of investments of $30,171,000, a net increase in deposits of
$14,844,000 and net cash provided by operating activities of $2,600,000. Funds
were used to acquire investment securities of $31,495,000 and fund a net
increase in loans to customers of $21,732,000. For the year ended December 31,
1998, TBI realized proceeds from sales and maturities of investments of
$64,957,000, a net increase in deposits of $42,736,000 and net cash provided by
operating activities of $5,577,000. Funds were used to acquire investment
securities of $67,177,000 and fund a net increase in loans to customers of
$41,506,000. For the year ended December 31, 1997, TBI realized proceeds from
sales and maturities of investment securities of $38,232,000, net cash provided
by operating activities of $3,680,000 and a net increase in deposits of
$19,273,000. These proceeds were partially offset by a purchase of investment
securities of $26,354,000 and a net increase in loans to customers of
$33,606,000. For the year ended December 31, 1996, TBI realized proceeds from
sales and maturities of investment securities of $52,899,000, net cash provided
by operating activities of $3,157,000, and a net income in deposits of
$9,319,000. These proceeds were partially offset by
84
<PAGE>
a purchase of investment securities of $59,045,000 and a net increase in loans
to customers of $11,065,000.
Asset liquidity is provided by cash and federal funds sold. Liability
liquidity is provided by access to core funding sources, principally various
customers' interest-bearing accounts in TBI's market areas. TBI does not have
and does not solicit brokered deposits.
Federal funds purchased and short-term borrowings by TBI are additional
sources of liquidity. These sources of liquidity are short-term in nature and
are used by TBI as necessary to fund asset growth and meet short-term liquidity
needs. As of June 30, 1999 and 1998, and December 31, 1998 and 1997, TBI had no
federal funds purchased and no borrowings on securities sold under repurchase
agreements. TBI had $3,373,000 and $2,935,000 outstanding under lines of credit
at the Federal Home Loan Bank on June 30, 1999 and December 31, 1998,
respectively. There were no outstanding balances with the Federal Home Loan Bank
at June 30, 1998 or December 31, 1997.
Capital
TBI's total shareholders' equity as of June 30, 1999 was $32,559,000, an
increase of $660,000 or 2.08%, compared with shareholders' equity of $31,893,000
as of December 31, 1998.
Total shareholders' equity as of December 31, 1998 was $31,893,000, an
increase of $3,280,000 or 11.46%, compared with shareholders' equity of
$28,613,000 as of December 31, 1997.
TBI is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on TBI's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, TBI must meet specific capital
guidelines that involve quantitative measures of TBI's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. TBI's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. Quantitative measures established by regulation to ensure capital
adequacy require TBI to maintain minimum amounts and ratios, set forth in the
table below of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined in the regulations), and of Tier I capital (as
defined in the regulations) to average assets (as defined in the regulations).
Management believes that TBI meets, as of June 30, 1999 and December 31, 1998,
all capital adequacy requirements to which it is subject.
As of June 30, 1999 and December 31, 1998, the most recent notification
from the Office of the Comptroller of the Currency and the FDIC categorized the
TBI's subsidiary banks and the consolidated entity as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the banks and the consolidated entity must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the
table. There are no conditions or events since that notification that management
believes have changed the banks' or consolidated entity's category.
85
<PAGE>
TBI's actual capital amounts and ratios are also presented in the following
table:
<TABLE>
<CAPTION>
Actual Actual
Amount Ratios
----------- ---------
(Dollars in Thousands)
First Bank of First Bank of
National South National South
Consolidated Bank Texas Consolidated Bank Texas
------------ ----------- --------- ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1999:
Total capital (to risk weighted $31,817 20,229 11,014 12.89% 11.01% 17.22%
assets)
Tier 1 capital (to risk weighted $29,734 18,568 10,592 12.05% 10.11% 16.56%
assets)
Tier 1 capital (to average assets) $29,734 18,568 10,592 7.67% 6.91% 8.86%
As of June 30, 1998:
Total capital (to risk weighted $27,194 17,137 9,366 11.83% 10.17% 15.37%
assets)
Tier 1 capital (to risk weighted $25,461 15,780 8,990 11.08% 9.37% 14.75%
assets)
Tier 1 capital (to average assets) $25,461 15,780 8,990 7.26% 6.70% 7.76%
As of December 31, 1998:
Total capital (to risk weighted $29,614 18,762 10,156 11.97% 10.05% 15.75%
assets)
Tier 1 capital (to risk weighted $27,567 17,031 9,728 11.14% 9.12% 15.09%
assets)
Tier 1 capital (to average assets) $27,567 17,031 9,728 7.44% 6.72% 8.26%
As of December 31, 1997:
Total capital (to risk weighted $25,213 15,932 8,577 11.90% 10.30% 15.30%
assets)
Tier 1 capital (to risk weighted $23,660 14,685 8,270 11.20% 9.50% 14.70%
assets)
Tier 1 capital (to average assets) $23,660 14,685 8,270 7.11% 6.70% 7.20%
</TABLE>
The FRB has adopted risk-based capital guidelines which assign risk
weightings to assets and off-balance sheet items. The guidelines also define and
set minimum capital requirements (risk-based capital ratios). Under the final
1992 rules, all banks are required to have core capital (Tier 1) of at least
4.0% of risk-weighted assets and total capital of 8.0% of risk-weighted assets.
Tier 1 capital consists principally of shareholders' equity less goodwill and
certain other intangibles, while total capital consists of core capital, certain
debt instruments and a portion of the reserve for credit losses. In order to be
deemed well capitalized pursuant to the regulations, an institution must have a
total risk-weighted capital ratio of 10%, a Tier 1 risk-weighted ratio of 6% and
a Tier 1 leverage ratio of 5%. The Company had risk-weighted Tier 1 capital
ratios of 11.14% and 11.20% and risk-weighted total capital ratios of 11.97% and
11.90% for December 31, 1998 and 1997, respectively, which are well above the
minimum regulatory requirements and exceed the well capitalized ratios (see note
13 to notes to Consolidated Financial Statements). At June 30, 1999 and 1998,
respectively, the Company had risk-weighted Tier 1 capital ratios of 12.05% and
11.08% and risk-weighted total capital ratios of 12.89% and 11.83%.
Impact of Inflation, Changing Prices and Monetary Policies
The financial statements and related financial data concerning TBI
presented in this proxy statement-prospectus have been prepared in accordance
with generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. The primary effect of inflation on the operation of TBI is reflected
in increased operating costs. Unlike most industrial companies, virtually all of
the assets and liabilities of a financial institution are monetary in nature. As
a result, changes in interest rates
86
<PAGE>
have a more significant effect on the performance of a financial institution
than do the effects of changes in the general rate of inflation and changes in
price. Interest rates do not necessarily move in the same direction or in the
same magnitude as the prices of goods and services. Interest rates are highly
sensitive to many factors which are beyond the control of TBI, including the
influence of domestic and foreign economic conditions and the monetary and
fiscal policies of the United States government and federal agencies,
particularly the Federal Reserve Board. The Federal Reserve Board implements
national monetary policy such as seeking to curb inflation and combat recession
by its open market operations in the United States government securities,
control of the discount rate applicable to borrowing by banks and establishment
of reserve requirements against bank deposits. The actions of the Federal
Reserve Board in these areas influence the growth of bank loans, investments and
deposits, and effect the interest rates charged on loans and paid on deposits.
The nature, timing and impact of any future changes in federal monetary and
fiscal policies on TBI and its subsidiary banks and their results of operations
are not predictable.
Year 2000 Compliance
In 1997, TBI initiated a plan to identify, assess, and remediate "Year
2000" issues within each of its significant computer programs and certain
equipment which contain micro-processors. The Year 2000 plan is addressing the
issue of computer programs and embedded computer chips being able to distinguish
between the year 1900 and the year 2000, if a program or chip uses only two
digits rather than four to define the applicable year. TBI has divided the Plan
into five major phases - assessment, planning, conversion, implementation and
testing. In 1997, TBI completed the assessment and planning phases. In 1998, TBI
conducted testing on critical systems followed by any necessary implementation
or conversion processes. Systems which have been determined not to be Year 2000
compliant are being either replaced or reprogrammed, and thereafter tested for
Year 2000 compliance. At mid-1999, TBI had completed all testing and
implementation phases for critical systems. TBI had also completed written
contingency plans and tested the plans accordingly.
TBI is in the process of identifying and contacting critical suppliers and
customers whose computerized systems interface with TBI's systems, regarding
their plans and progress in addressing their Year 2000 issues. TBI has received
varying information from such third parties on the state of compliance or
expected compliance. Contingency plans are being developed in the event that any
critical supplier or customer is not compliant.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect TBI's
operations, liquidity and financial condition. Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of third-party suppliers and customers, TBI is unable to
determine at this time whether the consequences of Year 2000 failures will have
a material impact on TBI's operations, liquidity or financial condition.
87
<PAGE>
Recent Accounting Pronouncements
TBI adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", effective January 1, 1996.
This statement established accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles which must be disposed. Long-lived assets and certain identifiable
intangibles to be disposed of must be reported at the lower of carrying amount
or fair value less cost to sell, except for assets that are covered by APB
Opinion, No. 30. The adoption of this statement did not have a material impact
on TBI's consolidated financial position, results of operation, or liquidity.
In 1997, TBI adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 permits companies to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant. In
management's opinion, the existing stock option valuation models do not
necessarily provide a reliable single measure of stock option fair value.
Therefore, as permitted, TBI will continue to apply the existing accounting
rules under APB No. 25 and provide pro forma net income and pro forma earnings
per share disclosures for employee stock option grants made in 1997 and
subsequent years as if the fair-value-based method defined in SFAS No. 123 had
been applied.
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125" was issued in December 1996. SFAS No. 127
defers portions of SFAS No. 125 to be effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1997. These statements are to be applied prospectively. SFAS No. 125 provides
accounting and extinguishments of liabilities based on consistent application of
a financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. The adoption of this statement did not have a material impact on
TBI's consolidated financial position, results of operations, or liquidity.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share." SFAS No. 128 specifies the computation,
presentation, and disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock or potential common stock. SFAS No.
128 replaces primary EPS and fully diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the basic EPS computation to the diluted EPS. Basic EPS is
calculated by dividing net income available to common shareholders, by the
weighted average of number of common shares outstanding. The computation of
diluted EPS assumes the issuance of common shares for all dilutive potential
common shares outstanding during the reporting period. The dilutive effect of
stock options are considered in earnings per share calculations if dilutive,
using the treasury stock method. SFAS No. 128 was effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. TBI adopted SFAS No. 128 in 1997, accordingly, all prior-period
earnings per share data presented in the accompanying consolidated financial
statements has been restated to conform to the requirements of SFAS No. 128.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of
88
<PAGE>
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that an enterprise (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS No. 130
was effective for fiscal years beginning after December 15, 1997. The adoption
of this Statement did not have a material impact on TBI's consolidated financial
position, results of operations, or liquidity.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
the "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as a "fair value hedge," a
"cash flow hedge," or a hedge of a foreign currency exposure of a net investment
in a foreign operation. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. In June 1999, the Financial
Accounting Standards Board issued SFAS No. 137 which delayed the adoptions of
SFAS No. 133 for all fiscal quarters of all fiscal years beginning after June
15, 2000. Management of TBI does not expect that the adoption of SFAS No. 133
will have a material impact on TBI's financial position, results of operation,
or liquidity.
89
<PAGE>
- --------------------------------------------------------------------------------
In deciding how to vote on the merger, you should rely only on the information
contained or incorporated by reference in this proxy statement-prospectus.
Neither Wells Fargo nor TBI has authorized any person to provide you with any
information that is different from what is contained in this proxy statement-
prospectus. This proxy statement-prospectus is dated ___________, 1999. You
should not assume that the information contained in this proxy statement-
prospectus is accurate as of any date other than such date, and neither the
mailing to you of this proxy statement-prospectus nor the issuance to you of
shares of Wells Fargo common stock will create any implication to the contrary.
- --------------------------------------------------------------------------------
90
<PAGE>
Independent Auditor's Report
The Board of Directors
Texas Bancshares, Inc. and Subsidiaries
San Antonio, Texas
We have audited the accompanying consolidated balance sheets of Texas
Bancshares, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income and comprehensive income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Texas
Bancshares, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/S/KPMG LLP
February 25, 1999
San Antonio, Texas
F-1
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1999 (unaudited) and December 31, 1998 and 1997
(000's omitted, except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
-------- ------------
Assets 1999 1998 1997
------ ---- ---- ----
(unaudited)
<S> <C> <C> <C>
Cash and due from banks $ 17,139 $ 16,256 $ 14,048
Federal funds sold 10,675 19,900 15,225
------------- ------------ -------------
Total cash and cash equivalents 27,814 36,156 29,273
Securities held-to-maturity (note 3) 6,856 10,162 21,290
Securities available-for-sale (notes 4 and 8) 122,626 106,405 94,368
Loans, less unearned discount (notes 2 and 5) 219,232 221,902 180,615
Less allowance for possible loan losses (note 5) 2,083 2,159 1,553
------------- ------------ -------------
Net Loans 217,149 219,743 179,062
Premises and equipment, net (note 6) 8,311 8,452 8,477
Other real estate owned 435 551 687
Intangible assets 4,152 4,413 4,881
Other assets (note 7) 5,551 5,016 4,016
------------- ------------ -------------
Total Assets $392,894 $ 390,898 $ 342,054
============= ============ =============
Liabilities and Stockholders' Equity
------------------------------------
Deposits:
Demand $ 64,710 $ 63,988 $ 51,319
NOW 54,054 64,545 52,080
Money market funds 63,074 55,064 44,289
Savings 24,559 24,366 23,466
Time (note 10) 148,077 145,709 139,782
------------- ------------ -------------
Total deposits 354,474 353,672 310,936
Note payable (note 8) 3,373 2,935 -
Other liabilities (note 7) 2,488 2,398 2,505
------------- ------------ -------------
Total liabilities 360,335 359,005 313,441
------------- ------------ -------------
Stockholders' equity (note 13):
Common stock of no par value; authorized 10,000,000 shares;
issued 2,003,400 shares 334 334 334
Preferred stock of no par value; authorized 1,000,000 shares;
no shares issued - - -
Surplus 2,375 2,375 2,375
Treasury stock; 36,864 shares (112) (112) (112)
Undivided profits 31,289 29,271 25,944
Accumulated other comprehensive income - unrealized gains
on securities available for sale, net of
deferred income taxes (1,327) 25 72
------------- ------------ -------------
Total stockholders' equity 32,559 31,893 28,613
------------- ------------ -------------
Commitments and contingent liabilities (notes 11 and 14) - - -
------------- ------------ -------------
Total Liabilities and Stockholders' Equity $392,894 $ 390,898 $ 342,054
============= ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
Six Months Ended June 30, 1999 and 1998 (unaudited)
Years ended December 31, 1998, 1997, and 1996
(000's omitted, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
-------- ------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans (note 5) $ 9,723 $ 8,858 $18,876 $15,262 $14,104
Interest on Federal funds sold 303 419 709 453 629
Interest on due from banks - time 6 3 11 26 41
Interest on securities:
Taxable 3,147 3,122 6,055 7,504 6,201
Tax - exempt 296 216 525 493 597
----------------------------------------------------------------
Total interest income 13,475 12,618 26,176 23,738 21,572
----------------------------------------------------------------
Interest expense:
Interest on time deposits (note 10) 3,604 3,753 7,533 7,122 6,745
Interest on savings, NOW and money market funds 1,828 1,784 3,756 3,160 2,792
Other interest expense 91 0 23 101 193
----------------------------------------------------------------
Total interest expense 5,523 5,537 11,312 10,383 9,730
----------------------------------------------------------------
Net interest income 7,952 7,081 14,864 13,355 11,842
Provision for possible loan losses (note 5) 1,081 463 931 105 1,088
----------------------------------------------------------------
Net interest income after provision for possible loan losses 6,871 6,618 13,933 13,250 10,754
----------------------------------------------------------------
Other operating income:
Service charges on deposit accounts 2,262 2,096 4,380 2,615 2,429
Other fees and commissions 148 148 281 192 192
Gain on sale of securities, net (note 4) 228 18 70 89 30
Other operating income 702 83 148 206 154
----------------------------------------------------------------
Total other operating income 3,340 2,345 4,879 3,102 2,805
----------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits (note 9) 3,479 3,235 6,728 5,733 5,118
Occupancy, furniture and equipment expense (note 6) 929 947 1,915 1,917 1,776
Other operating expenses 2,827 2,423 5,217 4,445 5,838
----------------------------------------------------------------
Total other operating expenses 7,235 6,605 13,860 12,095 12,732
----------------------------------------------------------------
Income before federal income taxes 2,976 2,358 4,952 4,257 827
----------------------------------------------------------------
Federal and state income tax expense (benefit) (note 7):
Current 941 728 1,664 1,001 798
Deferred 17 70 (39) 396 (582)
----------------------------------------------------------------
Total federal and state income tax expense 958 798 1,625 1,397 216
Net income 2,018 1,560 3,327 2,860 611
Other comprehensive income - unrealized gains
(losses) on securities available for sale (1,352) (128) (47) 153 207
================================================================
Comprehensive Income $ 666 $ 1,432 $ 3,280 $ 3,013 $ 818
================================================================
Earnings per common share (note 15):
Basic earnings $ 1.03 $ 0.79 $ 1.69 $ 1.45 $ 0.31
================================================================
Diluted earnings $ 1.02 $ 0.78 $ 1.68 $ 1.45 $ 0.31
================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Six Month Ended June 30, 1999 (unaudited),
And Years Ended December 31, 1998, 1997 and 1996
(000's omitted)
<TABLE>
<CAPTION>
Net
unrealized
gains
(losses) on Total
securities Stock
Common Stock Treasury Undivided available- holders'
Shares Amount Surplus stock profits for-sale equity
------ ------ ------- ----- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1995 1,002 $ 167 $ 2,542 $ (112) $ 22,473 $ (288) $ 24,782
Net income - - - - 611 - 611
Other comprehensive
income - - - - - 207 207
-------------------------------------------------------------------------------------
Balances at December 31,
1996 1,002 $ 167 $ 2,542 $ (112) $ 23,084 $ (81) $ 25,600
Net income - - - - 2,860 - 2,860
Other comprehensive
income - - - - - 153 153
Stock split 1,001 167 (167) - - - -
-------------------------------------------------------------------------------------
Balances at December 31,
1997 2,003 $ 334 $ 2,375 $ (112) $ 25,944 $ 72 $ 28,613
Net income - - - - 3,327 - 3,327
Other comprehensive
income - - - - - (47) (47)
-------------------------------------------------------------------------------------
Balances at December 31,
1998 2,003 $ 334 $ 2,375 $ (112) $ 29,271 $ 25 $ 31,893
Net income - - - - 2,018 - 2,018
Other comprehensive
income - - - - - (1,352) (1,352)
Balances at June 30,
-------------------------------------------------------------------------------------
1999 2,003 $ 334 $ 2,375 $ (112) $ 31,289 $ (1,327) $ 32,559
=====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998 (unaudited)
And Years ended December 31, 1998, 1997 and 1996
(000's omitted)
<TABLE>
<CAPTION>
Six Months Ended
June 30, Years Ended December 31,
-------- ------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,018 $ 1,560 $ 3,327 $ 2,860 $ 611
Adjustments to reconcile net income to net cash provided by
operations:
Depreciation 409 419 832 833 840
Net accretion/amortization of securities 261 305 621 259 221
Provision for possible loan losses 1,081 463 931 105 1,088
Deferred Federal income taxes 17 70 (39) 396 (582)
(Gain) Loss on sale and provision for writedowns
of other real estate owned, net 14 (3) 45 147 218
Other assets, net (535) (824) (649) (629) 539
Other liabilities, net (90) 384 107 (702) (237)
(Gain) Loss on sale of securities, net (228) (18) (70) (89) (30)
(Gain) Loss on sale of repossessed and other assets,
net (632) (9) 5 1 5
Amortization of intangible assets 286 253 467 499 484
-----------------------------------------------------------------
Net cash provided by operating activities 2,601 2,600 5,577 3,680 3,157
-----------------------------------------------------------------
Cash flows from investing activities:
Purchases of securities held-to-maturity - (728) (165) (26) (693)
Proceeds from maturities and principal collections of
securities held-to-maturity 3,284 5,140 11,219 6,252 6,156
Purchases of securities available-for-sale (42,856) (30,767) (67,012) (26,328) (58,352)
Proceeds from sales of securities available-for-sale 10,103 7,865 12,135 11,103 35,678
Proceeds from maturities and principal collections of
securities available-for-sale 14,378 17,166 41,603 20,877 11,065
Loans, net 2,881 (21,732) (41,506) (33,606) (3,746)
Purchases of premises and equipment (1,589) (904) (991) (1,195) (970)
Proceeds from sales of premises and equipment 1,268 52 52 184 0
Proceeds from sales of other real estate owned 201 90 91 680 0
Recoveries of charged off loans 71 84 158 65 144
Proceeds from sale of repossessed and other assets 76 24 51 48 69
Organizational costs 0 0 0 (6) (41)
-----------------------------------------------------------------
Net cash used by investing activities (12,183) (23,710) (44,365) (21,952) (10,690)
-----------------------------------------------------------------
Cash flows from financing activities:
Deposits, net 802 14,844 42,736 19,273 9,319
Loan proceeds, net 438 0 2,935 (1,902) (634)
-----------------------------------------------------------------
Net cash provided by financing activities 1,240 14,844 45,671 17,371 8,685
-----------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (8,342) (6,266) 6,883 (901) 1,152
Cash and cash equivalents, beginning of year 36,156 29,273 29,273 30,174 29,022
-----------------------------------------------------------------
Cash and cash equivalents, end of year $27,814 $23,007 $36,156 $29,273 $30,174
=================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Six Months Ended June 30, 1999 and 1998 (unaudited)
And Years Ended December 31, 1998, 1997 and 1996
(000's omitted)
<TABLE>
<CAPTION>
Six Months Ended
June 30, Years Ended December 31,
-------- ------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid $ 5,626 $ 5,677 $11,311 $ 9,837 $ 9,512
Income taxes paid 850 925 1,825 845 645
Income taxes refunded 0 12 12 340 29
Loans transferred to other real estate owned 107 33 33 39 172
Loans transferred to other assets 64 30 59 38 60
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(000's omitted from tabular data)
(1) Summary of Organization and Significant Accounting Policies
-----------------------------------------------------------
Organization
------------
The consolidated financial statements include the accounts of TBI, Inc.
(Parent Company) and its wholly-owned subsidiaries, First National Bank
of South Texas (FNB), Bank of South Texas (BOST), and Texas Bancshares
Subsidiary Corporation (Subsidiary), collectively called the Company.
All significant intercompany accounts and transactions have been
eliminated.
The financial statements have been prepared in accordance with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the
dates of the balance sheets and income and expenses for the periods.
Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance
for loan losses.
The Company is engaged in the business of banking, including the
acceptance of checking and savings deposits and the making of
residential, commercial, real estate, and consumer loans to customers
principally located in Nueces, Wilson, Bexar, Atascosa and Jim Wells
counties in south Texas. Although the loan portfolio is diversified, a
substantial portion of its debtors' ability to honor their loans is
dependent upon the economic conditions in the area, especially in the
agricultural and commercial business sectors. The Company competes for
deposits and loans principally with other commercial banks, savings and
loan associations and credit unions in the above mentioned counties. In
addition, the Company is subject to the regulations of certain Federal
agencies and undergoes periodic examinations by those regulatory
authorities. Such agencies may require certain standards or impose
certain limitations based on their judgments or changes in laws and
regulations. Also, the Company's investment portfolio is directly
impacted by fluctuations in market interest rates.
The accounting and reporting policies of the Company conform to
generally accepted accounting principles and to general practices
within the banking industry. The following is a description of the more
significant of those policies.
Cash Equivalents
----------------
For purposes of the consolidated statements of cash flows, the Company
considers cash equivalents to be cash on hand, cash items in process,
amounts due from banks, and Federal funds sold.
Securities Held-to-Maturity and Securities Available-for-Sale
-------------------------------------------------------------
The Company classifies debt securities, including mortgage-backed
securities, as either held-to-maturity or available-for-sale. Debt
securities classified as held-to-maturity are those which the Company
has the positive intent and ability to hold until maturity. These
securities are carried at amortized cost with premiums and discounts
being amortized using the effective interest method over the estimated
remaining life of the security. Securities classified as available-for-
sale are carried at fair value with unrealized gains or losses (net of
deferred income taxes) reflected in stockholders' equity. Gains and
losses recognized on the sale of securities are based on the specific
identification method.
F-7
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(000's omitted from tabular data)
Mortgage-backed securities represent participating interests in pools
of long-term first mortgage loans originated and serviced by the
issuers of the securities. Mortgage-backed securities are either issued
or guaranteed by the U. S. Government or its agencies. Mortgage-backed
securities that are held-to-maturity are carried at unpaid principal
balances, adjusted for unamortized premiums and unearned discounts.
Premiums and discounts are amortized using the straight-line method
over the remaining period to contractual maturity. The mortgage-backed
securities that are available-for-sale are carried at fair value.
Market interest rate fluctuations can affect the prepayment speed of
principal and the market value and yield on the security.
Loans
-----
Loans are reported at their principal amounts, net of unearned income
and allowance for possible loan losses. Management, considering current
information and events regarding the borrowers ability to repay their
obligation, considers a loan to be impaired when it is probable that
the Company will be unable to collect all amounts due according to the
original contractual terms of the loan agreement. An impaired loan is
to be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or at the loan's
observable market price or the fair value of the collateral if the loan
is collateral dependent.
Interest Income on Loans
------------------------
Interest income is accrued as earned on loans. When a loan, in
management's judgment, becomes doubtful as to the collection of accrued
interest income, it is placed on a non-accrual status. Interest
payments received on non-accrual loans are recognized as income on a
cash basis.
Provision and Allowance for Possible Loan Losses
------------------------------------------------
The provision for possible loan losses charged to operating expense is
based on past loan loss experience and other factors which, in
management's judgment, deserve current recognition in estimating
possible loan losses. Such factors include the growth and composition
of the loan portfolio, the relationship of the allowance to loans
outstanding and economic conditions.
Management believes that the allowance for possible loan losses is
adequate. While management uses available information to recognize
losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for possible loan losses.
Such agencies may require the Company to recognize additions to the
allowance based on their judgments of information available to them at
the time of their examination.
Unearned Discount
-----------------
Loans are frequently made on a discount basis. The amount of the
discount is subsequently included in interest income ratably over the
term of the related loans under the sum-of-the-digits (Rule of 78th's)
method which approximates the interest method.
F-8
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(000's omitted from tabular data)
Premises and Equipment
----------------------
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is calculated on a straight-line basis over
the estimated useful lives of the assets. Expenditures for major
renewals and betterments are capitalized and those for maintenance and
repairs are charged to income as incurred.
Other Real Estate Owned
-----------------------
Real estate acquired by foreclosure or deeds in lieu of foreclosure are
carried at the lower of the recorded investment in the property or its
fair value (determined by independent appraisal), less estimated costs
to sell. Prior to foreclosure, the value of the underlying loan is
written up or down to the fair value of the real estate to be acquired
by a charge to the allowance for possible loan losses, if necessary.
Any subsequent write-downs are charged against operating expenses. Net
operating expenses of such properties and losses on their disposition
are included in other operating expenses. If gains occur on
disposition, the results are included in other operating income.
Federal and State Income Taxes
------------------------------
The Company files a consolidated Federal income tax return with BOST
and FNB. The Parent Company, FNB and BOST each file separate franchise
tax returns with the state of Texas. Subsidiary files a separate
franchise tax return in Delaware. The Company accounts for income taxes
under the asset and liability method which requires that deferred
income taxes be recognized for the tax consequences of temporary
differences (differences between the financial statement carrying
amount and the tax bases of assets and liabilities) at the enacted
statutory tax rates applicable to the future years in which those
differences are expected to reverse.
Intangible Assets
-----------------
Intangible assets include goodwill and organizational costs. The
goodwill represents the cost in excess of the fair market value on the
acquisition of Floresville Bancshares, Inc. in 1988, the acquisition of
certain assets and liabilities of the First National Bank of Poth (a
branch of BOST) in 1991, the acquisition of certain assets and
liabilities of the Alice branch of the First Federal Savings Bank (a
branch of FNB) in 1993, the merger with State Bank of La Vernia (a
branch of FNB) in 1995, the acquisition of certain assets and
liabilities of the Pleasanton branch of Bank of America (a branch of
FNB) in 1995, and the acquisition of certain assets and liabilities of
the Floresville branch of Bank of America (a branch of BOST) in 1995.
Amortization is on a straight-line basis over 15 years, 7 years, 15
years, 15 years, 15 years and 15 years, respectively. The
organizational costs were incurred to open the Alice, La Vernia,
Pleasanton, Floresville, Corpus Christi, and San Antonio branches. The
Company will adopt AICPA Statement of Position 98-5 "Reporting on the
Costs of Start-Up Activities" during 1999. This Statement requires
costs of start-up activities and organization costs to be expensed as
incurred. The Company does not expect that adoption of this Statement
will have a material impact on the Company's operations, liquidity, or
financial condition.
F-9
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(000's omitted from tabular data)
Impairment of Long-Lived Assets and for Long-Lived Assets to be
---------------------------------------------------------------
Disposed Of
-----------
The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards No. 121
(Statement 121), "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." Statement 121 requires
that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
Stock Options
-------------
The Company accounts for its stock option plan in accordance with
Statement of Financial Accounting Standards No. 123 (Statement 123),
"Accounting for Stock-Based Compensation". Statement 123 permits
entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively,
Statement 123 also allows entities to continue to apply the provisions
of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value-based method defined in
Statement 123 had been applied. The Company has elected to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of Statement 123. As such, compensation expense is recorded
on the date of grant only if the current market price of the underlying
stock exceeded the exercise price.
Transfers and Servicing of Financial Assets and Extinguishments of
------------------------------------------------------------------
Liabilities
-----------
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 125, (Statement 125) "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities"
and Statement of Financial Accounting Standards No. 127, (Statement
127) "Deferral of the Effective Date of Certain Provisions of FASB No.
125." Statement 125 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishment of
liabilities based on consistent application of a financial-components
approach that focuses on control. It distinguishes transfers of
financial assets that are sales from transfers that are secured
borrowings. Adoption of Statement 125 and 127 did not have a material
impact on the Company's financial position, results of operations, or
liquidity.
Earnings Per Common Share Computations
--------------------------------------
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, (Statement 128) "Earnings per Share."
Statement 128 specifies the computation, presentation, and disclosure
requirements for earnings per share (EPS) and replaces primary EPS and
fully diluted EPS on the face of the income statement for all entities
with complex capital
F-10
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(000's omitted from tabular data)
structures and requires a reconciliation of the basic EPS computation
to the diluted EPS. Basic EPS is calculated by dividing net income
available to common shareholders, by the weighted average number of
common shares outstanding. The computation of diluted EPS assumes the
issuance of common shares for all dilutive potential common shares
outstanding during the reporting period. The dilutive effect of stock
options are considered in earnings per share calculations if dilutive,
using the treasury stock method. Statement 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. All prior-period earnings per share data
presented in the accompanying consolidated financial statements has
been restated to conform to the requirements of Statement 128.
Comprehensive Income
--------------------
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, ("Statement 130") "Reporting
Comprehensive Income." Statement 130 establishes standards for
reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-
purpose financial statements. Statement 130 requires that an enterprise
(a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial
position. Statement 130 is effective for fiscal years beginning after
December 15, 1997. The provisions of Statement 130 were adopted by the
Company as of January 1, 1998. The adoption of Statement 130 did not
have a material impact on the Company's financial position, results of
operation, or liquidity.
Reclassifications
-----------------
Certain 1996 and 1997 balances have been reclassified to conform to the
1998 presentation. Such reclassifications had no effect on net income
or total stockholders' equity.
(2) Related Party Transactions
--------------------------
The Company has had, in the ordinary course of business, banking
transactions (primarily loans) with officers, directors, and their
affiliates. In management's opinion, all such transactions have been on
substantially the same terms (including interest rates and collateral)
as those prevailing for comparable transactions with others and have
not included more than the normal risk of collectibility or other
unfavorable features. The loans outstanding to officers and directors,
including loans made to companies in which the officers and directors
exercise control through direct and indirect ownership, were as
follows:
Balance at December 31, 1997 $ 1,566
1998 additional loans 727
1998 paydowns on loans 967
--------
Balance at December 31, 1998 $ 1,326
1999 additional loans 517
1999 paydowns on loans 372
--------
Balance at June 30, 1999 (unaudited) $ 1,471
========
F-11
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(000's omitted from tabular data)
Loans are purchased and sold between Banks. The loan balances related
to such transactions were as follows:
<TABLE>
<S> <C> <C> <C>
Period ended June 30, 1999: (unaudited) FNB BOST Total
--- ---- -----
Participations purchased $ 326 $13,966 $ 14,292
=========== =========== ===========
Participations sold $13,966 $ 326 $ 14,292
=========== =========== ===========
Year ended December 31, 1998: FNB BOST Total
Participations purchased $ 1,533 $12,987 $ 14,520
=========== =========== ===========
Participations sold $12,987 $ 1,533 $ 14,520
=========== =========== ===========
Year ended December 31, 1997: FNB BOST Total
--- ---- -----
Participations purchased $ 1,840 $ 9,631 $ 11,471
=========== =========== ===========
Participations sold $ 9,631 $ 1,840 $ 11,471
=========== =========== ===========
</TABLE>
(3) Securities Held-to-Maturity
---------------------------
The following is a summary of the investment securities
held-to-maturity:
<TABLE>
<CAPTION>
June 30, 1999 (unaudited)
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Obligations of states and
political subdivisions $ 3,889 $ 102 $ - $ 3,991
Mortgage-backed securities 2,967 - (59) 2,908
------------ ------------- ------------ -----------
$ 6,856 $ 102 $ (59) $ 6,899
============ ============= ============ ===========
</TABLE>
The amortized cost and approximate fair value by type of securities
held-to-maturity at December 31 are as follows:
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Obligations of states and
political subdivisions $ 4,925 $ 181 $ - $ 5,106
Mortgage-backed securities 5,237 - (21) 5,216
------------- ------------- ------------ ------------
$ 10,162 $ 181 $ (21) $ 10,322
============= ============= ============ ============
</TABLE>
F-12
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(000's omitted from tabular data)
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Obligations of states and
political subdivisions $ 9,077 $ 197 $ (1) $ 9,273
Mortgage-backed securities 12,213 1 (109) 12,105
------------- -------------- -------------- ------------
$ 21,290 $ 198 $ (110) $ 21,378
============= ============== ============== ============
</TABLE>
The fair value of debt securities is estimated based on quoted market prices for
those investments.
The amortized cost and estimated fair values of debt securities held-to-maturity
at June 30, 1999 and December 31, 1998 and 1997, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities because
borrowers may have the right to prepay obligations with or without prepayment
penalties.
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998 December 31, 1997
(unaudited)
----------------------- ----------------------- -----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less $ 1,530 $ 1,543 $ 1,461 $ 1,470 $ 4,292 $ 4,299
Due after one year through five years 1,685 1,741 2,790 2,903 3,543 3,651
Due after five years through ten years 483 513 467 508 1,183 1,257
Due after ten years 191 194 207 225 59 66
Mortgage-backed securities 2,967 2,908 5,237 5,216 12,213 12,105
---------- ------- -------- -------- -------- --------
Total $ 6,856 $ 6,899 $ 10,162 $ 10,322 $ 21,290 $21,378
========== ======= ======== ======== ======== ========
</TABLE>
The amortized cost of mortgage-backed securities held at June 30, 1999
(unaudited), included $721,000 of FHLMC securities and $2,246,000 of FNMA
securities. The amortized cost of mortgage-backed securities held at December
31, 1998, included $1,881,000 of FHLMC securities, and $3,356,000 of FNMA
securities. The amortized cost of mortgage-backed securities held at December
31, 1997, included $8,116,000 of FHLMC securities, and $4,097,000 of FNMA
securities.
Securities held-to-maturity having an amortized cost of $4,941,000 on June 30,
1999 (unaudited), and $7,521,000 and $17,375,000 on December 31, 1998 and 1997,
respectively, were pledged to secure public fund deposits and for other purposes
required or permitted by law.
F-13
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(000's omitted from tabular data)
(4) Securities Available-For-Sale
-----------------------------
The following is a summary of the investment securities available-for-sale:
<TABLE>
<CAPTION>
June 30, 1999 (unaudited)
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
Government agencies and
corporations $ 79,853 $ 5 $ (1,357) $ 78,501
Obligations of states and
political subdivisions 7,781 - (198) 7,583
Mortgage-backed securities 35,649 26 (488) 35,187
Other securities 1,355 - - 1,355
------------- ------------- ------------ -----------
$ 124,638 $ 31 $ (2,043) $ 122,626
============= ============= ============ ===========
<CAPTION>
December 31, 1998
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
Government agencies and
corporations $ 50,443 $ 422 $ (104) $ 50,761
Obligations of states and
political subdivisions 7,782 132 (17) 7,897
Mortgage-backed securities 46,920 168 (563) 46,525
Other securities 1,222 - - 1,222
------------ ------------ ------------- ----------
$ 106,367 $ 722 $ (684) $ 106,405
============ ============ ============= ==========
<CAPTION>
December 31, 1997
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
Government agencies and
corporations $ 26,648 $ 106 $ (18) $ 26,736
Mortgage-backed securities 66,447 450 (427) 66,470
Other securities 1,162 - - 1,162
------------ ------------ ------------ -----------
$ 94,257 $ 556 $ (445) $ 94,368
============ ============ ============ ===========
</TABLE>
F-14
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(000's omitted from tabular data)
The fair value of debt securities is estimated based on quoted market
prices for those investments.
The amortized cost and estimated fair values of debt and other securities
available-for-sale at June 30, 1999 and December 31, 1998 and 1997, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to prepay
obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
June 30, 1999 (unaudited) December 31, 1998 December 31, 1997
------------------------- ------------------------- ----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less $ 6,034 $ 6,030 $ 6,012 $ 6,043 $ 12,972 $ 12,955
Due after one year through five years 63,312 62,149 30,371 30,447 2,001 2,006
Due after five years through ten years 11,830 11,611 8,949 9,122 4,000 4,023
Due after ten years 6,458 6,294 12,893 13,046 7,675 7,752
Mortgage-backed securities 35,649 35,187 46,920 46,525 66,447 66,470
Other securities 1,355 1,355 1,222 1,222 1,162 1,162
---------- --------- ---------- --------- --------- ---------
Total $ 124,638 $ 122,626 $ 106,367 $ 106,405 $ 94,257 $ 94,368
========== ========= ========== ========= ========= =========
</TABLE>
The mortgage-backed securities available-for-sale at estimated fair value
on June 30, 1999 (unaudited), included $23,983,000 of FNMA securities,
$11,003,000 of FHLMC securities, and $201,000 of privately issued
securities. The mortgage-backed securities available-for-sale at estimated
fair value at December 31,1998, included $33,635,000 of FNMA securities,
$12,445,000 of FHLMC securities, and $445,000 of privately issued
securities. The mortgage-backed securities available-for-sale estimated
fair value at December 31, 1997 included $54,233,000 of FNMA securities,
$11,318,000 of FHLMC securities, and $919,000 of privately issued
securities.
Gross gains of $228,000, $70,000 and $93,000 were realized on security
sales for the six months ended June 30, 1999 (unaudited), and for the years
ended December 31, 1998 and 1997, respectively.
Gross losses of $4,000 were realized on security sales during 1997.
Securities available-for-sale having an amortized cost of $52,390,000,
$47,793,000 and $39,731,000, and an estimated fair value of $51,538,000,
$47,362,000 and $39,500,000, on June 30, 1999 (unaudited), December 31,
1998 and 1997, respectively, were pledged to secure public fund deposits
and for other purposes required or permitted by law.
(5) Loans and Allowance for Possible Loan Losses
The loan portfolio was comprised of the following:
<TABLE>
<CAPTION>
June 30, 1999 December 31,
(unaudited)
------------------ ---------------------------------
1998 1997
---- ----
<S> <C> <C> <C>
Real estate $ 142,995 $ 144,368 $ 114,712
Commercial and agricultural 45,328 47,889 39,198
Consumer 29,152 27,712 23,455
Credit card and related plans 1,238 1,286 1,277
Other 1,863 1,812 2,938
------------------ --------------- ---------------
220,576 223,067 181,580
Less unearned discount (1,344) (1,165) (965)
------------------ --------------- ---------------
Total loans, net of unearned discount $ 219,232 $ 221,902 $ 180,615
================== =============== ===============
</TABLE>
F-15
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(000's omitted from tabular data)
The activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
Six Months Ended Years Ended
June 30, December 31,
------------------------- --------------------------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 2,159 $ 1,553 $ 1,553 $ 2,437 $ 1,892
Provision charged to expense 1,081 463 931 105 1,088
Losses charged to the allowance (1,228) (367) (483) (1,230) (687)
Recoveries of loans previously charged
to the allowance 71 84 158 241 144
------------ ------------- -------------- -------------- ---------------
Balance at end of year $ 2,083 $ 1,733 $ 2,159 $ 1,553 $ 2,437
============ ============= ============== ============== ===============
</TABLE>
As of June 30, 1999 (unaudited), December 31, 1998 and 1997 respectively,
the Company had impaired loans, including loans on non-accrual status,
totaling $271,000, $380,000 and $452,000. The average recorded investment
in impaired loans for the six months ended June 30, 1999 (unaudited), and
the years ended December 31, 1998 and 1997 respectively was $565,000,
$301,000 and $716,000. The allowance for possible loan losses related to
impaired loans was $11,000, $25,000 and $102,000 as of June 30, 1999
(unaudited), December 31, 1998 and 1997, respectively. Additional interest
income that would have been recorded during the six months ended June 30,
1999 (unaudited), and for the years ended December 31, 1998 and 1997 on
impaired and non-accrual loans, respectively, had such loans performed in
accordance with their original contract terms, was $83,000, $39,000 and
$83,000, respectively.
6) Premises and Equipment
----------------------
The following is a summary of the major components of bank premises and
equipment of the Company:
<TABLE>
<CAPTION>
June 30, December 31,
------- -----------
(unaudited)
Estimated 1999 1998 1997
---------- ---- ---- ----
useful lives
------------
<S> <C> <C> <C> <C>
Land $ 1,411 $ 1,408 $ 1,408
Buildings and improvements 10 - 40 years 6,681 6,612 6,458
Furniture, equipment, and
automobiles 3 - 10 years 4,750 4,554 3,963
------------- ------------- -----------
12,842 12,574 11,829
Less accumulated depreciation (4,531) (4,122) (3,352)
------------- ------------- -----------
$ 8,311 $ 8,452 $ 8,477
============= ============= ===========
</TABLE>
Depreciation expense for the six months ended June 30, 1999 (unaudited),
and the years ended December 31, 1998, 1997 and 1996, was $409,000,
$832,000, $833,000 and $840,000, respectively.
F-16
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(000's omitted from tabular data)
(7) Federal and State Income Taxes
------------------------------
Components of income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
Six month ended June 30, 1999 (unaudited)
U.S. federal $ 941 $ 17 $ 958
------------- -------------- -------------
$ 941 $ 17 $ 958
============= ============== =============
Year ended December 31, 1998
U.S. federal $ 1,664 $ (39) $ 1,625
------------- -------------- -------------
$ 1,664 $ (39) $ 1,625
============= ============== =============
Year ended December 31, 1997
U.S. federal $ 1,001 $ 396 $ 1,397
------------- -------------- -------------
$ 1,001 $ 396 $ 1,397
============= ============== =============
Year ended December 31, 1996
U.S. federal $ 798 $ (582) $ 216
------------- -------------- -------------
$ 798 $ (582) $ 216
============= ============== =============
</TABLE>
Income taxes for financial reporting purposes differ from the amount
computed by applying the statutory federal income tax rate of 34% to income
before income taxes for the six months ended June 30, 1999 and the years
ended December 31, 1998, 1997 and 1996, as follows:
<TABLE>
<CAPTION>
1999 1998 1997 1996
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Tax expense at statutory rate of 34% $ 1,011 $ 1,684 $ 1,447 $ 281
Increase (decrease) in tax expense resulting from:
Tax-exempt income from obligations of state and
political subdivisions (97) (179) (169) (206)
Non-deductible interest expense 13 25 31 39
Goodwill amortization 44 86 88 88
Other (13) 9 - 14
------------- ------------- ------------- -------------
$ 958 $ 1,625 $ 1,397 $ 216
============= ============= ============= ============
</TABLE>
F-17
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(000's omitted from tabular data)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June
30, 1999 (unaudited), and December 31, 1998, 1997 and 1996 are presented
below:
<TABLE>
<CAPTION>
1999 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Deferred tax assets: (unaudited)
Provision for possible loan losses $ 299 $ 306 $ 40 $ 324
Securities, primarily related to purchase accounting
adjustment - - 129 130
Interest on non-accrual loans 50 48 48 48
Accrued Expenses 87 85 96 165
Other Real Estate Owned 37 32 22 101
Amortization of goodwill 106 82 73 54
Organizational costs for branches 16 16 16 16
Net unrealized losses on available-for-sale securities 684 - - 42
----------- ----------- ------------ -----------
Total gross deferred tax assets 1,279 569 424 880
----------- ----------- ------------ -----------
Deferred tax liabilities:
Net unrealized gains on available-for-sale securities - (13) (37) -
Accumulated accretion on tax exempt bonds (22) (17) (24) (22)
Property, plant and equipment, principally due to
differences in depreciation (109) (91) (103) (120)
Deferred loan fee income (197) (177) (53) (135)
----------- ----------- ------------ -----------
Total gross deferred tax liabilities (328) (298) (217) (277)
----------- ----------- ------------ -----------
Net deferred tax asset $ 951 $ 271 $ 207 $ 603
=========== =========== ============ ===========
</TABLE>
Management believes that realization of the deferred tax assets is
more likely than not based on the expectation that such benefits will
be utilized in future consolidated tax returns of the Company.
The net deferred tax asset of $951,000 at June 30, 1999 (unaudited)
and $271,000 and $207,000 at December 31, 1998 and 1997, respectively,
is included in other assets. Included in other liabilities is federal
income taxes payable of $176,000 at June 30, 1999 (unaudited) and
$85,000 and $68,000 at December 31, 1998 and 1997, respectively.
(8) Lines of Credit
---------------
At June 30, 1999 (unaudited) and December 31, 1998, FNB and BOST had
two unused Federal fund lines of credit for $2,500,000 each at one
non-affiliated bank, expiring on December 31, 1999 and December 31,
1998, respectively. FNB and BOST renewed the lines of credit that
expired on December 31, 1998. The lines bear interest at the non-
affiliate bank's Federal fund rate when drawn and are due on demand,
but if no demand is made, then daily. The lines are unsecured. FNB and
BOST have unused Federal fund lines of $5,000,000 and $2,500,000,
respectively at another non-affiliated bank that expire on December
31, 1999 and June 24, 1999, respectively. FNB and BOST renewed the
lines of credit that expired on June 24, 1999. These lines bear
interest at the non-affiliate bank's Federal fund rate when drawn and
are due on demand, but if no demand is made, then daily. These lines
are fully secured by securities available-for-sale (see note 4).
Additionally, as members of the Federal Home Loan Bank (FHLB), the
Banks were eligible to borrow a total of $22,997,000 at June 30, 1999
(unaudited) and $22,929,000 at December 31, 1998, if secured with 1-4
family residential loans. $3,373,000
F-18
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(000's omitted from tabular data)
and $2,935,000, respectively were outstanding under the lines of
credit at the FHLB at June 30, 1999 (unaudited), and December 31,
1998.
(9) 401(K) / Profit Sharing Plan / Stock Options
--------------------------------------------
The Company has a 401(K) / profit sharing plan administered by the
Parent Company, which covers all eligible employees working at least
500 hours per year, and allows the Company to match the employees'
contributions, and to contribute a discretionary percentage of earnings
which by law may not exceed 15% of the total qualifying employee
compensation. Vesting of Company contributions occurs over a 6-year
period with distribution of Plan assets at retirement or termination of
employment. The Company's contributions to the Plan charged to
operating expenses were $108,000 for the six months ended June 30, 1999
(unaudited), $137,000, $124,000, and $0 for December 31, 1998, 1997 and
1996, respectively.
During 1996, the Company adopted a Stock Option Plan with 100,000
shares of common stock, no par value available for issuance under the
plan. In 1997, the Company adjusted the number of shares available for
issuance to 200,000 due to a two-for-one stock split.
Options Outstanding
-------------------
The following tables summarize information about stock options
outstanding at June 30, 1999 (unaudited) and December 31, 1998:
<TABLE>
<CAPTION>
June 30, 1999
(unaudited)
---------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Price At 6/30/99 Life Price At 6/30/99 Price
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 12.24 2,000 2.33 years $ 12.24 2,000 $ 12.24
$ 11.13 6,000 7.33 years $ 11.13 6,000 $ 11.13
$ 15.27 500 3.37 years $ 15.27 500 $ 15.27
$ 13.88 1,500 8.37 years $ 13.88 1,500 $ 13.88
$ 18.98 10,000 3.93 years $ 18.98 2,000 $ 18.98
$ 17.25 39,500 8.93 years $ 17.25 3,300 $ 17.25
-------------- --------------
$11.13-18.98 59,500 15,300
</TABLE>
F-19
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(000's omitted from tabular data)
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Price At 12/31/98 Life Price At 12/31/98 Price
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 12.24 2,000 2.33 years $ 12.24 2,000 $ 12.24
$ 11.13 6,000 7.33 years $ 11.13 6,000 $ 11.13
$ 15.27 500 3.37 years $ 15.27 500 $ 15.27
$ 13.88 1,500 8.37 years $ 13.88 1,500 $ 13.88
$ 18.98 10,000 3.93 years $ 18.98 2,000 $ 18.98
$ 17.25 40,250 8.93 years $ 17.25 3,300 $ 17.25
----------- -----------
$11.13-18.98 60,250 15,300
</TABLE>
Summary of Stock Option Plan Activity:
--------------------------------------
<TABLE>
<CAPTION>
Weighted
Number Average
of Shares Exercise
Price
------------------------------
<S> <C> <C>
Options Outstanding at December 31, 1996.............. - $ -
Granted............................................... 60,250 $ 16.66
Exercised............................................. - $ -
Cancelled............................................. - $ -
----------- ----------
Options Outstanding at December 31, 1997.............. 60,250 $ 16.66
Granted............................................... - $
Exercised............................................. - $
Cancelled............................................. - $
----------- ----------
Options Outstanding at December 31, 1998.............. 60,250 $ 16.66
----------- ----------
Granted............................................... - -
Exercised............................................. - -
Cancelled (unaudited)................................. 750 $ 17.25
----------- ----------
Options Outstanding at June 30, 1999 (unaudited)...... 59,500 $ 16.65
============ ==========
Exercisable at June 30, 1999 (unaudited).............. 15,300 $ 14.02
============ ==========
</TABLE>
No stock options were granted or exercised in 1998 or during the six
months ending June 30, 1999; however, 750 stock options were forfeited
during the period ended June 30, 1999 (unaudited). As of June 30, 1999
(unaudited), and December 31, 1998, the weighted average for value of
all options outstanding was $22.27 and $9.25 per option, respectively,
based upon the Modified Black-Scholes American Option pricing model.
Input variables used in the model included a risk free interest rate at
June 30, 1999 (unaudited) of 5.1% to 5.9%, and 4.6% and 4.8% for 1998.
An expected volatility factor of 38.5% and 32.5% were used for June 30,
1999
F-20
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(000's omitted from tabular data)
(unaudited) and December 31, 1998, respectively. An estimated option
life of 1.8 to 8.4 years was used for June 30, 1999 (unaudited) and 2
to 9 years was used for December 31, 1998. The pro forma impact on
income assumes no options will be forfeited. The pro forma effects may
not be representative of the effects on reported net income for future
years as most of the Company's employee stock options have an option
life of 10 years.
The following schedule shows total net income as reported and the pro
forma results:
<TABLE>
<CAPTION>
Six Months Ended Year Ended December 31,
---------------- -----------------------
June 30, 1999
-------------
(unaudited) 1998 1997 1996
----------- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income As reported $ 2,018 $ 3,327 $ 2,860 $ 611
Pro Forma $ 1,803 $ 3,112 $ 2,769 $ 611
Basic EPS As reported $ 1.03 $ 1.69 $ 1.45 $ 0.31
Pro Forma $ 0.92 $ 1.58 $ 1.41 $ 0.31
Diluted EPS As reported $ 1.02 $ 1.68 $ 1.45 $ 0.31
Pro Forma $ 0.91 $ 1.57 $ 1.41 $ 0.31
</TABLE>
(10) Time Deposits
-------------
Certificates of deposit in amounts of $100,000 or more included in time
deposits and their remaining maturities are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 ------------
(unaudited) 1998 1997
----------- ---- ----
<S> <C> <C> <C>
Three months or less $ 22,198 $ 15,651 $ 14,216
Three through twelve months 27,336 28,270 26,044
One year through five years 2,927 5,379 3,306
----------- ---------- ----------
$ 52,461 $ 49,300 $ 43,566
=========== ========== ==========
</TABLE>
Interest expense on such deposits for the six months ended June 30,
1999 (unaudited), and for the years ended December 31, 1998, 1997 and
1996, was $1,316,000, $2,577,000, $2,316,000, and $2,104,000,
respectively.
Included in total deposits is $1,878,000, $631,000 and $850,000 of
Mexican national deposits at June 30, 1999 (unaudited), December
31,1998 and 1997, respectively, the maturity of which is one year or
less. Also included in total deposits is $155,000, $42,000 and $127,000
of Mexican national deposits at June 30, 1999 (unaudited), December 31,
1998 and 1997, respectively, with a maturity in excess of one year.
(11) Financial Instruments with Off-Balance Sheet Risk and Other
-----------------------------------------------------------
Contingent Liabilities
----------------------
In the normal course of business, various commitments and contingent
liabilities are outstanding such as guarantees, standby letters of
credit, commitments to extend credit and various financial instruments
with off-balance sheet risk, that are not reflected in the accompanying
consolidated financial statements. Financial instruments with
off-balance sheet risk involve elements of credit risk, interest rate
risk, liquidity risk and market risk.
F-21
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(000's omitted from tabular data)
The Company's exposure to credit loss in the event of nonperformance by
the other party on such financial instruments is represented by the
contractual amount of the instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does
for on-balance sheet instruments. The Company controls the credit risk
of these transactions through credit approvals, limits, and monitoring
procedures.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require the payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counter-party. Collateral held
varies, but may include residential and commercial real estate,
certificates of deposit, accounts receivable, and inventory. At June
30, 1999 (unaudited), December 31, 1998 and 1997, the Company had
$57,916,000, $56,935,000 and $46,904,000 of outstanding loan
commitments, respectively.
Letters of credit are written conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loan facilities to customers. At
June 30, 1999 (unaudited), December 31, 1998 and 1997, the Company had
$1,599,000, $1,419,000 and $1,296,000, under standby letters of credit,
respectively. Management anticipates no material losses as a result of
these transactions.
(12) Fair Value of Financial Instruments
-----------------------------------
Statement of Financial Accounting Standards No. 107 (Statement 107),
"Disclosure about Fair Value of Financial Instruments," requires that
the Company disclose estimated fair values for its financial
instruments. Fair value estimates, methods, and assumptions are set
forth below for the Company's financial instruments.
Cash and Short-Term Investments
-------------------------------
For those short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Securities Held-to-Maturity and Securities Available-for-Sale
-------------------------------------------------------------
For securities available-for-sale (which includes U.S. Treasury, other
U.S. Government agencies, corporations, mortgage-backed securities and
other securities), and securities held-to-maturity (which includes
obligations of state and political subdivisions and collateralized
mortgage obligations (CMO's)), fair values are based on quoted market
prices or dealer quotes. For other securities, fair value equals quoted
market price, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar
securities.
Loans
-----
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
commercial, real estate, and consumer loans as outlined by the
regulatory reporting guidelines. Each loan category is further
segmented into fixed and adjustable rate interest terms and by
performing and nonperforming categories.
F-22
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(000's omitted from tabular data)
The fair value of loans is calculated by discounting scheduled cash
flows through the estimated maturity using estimated market discount
rates that reflect the credit and interest rate risk inherent in the
loan. The estimate of maturity is based on the Company's historical
experience and average days to maturity. The discount rates reflect the
term structure of interest based on the Treasury yield curve, a risk
premium for reported credit quality characteristics, expense allocation
and allowances for prepayment risk.
Deposits Liabilities
--------------------
Under Statement 107, the fair value of deposits with no stated
maturity, such as non-interest bearing demand deposits, savings, and
NOW accounts, and money market and checking accounts, is equal to the
amount payable on demand. The fair value of certificates of deposit is
based on the discounted value of contractual cash flows. The discount
rate is based on the Treasury yield curve adjusted for a risk premium,
expense allocation and allowances for prepayment, as calculated on the
day of the expected future cash flow.
Commitments to Extend Credit, Standby Letters of Credit, and Financial
----------------------------------------------------------------------
Guarantees Written
------------------
Commitments to extend credit, standby letters of credit, and financial
guarantees written are principally at current interest rates and
therefore have no material associated fair value.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
JUNE 30, December 31, December 31,
-------- ------------ ------------
1999 1999 1998 1998 1997 1997
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
------ ----- ------ ----- ------ -----
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and short-term
investments $ 27,814 $ 27,814 $ 36,156 $ 36,156 $ 29,273 $ 29,273
Securities held-to-maturity
and securities
available-for-sale 129,482 129,524 116,567 116,727 115,658 115,746
Loans 219,232 221,902 180,615
Less: Allowance for
possible loan losses 2,083 2,159 1,553
------------ ------------ ------------ ------------ ------------- ------------
Net Loans 217,149 219,278 219,743 223,679 179,062 180,198
------------ ------------ ------------ ------------ ------------- ------------
Total financial assets 374,445 376,616 372,466 376,562 323,993 325,217
============ ============ ============ ============ ============= ============
FINANCIAL LIABILITIES:
Deposits 354,474 354,706 353,672 354,383 310,936 312,028
Notes payable 3,373 3,269 2,935 3,074 - -
============ ============ ============ ============ ============= ============
Total financial liabilities $ 357,847 $ 357,975 $ 356,607 $ 357,457 $310,936 $ 312,028
============ ============ ============ ============ ============= ============
Commitments to extend
credit $ 57,916 - $ 56,935 - $ 46,904 -
Standby letters of credit $ 1,599 - $ 1,419 - $ 1,296 -
</TABLE>
Limitations
-----------
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or
F-23
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(000's omitted from tabular data)
discount that could result from offering for sale at one time the
Company's entire holdings of a particular financial instrument. Because
no market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Other significant assets
and liabilities that are not considered financial assets or liabilities
include the deferred tax assets and liabilities, premises and
equipment, and intangible and other assets. In addition, the tax
ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have
not been considered in the estimates.
(13) Dividend Restrictions / Capital Ratios
--------------------------------------
Dividend Restrictions
---------------------
Bank regulatory agencies limit the amount of dividends which banks can
pay without obtaining prior approval from such agencies. At June 30,
1999 (unaudited), the aggregate amount legally available to be
distributed to the Company from BOST and FNB as dividends was
approximately $5,948,000. At December 31, 1998 and 1997, the aggregate
amount legally available to be distributed to the Company from BOST and
FNB as dividends was approximately $3,874,000 and $4,807,000.
Capital Ratios
--------------
The Company and FNB and BOST are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and
possibly additional discretionary - action by regulators that, if
undertaken, could have a direct material effect on the Company's
consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company
and FNB and BOST must meet specific capital guidelines that involve
quantitative measures of the Company's, FNB's and BOST's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's and FNB and BOST's
capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and FNB and BOST to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier I capital (as defined) to average assets (as
defined). Management believes, as of June 30, 1999 and December 31,
1998, that the Company and FNB and BOST meet all capital adequacy
requirements to which they are subject.
As of June 30, 1999 and December 31, 1998, the most recent notification
from the Office of the Comptroller of the Currency and the Federal
Deposit Insurance Corporation categorized FNB and BOST, respectively,
as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, FNB and BOST
must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or
events since that notification, that management believes have changed
FNB's or BOST's category.
F-24
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(000's omitted from tabular data)
The Company's, FNB's and BOST's actual capital amounts and ratios are presented
in the tables below:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----------- ----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1999:
Total Capital (to Risk Weighted Assets):
Consolidated 31,817 12.89% 19,734 38.0% 24,667 310.0%
First National Bank of South Texas 20,229 11.01% 14,699 38.0% 18,374 310.0%
Bank of South Texas 11,014 17.22% 5,117 38.0% 6,396 310.0%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 29,734 12.05% 9,867 34.0% 14,800 36.0%
First National Bank of South Texas 18,568 10.11% 7,350 34.0% 11,024 36.0%
Bank of South Texas 10,592 16.56% 2,559 34.0% 3,838 36.0%
Tier 1 Capital (to Average Assets):
Consolidated 29,734 7.67% 15,506 34.0% 19,383 35.0%
First National Bank of South Texas 18,568 6.91% 10,752 34.0% 13,440 35.0%
Bank of South Texas 10,592 8.86% 4,783 34.0% 5,978 35.0%
</TABLE>
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk Weighted Assets):
Consolidated $ 29,614 11.97% $ 19,789 38.0% $ 24,736 310.0%
First National Bank of South Texas $ 18,762 10.05% $ 14,930 38.0% $ 18,663 310.0%
Bank of South Texas $ 10,156 15.75% $ 5,156 38.0% $ 6,445 310.0%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated $ 27,567 11.14% $ 9,894 34.0% $ 14,842 36.0%
First National Bank of South Texas $ 17,031 9.12% $ 7,465 34.0% $ 11,198 36.0%
Bank of South Texas $ 9,728 15.09% $ 2,578 34.0% $ 3,867 36.0%
Tier 1 Capital (to Average Assets):
Consolidated $ 27,567 7.44% $ 14,813 34.0% $ 18,517 35.0%
First National Bank of South Texas $ 17,031 6.72% $ 10,133 34.0% $ 12,666 35.0%
Bank of South Texas $ 9,728 8.26% $ 4,710 34.0% $ 5,887 35.0%
</TABLE>
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk Weighted Assets):
Consolidated $ 25,213 11.90% $ 16,893 38.0% $ 21,116 310.0%
First National Bank of South Texas $ 15,932 10.30% $ 12,391 38.0% $ 15,487 310.0%
Bank of South Texas $ 8,577 15.30% $ 4,488 38.0% $ 5,610 310.0%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated $ 23,660 11.20% $ 8,447 34.0% $ 12,670 36.0%
First National Bank of South Texas $ 14,685 9.50% $ 6,196 34.0% $ 9,293 36.0%
Bank of South Texas $ 8,270 14.70% $ 2,244 34.0% $ 3,366 36.0%
Tier 1 Capital (to Average Assets):
Consolidated $ 23,660 7.11% $ 13,319 34.0% $ 16,649 35.0%
First National Bank of South Texas $ 14,685 6.70% $ 8,763 34.0% $ 10,954 35.0%
Bank of South Texas $ 8,270 7.20% $ 4,587 34.0% $ 5,734 35.0%
</TABLE>
F-25
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(000's omitted from tabular data)
(14) Litigation
----------
The Company is involved in legal proceedings that are in various stages
of litigation by the Company and its legal counsel. These actions
allege claims on a variety of theories and claim substantial actual and
punitive damages. Management of the Company has determined, based on
discussions with its counsel, that the risk of any material loss in
such actions, individually or in the aggregate, is remote or the
damages sought, even if fully recovered, would not be considered
material. However, many of these matters are in various stages of
proceedings and further developments could cause Management to revise
its assessment of these matters.
(15) Earnings Per Common Share
-------------------------
Basic earnings per share was computed by dividing net income available
to common shareholders by the weighted average number of shares of
common stock outstanding during the year, retroactively adjusted for
stock splits effected as a stock dividend.
Diluted earnings per share was computed by dividing net income by the
weighted average number of shares of common stock and common stock
equivalents outstanding during the year, retroactively adjusted for
stock splits effected as a stock dividend. The diluted earnings per
share computations include the effects of common stock equivalents
applicable to stock option contracts.
The table below presents a reconciliation of basic and diluted earnings
per share computations for June 30, 1999 and 1998, and the years ended
December 31, 1998, 1997 and 1996. (Dollars in thousands, except per
share data.)
<TABLE>
<CAPTION>
June 30, December 31
-------- -----------
1999 1998 1998 1997 1996
---- ---- ---- ---- ====
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net income available to common shareholders $ 2,018 $ 1,560 $ 3,327 $ 2,860 $ 611
========== ========== ========== ========== ==========
Weighted average number of common shares
Outstanding used in basic EPS calculation 1,966,536 1,966,536 1,966,536 1,966,536 1,966,536
Add assumed exercise of outstanding stock options
as adjustments for dilutive securities 15,300 15,300 15,300 8,000 -
---------- ---------- ---------- ---------- ----------
Weighted average number of common shares
Outstanding used in diluted EPS calculations 1,981,836 1,981,836 1,981,836 1,974,536 1,966,536
========== ========== ========== ========== ==========
Basic EPS $ 1.03 $ 0.79 $ 1.69 $ 1.45 $ 0.31
========== ========== ========== ========== ==========
Diluted EPS $ 1.02 $ 0.78 $ 1.68 $ 1.45 $ 0.31
========== =========== ========== ========== ==========
</TABLE>
F-26
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(000's omitted from tabular data)
(16) Year 2000 Issues (unaudited)
----------------------------
In 1997, the Company initiated a plan ("Plan") to identify, assess, and
remediate "Year 2000" issues within each of its significant computer
programs and certain equipment which contain micro-processors. The Plan
is addressing the issue of computer programs and embedded computer
chips being able to distinguish between the year 1900 and the year
2000, if a program or chip uses only two digits rather than four to
define the applicable year. The Company has divided the Plan into five
major phases - assessment, planning, conversion, implementation and
testing. After completing the assessment and planning phases in 1997,
the Company is currently in the conversion, implementation and testing
phases. Systems which have been determined not to be Year 2000
compliant are being either replaced or reprogrammed, and thereafter
tested for Year 2000 compliance. In 1997, the Company completed the
assessment and planning phases. In 1998, the Company conducted testing
on critical systems followed by any necessary implementation or
conversion processes. Systems which have been determined not to be Year
2000 compliant are being either replaced or reprogrammed, and
thereafter tested for Year 2000 compliance. At mid-1999, the Company
had completed all testing and implementation phases for critical
systems. The Company had also completed written contingency plans and
tested the plans accordingly.
The Company is in the process of identifying and contacting critical
suppliers and customers whose computerized systems interface with the
Company's systems, regarding their plans and progress in addressing
their Year 2000 issues. The Company has received varying information
from such third parties on the state of compliance or expected
compliance. Contingency plans are being developed in the event that any
critical supplier or customer is not compliant.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the
Company's operations, liquidity and financial condition. Due to the
general uncertainty inherent in the Year 2000 problem, resulting in
part from the uncertainty of the Year 2000 readiness of third-party
suppliers and customers, the Company is unable to determine at this
time whether the consequences of Year 2000 failures will have a
material impact on the Company's operations, liquidity or financial
condition.
F-27
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(000's omitted from tabular data)
(17) Quarterly Financial Data (unaudited)
------------------------------------
Summarized quarterly financial data follows (dollars in thousands):
<TABLE>
<CAPTION>
Quarters Ended
-------------------------------
June 30, March 31,
1999 1999
---- ----
<S> <C> <C>
Interest income $ 6,818 $ 6,657
Interest expense 2,739 2,784
Provision for loan losses 139 942
------------ ------------
Net interest income after provision
for loan losses 3,940 2,931
Noninterest income 1,307 2,033
Noninterest expense 3,533 3,702
------------ ------------
Income before income taxes 1,714 1,262
Income tax provision 548 410
------------ ------------
Net income $ 1,166 $ 852
============ ============
</TABLE>
<TABLE>
<CAPTION>
Quarters Ended
-----------------------------------------------------------------
December 31, September 30, June 30, March 31,
1998 1998 1998 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income $ 6,676 $ 6,882 $ 6,402 $ 6,216
Interest expense 2,904 2,871 2,799 2,738
Provision for loan losses 201 267 221 242
------------ ------------- ------------- -------------
Net interest income after provision
for loan losses 3,571 3,744 3,382 3,236
Noninterest income 1,254 1,280 1,171 1,174
Noninterest expense 3,664 3,591 3,369 3,236
------------ ------------- ------------- -------------
Income before income taxes 1,161 1,433 1,184 1,174
Income tax provision 385 442 398 400
------------ ------------- ------------- -------------
Net income $ 776 $ 991 $ 786 $ 774
============ ============= ============= =============
</TABLE>
F-28
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(000's omitted from tabular data)
<TABLE>
<CAPTION>
Quarters Ended
--------------------------------------------------------------------------------
December 31, September 30, June 30, March 31,
1997 1997 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income $ 6,259 $ 6,049 $ 5,793 $ 5,637
Interest expense 2,750 2,667 2,512 2,454
Provision for loan losses 2 0 32 71
------------------ ------------------ ------------------ --------------
Net interest income after provision for loan
losses 3,507 3,382 3,249 3,112
Noninterest income 878 729 711 784
Noninterest expense 3,231 2,958 2,964 2,942
------------------ ------------------ ------------------ --------------
Income before income taxes 1,154 1,153 996 954
Income tax provision 388 376 323 310
------------------ ------------------ ------------------ --------------
Net income $ 766 $ 777 $ 673 $ 644
================== ================== ================== ==============
</TABLE>
F-29
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(000's omitted from tabular data)
(18) Parent Company Condensed Financial Statements
---------------------------------------------
Texas Bancshares, Inc.
Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
------------
Assets 1999 1998 1997
------ ---- ---- ----
(unaudited)
<S> <C> <C> <C>
Cash $ 501 20 51
Loans, less unearned discount 8 10 15
Investment in subsidiaries 22,060 19,381 14,532
Premises and equipment, net 0 632 632
Goodwill, net 698 728 787
Other assets 9,293 11,124 12,607
-------------- ------------- --------------
$ 32,560 31,895 28,624
============== ============= ==============
Liabilities and Stockholders' Equity
------------------------------------
Other liabilities $ 1 2 11
-------------- ------------- --------------
Total liabilities $ 1 2 11
============== ============= ==============
Stockholders' equity:
Common stock 334 334 334
Preferred stock - - -
Surplus 2,375 2,375 2,375
Treasury stock (112) (112) (112)
Undivided profits 31,289 29,271 25,944
Net unrealized gains (losses) on securities available for sale,
net of deferred income taxes (1,327) 25 72
-------------- ------------- --------------
Total stockholders' equity 32,559 31,893 28,613
-------------- ------------- --------------
$ 32,560 31,895 28,624
============== ============= ==============
</TABLE>
F-30
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(000's omitted from tabular data)
(18) Parent Company Condensed Financial Statements
---------------------------------------------
Texas Bancshares, Inc.
Statements of Income
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(unaudited) Year Ended December 31,
--------------------------- ----------------------------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income:
Interest and fees on loans $ - $ - $ 1 $ 1 $ -
Interest received from subsidiaries 287 331 648 733 813
Dividends received from subsidiaries - 25 75 2,690 787
Other operating income - - 1 - 1
----------- ------------ ------------- ------------ -------------
287 356 725 3,424 1,601
----------- ------------ ------------- ------------ -------------
Expenses:
Interest expense - - - 93 191
Amortization of goodwill 30 32 60 60 60
Other 183 60 135 136 133
----------- ------------ ------------- ------------ -------------
213 92 195 289 384
----------- ------------ ------------- ------------ -------------
Income before Federal income tax expense
(benefit) 74 264 530 3,135 1,217
Federal income tax expense (benefit) (62) (24) 49 78 115
----------- ------------ ------------- ------------ -------------
Income before undistributed earnings of
subsidiaries 136 288 579 3,213 1,332
Undistributing earnings of subsidiaries 1,882 1,272 2,748 (353) (721)
----------- ------------ ------------- ------------ -------------
Net income $ 2,018 $ 1,560 $ 3,327 $ 2,860 $ 611
=========== ============ ============= ============ =============
</TABLE>
F-31
<PAGE>
TEXAS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(000's omitted from tabular data)
(18) Parent Company Condensed Financial Statements
---------------------------------------------
Texas Bancshares, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(unaudited)
-----------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,018 $ 1,560
Adjustments to reconcile net income to net cash provided
by operations:
Undistributed earnings of subsidiaries (1,882) (1,272)
Amortization of goodwill 30 30
Decrease (increase) in other assets 950 375
Increase (decrease) in other liabilities (1) (6)
------------ ------------
Net cash provided by operating activities 1,115 687
------------ ------------
Cash flows from investing activities:
Payments for investments in advances to subsidiaries (2,149) (2,149)
Sale or repayment of investments in and advances to
subsidiaries 1,515 1,429
------------ ------------
Net cash used by investing activities (634) (720)
------------ ------------
Cash flows from financing activities:
Proceeds from (repayment of) note payable - -
------------ ------------
Net cash used by financing activities - -
------------ ------------
Net increase (decrease) in cash 481 (33)
Cash at beginning of year 20 51
------------ ------------
Cash at end of year $ 501 $ 18
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ - $ -
Income taxes paid $ 850 $ 925
Income taxes refunded $ 0 $ 12
<CAPTION>
Years Ended December 31,
---------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,327 $ 2,860 $ 611
Adjustments to reconcile net income to net cash provided
by operations:
Undistributed earnings of subsidiaries (2,748) 352 721
Amortization of goodwill 60 60 60
Decrease (increase) in other assets 58 (553) 24
Increase (decrease) in other liabilities (8) (18) (8)
------------ ------------- ------------
Net cash provided by operating activities 689 2,701 1,408
------------ ------------- ------------
Cash flows from investing activities:
Payments for investments in advances to subsidiaries (2,149) (2,149) (1,200)
Sale or repayment of investments in and advances to
subsidiaries 1,429 1,348 323
------------ ------------- ------------
Net cash used by investing activities (720) (801) (877)
------------ ------------- ------------
Cash flows from financing activities:
Proceeds from (repayment of) note payable - (1,902) (634)
------------ ------------- ------------
Net cash used by financing activities - (1,902) (634)
------------ ------------- ------------
Net increase (decrease) in cash (31) (2) (103)
Cash at beginning of year 51 53 156
------------ ------------- ------------
Cash at end of year $ 20 $ 51 $ 53
============ ============= ============
Supplemental disclosure of cash flow information:
Interest paid $ - $ 93 $ 191
Income taxes paid $ 1,825 $ 845 $ 645
Income taxes refunded $ 12 $ 340 $ 29
</TABLE>
F-32
<PAGE>
APPENDIX A
_____________________
AGREEMENT AND PLAN OF REOGANIZATION
by and among
TEXAS BANCSHARES, INC.
and
WELLS FARGO & COMPANY
_____________________
Dated as of May 28, 1999
and
Amended and Restated as of August 26, 1999
Effective as of May 28, 1999
_____________________
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") originally entered
into as of the 28th day of May, 1999, amended and restated as of August 26,
1999, effective as of May 28, 1999, by and between TEXAS BANCSHARES, INC.
("TBI"), a Texas corporation, and WELLS FARGO & COMPANY ("Wells Fargo"), a
Delaware corporation.
WHEREAS, the parties hereto desire to effect a reorganization whereby a
wholly-owned subsidiary of Wells Fargo will merge with and into TBI (the
"Merger") pursuant to an agreement and plan of merger (the "Merger Agreement")
in substantially the form attached hereto as Exhibit A, which provides, among
other things, for the exchange of the shares of Common Stock of TBI, no par
value per share ("TBI Common Stock"), outstanding immediately prior to the time
the Merger becomes effective in accordance with the provisions of the Merger
Agreement, for shares of voting Common Stock of Wells Fargo of the par value of
$1-2/3 per share ("Wells Fargo Common Stock").
NOW, THEREFORE, to effect such reorganization and in consideration of the
premises and the mutual covenants and agreements contained herein, the parties
hereto do hereby represent, warrant, covenant and agree as follows:
1. Basic Plan of Reorganization
(a) Merger. Subject to the terms and conditions contained herein, a
------
wholly-owned subsidiary of Wells Fargo (the "Merger Co.") will be merged by
statutory merger with and into TBI pursuant to the Merger Agreement, with TBI as
the surviving corporation, in which merger each share of TBI Common Stock
outstanding immediately prior to the Effective Time of the Merger (as defined
below), other than shares as to which statutory dissenters' appraisal rights
have been exercised, will be exchanged for the number of shares of Wells Fargo
Common Stock determined by dividing the Adjusted Wells Fargo Shares (as defined
below) by the number of shares of TBI Common Stock then outstanding.
The "Adjusted Wells Fargo Shares" shall be a number equal to the Aggregate
Share Amount divided by the Wells Fargo Measurement Price. The "Wells Fargo
Measurement Price" is defined as the average of the closing prices of a share of
Wells Fargo Common Stock as reported on the consolidated tape of the New York
Stock Exchange during the period of 10 trading days ending on the day
immediately preceding the meeting of shareholders required by paragraph 4(c) of
this Agreement. The "Aggregate Share Amount" shall be $68,500,000 plus the
aggregate exercise price of all Options exercised by cash payments between the
date hereof and the day immediately prior to the Closing Date minus the Cash
Surrender Amount. The "Cash Surrender Amount" shall equal the difference
between (i) the product of (A) the "Fair Market Value Per Share" multiplied by
(B) the number of Redeemed Options , minus (ii) the aggregate
<PAGE>
exercise price of all Redeemed Options. "Fair Market Value Per Share" shall mean
$34.2988. "Option" has the meaning given it in paragraph 2(c).
(b) Wells Fargo Common Stock Adjustments. If, between the date hereof and
------------------------------------
the Effective Time of the Merger, shares of Wells Fargo Common Stock shall be
changed into a different number of shares or a different class of shares by
reason of any reclassification, recapitalization, split-up, combination,
exchange of shares or readjustment, or if a stock dividend thereon shall be
declared with a record date within such period (a "Common Stock Adjustment"),
then the number of shares of Wells Fargo Common Stock into which a share of TBI
Common Stock shall be converted pursuant to subparagraph (a), above, will be
appropriately and proportionately adjusted so that the number of such shares of
Wells Fargo Common Stock into which a share of TBI Common Stock shall be
converted will equal the number of shares of Wells Fargo Common Stock which
holders of shares of TBI Common Stock would have received pursuant to such
Common Stock Adjustment had the record date therefor been immediately following
the Effective Time of the Merger.
(c) Fractional Shares. No fractional shares of Wells Fargo Common Stock
-----------------
and no certificates or scrip certificates therefor shall be issued to represent
any such fractional interest, and any holder thereof shall be paid an amount of
cash equal to the product obtained by multiplying the fractional share interest
to which such holder is entitled by the average of the closing prices of a share
of Wells Fargo Common Stock as reported by the consolidated tape of the New York
Stock Exchange for each of the ten (10) trading days ending on the day
immediately preceding the meeting of shareholders required by paragraph 4(c) of
this Agreement.
(d) Mechanics of Closing Merger. Subject to the terms and conditions set
---------------------------
forth herein, the Merger Agreement shall be executed and it or Articles of
Merger or a Certificate of Merger shall be filed with the Secretary of State of
the State of Texas within ten (10) business days following the satisfaction or
waiver of all conditions precedent set forth in Sections 6 and 7 of this
Agreement or on such other date as may be agreed to by the parties (the "Closing
Date"). Each of the parties agrees to use its best efforts to cause the Merger
to be completed as soon as practicable after the receipt of final regulatory
approval of the Merger and the expiration of all required waiting periods. The
time that the filing referred to in the first sentence of this paragraph is made
is herein referred to as the "Time of Filing." The day on which such filing is
made and accepted is herein referred to as the "Effective Date of the Merger."
The "Effective Time of the Merger" shall be 11:59 p.m., Austin, Texas time, on
the Effective Date of the Merger. At the Effective Time of the Merger on the
Effective Date of the Merger, the separate existence Merger Co. shall cease and
Merger Co. will be merged with and into TBI pursuant to the Merger Agreement.
The closing of the transactions contemplated by this Agreement and the
Merger Agreement (the "Closing") shall take place on the Closing Date at the
offices of Wells Fargo, Norwest Center, Sixth and Marquette, Minneapolis,
Minnesota.
A-2
<PAGE>
2. Representations and Warranties of TBI. TBI represents and warrants to
Wells Fargo as follows, subject to the exceptions set forth in the schedules
attached hereto (whenever representations or warranties of TBI are qualified by
the knowledge or best knowledge of TBI, knowledge shall mean actual knowledge of
the executive officers and officers having the title Vice President or better
and directors of TBI and of the "TBI Subsidiaries" (defined below) after due
inquiry and investigation:
(a) Organization and Authority. TBI is a corporation duly organized,
--------------------------
validly existing and in good standing under the laws of the State of Texas, is
duly qualified to do business and is in good standing in all jurisdictions where
its ownership or leasing of property or the conduct of its business requires it
to be so qualified and failure to be so qualified would have a material adverse
effect on TBI and the TBI Subsidiaries (defined below) taken as a whole, and has
corporate power and authority to own its properties and assets and to carry on
its business as it is now being conducted. TBI is registered as a bank holding
company with the Federal Reserve Board under the Bank Holding Company Act of
1956, as amended (the "BHC Act"). TBI has furnished Wells Fargo true and
correct copies of its articles of incorporation and by-laws, as amended.
(b) TBI's Subsidiaries. Schedule 2(b) sets forth a complete and correct
------------------
list of all TBI subsidiaries as of the date hereof (individually a "TBI
Subsidiary" and collectively the "TBI Subsidiaries"), all shares of the
outstanding capital stock of each of which, except as set forth on Schedule
2(b), are owned directly or indirectly by TBI. No equity security of any TBI
Subsidiary is or may be required to be issued by reason of any option, warrant,
scrip, preemptive right, right to subscribe to, call or commitment of any
character whatsoever relating to, or security or right convertible into, shares
of any capital stock of such subsidiary, and there are no contracts,
commitments, understandings or arrangements by which any TBI Subsidiary is bound
to issue additional shares of its capital stock, or any option, warrant or right
to purchase or acquire any additional shares of its capital stock. Subject to
12 U.S.C. (S) 55 (1982) and the Texas Business Corporation Act, all of such
shares so owned by TBI are fully paid and nonassessable and are owned by it free
and clear of any lien, claim, charge, option, encumbrance or agreement with
respect thereto. Each TBI Subsidiary is a corporation, Texas state banking
association, or national banking association duly organized, validly existing,
duly qualified to do business and in good standing under the laws of its
jurisdiction of incorporation, and has corporate power and authority to own or
lease its properties and assets and to carry on its business as it is now being
conducted. Except as set forth on Schedule 2(b), TBI does not own beneficially,
directly or indirectly, more than 5% of any class of equity securities or
similar interests of any corporation, bank, business trust, association or
similar organization, and is not, directly or indirectly, a partner in any
partnership or party to any joint venture.
(c) Capitalization. The authorized capital stock of TBI consists of
--------------
10,000,000 shares of common stock, no par value, and 1,000,000 shares of
preferred stock, no par value, of which as of the close of business on December
31, 1998, 1,966,536 shares of common stock and no shares of preferred stock were
outstanding and 36,864 shares of common stock were held in the treasury. The
maximum number of shares of TBI
A-3
<PAGE>
Common Stock (assuming for this purpose that phantom shares and other share-
equivalents constitute TBI Common Stock) that would be outstanding as of the
Effective Date of the Merger if all options, warrants, conversion rights and
other rights with respect thereto, were exercised is 2,026,036. All of the
outstanding shares of capital stock of TBI have been duly and validly authorized
and issued and are fully paid and nonassessable. Except as set forth in Schedule
2(c), there are no outstanding subscriptions, contracts, conversion privileges,
options, warrants, calls, preemptive rights or other rights obligating TBI or
any TBI Subsidiary to issue, sell or otherwise dispose of, or to purchase,
redeem or otherwise acquire, any shares of capital stock of TBI or any TBI
Subsidiary. As of the date hereof, the total number of options and the exercise
price thereof issued pursuant to the 1996 Texas Bancshares, Inc. Stock Option
Plan, as amended as of October 20, 1997 (the "Option Plan"), of the Options
granted thereunder ("Options") is as set forth on Schedule 2(c). The Option Plan
has not been amended or modified since October 20, 1997. Except as set forth on
Schedule 2(c), since December 31, 1998 no shares of TBI capital stock have been
purchased, redeemed or otherwise acquired, directly or indirectly, by TBI or any
TBI Subsidiary and no dividends or other distributions have been declared, set
aside, made or paid to the shareholders of TBI.
(d) Authorization. TBI has the corporate power and authority to enter
-------------
into this Agreement and the Merger Agreement and, subject to any required
approvals of its shareholders, to carry out its obligations hereunder and
thereunder. The execution, delivery, and performance of this Agreement and the
Merger Agreement by TBI and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by the Board of Directors of TBI.
Subject to such approvals of shareholders and of government agencies and other
governing boards having regulatory authority over TBI as may be required by
statute or regulation, this Agreement and the Merger Agreement are valid and
binding obligations of TBI enforceable against TBI in accordance with their
respective terms.
Except as set forth on Schedule 2(d), neither the execution, delivery and
performance by TBI of this Agreement or the Merger Agreement, nor the
consummation of the transactions contemplated hereby and thereby, nor compliance
by TBI with any of the provisions hereof or thereof, will (i) violate, conflict
with, or result in a breach of any provision of, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a default)
under, or result in the termination of, or accelerate the performance required
by, or result in a right of termination or acceleration of, or result in the
creation of, any lien, security interest, charge or encumbrance upon any of the
properties or assets of TBI or any TBI Subsidiary under any of the terms,
conditions or provisions of (x) its articles of incorporation or by-laws or (y)
any material note, bond, mortgage, indenture, deed of trust, license, lease,
agreement or other instrument or obligation to which TBI or any TBI Subsidiary
is a party or by which it may be bound, or to which TBI or any TBI Subsidiary or
any of the properties or assets of TBI or any TBI Subsidiary may be subject, or
(ii) subject to compliance with the statutes and regulations referred to in the
next paragraph, to the best knowledge of TBI, violate any judgment, ruling,
order, writ, injunction, decree, statute, rule or regulation applicable to TBI
or any TBI Subsidiary or any of their respective properties or assets.
A-4
<PAGE>
Other than in connection or in compliance with the provisions of the
Securities Act of 1933 and the rules and regulations thereunder (the "Securities
Act"), the Securities Exchange Act of 1934 and the rules and regulations
thereunder (the "Exchange Act"), the securities or blue sky laws of the various
states or filings, consents, reviews, authorizations, approvals or exemptions
required under the BHC Act or the Hart-Scott-Rodino Antitrust Improvements Act
of 1976 ("HSR Act"), and filings required to effect the Merger under Texas law,
no notice to, filing with, exemption or review by, or authorization, consent or
approval of, any public body or authority is necessary for the consummation by
TBI of the transactions contemplated by this Agreement and the Merger Agreement.
(e) TBI Financial Statements. The consolidated balance sheets of TBI and
------------------------
the TBI Subsidiaries as of December 31, 1998 and 1997 and related consolidated
statements of income, shareholders' equity and comprehensive income, and cash
flows for the three years ended December 31, 1998, together with the notes
thereto, certified by KMPG LLP, and the unaudited consolidated statements of
financial condition of TBI and the TBI Subsidiaries as of March 31, 1999 and the
related unaudited consolidated statements of income, shareholders' equity and
cash flows for the nine months then ended (collectively, the "TBI Financial
Statements"), have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis and present fairly (subject,
in the case of financial statements for interim periods, to normal recurring
adjustments) the consolidated financial position of TBI and the TBI Subsidiaries
at the dates and the consolidated results of operations and cash flows of TBI
and the TBI Subsidiaries for the periods stated therein.
(f) Reports. Since December 31, 1994, TBI and each TBI Subsidiary has
-------
filed all reports, registrations and statements, together with any required
amendments thereto, that it was required to file with (i) the Securities and
Exchange Commission ("SEC"), including, but not limited to, Forms 10-K, Forms
10-Q and proxy statements, (ii) the Federal Reserve Board, (iii) the Federal
Deposit Insurance Corporation (the "FDIC"), (iv) the United States Comptroller
of the Currency (the "Comptroller") and (v) any applicable state securities or
banking authorities. All such reports and statements filed with any such
regulatory body or authority are collectively referred to herein as the "TBI
Reports." As of their respective dates, the TBI Reports complied in all
material respects with all the rules and regulations promulgated by the SEC, the
Federal Reserve Board, the FDIC, the Comptroller and applicable state securities
or banking authorities, as the case may be, and did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. Copies of all the
TBI Reports have been made available to Wells Fargo by TBI.
(g) Properties and Leases. Except (i) as may be reflected in the TBI
---------------------
Financial Statements, (ii) for any lien for current taxes not yet delinquent,
and (iii) for rights of lessees or sublessees as set forth in a written lease or
sublease, TBI and each TBI Subsidiary have good title free and clear of any
material liens, claims, charges, options,
A-5
<PAGE>
encumbrances or similar restrictions to all the real and personal property
reflected in TBI's consolidated balance sheet as of December 31, 1998 for the
period then ended, and all real and personal property acquired since such date,
except such real and personal property as has been disposed of in the ordinary
course of business. All leases of real property and all other leases material to
TBI or any TBI Subsidiary pursuant to which TBI or such TBI Subsidiary, as
lessee, leases real or personal property, which leases are described on Schedule
2(g), are valid and effective in accordance with their respective terms, and
there is not, under any such lease, any material existing default by TBI or such
TBI Subsidiary or any event which, with notice or lapse of time or both, would
constitute such a material default. Substantially all TBI's and each TBI
Subsidiary's buildings and equipment in regular use have been well maintained
and are in good and serviceable condition, reasonable wear and tear excepted.
(h) Taxes. Each of TBI and the TBI Subsidiaries has filed all federal,
-----
state, county, local and foreign tax returns, including information returns,
required to be filed by it, and paid or made adequate provision on its balance
sheet for all taxes owed by it, including those with respect to income,
withholding, social security, unemployment, workers compensation, franchise, ad
valorem, premium, excise and sales taxes, and no taxes shown on such returns to
be owed by it or assessments received by it are delinquent. The federal income
tax returns of TBI and the TBI Subsidiaries for the fiscal year ended December
31, 1995, and for all fiscal years prior thereto, are for the purposes of
routine audit by the Internal Revenue Service closed because of the statute of
limitations, and no claims for additional taxes for such fiscal years are
pending. Except only as set forth on Schedule 2(h), (i) neither TBI nor any TBI
Subsidiary is a party to any pending action or proceeding, nor to the knowledge
of TBI is any such action or proceeding threatened by any governmental
authority, for the assessment or collection of taxes, interest, penalties,
assessments or deficiencies and (ii) no issue has been raised by any federal,
state, local or foreign taxing authority in connection with an audit or
examination of the tax returns, business or properties of TBI or any TBI
Subsidiary which has not been settled, resolved and fully satisfied. Each of
TBI and the TBI Subsidiaries has paid all taxes owed or which it is required to
withhold from amounts owing to employees, creditors or other third parties. The
consolidated balance sheet as of December 31, 1998, referred to in paragraph
2(e) hereof, includes adequate provision for all accrued but unpaid federal,
state, county, local and foreign taxes, interest, penalties, assessments or
deficiencies of TBI and the TBI Subsidiaries with respect to all periods through
the date thereof.
(i) Absence of Certain Changes. Since December 31, 1998 there has been no
--------------------------
change in the business, financial condition or results of operations of TBI or
any TBI Subsidiary, which has had, or may reasonably be expected to have, a
material adverse effect on the business, financial condition or results of
operations of TBI and the TBI Subsidiaries taken as a whole (other than changes
in banking laws or regulations, or interpretations thereof, that affect the
banking industry generally or changes in the general level of interest rates).
A-6
<PAGE>
(j) Commitments and Contracts. Except as set forth on Schedule 2(j),
-------------------------
neither TBI nor any TBI Subsidiary is a party or subject to any of the following
(whether written or oral, express or implied):
(i) any employment contract or understanding (including any
understandings or obligations with respect to severance or termination pay
liabilities or fringe benefits) with any present or former officer,
director, employee or consultant (other than those which are terminable at
will by TBI or such TBI Subsidiary);
(ii) any plan, contract or understanding providing for any
bonus, pension, option, deferred compensation, retirement payment, profit
sharing or similar arrangement with respect to any present or former
officer, director, employee or consultant;
(iii) any labor contract or agreement with any labor union;
(iv) any contract not made in the ordinary course of business
containing covenants which limit the ability of TBI or any TBI Subsidiary
to compete in any line of business or with any person or which involve any
restriction of the geographical area in which, or method by which, TBI or
any TBI Subsidiary may carry on its business (other than as may be required
by law or applicable regulatory authorities);
(v) any other contract or agreement which is a "material
contract" within the meaning of Item 601(b)(10) of Regulation S-K; or
(vi) any lease with annual rental payments aggregating $10,000
or more; or
(vii) any agreement or commitment with respect to the Community
Reinvestment Act with any state or federal bank regulatory authority or any
other party; or
(viii) any current or past agreement, contract or understanding
with any current or former director, officer, employee, consultant,
financial adviser, broker, dealer, or agent providing for any rights of
indemnification in favor of such person or entity.
(k) Litigation and Other Proceedings. TBI has furnished Wells Fargo
--------------------------------
copies of (i) all attorney responses to the request of the independent auditors
for TBI with respect to loss contingencies as of December 31, 1998 in connection
with the TBI financial statements included in TBI's 1998 Annual Report to
Shareholders, and (ii) a written list of legal and regulatory proceedings filed
against TBI or any TBI Subsidiary since said date. Neither TBI nor any TBI
Subsidiary is a party to any pending or, to the best knowledge of TBI,
threatened, claim, action, suit, investigation or proceeding, or is
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subject to any order, judgment or decree, except for matters which, in the
aggregate, will not have, or cannot reasonably be expected to have, a material
adverse effect on the business, financial condition or results of operations of
TBI and the TBI Subsidiaries taken as a whole.
(l) Insurance. TBI and each TBI Subsidiary are presently insured, and
---------
during each of the past five calendar years (or during such lesser period of
time as TBI has owned such TBI Subsidiary) have been insured, for reasonable
amounts with financially sound and reputable insurance companies against such
risks as companies engaged in a similar business would, in accordance with good
business practice, customarily be insured and has maintained all insurance
required by applicable law and regulation.
(m) Compliance with Laws. TBI and each TBI Subsidiary have all permits,
--------------------
licenses, authorizations, orders and approvals of, and have made all filings,
applications and registrations with, federal, state, local or foreign
governmental or regulatory bodies that are required in order to permit it to own
or lease its properties and assets and to carry on its business as presently
conducted and that are material to the business of TBI or such TBI Subsidiary;
all such permits, licenses, certificates of authority, orders and approvals are
in full force and effect and, to the best knowledge of TBI, no suspension or
cancellation of any of them is threatened; and all such filings, applications
and registrations are current. The conduct by TBI and each TBI Subsidiary of
its business and the condition and use of its properties does not violate or
infringe, in any respect material to any such business, any applicable domestic
(federal, state or local) or foreign law, statute, ordinance, license or
regulation. Neither TBI nor any TBI Subsidiary is in default under any order,
license, regulation or demand of any federal, state, municipal or other
governmental agency or with respect to any order, writ, injunction or decree of
any court. Except for statutory or regulatory restrictions of general
application and except as set forth on Schedule 2(m), no federal, state,
municipal or other governmental authority has placed any restriction on the
business or properties of TBI or any TBI Subsidiary which reasonably could be
expected to have a material adverse effect on the business or properties of TBI
and the TBI Subsidiaries taken as a whole.
(n) Labor. No work stoppage involving TBI or any TBI Subsidiary is
-----
pending or, to the best knowledge of TBI, threatened. Neither TBI nor any TBI
Subsidiary is involved in, or to the knowledge of TBI threatened with or
affected by, any labor dispute, arbitration, lawsuit or administrative
proceeding which could materially and adversely affect the business of TBI or
such TBI Subsidiary. Employees of TBI and the TBI Subsidiaries are not
represented by any labor union nor are any collective bargaining agreements
otherwise in effect with respect to such employees.
(o) Material Interests of Certain Persons. Except as set forth on
-------------------------------------
Schedule 2(o), to the best knowledge of TBI no officer or director of TBI or any
TBI Subsidiary, or any "associate" (as such term is defined in Rule l4a-1 under
the Exchange Act) of any such officer or director, has any interest in any
material contract or property (real or personal), tangible or intangible, used
in or pertaining to the business of TBI or any TBI Subsidiary.
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Schedule 2(o) sets forth a correct and complete list of any loan from TBI
or any TBI Subsidiary to any present officer, director, employee or any
associate or related interest of any such person which was required under
Regulation O of the Federal Reserve Board to be approved by or reported to TBI's
or such TBI Subsidiary's Board of Directors.
(p) TBI Benefit Plans.
-----------------
(i) Schedule 2(p)(i) sets forth each employee benefit plan
with respect to which TBI or any TBI Subsidiary contributes, sponsors or
otherwise has any obligation (the "Plans"). For purposes of this Section
2(p) and Schedule 2(p)(i), "ERISA" means the Employee Retirement Income
Security Act of 1974, as amended, and the term "Plan" or "Plans" means all
employee benefit plans as defined in Section 3(3) of ERISA, and all other
benefit arrangements including, without limitation, any plan, program,
agreement, policy or commitment providing for insurance coverage of
employees, workers' compensation, disability benefits, supplemental
unemployment benefits, vacation benefits, retirement benefits, severance or
termination of employment benefits, life, health, death, disability or
accidental benefits.
(ii) Except as disclosed on Schedule 2(p)(ii), no Plan is a
"multiemployer plan" within the meaning of Section 3(37) of ERISA.
(iii) Except as disclosed on Schedule 2(p)(iii), no Plan
promises or provides health or life benefits to retirees or former
employees except as required by federal continuation of coverage laws or
similar state laws.
(iv) Except as disclosed on Schedule 2(p)(iv), (a) each Plan is
and has been in all material respects operated and administered in
accordance with its provisions and applicable law including, if applicable,
ERISA and the Code; (b) all reports and filings with governmental agencies
(including but not limited to the Department of Labor, Internal Revenue
Service, Pension Benefit Guaranty Corporation and the Securities and
Exchange Commission) required in connection with each Plan have been timely
made; (c) all disclosures and notices required by law or Plan provisions to
be given to participants and beneficiaries in connection with each Plan
have been properly and timely made; (d) there are no actions, suits or
claims pending, other than routine uncontested claims for benefits with
respect to each Plan; and (e) each Plan intended to be qualified under
Section 401(a) of the Code has received a favorable determination letter
from the Internal Revenue Service stating that the Plan (including all
amendments) is tax qualified under Section 401(a) of the Code and TBI knows
of no reason that any such Plan is not qualified within the meaning of
Section 401(a) of the Code and knows of no reason that each related Plan
trust is not exempt from taxation under Section 501(a) of the Code.
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(v) Except as disclosed on Schedule 2(p)(v), (a) all
contributions, premium payments and other payments required to be made in
connection with the Plans as of the date of this Agreement have been made;
(b) a proper accrual has been made on the books of TBI for all
contributions, premium payments and other payments due in the current
fiscal year but not made as of the date of this Agreement; (c) no
contribution, premium payment or other payment has been made in support of
any Plan that is in excess of the allowable deduction for federal income
tax purposes for the year with respect to which the contribution was made
(whether under Sections 162, 280G, 404, 419, 419A of the Code or
otherwise); and (d) with respect to each Plan that is subject to Section
301 of ERISA or Section 412 of the Code, TBI is not liable for any
accumulated funding deficiency as that term is defined in Section 412 of
the Code and the projected benefit obligations determined as of the date of
this Agreement do not exceed the assets of the Plan.
(vi) Except as disclosed in Schedule 2(p)(vi) and to best
knowledge of TBI, no Plan or any trust created thereunder, nor any trustee,
fiduciary or administrator thereof, has engaged in a "prohibited
transaction," as such term is defined in Section 4975 of the Code or
Section 406 of ERISA or violated any of the fiduciary standards under Part
4 of Title 1 of ERISA which could subject such Plan or trust, or any
trustee, fiduciary or administrator thereof, or any party dealing with any
such Plan or trust, to a tax penalty or prohibited transactions imposed by
Section 4975 of the Code or would result in material liability to TBI and
the TBI Subsidiaries as a whole.
(vii) No Plan subject to Title IV of ERISA or any trust created
thereunder has been terminated, nor have there been any "reportable events"
as that term is defined in Section 4043 of ERISA, with respect to any Plan,
other than those events which may result from the transactions contemplated
by this Agreement and the Merger Agreement.
(viii) Except as disclosed in Schedule 2(p)(viii), neither the
execution and delivery of this Agreement and the Merger Agreement nor the
consummation of the transactions contemplated hereby and thereby will (a)
result in any material payment (including, without limitation, severance,
unemployment compensation, golden parachute or otherwise) becoming due to
any director or employee or former employee of TBI under any Plan or
otherwise, (b) materially increase any benefits otherwise payable under any
Plan, or (c) result in the acceleration of the time of payment or vesting
of any such benefits to any material extent.
(q) Proxy Statement, etc. None of the information regarding TBI and the
--------------------
TBI Subsidiaries supplied or to be supplied by TBI for inclusion in (i) a
Registration Statement on Form S-4 to be filed with the SEC by Wells Fargo for
the purpose of registering the shares of Wells Fargo Common Stock to be
exchanged for shares of TBI Common Stock pursuant to the provisions of the
Merger Agreement (the "Registration Statement"), (ii) the proxy statement to be
mailed to TBI's shareholders in connection
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with the meeting to be called to consider the Merger (the "Proxy Statement") and
(iii) any other documents to be filed with the SEC or any regulatory authority
in connection with the transactions contemplated hereby or by the Merger
Agreement will, at the respective times such documents are filed with the SEC or
any regulatory authority and, in the case of the Registration Statement, when it
becomes effective and, with respect to the Proxy Statement, when mailed, be
false or misleading with respect to any material fact, or omit to state any
material fact necessary in order to make the statements therein not misleading
or, in the case of the Proxy Statement or any amendment thereof or supplement
thereto, at the time of the meeting of shareholders referred to in paragraph
4(c), be false or misleading with respect to any material fact, or omit to state
any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of any proxy for such meeting.
All documents which TBI and the TBI Subsidiaries are responsible for filing with
the SEC and any other regulatory authority in connection with the Merger will
comply as to form in all material respects with the provisions of applicable
law.
(r) Registration Obligations. Except as set forth on Schedule 2(r),
------------------------
neither TBI nor any TBI Subsidiary is under any obligation, contingent or
otherwise, which will survive the Merger by reason of any agreement to register
any of its securities under the Securities Act.
(s) Brokers and Finders. Except as set forth on Schedule 2(s), neither
-------------------
TBI nor any TBI Subsidiary nor any of their respective officers, directors or
employees has employed any broker or finder or incurred any liability for any
financial advisory fees, brokerage fees, commissions or finder's fees, and no
broker or finder has acted directly or indirectly for TBI or any TBI Subsidiary
in connection with this Agreement and the Merger Agreement or the transactions
contemplated hereby and thereby.
(t) Administration of Trust Accounts. TBI and each TBI Subsidiary has
--------------------------------
properly administered in all material respects and which could reasonably be
expected to be material to the financial condition of TBI and the TBI
Subsidiaries taken as a whole all accounts for which it acts as a fiduciary,
including but not limited to accounts for which it serves as a trustee, agent,
custodian, personal representative, guardian, conservator or investment advisor,
in accordance with the terms of the governing documents and applicable state and
federal law and regulation and common law. To the knowledge of TBI, neither TBI,
any TBI Subsidiary, nor any director, officer or employee of TBI or any TBI
Subsidiary has committed any breach of trust with respect to any such fiduciary
account which is material to or could reasonably be expected to be material to
the financial condition of TBI and the TBI Subsidiaries taken as a whole, and
the accountings for each such fiduciary account are true and correct in all
material respects and accurately reflect the assets of such fiduciary account.
(u) No Defaults. Neither TBI nor any TBI Subsidiary is in default, nor
-----------
has any event occurred which, with the passage of time or the giving of notice,
or both, would constitute a default, under any material agreement, indenture,
loan agreement or other instrument to which it is a party or by which it or any
of its assets is bound or to which
A-11
<PAGE>
any of its assets is subject, the result of which has had or could reasonably be
expected to have a material adverse effect upon TBI and the TBI Subsidiaries,
taken as a whole. To the best of TBI's knowledge, all parties with whom TBI or
any TBI Subsidiary has material leases, agreements or contracts or who owe to
TBI or any TBI Subsidiary material obligations other than with respect to those
arising in the ordinary course of the banking business of the TBI Subsidiaries
are in compliance therewith in all material respects.
(v) Environmental Liability. There is no legal, administrative, or other
-----------------------
proceeding, claim, or action of any nature seeking to impose, or that could
result in the imposition of, on TBI or any TBI Subsidiary, any liability
relating to the release of hazardous substances as defined under any local,
state or federal environmental statute, regulation or ordinance including,
without limitation, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), pending or to the best of TBI's
knowledge, threatened against TBI or any TBI Subsidiary the result of which has
had or could reasonably be expected to have a material adverse effect upon TBI
and the TBI Subsidiaries taken as a whole; to the best of TBI's knowledge there
is no reasonable basis for any such proceeding, claim or action; and to the best
of TBI's knowledge neither TBI nor any TBI Subsidiary is subject to any
agreement, order, judgment, or decree by or with any court, governmental
authority or third party imposing any such environmental liability. TBI has
provided Wells Fargo with copies of all environmental assessments, reports,
studies and other related information in its possession with respect to each
bank facility and each non-residential OREO property.
(w) Compliance with Year 2000 Requirements. Except as set forth in
--------------------------------------
Schedule 2(w), TBI is in full compliance with its Year 2000 project management
process as set forth in the May 5, 1997 Federal Financial Institutions
Examination Council ("FFIEC") Interagency Statement on the Year 2000 and
subsequent guidance documents (the "FFIEC Requirements"). TBI has made its Year
2000 project assessment and remediation plan available to Wells Fargo for review
and has furnished Wells Fargo with copies of all communications between TBI or
any TBI Subsidiary with regulators having responsibility for overseeing
compliance with such FFIEC Requirements.
3. Representations and Warranties of Wells Fargo. Wells Fargo represents
and warrants to TBI as follows:
(a) Organization and Authority. Wells Fargo is a corporation duly
--------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware, is duly qualified to do business and is in good standing in all
jurisdictions where its ownership or leasing of property or the conduct of its
business requires it to be so qualified and failure to be so qualified would
have a material adverse effect on Wells Fargo and its subsidiaries taken as a
whole and has corporate power and authority to own its properties and assets and
to carry on its business as it is now being conducted. Wells Fargo is registered
as a bank holding company with the Federal Reserve Board under the BHC Act.
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<PAGE>
(b) Wells Fargo Subsidiaries. Schedule 3(b) sets forth a complete and
------------------------
correct list as of December 31, 1998, of Wells Fargo's Significant Subsidiaries
(as defined in Regulation S-X promulgated by the SEC) (individually a "Wells
Fargo Subsidiary" and collectively the "Wells Fargo Subsidiaries"), all shares
of the outstanding capital stock of each of which, except as set forth in
Schedule 3(b), are owned directly or indirectly by Wells Fargo. No equity
security of any Wells Fargo Subsidiary is or may be required to be issued to any
person or entity other than Wells Fargo by reason of any option, warrant, scrip,
right to subscribe to, call or commitment of any character whatsoever relating
to, or security or right convertible into, shares of any capital stock of such
subsidiary, and there are no contracts, commitments, understandings or
arrangements by which any Wells Fargo Subsidiary is bound to issue additional
shares of its capital stock, or options, warrants or rights to purchase or
acquire any additional shares of its capital stock. Subject to 12 U.S.C. (S) 55
(1982), all of such shares so owned by Wells Fargo are fully paid and
nonassessable and are owned by it free and clear of any lien, claim, charge,
option, encumbrance or agreement with respect thereto. Each Wells Fargo
Subsidiary is a corporation or national banking association duly organized,
validly existing, duly qualified to do business and in good standing under the
laws of its jurisdiction of incorporation, and has corporate power and authority
to own or lease its properties and assets and to carry on its business as it is
now being conducted.
(c) Wells Fargo Capitalization. As of March 31, 1999, the authorized
--------------------------
capital stock of Wells Fargo consists of (i) 20,000,000 shares of Preferred
Stock, without par value, of which as of the close of business on December 31,
1998, 980,000 shares of Cumulative Tracking Preferred Stock, at $200 stated
value, 9,661 shares of ESOP Cumulative Convertible Preferred Stock, at $1,000
stated value, 20,016 shares of 1995 ESOP Cumulative Convertible Preferred Stock,
at $1,000 stated value, 21,466 shares of 1996 ESOP Cumulative Convertible
Preferred Stock, at $1,000 stated value, 18,810 shares of 1997 ESOP Cumulative
Convertible Preferred Stock, at $1,000 stated value, 8,740 shares of 1998 ESOP
Cumulative Convertible Preferred Stock, $1,000 stated value, 58,787 shares of
1999 ESOP Cumulative Convertible Preferred Stock, $1,000 stated value, 1,500,000
shares of Adjustable-Rate Cumulative Preferred Stock, Series B, $50 stated
value, and 4,000,000 shares of 6.59% Adjustable Rate Noncumulative Preferred
Stock, Series B, $50 stated value, were outstanding; (ii) 4,000,000 shares of
Preference Stock, without par value, of which as of the close of business on
December 31, 1998, no shares were outstanding; and (iii) 4,000,000,000 shares of
Common Stock, $1-2/3 par value, of which as of the close of business on March
31, 1999, 1,666,095,285 shares were outstanding and 13,478,919 shares were held
in the treasury. All of the outstanding shares of capital stock of Wells Fargo
have been duly and validly authorized and issued and are fully paid and
nonassessable.
(d) Authorization. Wells Fargo has the corporate power and authority to
-------------
enter into this Agreement and to carry out its obligations hereunder. The
execution, delivery and performance of this Agreement by Wells Fargo and the
consummation of the transactions contemplated hereby have been duly authorized
by the Board of Directors of Wells Fargo. No approval or consent by the
stockholders of Wells Fargo is necessary for the execution and delivery of this
Agreement and the Merger Agreement and the
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consummation of the transactions contemplated hereby and thereby. Subject to
such approvals of government agencies and other governing boards having
regulatory authority over Wells Fargo as may be required by statute or
regulation, this Agreement is a valid and binding obligation of Wells Fargo
enforceable against Wells Fargo in accordance with its terms.
Neither the execution, delivery and performance by Wells Fargo of this
Agreement or the Merger Agreement, nor the consummation of the transactions
contemplated hereby and thereby, nor compliance by Wells Fargo with any of the
provisions hereof or thereof, will (i) violate, conflict with, or result in a
breach of any provision of, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, or result in
the termination of, or accelerate the performance required by, or result in a
right of termination or acceleration of, or result in the creation of, any lien,
security interest, charge or encumbrance upon any of the properties or assets of
Wells Fargo or any Wells Fargo Subsidiary under any of the terms, conditions or
provisions of (x) its certificate of incorporation or by-laws or (y) any
material note, bond, mortgage, indenture, deed of trust, license, lease,
agreement or other instrument or obligation to which Wells Fargo or any Wells
Fargo Subsidiary is a party or by which it may be bound, or to which Wells Fargo
or any Wells Fargo Subsidiary or any of the properties or assets of Wells Fargo
or any Wells Fargo Subsidiary may be subject, or (ii) subject to compliance with
the statutes and regulations referred to in the next paragraph, to the best
knowledge of Wells Fargo, violate any judgment, ruling, order, writ, injunction,
decree, statute, rule or regulation applicable to Wells Fargo or any Wells Fargo
Subsidiary or any of their respective properties or assets.
Other than in connection with or in compliance with the provisions of the
Securities Act, the Exchange Act, the securities or blue sky laws of the various
states or filings, consents, reviews, authorizations, approvals or exemptions
required under the BHC Act or the HSR Act, and filings required to effect the
Merger under Texas law, no notice to, filing with, exemption or review by, or
authorization, consent or approval of, any public body or authority is necessary
for the consummation by Wells Fargo of the transactions contemplated by this
Agreement and the Merger Agreement.
(e) Wells Fargo Financial Statements. The consolidated balance sheets of
--------------------------------
Wells Fargo and Wells Fargo's subsidiaries as of December 31, 1998 and 1997 and
related consolidated statements of income, changes in stockholders' equity and
comprehensive income, and cash flows for the three years ended December 31,
1998, together with the notes thereto, certified by KPMG LLP and included in
Wells Fargo's Annual Report on Form 10-K for the fiscal year ended December 31,
1998 (the "Wells Fargo 10-K") as filed with the SEC, and the unaudited
consolidated balance sheets of Wells Fargo and its subsidiaries as of September
30, 1998 and the related unaudited consolidated statements of income, changes in
stockholders' equity and comprehensive income, and cash flows for the nine (9)
months then ended included in Wells Fargo's Quarterly Report on Form 10-Q for
the fiscal quarter ended September 30, 1998, as filed with the SEC
(collectively, the "Wells Fargo Financial Statements"), have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis and present fairly
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<PAGE>
(subject, in the case of financial statements for interim periods, to normal
recurring adjustments) the consolidated financial position of Wells Fargo and
its subsidiaries at the dates and the consolidated results of operations,
changes in financial position and cash flows of Wells Fargo and its subsidiaries
for the periods stated therein.
(f) Reports. Since December 31, 1994, Wells Fargo and each Wells Fargo
-------
Subsidiary has filed all reports, registrations and statements, together with
any required amendments thereto, that it was required to file with (i) the SEC,
including, but not limited to, Forms 10-K, Forms 10-Q and proxy statements, (ii)
the Federal Reserve Board, (iii) the FDIC, (iv) the Comptroller and (v) any
applicable state securities or banking authorities. All such reports and
statements filed with any such regulatory body or authority are collectively
referred to herein as the "Wells Fargo Reports." As of their respective dates,
the Wells Fargo Reports complied in all material respects with all the rules and
regulations promulgated by the SEC, the Federal Reserve Board, the FDIC, the
Comptroller and any applicable state securities or banking authorities, as the
case may be, and did not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
(g) Properties and Leases. Except as may be reflected in the Wells Fargo
---------------------
Financial Statements and except for any lien for current taxes not yet
delinquent, Wells Fargo and each Wells Fargo Subsidiary has good title free and
clear of any material liens, claims, charges, options, encumbrances or similar
restrictions to all the real and personal property reflected in Wells Fargo's
consolidated balance sheet as of December 31, 1998 included in Wells Fargo's
Annual Report on Form 10-K for the period then ended, and all real and personal
property acquired since such date, except such real and personal property that
has been disposed of in the ordinary course of business. All leases of real
property and all other leases material to Wells Fargo or any Wells Fargo
Subsidiary pursuant to which Wells Fargo or such Wells Fargo Subsidiary, as
lessee, leases real or personal property, are valid and effective in accordance
with their respective terms, and there is not, under any such lease, any
material existing default by Wells Fargo or such Wells Fargo Subsidiary or any
event which, with notice or lapse of time or both, would constitute such a
material default. Substantially all Wells Fargo's and each Wells Fargo
Subsidiary's buildings and equipment in regular use have been well maintained
and are in good and serviceable condition, reasonable wear and tear excepted.
(h) Taxes. Each of Wells Fargo and the Wells Fargo Subsidiaries has filed
-----
all material federal, state, county, local and foreign tax returns, including
information returns, required to be filed by it, and paid or made adequate
provision for the payment of all taxes owed by it, including those with respect
to income, withholding, social security, unemployment, workers compensation,
franchise, ad valorem, premium, excise and sales taxes, and no taxes shown on
such returns to be owed by it or assessments received by it are delinquent. The
federal income tax returns of Wells Fargo and the Wells Fargo Subsidiaries for
the fiscal year ended December 31, 1982, and for all fiscal years prior thereto,
are for the purposes of routine audit by the Internal Revenue Service closed
because of the statute of limitations, and no claims for additional taxes for
such fiscal
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<PAGE>
years are pending. Except only as set forth on Schedule 3(h), (i) neither Wells
Fargo nor any Wells Fargo Subsidiary is a party to any pending action or
proceeding, nor to Wells Fargo's knowledge is any such action or proceeding
threatened by any governmental authority, for the assessment or collection of
taxes, interest, penalties, assessments or deficiencies which could reasonably
be expected to have any material adverse effect on Wells Fargo and its
subsidiaries taken as a whole, and (ii) no issue has been raised by any federal,
state, local or foreign taxing authority in connection with an audit or
examination of the tax returns, business or properties of Wells Fargo or any
Wells Fargo Subsidiary which has not been settled, resolved and fully satisfied,
or adequately reserved for. Each of Wells Fargo and the Wells Fargo Subsidiaries
has paid all taxes owed or which it is required to withhold from amounts owing
to employees, creditors or other third parties.
(i) Absence of Certain Changes. Since December 31, 1998, there has been
--------------------------
no change in the business, financial condition or results of operations of Wells
Fargo or any Wells Fargo Subsidiary which has had, or may reasonably be expected
to have, a material adverse effect on the business, financial condition or
results of operations of Wells Fargo and its subsidiaries taken as a whole.
(j) Commitments and Contracts. Except as set forth on Schedule 3(j), as
-------------------------
of December 31, 1998 neither Wells Fargo nor any Wells Fargo Subsidiary is a
party or subject to any of the following (whether written or oral, express or
implied):
(i) any labor contract or agreement with any labor union;
(ii) any contract not made in the ordinary course of business
containing covenants which materially limit the ability of Wells Fargo or
any Wells Fargo Subsidiary to compete in any line of business or with any
person or which involve any material restriction of the geographical area
in which, or method by which, Wells Fargo or any Wells Fargo Subsidiary may
carry on its business (other than as may be required by law or applicable
regulatory authorities);
(iii) any other contract or agreement which is a "material
contract" within the meaning of Item 601(b)(10) of Regulation S-K.
(k) Litigation and Other Proceedings. Neither Wells Fargo nor any Wells
--------------------------------
Fargo Subsidiary is a party to any pending or, to the best knowledge of Wells
Fargo, threatened, claim, action, suit, investigation or proceeding, or is
subject to any order, judgment or decree, except for matters which, in the
aggregate, will not have, or cannot reasonably be expected to have, a material
adverse effect on the business, financial condition or results of operations of
Wells Fargo and its subsidiaries taken as a whole.
(l) Insurance. Wells Fargo and each Wells Fargo Subsidiary is presently
---------
insured or self insured, and during each of the past five calendar years (or
during such lesser period of time as Wells Fargo has owned such Wells Fargo
Subsidiary) has been insured or self-insured, for reasonable amounts with
financially sound and reputable insurance companies against such risks as
companies engaged in a similar business would, in
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<PAGE>
accordance with good business practice, customarily be insured and has
maintained all insurance required by applicable law and regulation.
(m) Compliance with Laws. Wells Fargo and each Wells Fargo Subsidiary has
--------------------
all permits, licenses, authorizations, orders and approvals of, and has made all
filings, applications and registrations with, federal, state, local or foreign
governmental or regulatory bodies that are required in order to permit it to own
or lease its properties or assets and to carry on its business as presently
conducted and that are material to the business of Wells Fargo or such
Subsidiary; all such permits, licenses, certificates of authority, orders and
approvals are in full force and effect, and to the best knowledge of Wells
Fargo, no suspension or cancellation of any of them is threatened; and all such
filings, applications and registrations are current. The conduct by Wells Fargo
and each Wells Fargo Subsidiary of its business and the condition and use of its
properties does not violate or infringe, in any respect material to any such
business, any applicable domestic (federal, state or local) or foreign law,
statute, ordinance, license or regulation. Neither Wells Fargo nor any Wells
Fargo Subsidiary is in default under any order, license, regulation or demand of
any federal, state, municipal or other governmental agency or with respect to
any order, writ, injunction or decree of any court. Except for statutory or
regulatory restrictions of general application, no federal, state, municipal or
other governmental authority has placed any restrictions on the business or
properties of Wells Fargo or any Wells Fargo Subsidiary which reasonably could
be expected to have a material adverse effect on the business or properties of
Wells Fargo and its subsidiaries taken as a whole.
(n) Labor. No work stoppage involving Wells Fargo or any Wells Fargo
-----
Subsidiary is pending or, to the best knowledge of Wells Fargo, threatened.
Neither Wells Fargo nor any Wells Fargo Subsidiary is involved in, or threatened
with or affected by, any labor dispute, arbitration, lawsuit or administrative
proceeding which could materially and adversely affect the business of Wells
Fargo or such Wells Fargo Subsidiary. Except as set forth on Schedule 3(j),
employees of Wells Fargo and the Wells Fargo Subsidiaries are not represented by
any labor union nor are any collective bargaining agreements otherwise in effect
with respect to such employees.
(o) Wells Fargo Benefit Plans.
-------------------------
(i) For purposes of this Section 3(o), the term "Wells Fargo
Plan" or "Wells Fargo Plans" means all employee benefit plans as defined in
Section 3(3) of ERISA, to which Wells Fargo contributes, sponsors, or
otherwise has any obligations.
(ii) No Wells Fargo Plan is a "multiemployer plan" within the
meaning of Section 3(37) of ERISA.
(iii) Each Wells Fargo Plan is and has been in all material
respects operated and administered in accordance with its provisions and
applicable law, including, if applicable, ERISA and the Code.
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<PAGE>
(iv) Each Wells Fargo Plan intended to be qualified under
Section 401(a) of the Code has received a favorable determination letter
from the Internal Revenue Service stating that the Wells Fargo Plan
(including all amendments) is tax qualified under Section 401(a) of the
Code and Wells Fargo knows of no reason that any such Wells Fargo Plan is
not qualified within the meaning of Section 401(a) of the Code and knows of
no reason that each related Wells Fargo Plan trust is not exempt from
taxation under Section 501(a) of the Code.
(v) All contributions, premium payments, and other payments
required to be made in connection with the Wells Fargo Plans as of the date
of this Agreement have been made.
(vi) With respect to each Wells Fargo Plan that is subject to
Section 301 of ERISA or Section 412 of the Code, neither Wells Fargo nor
any Wells Fargo Subsidiary is liable for any accumulated funding deficiency
as that term is defined in Section 412 of the Code.
(vii) The present value of all benefits vested and all benefits
accrued under each Wells Fargo Plan that is subject to Title IV of ERISA
does not, in each case, exceed the value of the assets of the Wells Fargo
Plans allocable to such vested or accrued benefits as of the end of the
most recent Plan Year.
(p) Registration Statement, etc. None of the information regarding Wells
---------------------------
Fargo and the Wells Fargo Subsidiaries supplied or to be supplied by Wells Fargo
for inclusion in (i) the Registration Statement, (ii) the Proxy Statement, and
(iii) any other documents to be filed with the SEC or any regulatory authority
in connection with the transactions contemplated hereby or by the Merger
Agreement will, at the respective times such documents are filed with the SEC or
any regulatory authority and, in the case of the Registration Statement, when it
becomes effective and, with respect to the Proxy Statement, when mailed, be
false or misleading with respect to any material fact, or omit to state any
material fact necessary in order to make the statements therein not misleading
or, in the case of the Proxy Statement or any amendment thereof or supplement
thereto, at the time of the meeting of shareholders referred to in paragraph
4(c), be false or misleading with respect to any material fact, or omit to state
any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of any proxy for such meeting.
All documents which Wells Fargo and the Wells Fargo Subsidiaries are responsible
for filing with the SEC and any other regulatory authority in connection with
the Merger will comply as to form in all material respects with the provisions
of applicable law.
(q) Brokers and Finders. Neither Wells Fargo nor any Wells Fargo
-------------------
Subsidiary nor any of their respective officers, directors or employees has
employed any broker or finder or incurred any liability for any financial
advisory fees, brokerage fees, commissions or finder's fees, and no broker or
finder has acted directly or indirectly for
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Wells Fargo or any Wells Fargo Subsidiary in connection with this Agreement and
the Merger Agreement or the transactions contemplated hereby and thereby.
(r) No Defaults. Neither Wells Fargo nor any Wells Fargo Subsidiary is in
-----------
default, nor has any event occurred which, with the passage of time or the
giving of notice, or both, would constitute a default under any material
agreement, indenture, loan agreement or other instrument to which it is a party
or by which it or any of its assets is bound or to which any of its assets is
subject, the result of which has had or could reasonably be expected to have a
material adverse effect upon Wells Fargo and its subsidiaries taken as a whole.
To the best of Wells Fargo's knowledge, all parties with whom Wells Fargo or any
Wells Fargo Subsidiary has material leases, agreements or contracts or who owe
to Wells Fargo or any Wells Fargo Subsidiary material obligations other than
with respect to those arising in the ordinary course of the banking business of
the Wells Fargo Subsidiaries are in compliance therewith in all material
respects.
(s) Environmental Liability. There is no legal, administrative, or other
-----------------------
proceeding, claim, or action of any nature seeking to impose, or that could
result in the imposition, on Wells Fargo or any Wells Fargo Subsidiary of any
liability relating to the release of hazardous substances as defined under any
local, state or federal environmental statute, regulation or ordinance
including, without limitation, CERCLA, pending or to the best of Wells Fargo's
knowledge, threatened against Wells Fargo or any Wells Fargo Subsidiary, the
result of which has had or could reasonably be expected to have a material
adverse effect upon Wells Fargo and its subsidiaries taken as a whole; to the
best of Wells Fargo's knowledge there is no reasonable basis for any such
proceeding, claim or action; and to the best of Wells Fargo's knowledge neither
Wells Fargo nor any Wells Fargo Subsidiary is subject to any agreement, order,
judgment, or decree by or with any court, governmental authority or third party
imposing any such environmental liability.
(t) Merger Co. As of the Closing Date, Merger Co. will be a corporation
---------
duly organized, validly existing, duly qualified to do business and in good
standing under the laws of its jurisdiction of incorporation, and will have
corporate power and authority to own or lease its properties and assets and to
carry on its business. As of the Effective Date of the Merger, the execution,
delivery, and performance by Merger Co. of the Merger Agreement will have been
duly authorized by the Board of Directors and shareholders of Merger Co. and the
Merger Agreement will be a valid and binding obligation of Merger Co.
enforceable against Merger Co. in accordance with its terms.
4. Covenants of TBI. TBI covenants and agrees with Wells Fargo as follows:
(a) Except as otherwise permitted or required by this Agreement, from the
date hereof until the Effective Time of the Merger, TBI, and each TBI Subsidiary
will: maintain its corporate existence in good standing; maintain the general
character of its business and conduct its business in its ordinary and usual
manner; extend credit in accordance with existing lending policies, except that
it shall not, without the prior written consent of Wells Fargo (which consent
requirement shall be deemed to be waived as to any loan approval request to
which Wells Fargo has made no response by the end of
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<PAGE>
the second complete business day following the receipt of the request by a Wells
Fargo representative designated in writing), make any new loan or modify,
restructure or renew any existing loan (except pursuant to commitments made
prior to the date of this Agreement) to any borrower if the amount of the
resulting loan, when aggregated with all other loans or extensions of credit to
such person, would be in excess of $500,000; maintain proper business and
accounting records in accordance with generally accepted principles; maintain
its properties in good repair and condition, ordinary wear and tear excepted;
maintain in all material respects presently existing insurance coverage; use its
best efforts to preserve its business organization intact, to keep the services
of its present principal employees and to preserve its good will and the good
will of its suppliers, customers and others having business relationships with
it; use its best efforts to obtain any approvals or consents required to
maintain existing leases and other contracts in effect following the Merger;
comply in all material respects with all laws, regulations, ordinances, codes,
orders, licenses and permits applicable to the properties and operations of TBI
and each TBI Subsidiary the non-compliance with which reasonably could be
expected to have a material adverse effect on TBI and the TBI Subsidiaries taken
as a whole; and, upon reasonable prior notice, permit Wells Fargo and its
representatives (including KPMG LLP) to examine its and its subsidiaries books,
records and properties and to interview officers, employees and agents at all
reasonable times when it is open for business, provided that Wells Fargo
conducts such review in a manner so as not to disrupt or impair TBI's personnel,
business, or operations. No such examination by Wells Fargo or its
representatives either before or after the date of this Agreement shall in any
way affect, diminish or terminate any of the representations, warranties or
covenants of TBI herein expressed.
(b) Except as otherwise contemplated or required by this Agreement, from
the date hereof until the Effective Time of the Merger, TBI and each TBI
subsidiary will not (without the prior written consent of Wells Fargo): amend or
otherwise change its articles of incorporation or association or by-laws; issue
or sell or authorize for issuance or sale, or grant any options or make other
agreements with respect to the issuance or sale or conversion of, any shares of
its capital stock, phantom shares or other share-equivalents, or any other of
its securities, except that TBI may issue shares of TBI Common Stock upon the
exercise of outstanding stock options described in Schedule 2(c); authorize or
incur any long-term debt (other than deposit liabilities); mortgage, pledge or
subject to lien or other encumbrance any of its properties, except in the
ordinary course of business; enter into any material agreement, contract or
commitment in excess of $10,000 except banking transactions in the ordinary
course of business and in accordance with policies and procedures in effect on
the date hereof; make any investments except (i) investments made by bank
subsidiaries in the ordinary course of business for terms of up to one year and
in amounts of $100,000 or less, and (ii) investments made upon written consent
of Wells Fargo (which consent requirement shall be deemed to be waived as to any
investment request to which Wells Fargo has made no response by the end of the
second complete business day following the receipt of the request by a Wells
Fargo representative designated in writing); amend or terminate any Plan except
as required by law; make any contributions to any Plan except as required by the
terms of such Plan in effect as of the date hereof; declare, set aside, make
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or pay any dividend or other distribution with respect to its capital stock
except any dividend declared by a subsidiary's Board of Directors in accordance
with applicable law and regulation; redeem, purchase or otherwise acquire,
directly or indirectly, any of the capital stock of TBI (except as contemplated
by paragraph 4(q)); increase the compensation of any officers, directors or
executive employees, except (i) pursuant to existing compensation plans and
practices and (ii) the payment by TBI prior to the Effective Date of all amounts
accrued through the end of the month preceding the Effective Date in connection
with the cash bonuses of the members of the Executive Committee and the
designated Executive Bankers; or (iii) the matching by TBI or TBI Subsidiaries
prior to the Effective Date of the contributions made by employees of TBI
Subsidiaries to the TBI Employees' 401(k) Profit Sharing Plan & Trust during
1999 by contributing to the Plan for each employee an amount equal to 100% of
each employee's contribution to the Plan up to 4% of the total qualifying
employee compensation; sell or otherwise dispose of any shares of the capital
stock of any TBI Subsidiary; or sell or otherwise dispose of any of its assets
or properties other than in the ordinary course of business.
(c) The Board of Directors of TBI will duly call, and will cause to be
held not later than twenty-five (25) business days following the effective date
of the Registration Statement referred to in paragraph 5(c) hereof and on a date
acceptable to Wells Fargo, a meeting of its shareholders and will direct that
this Agreement and the Merger Agreement be submitted to a vote at such meeting.
The Board of Directors of TBI will (i) cause proper notice of such meeting to be
given to its shareholders in compliance with the Texas Business Corporation Act
and other applicable law and regulation, (ii) recommend by the affirmative vote
of the Board of Directors a vote in favor of approval of this Agreement and the
Merger Agreement, and (iii) use its best efforts to solicit from its
shareholders proxies in favor thereof.
(d) TBI will furnish or cause to be furnished to Wells Fargo all the
information concerning TBI and its subsidiaries required for inclusion in the
Registration Statement referred to in paragraph 5(c) hereof, or any statement or
application made by Wells Fargo to any governmental body in connection with the
transactions contemplated by this Agreement. Any financial statement for any
fiscal year provided under this paragraph must include the audit opinion and the
consent of KMPG LLP to use such opinion in such Registration Statement.
(e) TBI will take all necessary corporate and other action and use its
best efforts to obtain all approvals of regulatory authorities, consents and
other approvals required of TBI to carry out the transactions contemplated by
this Agreement and will cooperate with Wells Fargo to obtain all such approvals
and consents required of Wells Fargo.
(f) TBI will use its best efforts to deliver to the Closing all opinions,
certificates and other documents required to be delivered by it at the Closing.
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<PAGE>
(g) TBI will hold in confidence all documents and information concerning
Wells Fargo and its subsidiaries furnished to TBI and its representatives in
connection with the transactions contemplated by this Agreement and will not
release or disclose such information to any other person, except as required by
law and except to TBI's outside professional advisers in connection with this
Agreement, with the same undertaking from such professional advisers. If the
transactions contemplated by this Agreement shall not be consummated, such
confidence shall be maintained and such information shall not be used in
competition with Wells Fargo (except to the extent that such information can be
shown to be previously known to TBI, in the public domain, or later acquired by
TBI from other legitimate sources) and, upon request, all such documents, any
copies thereof and extracts therefrom shall immediately thereafter be returned
to Wells Fargo.
(h) Neither TBI, nor any TBI Subsidiary, nor any director, officer,
representative or agent thereof, will, directly or indirectly, solicit,
authorize the solicitation of or enter into any discussions with any
corporation, partnership, person or other entity or group (other than Wells
Fargo) concerning any offer or possible offer (i) to purchase any shares of
common stock, any option or warrant to purchase any shares of common stock, any
securities convertible into any shares of such common stock, or any other equity
security of TBI or any TBI Subsidiary, (ii) to make a tender or exchange offer
for any shares of such common stock or other equity security, (iii) to purchase,
lease or otherwise acquire the assets of TBI or any TBI Subsidiary except in the
ordinary course of business, or (iv) to merge, consolidate or otherwise combine
with TBI or any TBI Subsidiary. If any corporation, partnership, person or other
entity or group makes an offer or inquiry to TBI or any TBI Subsidiary
concerning any of the foregoing, TBI or such TBI Subsidiary will promptly
disclose such offer or inquiry, including the terms thereof, to Wells Fargo.
(i) TBI shall consult with Wells Fargo as to the form and substance of any
proposed press release or other proposed public disclosure of matters related to
this Agreement or any of the transactions contemplated hereby.
(j) TBI and each TBI Subsidiary will take all action necessary or required
(i) to terminate or amend, if requested by Wells Fargo, all qualified pension
and welfare benefit plans and all non-qualified benefit plans and compensation
arrangements as of the Effective Date of the Merger, and (ii) to submit
application to the Internal Revenue Service for a favorable determination letter
for each of the Plans which is subject to the qualification requirements of
Section 401(a) of the Code prior to the Effective Date of the Merger.
(k) TBI shall use its best efforts to obtain and deliver prior to the
Effective Date of the Merger signed representations substantially in the form
attached hereto as Exhibit B to Wells Fargo by each executive officer, director
or shareholder of TBI who may reasonably be deemed an "affiliate" of TBI within
the meaning of such term as used in Rule 145 under the Securities Act.
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<PAGE>
(l) At or before the Closing Date, TBI shall establish such additional
accruals and reserves as may be necessary to conform TBI's accounting and credit
loss reserve practices and methods to those of Wells Fargo and Wells Fargo's
plans with respect to the conduct of TBI's business following the Merger and to
provide for the costs and expenses relating to the consummation by TBI of the
Merger and the other transactions contemplated by this Agreement; provided,
however, that (i) TBI shall not be required to take such actions more than one
(1) day prior to the Closing Date, and (ii) based upon consultation with counsel
and accountants for TBI, no such adjustment shall (x) require any filing with
any governmental agency or regulatory authority, (y) violate any law, rule or
regulation applicable to TBI, or (z) otherwise materially disadvantage TBI if
the Merger were not consummated; provided, further, that TBI's compliance with
this paragraph 4(l) shall in no event constitute a breach of any other
representation, warranty or covenant contained in this Agreement.
(m) TBI shall obtain, at its sole expense, Phase I environmental
assessments for each owned bank facility and each non-residential OREO property.
Oral reports of such environmental assessments shall be delivered to Wells Fargo
no later than four (4) weeks and written reports shall be delivered to Wells
Fargo no later than eight (8) weeks from the date of this Agreement. TBI shall
obtain, at its sole expense, Phase II environmental assessments for properties
identified by Wells Fargo on the basis of the results of such Phase I
environmental assessments. TBI shall obtain a survey and assessment of all
potential asbestos containing material in owned or leased properties (other than
OREO property) and a written report of the results shall be delivered to Wells
Fargo within four weeks of execution of the definitive agreement.
(n) TBI shall obtain, at its sole expense, commitments for title insurance
and boundary surveys for each owned bank facility which shall be delivered to
Wells Fargo no later than four (4) weeks from the date of this Agreement.
(o) TBI will cooperate with Wells Fargo to assess the impact of the
transactions contemplated by this Agreement on TBI's continued compliance with
the FFIEC Requirements and TBI will take such action, in consultation with Wells
Fargo, as may be necessary to amend TBI's Year 2000 project assessment and
remediation plan. TBI will continue its current preparations for compliance
with the FFIEC Requirements and will not rely on the consummation of the
transactions contemplated by this Agreement to satisfy its FFIEC requirements.
(p) TBI shall take such action as is necessary to terminate the Option
Plan effective as of the Effective Time. TBI shall collect (and timely pay) all
applicable withholding and payroll taxes from each holder of an Option that is
exercised for shares of TBI Common Stock, and shall comply with all payroll
reporting requirements with respect thereto.
(q) Immediately prior to the Effective Time, TBI shall redeem and shall
cause TBI's Stock Option Plan Committee to take all action necessary to redeem
all Options which have not been exercised prior to the Closing Date ("Redeemed
Options") in an
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<PAGE>
amount for each Redeemed Option equal to the Fair Market Value Per Share of such
Redeemed Option minus the exercise price thereof as set forth in an Option
holder's Option Agreement or Option Agreements. TBI shall withhold (and timely
pay) all applicable withholding, and payroll taxes from the Cash Surrender
Amount, and shall comply with all payroll reporting requirements with respect to
such payments. In addition, TBI shall, and shall cause the TBI Stock Option Plan
Committee to, determine the "Fair Market Value" (as defined in the Option Plan)
of a Redeemed Option to be an amount equal to the Fair Market Value Per Share as
defined in this Agreement
(r) Subject to the terms and conditions contained herein, TBI shall
execute and deliver such additional instruments and documents and shall take
such further actions as may be necessary or appropriate to effectuate, carry
out, and comply with the terms of this Agreement and the transaction
contemplated heretofore.
(s) In anticipation of conditions reasonably expected to be imposed by the
Federal Reserve Board in approving the Merger ("Board Approval"), TBI agrees to
enter into and agrees to cause First National Bank of South Texas ("Bank") to
enter into such agreements prior to Closing for the divestiture ("Divestiture")
of the branch of Bank located in Pleasanton, Texas ("Branch") and to take such
other actions prior to the Closing as may be necessary (or may reasonably be
expected to be necessary) to be taken in connection therewith and in order to
satisfy any requirements related thereto to be imposed by the Federal Reserve
Board as a condition to the Board Approval. TBI shall use, and shall cause Bank
to use their respective commercially reasonable best efforts to cooperate with
Wells Fargo in identifying prospective bidders for the Branch, allowing
prospective bidders to conduct due diligence on the Branch, and in negotiating
the terms of the Divestiture; provided that neither TBI nor Bank shall enter
into definitive agreements for the Divestiture without the prior consent of
Wells Fargo, which consent shall not be unreasonably withheld; provided further
that the consummation of the Divestiture contemplated by this Paragraph 2(s)
will be subject to and contingent upon Closing of the Merger and will not occur
prior to the Effective Time of the Merger; provided further that the actions
taken to implement the Divestiture shall not impair or unduly burden or be
deemed to impair or unduly burden the operations of business of TBI and the TBI
Subsidiaries. Nothing contained in this Paragraph 4(s) shall diminish the
agreements, covenants, and obligations of the parties otherwise set forth in
Articles 4 and 5 of the Agreement.
5. Covenants of Wells Fargo. Wells Fargo covenants and agrees with TBI as
follows:
(a) From the date hereof until the Effective Time of the Merger, Wells
Fargo will maintain its corporate existence in good standing; conduct, and cause
the Wells Fargo Subsidiaries to conduct, their respective businesses in
compliance with all material obligations and duties imposed on them by all laws,
governmental regulations, rules and ordinances, and judicial orders, judgments
and decrees applicable to Wells Fargo or the Wells Fargo Subsidiaries, their
businesses or their properties; maintain all books and records of it and the
Wells Fargo Subsidiaries, including all financial statements, in
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<PAGE>
accordance with the accounting principles and practices consistent with those
used for the Wells Fargo Financial Statements, except for changes in such
principles and practices required under generally accepted accounting
principles.
(b) Wells Fargo will furnish to TBI all the information concerning Wells
Fargo required for inclusion in a proxy statement or statements to be sent to
the shareholders of TBI, or in any statement or application made by TBI to any
governmental body in connection with the transactions contemplated by this
Agreement.
(c) As promptly as practicable after the execution of this Agreement,
Wells Fargo will file with the SEC a registration statement on Form S-4 (the
"Registration Statement") under the Securities Act and any other applicable
documents, relating to the shares of Wells Fargo Common Stock to be delivered to
the shareholders of TBI pursuant to the Merger Agreement, and will use its best
efforts to cause the Registration Statement to become effective. At the time
the Registration Statement becomes effective, the Registration Statement will
comply in all material respects with the provisions of the Securities Act and
the published rules and regulations thereunder, and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not false or
misleading, and at the time of mailing thereof to the TBI shareholders, at the
time of the TBI shareholders' meeting referred to in paragraph 4(c) hereof and
at the Effective Time of the Merger the prospectus included as part of the
Registration Statement, as amended or supplemented by any amendment or
supplement filed by Wells Fargo (hereinafter the "Prospectus"), will not contain
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not false or misleading; provided,
--------
however, that none of the provisions of this subparagraph shall apply to
- -------
statements in or omissions from the Registration Statement or the Prospectus
made in reliance upon and in conformity with information furnished by TBI or any
TBI subsidiary for use in the Registration Statement or the Prospectus.
(d) Wells Fargo will file all documents required to be filed to list the
Wells Fargo Common Stock to be issued pursuant to the Merger Agreement on the
New York Stock Exchange and the Chicago Stock Exchange and use its best efforts
to effect said listings.
(e) The shares of Wells Fargo Common Stock to be issued by Wells Fargo to
the shareholders of TBI pursuant to this Agreement and the Merger Agreement
will, upon such issuance and delivery to said shareholders pursuant to the
Merger Agreement, be duly authorized, validly issued, fully paid and
nonassessable. The shares of Wells Fargo Common Stock to be delivered to the
shareholders of TBI pursuant to the Merger Agreement are and will be free of any
preemptive rights of the stockholders of Wells Fargo.
(f) Wells Fargo will file all documents required to obtain, prior to the
Effective Time of the Merger, all necessary Blue Sky permits and approvals, if
any, required to carry out the transactions contemplated by this Agreement, will
pay all expenses incident thereto and will use its best efforts to obtain such
permits and approvals.
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<PAGE>
(g) Wells Fargo will take all necessary corporate and other action and
file all documents required to obtain and will use its best efforts to obtain
all approvals of regulatory authorities, consents and approvals required of it
to carry out the transactions contemplated by this Agreement and will cooperate
with TBI to obtain all such approvals and consents required by TBI and will file
all necessary applications with regulatory authorities as promptly as
practicable after the date hereof.
(h) Wells Fargo will hold in confidence all documents and information
concerning TBI and the TBI Subsidiaries furnished to it and its representatives
in connection with the transactions contemplated by this Agreement and will not
release or disclose such information to any other person, except as required by
law and except to its outside professional advisers in connection with this
Agreement, with the same undertaking from such professional advisers. If the
transactions contemplated by this Agreement shall not be consummated, such
confidence shall be maintained and such information shall not be used in
competition with TBI (except to the extent that such information can be shown to
be previously known to Wells Fargo, in the public domain, or later acquired by
Wells Fargo from other legitimate sources) and, upon request, all such
documents, copies thereof or extracts therefrom shall immediately thereafter be
returned to TBI.
(i) Wells Fargo will file any documents or agreements required to be filed
in connection with the Merger under the Texas Business Corporation Act.
(j) Wells Fargo will use its best efforts to deliver to the Closing all
opinions, certificates and other documents required to be delivered by it at the
Closing.
(k) Wells Fargo shall consult with TBI as to the form and substance of any
proposed press release or other proposed public disclosure of matters related to
this Agreement or any of the transactions contemplated hereby.
(l) Wells Fargo shall furnish TBI with copies, prior to filing, of the
non-confidential portions of the applications referred to in paragraph 7(e) and
shall give TBI notice of receipt of the regulatory approvals referred to
therein.
(m) Subject to the terms and conditions contained herein, Wells Fargo
shall execute and deliver such additional instruments and documents and shall
take such further actions as may be necessary or appropriate to effectuate,
carry out, and comply, with the terms of this Agreement and the transactions
contemplated hereby.
(n) Wells Fargo shall use its best efforts to cause the Board of Directors
of Merger Co. to authorize and approve the Merger Agreement and the transactions
contemplated thereby.
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<PAGE>
(o) With respect to the indemnification of directors and officers and with
respect to directors' and officers' insurance, Wells Fargo agrees as follows:
(i) Wells Fargo shall ensure that all rights to indemnification and
all limitations of liability existing in favor of any person who is now, or
has been at any time prior to the date hereof, or who becomes prior to the
Effective Time of the Merger, a director or officer of TBI or any TBI
Subsidiary (an "Indemnified Party" and, collectively, the "Indemnified
Parties"), in TBI's Articles of Incorporation or Bylaws or similar
governing documents of any TBI Subsidiary, as applicable in the particular
case and as in effect on the date hereof, shall, with respect to claims
arising from (A) facts or events that occurred before the Effective Time of
the Merger, or (B) this Agreement or any of the transactions contemplated
by this Agreement, whether in any case asserted or arising before or after
the Effective Time of the Merger, survive the Merger and shall continue in
full force and effect. Nothing contained in this paragraph 5(o)(i) shall
be deemed to preclude the liquidation, consolidation, or merger of TBI or
any TBI Subsidiary, in which case all of such rights to indemnification and
limitations on liability shall be deemed to survive and continue as
contractual rights notwithstanding any such liquidation or consolidation
or merger; provided, however, that in the event of liquidation or sale of
-------- -------
substantially all of the assets of TBI, Wells Fargo shall guarantee, to the
extent of the net asset value of TBI or any TBI Subsidiary as of the
Effective Date of the Merger, the indemnification obligations of TBI or any
TBI Subsidiary to the extent of indemnification obligations of TBI and the
TBI Subsidiaries described above. Notwithstanding anything to the
contrary contained in this paragraph 5(o)(i), nothing contained herein
shall require Wells Fargo to indemnify any person who was a directors or
officer of TBI or any TBI Subsidiary to a greater extent than TBI or any
TBI Subsidiary is, as of the date of this Agreement, required to indemnify
any such person.
(ii) any Indemnified Party wishing to claim indemnification under
paragraph 5(o)(i), upon learning of any such claim, action, suit,
proceeding, or investigation, shall promptly notify Wells Fargo thereof,
but the failure to so notify shall not relieve Wells Fargo of any liability
it may have to such Indemnified Party. In the event of any such claim,
action, suit, proceeding, or investigation (whether arising before of after
the Effective Time of the Merger) (A) Wells Fargo shall have the right to
assume the defense thereof and Wells Fargo shall not be liable to any
Indemnified Party for any legal expenses of other counsel or any other
expenses subsequently incurred by such Indemnified Party in connection with
the defense thereof, except that if Wells Fargo elects not to assume such
defense or counsel for the Indemnified Party advises that there are issues
which raise conflicts of interest between Wells Fargo and the Indemnified
Party, the Indemnified Party may retain counsel satisfactory to them, and
Wells Fargo shall pay the reasonable fees and expenses of such counsel for
the Indemnified Party promptly as statements therefor are received,
provided, however, that Wells Fargo shall be obligated pursuant to this
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subparagraph (ii) to
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pay for only one firm of counsel for all Indemnified Parties in any
jurisdiction unless the use of one counsel for such Indemnified Parties
would present such counsel with a conflict of interest, and (B) such
Indemnified Party shall cooperate in the defense of any such matter.
6. Conditions Precedent to Obligation of TBI. The obligation of TBI to
effect the Merger shall be subject to the satisfaction at or before the Time of
Filing of the following further conditions, which may be waived in writing by
TBI:
(a) Except as they may be affected by transactions contemplated hereby and
except to the extent such representations and warranties are by their express
provisions made as of a specified date and except for activities or transactions
after the date of this Agreement made in the ordinary course of business and not
expressly prohibited by this Agreement, the representations and warranties
contained in paragraph 3 hereof shall be true and correct in all respects
material to Wells Fargo and its subsidiaries taken as a whole as if made at the
Time of Filing.
(b) Wells Fargo shall have, or shall have caused to be, performed and
observed in all material respects all covenants, agreements and conditions
hereof to be performed or observed by it and Merger Co. at or before the Time of
Filing.
(c) TBI shall have received a favorable certificate, dated as of the
Effective Date of the Merger, signed by the Chairman, the President or any
Executive Vice President or Senior Vice President and by the Secretary or
Assistant Secretary of Wells Fargo, as to the matters set forth in subparagraphs
(a) and (b) of this paragraph 6.
(d) This Agreement and the Merger Agreement shall have been approved by
the affirmative vote of the holders of the percentage of the outstanding shares
of TBI required for approval of a plan of merger in accordance with the
provisions of TBI's Articles of Incorporation and the Texas Business Corporation
Act.
(e) Wells Fargo shall have received approval by the Federal Reserve Board
and by such other governmental agencies as may be required by law of the
transactions contemplated by this Agreement and the Merger Agreement and all
waiting and appeal periods prescribed by applicable law or regulation shall have
expired.
(f) No court or governmental authority of competent jurisdiction shall
have issued an order restraining, enjoining or otherwise prohibiting the
consummation of the transactions contemplated by this Agreement.
(g) The shares of Wells Fargo Common Stock to be delivered to the
stockholders of TBI pursuant to this Agreement and the Merger Agreement shall
have been authorized for listing on the New York Stock Exchange and the Chicago
Stock Exchange.
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(h) TBI shall have received an opinion, dated the Closing Date, of KPMG
LLP, substantially to the effect that, for federal income tax purposes: (i) the
Merger will constitute a reorganization within the meaning of Sections
368(a)(1)(A) and 368(a)(2)(E) of the Code; (ii) no gain or loss will be
recognized by the holders of TBI Common Stock upon receipt of Wells Fargo Common
Stock except for cash received in lieu of fractional shares; (iii) the basis of
the Wells Fargo Common Stock received by the shareholders of TBI will be the
same as the basis of TBI Common Stock exchanged therefor; and (iv) the holding
period of the shares of Wells Fargo Common Stock received by the shareholders of
TBI will include the holding period of the TBI Common Stock, provided such
shares of TBI Common Stock were held as a capital asset as of the Effective Time
of the Merger.
(i) The Registration Statement (as amended or supplemented) shall have
become effective under the Securities Act and shall not be subject to any stop
order, and no action, suit, proceeding or investigation by the SEC to suspend
the effectiveness of the Registration Statement shall have been initiated and be
continuing, or have been threatened and be unresolved. Wells Fargo shall have
received all state securities law or blue sky authorizations necessary to carry
out the transactions contemplated by this Agreement.
(j) Since December 31, 1998, no change shall have occurred and no
circumstances shall exist which has had or might reasonably be expected to have
a material adverse effect on the financial condition, results of operations,
business or prospects of Wells Fargo and the Wells Fargo Subsidiaries taken as a
whole (other than changes in banking laws or regulations, or interpretations
thereof, that affect the banking industry generally or changes in the general
level of interest rates).
7. Conditions Precedent to Obligation of Wells Fargo. The obligation of
Wells Fargo to effect the Merger shall be subject to the satisfaction at or
before the Time of Filing of the following conditions, which may be waived in
writing by Wells Fargo:
(a) Except as they may be affected by transactions contemplated hereby and
except to the extent such representations and warranties are by their express
provisions made as of a specified date and except for activities or transactions
or events occurring after the date of this Agreement made in the ordinary course
of business and not expressly prohibited by this Agreement, the representations
and warranties contained in paragraph 2 hereof shall be true and correct in all
respects material to TBI and the TBI Subsidiaries taken as a whole as if made at
the Time of Filing.
(b) TBI shall have, or shall have caused to be, performed and observed in
all material respects all covenants, agreements and conditions hereof to be
performed or observed by it at or before the Time of Filing.
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(c) This Agreement and the Merger Agreement shall have been approved by
the affirmative vote of the holders of the percentage of the outstanding shares
of TBI required for approval of a plan of merger in accordance with the
provisions of TBI's Articles of Incorporation and the Texas Business
Corporation Act.
(d) Wells Fargo shall have received a favorable certificate dated as of
the Effective Date of the Merger signed by the Chairman or President and by the
Secretary or Assistant Secretary of TBI, as to the matters set forth in
subparagraphs (a) through (c) of this paragraph 7.
(e) Wells Fargo shall have received approval by all governmental agencies
as may be required by law of the transactions contemplated by this Agreement and
the Merger Agreement and all waiting and appeal periods prescribed by applicable
law or regulation shall have expired. No approvals, licenses or consents
granted by any regulatory authority shall contain any condition or requirement
relating to TBI or any TBI Subsidiary that, in the good faith judgment of Wells
Fargo, is unreasonably burdensome to Wells Fargo.
(f) TBI and each TBI Subsidiary shall have obtained any and all material
consents or waivers from other parties to loan agreements, leases or other
contracts material to TBI's or such TBI Subsidiary's business required for the
consummation of the Merger, and TBI and each TBI Subsidiary shall have obtained
any and all material permits, authorizations, consents, waivers and approvals
required for the lawful consummation by it of the Merger.
(g) No court or governmental authority of competent jurisdiction shall
have issued an order restraining, enjoining or otherwise prohibiting the
consummation of the transactions contemplated by this Agreement.
(h) At any time since the date hereof the total number of shares of TBI
Common Stock outstanding and subject to issuance upon exercise (assuming for
this purpose that phantom shares and other share-equivalents constitute TBI
Common Stock) of all warrants, options, conversion rights, phantom shares or
other share-equivalents, other than any option held by Wells Fargo, shall not
have exceeded 2,026,036.
(i) The Registration Statement (as amended or supplemented) shall have
become effective under the Securities Act and shall not be subject to any stop
order, and no action, suit, proceeding or investigation by the SEC to suspend
the effectiveness of the Registration Statement shall have been initiated and be
continuing, or have been threatened or be unresolved. Wells Fargo shall have
received all state securities law or blue sky authorizations necessary to carry
out the transactions contemplated by this Agreement.
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(j) Wells Fargo shall have received from the Chief Executive Officer and
Chief Financial Officer of TBI a letter, dated as of the effective date of the
Registration Statement and updated through the date of Closing, in form and
substance satisfactory to Wells Fargo, to the effect that:
(i) the interim quarterly financial statements of TBI included or
incorporated by reference in the Registration Statement are prepared in
accordance with generally accepted accounting principles applied on a basis
consistent with the audited financial statements of TBI;
(ii) the amounts reported in the interim quarterly financial
statements of TBI agree with the general ledger of TBI;
(iii) the annual and quarterly financial statements of TBI and the
TBI Subsidiaries included in, or incorporated by reference in, the
Registration Statement comply as to form in all material respects with the
applicable accounting requirements of the Securities Act and the published
rules and regulations thereunder;
(iv) from March 31, 1999 to a date five (5) days prior to the
Closing, there are no increases in long-term debt, changes in the capital
stock or decreases in stockholders' equity of TBI and the TBI Subsidiaries,
except in each case for changes, increases or decreases which the
Registration Statement discloses have occurred or may occur or which are
described in such letters. For the same period, there have been no
decreases in consolidated net interest income, consolidated net interest
income after provision for credit losses, consolidated income before income
taxes, consolidated net income and net income per share amounts of TBI and
the TBI Subsidiaries, or in income before equity in undistributed income of
subsidiaries, in each case as compared with the comparable period of the
preceding year, except in each case for changes, increases or decreases
which the Registration Statement discloses have occurred or may occur or
which are described in such letters;
(v) they have reviewed certain amounts, percentages, numbers of
shares and financial information which are derived from the general
accounting records of TBI and the TBI Subsidiaries, which appear in the
Registration Statement under the certain captions to be specified by Wells
Fargo, and have compared certain of such amounts, percentages, numbers and
financial information with the accounting records of TBI and the TBI
Subsidiaries and have found them to be in agreement with financial records
and analyses prepared by TBI included in the annual and quarterly financial
statements, except as disclosed in such letters.
(k) TBI and the TBI Subsidiaries considered as a whole shall not have
sustained since December 31, 1998 any material loss or interference with their
business from any civil disturbance or any fire, explosion, flood or other
calamity, whether or not covered by insurance.
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(l) There shall be no effected, instituted, pending, or proposed
proceeding, claim or action of any nature seeking to impose, or that could
result in the imposition on TBI or any TBI Subsidiary of, any liability relating
to the release of hazardous substances as defined under any local, state or
federal environmental statute, regulation or ordinance including, without
limitation, CERCLA, which has had or could reasonably be expected to have a
material adverse effect upon TBI and its subsidiaries taken as a whole.
(m) Since December 31, 1998, no change shall have occurred and no
circumstances shall exist which has had or might reasonably be expected to have
a material adverse effect on the financial condition, results of operations,
business or prospects of TBI and the TBI Subsidiaries taken as a whole (other
than changes in banking laws or regulations, or interpretations thereof, that
affect the banking industry generally or changes in the general level of
interest rates). No action taken by TBI solely in order to comply with
paragraph 4(l) hereof shall be deemed to have a material adverse effect for
purposed of this paragraph 7(m).
(n) TBI shall be in full compliance with current FFIEC Requirements. There
shall be no feature of TBI's data processing, operating or platform systems that
would prevent those systems from (A) being successfully converted to Wells Fargo
systems prior to December 31, 1999 in full compliance with current FFIEC
Requirements, or (B) if the conversion cannot be completed in the manner
contemplated by subparagraph (A) above, continuing to run independently after
December 31, 1999 in full compliance with current FFIEC Requirements until such
time as a subsequent conversion to Wells Fargo systems can be completed.
(o) TBI shall have taken the actions required by paragraph 4(p).
(p) TBI shall have taken the actions required by paragraph 4(q).
(q) Except as a result of any actions by Wells Fargo, the Non-Competition
Agreements and Employment and Non-Competition Agreements listed on Schedule 7(q)
shall be in full force and effect.
8. Employee Benefit Plans. Each person who is an employee of TBI or any
TBI Subsidiary as of the Effective Date of the Merger ("TBI Employees") shall be
eligible for participation in the employee welfare and retirement plans of Wells
Fargo, as in effect from time to time, as follows:
(a) Employee Welfare Benefit Plans. Each TBI Employee shall be eligible
-------------------------------
for participation in the employee welfare benefit plans of Wells Fargo listed
below subject to any eligibility requirements applicable to such plans (and not
subject to pre-existing condition exclusions, except with respect to the Wells
Fargo Long Term Care Plan) and shall enter each plan no later than the first day
of the calendar quarter which begins at least thirty-two (32) days after the
Effective Date of the Merger ("Benefits Conversion Date") unless the first day
of the calendar quarter beginning at least thirty-two (32) days
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after the Effective Date of the Merger is January 1, 2000, in which event the
Benefits Conversion Date shall be February 1, 2000 (provided that the transition
from TBI's Plans to the Wells Fargo Plans will be facilitated without gaps in
coverage to the participants and without duplication of costs to Wells Fargo):
Medical Plan
Dental Plan
Vision Plan
Short Term Disability Plan
Long Term Disability Plan
Long Term Care Plan
Flexible Benefits Plan
Basic Group Life Insurance Plan
Group Universal Life Insurance Plan
Dependent Group Life Insurance Plan
Business Travel Accident Insurance Plan
Accidental Death and Dismemberment Plan
Separation Pay Plan
Paid Time Off Program
TBI Employees shall receive credit for years of service to TBI, the TBI
Subsidiaries and any predecessors of TBI or the TBI Subsidiaries (to the extent
credited under the vacation and short-term disability programs of TBI) for the
purpose of determining benefits under the Wells Fargo Paid Time Off Program,
Separation Pay Plan, and Short Term Disability Plan.
(b) Employee Retirement Benefit Plans. Each TBI Employee shall be
---------------------------------
eligible for participation in the Wells Fargo 401(k) (the "401(k)"), subject to
any eligibility requirements applicable to the 401(k) (with full credit for
years of past service to TBI and the TBI Subsidiaries for the purpose of
satisfying any eligibility and vesting periods applicable to the 401(k)), and
shall enter the 401(k) no later than the first day of the calendar quarter which
begins at least thirty-two (32) days after the Effective Date of the Merger
("Benefits Conversion Date") unless the first day of the calendar quarter
beginning at least thirty-two (32) days after the Effective Date of the Merger
is January 1, 2000, in which event the Benefits Conversion Date shall be
February 1, 2000.
Each TBI Employee shall be eligible for participation, as a new employee,
in the Wells Fargo Cash Balance Plan under the terms thereof.
9. Termination of Agreement.
(a) This Agreement may be terminated at any time prior to the Time of
Filing:
(i) by mutual written consent of the parties hereto;
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(ii) by either of the parties hereto upon written notice to the
other party if the Merger shall not have been consummated by February 29,
2000, unless such failure of consummation shall be due to the failure of
the party seeking to terminate to perform or observe in all material
respects the covenants and agreements hereof to be performed or observed by
such party; or
(iii) by TBI or Wells Fargo upon written notice to the other party if
any court or governmental authority of competent jurisdiction shall have
issued a final order restraining, enjoining or otherwise prohibiting the
consummation of the transactions contemplated by this Agreement.
(b) Termination of this Agreement under this paragraph 9 shall not
release, or be construed as so releasing, either party hereto from any liability
or damage to the other party hereto arising out of the breaching party's willful
and material breach of the warranties and representations made by it, or willful
and material failure in performance of any of its covenants, agreements, duties
or obligations arising hereunder, and the obligations under paragraphs 4(g),
5(h) and 10 shall survive such termination.
10. Expenses. All expenses in connection with this Agreement and the
transactions contemplated hereby, including without limitation legal and
accounting fees, incurred by TBI and TBI Subsidiaries shall be borne by TBI, and
all such expenses incurred by Wells Fargo shall be borne by Wells Fargo.
11. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns, but shall not be assignable by either party hereto without the prior
written consent of the other party hereto.
12. Third Party Beneficiaries. Each party hereto intends that this
Agreement shall not benefit or create any right or cause of action in or on
behalf of any person other than the parties hereto.
13. Notices. Any notice or other communication provided for herein or
given hereunder to a party hereto shall be in writing and shall be delivered in
person or shall be mailed by first class registered or certified mail, postage
prepaid, addressed as follows:
If to Wells Fargo:
Wells Fargo & Company
Sixth and Marquette
Minneapolis, Minnesota 55479-1026
Attention: Secretary
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If to TBI:
Texas Bancshares, Inc.
750 East Mulberry
San Antonio, Texas 78212
Attention: Fredrick Erck
or to such other address with respect to a party as such party shall notify the
other in writing as above provided.
14. Complete Agreement. This Agreement and the Merger Agreement
contain the complete agreement between the parties hereto with respect to the
Merger and other transactions contemplated hereby and supersede all prior
agreements and understandings between the parties hereto with respect thereto.
15. Captions. The captions contained in this Agreement are for
convenience of reference only and do not form a part of this Agreement.
16. Waiver and Other Action. Either party hereto may, by a signed
writing, give any consent, take any action pursuant to paragraph 9 hereof or
otherwise, or waive any inaccuracies in the representations and warranties by
the other party and compliance by the other party with any of the covenants and
conditions herein.
17. Amendment. At any time before the Time of Filing, the parties
hereto, by action taken by their respective Boards of Directors or pursuant to
authority delegated by their respective Boards of Directors, may amend this
Agreement; provided, however, that no amendment after approval by the
shareholders of TBI shall be made which changes in a manner adverse to such
shareholders the consideration to be provided to said shareholders pursuant to
this Agreement and the Merger Agreement.
18. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Texas.
19. Non-Survival of Representations and Warranties. No
representation or warranty contained in the Agreement or the Merger Agreement
shall survive the Merger or except as set forth in paragraph 9(b), the
termination of this Agreement. Paragraph 10 shall survive the Merger.
20. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
constitute but one instrument.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
WELLS FARGO & COMPANY
By /s/ John E. Ganoe
---------------------------
Its Executive Vice President
---------------------------
TEXAS BANCSHARES, INC.
By /s/ Fredrick Erck
---------------------------
Its Chairman
---------------------------
[signature page to Amended and Restated Agreement and Plan of Reorganization]
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APPENDIX B
_____________________
OPINION OF HOEFER & ARNETT, INCORPORATED
_____________________
<PAGE>
[LETTERHEAD OF HOEFER & ARNETT, INCORPORATED]
[date of the proxy statement-prospectus]
Members of the Board of Directors
Texas Bancshares, Inc.
750 E. Mulberry
San Antonio, Texas 78212
Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from a
financial point of view, to the shareholders of Texas Bancshares, Inc., San
Antonio, Texas ("TBI") of the terms of the proposed merger of a wholly-owned
subsidiary of Wells Fargo & Company, San Francisco, California ("Wells Fargo")
with and into TBI in accordance with the terms and conditions of the Amended and
Restated Agreement and Plan of Reorganization (the "Agreement"). Pursuant to the
Agreement and subject to the terms and conditions therein, each share of TBI
Common Stock outstanding immediately prior to the Effective Time of the Merger
(as defined in the Agreement), other than shares as to which statutory
dissenters' appraisal rights have been exercised, will be exchanged for the
number of shares of Wells Fargo Common Stock determined by dividing the Adjusted
Wells Fargo Shares (as defined below) by the number of shares of TBI Common
Stock then outstanding. The "Adjusted Wells Fargo Shares" shall be a number
equal to the Aggregate Share Amount divided by the Wells Fargo Measurement
Price. The "Wells Fargo Measurement Price" is defined as the average of the
closing prices of a share of Wells Fargo Common Stock as reported on the
consolidated tape of the New York Stock Exchange during the period of 10 trading
days ending on the day immediately preceding the meeting of shareholders
required by paragraph 4(c) of the Agreement. The "Aggregate Share Amount" shall
be $68,500,000 plus the aggregate exercise price of all Options exercised by
cash payments between the date hereof and the day immediately prior to the
Closing Date minus the Cash Surrender Amount. The "Cash Surrender Amount" shall
equal the difference between (i) the product of (A) the "Fair Market Value Per
Share" multiplied by (B) the number of Redeemed Options, minus (ii) the
aggregate exercise price of all Redeemed Options. "Fair Market Value Per Share"
shall mean $34.2988. "Option" has the meaning given it in paragraph 2(c) of the
Agreement.
As part of its investment banking business, Hoefer & Arnett, Incorporated is
continually engaged in the valuation of bank, bank holding company and thrift
securities in connection
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with mergers and acquisitions nationwide. We have not previously provided
investment banking and financial advisory services to TBI.
In arriving at our opinion, we have reviewed and analyzed, among other things,
the following: (i) the Agreement; (ii) Annual Reports to Shareholders of TBI and
Wells Fargo for the years ended December 31, 1997 and December 31, 1998; (iii)
Quarterly Consolidated Financial Statements for Bank Holding Companies on Form
FR Y-9C as filed with the Federal Reserve for the quarters ended March 31, 1998,
June 30, 1998, September 30, 1998, December 31, 1998 and March 31, 1999; (iv)
certain other publicly available financial and other information concerning TBI
and Wells Fargo and the trading markets for the publicly traded securities of
TBI and Wells Fargo; and (v) publicly available information concerning other
banks and bank holding companies, the trading markets for their securities and
the nature and terms of certain other merger transactions we believe relevant to
our inquiry. We have held discussions with senior management of TBI and Wells
Fargo concerning their past and current operations, financial condition and
prospects, as well as the results of regulatory examinations.
We have reviewed with senior management of TBI earnings projections for 1999
through 2003 for TBI as a stand-alone entity, assuming the merger does not
occur. Such projections were prepared by TBI senior management.
In conducting our review and in arriving at our opinion, we have relied upon and
assumed the accuracy and completeness of the financial and other information
provided to us or publicly available, and we have not assumed any responsibility
for independent verification of the same. We have relied upon the management of
TBI as to the reasonableness of the financial and operating forecasts and
projections (and the assumptions and bases therefor) provided to us, and we have
assumed that such forecasts and projections reflect the best currently available
estimates and judgments of TBI management. We have also assumed, without
assuming any responsibility for the independent verification of the same, that
the aggregate allowances for loan losses for Wells Fargo and TBI are adequate to
cover such losses. We have not made or obtained any evaluations or appraisals
of the property of TBI or Wells Fargo, nor have we examined any individual loan
credit files. For purposes of this opinion, we have assumed that the merger
will have the tax, accounting and legal effects described in the Agreement and
assumed the accuracy of the disclosures set forth in the Agreement. Our opinion
as expressed herein is limited to the fairness, from a financial point of view,
to the holders of shares of TBI Common Stock of the terms of the proposed
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merger of a wholly-owned subsidiary of Wells Fargo with and into TBI and does
not address TBI's underlying business decision to proceed with the merger.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including among others the following: (i)
the historical and current financial position and results of operations of TBI
and Wells Fargo, including interest income, interest expense, net interest
income, net interest margin, provision for loan losses, non-interest income,
non-interest expense, earnings, dividends, internal capital generation, book
value, intangible assets, return on assets, return on shareholders' equity,
capitalization, the amount and type of non-performing assets, loan losses and
the reserve for loan losses, all as set forth in the financial statements for
TBI and Wells Fargo; (ii) the assets and liabilities of TBI and Wells Fargo,
including the loan, investment and mortgage portfolios, deposits, other
liabilities, historical and current liability sources and costs and liquidity;
and (iii) the nature and terms of certain other merger transactions involving
banks and bank holding companies. We have also taken into account our
assessment of general economic, market and financial conditions and our
experience in other transactions, as well as our experience in securities
valuation and our knowledge of the banking industry generally. Our opinion is
necessarily based upon conditions as they exist and can be evaluated on the date
hereof and the information made available to us through the date hereof.
Based upon and subject to the foregoing, we are of the opinion as investment
bankers that, as of the date hereof, the terms of the proposed merger of a
wholly-owned subsidiary of Wells Fargo with and into TBI are fair, from a
financial point of view, to the holders of shares of TBI Common Stock.
It is understood that this letter is for the information of the Board of
Directors of TBI and does not constitute a recommendation to the Board of
Directors or to any shareholder of TBI with respect to any approval of the
merger. We hereby consent to the reference to our firm in the proxy statement
or prospectus related to the merger transaction and to the inclusion of our
opinion as an exhibit to the proxy statement or prospectus related to the merger
transaction.
Very truly yours,
/s/ Hoefer & Arnett, Incorporated
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APPENDIX C
_____________________
ARTICLES 5.11, 5.12 AND 5.13 OF THE
TEXAS BUSINESS CORPORATION ACT
_____________________
<PAGE>
Art. 5.11 Rights of Dissenting Shareholders in the Event of Certain Corporate
Actions
A. Any shareholder of a domestic corporation shall have the right to
dissent from any of the following corporate actions:
(1) Any plan of merger to which the corporation is a party if
shareholder approval is required by Article 5.03 or 5.16 of this Act
and the shareholder holds shares of a class or series that was
entitled to vote thereon as a class or otherwise:
(2) Any sale, lease, exchange or other disposition (not
including any pledge, mortgage, deed of trust or trust indenture
unless otherwise provided in the articles of incorporation) of all,
or substantially all, the property and assets, with or without good
will, of a corporation requiring the special authorization of the
shareholders as provided by this Act;
(3) Any plan of exchange pursuant to Article 5.02 of this Act in
which the shares of the corporation of the class or series held by
the shareholder are to be acquired.
B. Notwithstanding the provisions of Section A of this Article, a
shareholder shall not have the right to dissent from any plan of
merger in which there is a single surviving or new domestic or
foreign corporation, or from any plan of exchange, if (1) the shares
held by the shareholder are part of a class shares of which are
listed on a national securities exchange, or are held of record by
not less than 2,000 holders, on the record date fixed to determine
the shareholders entitled to vote on the plan of merger or the plan
of exchange, and (2) the shareholder is not required by the terms of
the plan of merger or the plan of exchange to accept for his shares
any consideration other than (a) shares of a corporation that,
immediately after the effective time of the merger or exchange, will
be part of a class or series of shares of which are (i) listed, or
authorized for listing upon official notice of issuance, on a
national securities exchange, or (ii) held of record by not less than
2,000 holders, and (b) cash in lieu of fractional shares otherwise
entitled to be received.
Acts 1955, 54th Leg., p. 239, ch. 64, eff. Sept. 6, 1955. Amended by
Acts 1957, 55th Leg., p. 111, ch. 54, (S) 10; Acts 1973, 63rd Leg.,
p. 1508, ch. 545, (S) 36, eff. Aug. 27, 1973; Acts 1989, 71st Leg.,
ch. 801, (S) 34, eff. Aug. 28, 1989; Acts 1991, 72nd Leg., ch. 901,
(S) 32, eff. Aug 26, 1991.
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Art. 5.12 Procedure for Dissent by Shareholders as to Said Corporate Actions
A. Any shareholder of any domestic corporation who has the right to
dissent from any of the corporate actions referred to in Article 5.11
of this Act may exercise that right to dissent only by complying with
the following procedures:
(1) (a) With respect to proposed corporate action that is
submitted to a vote of shareholders at a meeting, the shareholder
shall file with the corporation, prior to the meeting, a written
objection to the action, setting out that the shareholder's right to
dissent will be exercised if the action is effective and giving the
shareholder's address, to which notice thereof shall be delivered or
mailed in that event. If the action is effected and the shareholder
shall not have voted in favor of the action, the corporation, in the
case of action other than a merger, or the surviving or new
corporation (foreign or domestic) or other entity that is liable to
discharge the shareholder's right of dissent, in the case of a
merger, shall, within ten (10) days after the action is effected,
deliver or mail to the shareholder written notice that the action has
been effected, and the shareholder may, within ten (10) days from the
delivery or mailing of the notice, make written demand on the
existing, surviving, or new corporation (foreign or domestic) or
other entity, as the case may be, for payment of the fair value of
the shareholder's shares. The fair value of the shares shall be the
value thereof as of the day immediately preceding the meeting,
excluding any appreciation or depreciation in anticipation of the
proposed action. The demand shall state the number and class of the
shares owned by the shareholder and the fair value of the shares as
estimated by the shareholder. Any shareholder failing to make demand
within the ten (10) day period shall be bound by the action.
(b) With respect to proposed corporate action that is approved
pursuant to Section A of Article 9.10 of this Act, the corporation,
in the case of action other than a merger, and the surviving or new
corporation (foreign or domestic) or other entity that is liable to
discharge the shareholder's right of dissent, in the case of a
merger, shall, within ten (10) days after the date the action is
effected, mail to each shareholder of record as of the effective date
of the action notice of the fact and date of the action and that the
shareholder may exercise the shareholder's right to dissent from the
action. The notice shall be accompanied by a copy of this Article and
any articles or documents filed by the Corporation with the Secretary
of State to effect the action. If the shareholder shall not have
consented to the taking of the action, the shareholder may, within
twenty (20) days after the mailing of the notice, make written demand
on the existing, surviving, or new corporation (foreign or domestic)
or other entity, as the case may be, for payment of the fair value of
the
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shareholder's shares. The fair value of the shares shall be the value
thereof as of the date the written consent authorizing the action was
delivered to the corporation pursuant to Section A of Article 9.10 of
this Act, excluding any appreciation or depreciation in anticipation
of the action. The demand shall state the number and class of shares
owned by the dissenting shareholder and the fair value of the shares
as estimated by the shareholder. Any shareholder failing to make
demand within the twenty (20) day period shall be bound by the action.
(2) Within twenty (20) days after receipt by the existing,
surviving, or new corporation (foreign or domestic) or other entity,
as the case may be, of a demand for payment made by a dissenting
shareholder in accordance with Subsection (1) of this Section, the
corporation (foreign or domestic) or other entity shall deliver or
mail to the shareholder a written notice that shall either set out
that the corporation (foreign or domestic) or other entity accepts the
amount claimed in the demand and agrees to pay that amount within
ninety (90) days after the date on which the action was effected, and,
in the case of shares represented by certificates, upon the surrender
of the certificates duly endorsed, or shall contain an estimate by the
corporation (foreign or domestic) or other entity of the fair value of
the shares, together with an offer to pay the amount of that estimate
within ninety (90) days after the date on which the action was
effected, upon receipt of notice within sixty (60) days after that
date from the shareholder that the shareholder agrees to accept that
amount and, in the case of shares represented by certificates, upon
the surrender of the certificates duly endorsed.
(3) If, within sixty (60) days after the date on which the
corporate action was effected, the value of the shares is agreed upon
between the shareholder and the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be,
payment for the shares shall be made within ninety (90) days after the
date on which the action was effected and, in the case of shares
represented by certificates, upon surrender of the certificates duly
endorsed. Upon payment of the agreed value, the shareholder shall
cease to have any interest in the shares or in the corporation.
B. If, within the period of sixty (60) days after the date on which the
corporate action was effected, the shareholder and the existing,
surviving, or new corporation (foreign or domestic) or other entity,
as the case may be, do not so agree, then the shareholder or the
corporate (foreign or domestic) or other entity may, within sixty (60)
days after the expiration of the sixty (60) day period, file a
petition in any court of competent jurisdiction in the county in which
the principal office of the domestic corporation is located, asking
for a finding and determination of the fair
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<PAGE>
value of the shareholder's shares. Upon the filing of any such
petition by the shareholder, service of a copy thereof shall be made
upon the corporation (foreign or domestic) or other entity, which
shall, within ten (10) days after service, file in the office of the
clerk of the court in which the petition was filed a list containing
the names and addresses of all shareholders of the domestic
corporation who have demanded payment for their shares and with whom
agreements as to the value of their shares have not been reached by
the corporation (foreign or domestic) or other entity. If the petition
shall be filed by the corporation (foreign or domestic) or other
entity, the petition shall be accompanied by such a list. The clerk of
the court shall give notice of the time and place fixed for the
hearing of the petition by registered mail to the corporation (foreign
or domestic) or other entity and to the shareholders named on the list
at the addresses therein stated. The forms of the notices by mail
shall be approved by the court. All shareholders thus notified and the
corporation (foreign or domestic) or other entity shall thereafter be
bound by the final judgment of the court.
C. After the hearing of the petition, the court shall determine the
shareholders who have complied with the provisions of this Article and
have become entitled to the valuation of and payment for their shares,
and shall appoint one or more qualified appraisers to determine that
value. The appraisers shall have power to examine any of the books
and records of the corporation the shares of which they are charged
with the duty of valuing, and they shall make a determination of the
fair value of the shares upon such investigation as to them may seem
proper. The appraisers shall also afford a reasonable opportunity to
the parties interested to submit to them pertinent evidence as to the
value of the shares. The appraisers shall also have such power and
authority as may be conferred on Masters in Chancery by the Rules of
Civil Procedure or by the order of their appointment.
D. The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their
shares and shall file their report of that value in the office of the
clerk of the court. Notice of the filing of the report shall be given
by the clerk to the parties in interest. The report shall be subject
to exceptions to be heard before the court both upon the law and the
facts. The court shall by its judgment determine the fair value of
the shares of the shareholders entitled to payment for their shares
and shall direct the payment of that value by the existing, surviving,
or new corporation (foreign or domestic) or other entity, together
with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to
dissent was effected to the date of such judgment, to the shareholders
entitled to payment. The judgment shall be payable to the holders of
uncertificated shares immediately but to the holders of shares
represented
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<PAGE>
by certificates only upon, and simultaneously with, the surrender to
the existing, surviving, or new corporation (foreign or domestic) or
other entity, as the case may be, of duly endorsed certificates for
those shares. Upon payment of the judgment, the dissenting
shareholders shall cease to have any interest in those shares or in
the corporation. The court shall allow the appraisers a reasonable fee
as court costs, and all court costs shall be allotted between the
parties in the manner that the court determines to be fair and
equitable.
E. Shares acquired by the existing, surviving, or new corporation
(foreign or domestic) or other entity, as the case may be, pursuant
to the payment of the agreed value of the shares or pursuant to
payment of the judgment entered for the value of the shares, as in
this Article provided, shall, in the case of a merger, be treated as
provided in the plan of merger and, in all other cases, may be held
and disposed of by the corporation as in the case of other treasury
shares.
F. The provisions of this Article shall not apply to a merger if, on the
date of filing of the articles of merger, the surviving corporation is
the owner of all the outstanding shares of the other corporations,
domestic or foreign, that are parties to the merger.
G. In the absence of fraud in the transaction, the remedy provided by
this Article to a shareholder objecting to any corporate action
referred to in Article 5.11 of this Act is the exclusive remedy for
the recovery of the value of his shares or money damages to the
shareholder with respect to the action. If the existing, surviving,
or new corporation (foreign or domestic) or other entity, as the case
may be, complies with the requirements of this Article, any
shareholder who fails to comply with the requirements of this Article
shall not be entitled to bring suit for the recovery of the value of
his shares or money damages to the shareholder with respect to the
action.
Acts 1955, 54th Leg., p. 239, ch. 64, eff. Sept. 6, 1955. Amended by
Acts 1967, 60th Leg., p. 1721, ch. 657 (S) 12, eff. June 17, 1967;
Acts 1983, 68th Leg., p. 2570, ch. 442 (S) 9, eff. Sept. 1, 1983;
Acts 1987, 70th Leg., ch. 93, (S) 27, eff. Aug. 31, 1987; Acts 1989,
71st Leg., ch. 801, (S) 35, eff. Aug 28, 1989; Acts 1993, 73rd Leg.,
ch 215, (S) 2.16, eff. Sept. 1, 1993.
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<PAGE>
Art. 5.13 Provisions Affecting Remedies of Dissenting Shareholders
A. Any shareholder who has demanded payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act shall not
thereafter be entitled to vote or exercise any other rights of a
shareholder except the right to receive payment for his shares
pursuant to the provisions of those articles and the right to
maintain an appropriate action to obtain relief on the ground that
the corporate action would be or was fraudulent, and the respective
shares for which payment has been demanded shall not thereafter be
considered outstanding for the purposes of any subsequent vote of
shareholders.
B. Upon receiving a demand for payment from any dissenting
shareholder, the corporation shall make an appropriate notation
thereof in its shareholder records. Within twenty (20) days after
demanding payment for his shares in accordance with either Article
5.12 or 5.16 of this Act, each holder of certificates representing
shares so demanding payment shall submit such certificates to the
corporation for notation thereon that such demand has been made.
The failure of holders of certificated shares to do so shall, at
the option of the corporation, terminate such shareholder's rights
under Articles 5.12 and 5.16 of this Act unless a court of
competent jurisdiction for good and sufficient cause shown shall
otherwise direct. If uncertificated shares for which payment has
been demanded or shares represented by a certificate on which
notation has been so made shall be transferred, any new certificate
issued therefor shall bear similar notation together with the name
of the original dissenting holder of such shares and a transferee
of such shares shall acquire by such transfer no rights in the
corporation other than those which the original dissenting
shareholder had after making demand for payment of the fair value
thereof.
C. Any shareholder who has demanded payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act may
withdraw such demand at any time before payment for his shares or
before any petition has been filed pursuant to Article 5.12 or 5.16
of this Act asking for a finding and determination of the fair
value of such shares, but no such demand may be withdrawn after
such payment has been made or, unless the corporation shall consent
thereto, after any such petition has been filed. If, however, such
demand shall be withdrawn as hereinbefore provided, or if pursuant
to Section B of this Article the corporation shall terminate the
shareholder's rights under Article 5.12 or 5.16 of this Act, as the
case may be, or if no petition asking for a finding and
determination of fair value of such shares by a court shall have
been filed within the time provided in Article 5.12 or 5.16 of this
Act, as the case may be, or if after the hearing of a petition
filed pursuant to Article 5.12 or 5.16, the court shall determine
that such shareholder is not entitled to the relief provided by
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<PAGE>
those articles, then, in any such case, such shareholder and all
persons claiming under him shall be conclusively presumed to have
approved and ratified the corporate action from which he dissented
and shall be bound thereby, the right of such shareholder to be
paid the fair value of his shares shall cease, and his status as a
shareholder shall be restored without prejudice to any corporate
proceedings which may have been taken during the interim, and such
shareholder shall be entitled to receive any dividends or other
distributions made to shareholders in the interim.
Acts 1955, 54th Leg., p. 239, ch. 64, eff. Sept. 6, 1955. Amended
by Acts 1967, 60th Leg., p. 1723, ch. 657, (S) 13, eff. June 17,
1967; Acts 1983, 68th Leg., p. 2573, ch. 442, (S) 10, eff. Sept. 1,
1983; Acts 1993, 73rd Leg., ch. 215, (S) 2.17, eff. Sept. 1, 1993.
C-7
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law authorizes
indemnification of directors and officers of a Delaware corporation under
certain circumstances against expenses, judgments and the like in connection
with an action, suit or proceeding. Article Fourteenth of the Registrant's
Restated Certificate of Incorporation provides for broad indemnification of
directors and officers.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits. See Exhibit Index.
(b) Financial Statement Schedules. Not Applicable.
(c) Report, Opinion or Appraisal. See Exhibits 5.1 and 8.1
Item 22. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
posteffective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) ((S)230.424(b) of this
chapter) if, in the aggregate, the changes in volume and price represent no more
than 20% change in the maximum offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such posteffective amendment shall be deemed to be
a new registration statement relating to the
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<PAGE>
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a posteffective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(d) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (c) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(f) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11, or 13 of this form,
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<PAGE>
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(g) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of San Francisco, state of
California, on September 1, 1999.
WELLS FARGO & COMPANY
By: /s/ Richard M. Kovacevich
----------------------------------------
Richard M. Kovacevich
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed on September 1, 1999 by the following
persons in the capacities indicated:
/s/ Richard M. Kovacevich President and Chief Executive Officer
- ----------------------------
Richard M. Kovacevich (Principal Executive Officer)
/s/ Rodney L. Jacobs Vice Chairman and Chief Financial Officer
- ----------------------------
Rodney L. Jacobs (Principal Financial Officer)
/s/ Les L. Quock Senior Vice President and Controller
- ----------------------------
Les L. Quock (Principal Accounting Officer)
LES S. BILLER ) RICHARD D. McCORMICK )
J.A. BLANCHARD III ) CYNTHIA H. MILLIGAN )
MICHAEL R. BOWLIN ) BENJAMIN F. MONTOYA )
EDWARD M. CARSON ) PHILIP J. QUIGLEY )
DAVID A. CHRISTENSEN ) DONALD B. RICE )
WILLIAM S. DAVILA ) IAN M. ROLLAND ) A majority of
SUSAN E. ENGEL ) JUDITH M. RUNSTAD ) the Board of
PAUL HAZEN ) SUSAN G. SWENSON ) Directors*
WILLIAM A. HODDER ) DANIEL M. TELLEP )
RODNEY L. JACOBS ) CHANG-LIN TIEN )
REATHA CLARK KING ) MICHAEL W. WRIGHT )
RICHARD M. KOVACEVICH ) JOHN A. YOUNG )
__________________
* Richard M. Kovacevich, by signing his name hereto, does hereby sign this
document on behalf of each of the directors named above pursuant to powers of
attorney duly executed by such persons.
/s/ Richard M. Kovacevich
--------------------------------
Richard M. Kovacevich
Attorney-in-Fact
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<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
------ ------------
2.1 Agreement and Plan of Reorganization, dated as of May 28, 1999, as
amended and restated as of August 26, 1999, effective May 28, 1999,
by and between Texas Bancshares, Inc. and Wells Fargo & Company,
included as Appendix A to the accompanying proxy statement-
prospectus.
3.1 Restated Certificate of Incorporation, incorporated by reference to
Exhibit 3(b) to the Registrant's Current Report on Form 8-K dated
June 28, 1993. Certificates of Amendment of Certificate of
Incorporation, incorporated by reference to Exhibit 3 to the
Registrant's Current Report on Form 8-K dated July 3, 1995
(authorizing preference stock), and Exhibits 3(b) and 3(c) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998 (changing the Registrant's name and increasing
authorized common and preferred stock, respectively).
3.2 Certificate of Designations for the Registrant's ESOP Cumulative
Convertible Preferred Stock, incorporated by reference to Exhibit 4
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1994.
3.3 Certificate of Designations for the Registrant's Cumulative Tracking
Preferred Stock, incorporated by reference to Exhibit 3 to the
Registrant's Current Report on Form 8-K dated January 9, 1995.
3.4 Certificate of Designations for the Registrant's 1995 ESOP
Cumulative Convertible Preferred Stock, incorporated by reference to
Exhibit 4 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995.
3.5 Certificate Eliminating the Certificate of Designations for the
Registrant's Cumulative Convertible Preferred Stock, Series B,
incorporated by reference to Exhibit 3(a) to the Registrant's
Current Report on Form 8-K dated November 1, 1995.
3.6 Certificate Eliminating the Certificate of Designations for the
Registrant's 10.24% Cumulative Preferred Stock, incorporated by
reference to Exhibit 3 to the Registrant's Current Report on Form 8-
K dated February 20, 1996.
3.7 Certificate of Designations for the Registrant's 1996 ESOP
Cumulative Convertible Preferred Stock, incorporated by reference to
Exhibit 3 to the Registrant's Current Report on Form 8-K dated
February 26, 1996.
<PAGE>
Exhibit
Number Description
------ ------------
3.8 Certificate of Designations for the Registrant's 1997 ESOP
Cumulative Convertible Preferred Stock, incorporated by reference
to Exhibit 3 to the Registrant's Current Report on Form 8-K dated
April 14, 1997.
3.9 Certificate of Designations for the Registrant's 1998 ESOP
Cumulative Convertible Preferred Stock, incorporated by reference
to Exhibit 3 to the Registrant's Current Report on Form 8-K dated
April 20, 1998.
3.10 Certificate of Designations for the Registrant's Adjustable
Cumulative Preferred Stock, Series B, incorporated by reference to
Exhibit 3(j) to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998.
3.11 Certificate of Designations for the Registrant's Fixed/Adjustable
Rate Noncumulative Preferred Stock, Series H, incorporated by
reference to Exhibit 3(k) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998.
3.12 Certificate of Designations for the Registrant's Series C Junior
Participating Preferred Stock, incorporated by reference to Exhibit
3(l) to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998.
3.13 Certificate Eliminating the Certificate of Designations for the
Registrant's Series A Junior Participating Preferred Stock,
incorporated by reference to Exhibit 3(a) to the Registrant's
Current Report on Form 8-K dated April 21, 1999.
3.14 Certificate of Designations for the Registrant's 1999 ESOP
Cumulative Convertible Preferred Stock, incorporated by reference
to Exhibit 3(b) to the Registrant's Current Report on Form 8-K
dated April 21, 1999.
3.15 By-Laws, incorporated by reference to Exhibit 3(m) to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1998.
4.1 See Exhibits 3.1 through 3.15.
4.2 Rights Agreement, dated as of October 21, 1998, between the
Registrant and ChaseMellon Shareholder Services, L.L.C., as Rights
Agent, incorporated by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form 8-A dated October 21, 1998.
5.1 Opinion of Stanley S. Stroup as to the legality of the shares to be
issued (including consent).
<PAGE>
Exhibit
Number Description
------ ------------
8.1 Opinion of KPMG LLP regarding the material U.S. federal income tax
consequences of the merger (including consent).*
23.1 Consent of Stanley S. Stroup (included in Exhibit 5.1).
23.2 Consent of KPMG LLP relating to the audited financial statements
of Wells Fargo & Company.
23.3 Consent of KPMG LLP relating to the audited financial statements
of Texas Bancshares, Inc.
23.4 Consent of KPMG LLP regarding its tax opinion (included in Exhibit
8.1).
24.1 Powers of Attorney.
99.1 Form of proxy for special meeting of shareholders of Texas
Bancshares, Inc.
99.2 Consent of Hoefer & Arnett, Incorporated relating to Texas
Bancshares, Inc.
______________
* To be filed by amendment.
<PAGE>
Exhibit 5.1
[LETTERHEAD OF STANLEY S. STROUP
EXECUTIVE VICE PRESIDENT AND GENERAL
COUNSEL OF WELLS FARGO & COMPANY]
September 1, 1999
Board of Directors
Wells Fargo & Company
420 Montgomery Street
San Francisco, California 94163
Ladies and Gentlemen:
In connection with the proposed registration under the Securities Act of 1933,
as amended, of a maximum of 1,750,000 shares of common stock, par value $1-2/3
per share, of Wells Fargo & Company, a Delaware corporation (the "Company"), and
associated preferred stock purchase rights (such shares and rights collectively
referred to as the "Shares"), which are proposed to be issued by the Company in
connection with the merger (the "Merger") of a wholly-owned subsidiary of the
Company with Texas Bancshares, Inc., I have examined such corporate records and
other documents, including the registration statement on Form S-4 relating to
the Shares, and have reviewed such matters of law as I have deemed necessary for
this opinion, and I advise you that in my opinion:
1. The Company is a corporation duly organized and existing under the
laws of the state of Delaware.
2. All necessary corporate action on the part of the Company has been
taken to authorize the issuance of the Shares in connection with the
Merger, and, when issued as described in the registration statement,
the Shares will be legally and validly issued, fully paid and
nonassessable.
I consent to the filing of this opinion as an exhibit to the registration
statement.
Sincerely,
/s/ Stanley S. Stroup
<PAGE>
Exhibit 23.2
[LETTERHEAD OF KPMG LLP]
The Board of Directors
of Wells Fargo & Company
We consent to the incorporation by reference in the proxy statement-prospectus
included in this registration statement on Form S-4 of Wells Fargo & Company of
our report dated January 19, 1999, with respect to the consolidated balance
sheet of Wells Fargo & Company and Subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, changes in
stockholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 1998, and to the reference to
our firm under the heading "Experts" in the proxy statement-prospectus.
/s/ KPMG LLP
San Francisco, California
September 1, 1999
<PAGE>
Exhibit 23.3
[LETTERHEAD OF KPMG LLP]
The Board of Directors
of Texas Bancshares, Inc.
We consent to the inclusion in this registration statement on Form S-4 of Wells
Fargo & Company of our report dated February 25, 1999, with respect to the
consolidated balance sheets of Texas Bancshares, Inc. and Subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of income
and comprehensive income, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1998, and to the reference to
our firm under the heading "Experts" in the proxy statement-prospectus.
/s/ KPMG LLP
San Antonio, Texas
September 1, 1999
<PAGE>
Exhibit 24.1
WELLS FARGO & COMPANY
Power of Attorney
of Director and/or Officer
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of WELLS FARGO & COMPANY, a Delaware corporation, does hereby make,
constitute and appoint PAUL HAZEN, RICHARD M. KOVACEVICH, LES BILLER, RODNEY L.
JACOBS, STANLEY S. STROUP, AND LAUREL A. HOLSCHUH, and each or any one of them,
the undersigned's true and lawful attorneys-in-fact, with power of substitution,
for the undersigned and in the undersigned's name, place and stead, to sign and
affix the undersigned's name as such director and/or officer of said Company to
a Registration Statement on Form S-4 or other applicable form, and all
amendments, including post-effective amendments, thereto, to be filed by said
Company with the Securities and Exchange Commission, Washington, D.C., in
connection with the registration under the Securities Act of 1933, as amended,
of up to 1,750,000 shares of Common Stock of the Company and any preferred stock
purchase rights associated with such shares, adjusted for any change in the
number of outstanding shares of Common Stock resulting from stock splits,
reverse stock splits or stock dividends occurring after the date hereof, which
may be issued in connection with the acquisition by the Company of Texas
Bancshares, Inc., San Antonio, Texas, and its subsidiaries, and to file the
same, with all exhibits thereto and other supporting documents, with said
Commission, granting unto said attorneys-in-fact, and each of them, full power
and authority to do and perform any and all acts necessary or incidental to the
performance and execution of the powers herein expressly granted.
IN WITNESS WHEREOF, the undersigned has executed this power of attorney
this 27th day of July, 1999.
/s/ Les S. Biller /s/ Richard D. McCormick
/s/ J. A. Blanchard III /s/ Cynthia H. Milligan
/s/ Michael R. Bowlin /s/ Benjamin F. Montoya
/s/ Edward M. Carson /s/ Philip J. Quigley
/s/ David A. Christensen /s/ Donald B. Rice
/s/ William S. Davila /s/ Ian M. Rolland
/s/ Susan E. Engel /s/ Judith M. Runstad
/s/ Paul Hazen /s/ Susan G. Swenson
/s/ William A. Hodder /s/ Daniel M. Tellep
/s/ Rodney L. Jacobs /s/ Chang-Lin Tien
/s/ Reatha Clark King /s/ Michael W. Wright
/s/ Richard M. Kovacevich /s/ John A. Young
<PAGE>
Exhibit 99.1
Form of Proxy for Special Meeting of
Shareholders of Texas Bancshares, Inc.
The undersigned hereby appoints __________________ and _________________,
or either of them, as proxies to vote all shares of common stock the undersigned
is entitled to vote at the special meeting of shareholders of Texas Bancshares,
Inc. ("TBI") to be held on _______ __, 1999 at ________________________, Texas,
or at any adjournment or postponement thereof, as follows, hereby revoking any
proxy previously given:
1. To approve the Agreement and Plan of Reorganization, dated as of May
28, 1999 (the "Reorganization Agreement"), amended and restated as of
August 26, 1999, effective May 28, 1999, by and between TBI and Wells
Fargo & Company ("Wells Fargo") pursuant to which, among other things,
a wholly-owned subsidiary of Wells Fargo will merge with and into TBI
(the "Merger") upon the terms and subject to the conditions set forth
in the Reorganization Agreement, a copy of which is included as
Appendix A in the accompanying Proxy Statement-Prospectus; and to
authorize such further action by the Board of Directors and officers
of TBI as may be necessary or appropriate to carry out the intent and
purposes of the Merger.
_______ FOR _______ AGAINST _______ ABSTAIN
2. In the discretion of the persons appointed proxies hereby to vote on
such other matters as may properly come before the special meeting.
Shares represented by this proxy will be voted as directed by the
shareholder. The Board of Directors recommends a vote "FOR" proposal 1. If no
direction is supplied, the proxy will be voted "FOR" proposal 1.
Dated: _______________________________, 199__.
________________________________________________
________________________________________________
(Please sign exactly as name appears at left.)
(If stock is owned by more than one person, all
owners should sign. Persons signing as executors
administrators, trustees, or in similar
capacities should so indicate.)
THIS PROXY IS SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS OF TEXAS BANCSHARES, INC.
<PAGE>
Exhibit 99.2
[LETTERHEAD OF HOEFER & ARNETT, INCORPORATED]
In connection with the proposed merger of Texas Bancshares, Inc., San Antonio,
Texas and Wells Fargo & Company, San Francisco, California, the undersigned,
acting as an independent financial analyst to the common shareholders of Texas
Bancshares, Inc., hereby consents to the reference to our firm in the proxy
statement and to the inclusion of our fairness opinion as an exhibit to the
proxy statement.
/S/ HOEFER & ARNETT, INCORPORATED
Austin, Texas
September 1, 1999
