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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 18, 1997
STERLING BANCSHARES, INC.
(Exact name of registrant as specified in charter)
Texas 0-20750 74-2175590
(State or other jurisdiction (Commission File Number) (IRS employer
of incorporation) identification number)
15000 Northwest Freeway, Houston, Texas 77040
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 466-8300
N/A
(Former name or former address, if changed since last report)
Item 5. OTHER EVENTS
On March 18, 1997, Sterling Bancshares, Inc. (the
"Company") entered into an Agreement and Plan of Merger
(the "Merger Agreement") to acquire First Houston
Bancshares, Inc. ("First Houston") and its wholly-owned
subsidiary, Houston National Bank, in a stock-for-stock
merger (the "Merger"). At December 31, 1996, First
Houston had total assets of approximately $132 million and
total deposits of approximately $123 million. Houston
National Bank operates one banking office in central
Houston. The Merger Agreement, which is subject to
approval of First Houston's shareholders and various
banking regulatory authorities, provides that the Company
will issue approximately 1.72 million shares of the
Company's common stock to the shareholders of First
Houston in exchange for all of the shares of stock of
First Houston, or 0.707 shares of the Company's common
stock for each share of First Houston common stock. The
final purchase price is subject to certain closing
adjustments. The transaction is expected to be accounted
for as a pooling of interests. Additional information
regarding the proposed Merger is included in Exhibits 2.1
and 99.1 of this Report.
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Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS
(a) Financial Statements of Businesses Acquired.
Attached as Exhibit 99.2 are the Consolidated
Financial Statements of First Houston and its
subsidiaries for the years ended December 31,
1996 and 1995 and the report of First Houston's
independent auditors with respect thereto. Such
Consolidated Financial Statements have been
prepared and furnished by First Houston and the
Company does not assume and expressly disclaims
any responsibility for such financial statements
or the accuracy or completeness of any
information contained therein.
(b) Pro Forma Financial Information.
Attached as Exhibit 99.3 are selected
consolidated financial data for the Company for
the last five fiscal years which should be read
in conjunction with the financial information
included in the Company's 1996 Annual Report on
Form 10-K for the year ended December 31, 1996,
which is incorporated herein by reference.
Attached as Exhibit 99.4 are selected pro forma
consolidated financial data which combine
certain consolidated financial information of the
Company and First Houston as if the Merger had
occurred on January 1, 1994.
Attached as Exhibit 99.5 are pro forma
consolidated financial statements which combine
the historical financial statements of the Company
and First Houston as if the Merger had occurred
on January 1, 1996, after giving effect to the
pro forma adjustments described in the
accompanying notes.
The pro forma selected financial information and
the pro forma consolidated financial statements
included as Exhibits 99.4 and 99.5, respectively,
are not necessarily indicative of the
consolidated financial position or results of
future operations of the combined entity or of the
actual results that would have been achieved had
the Merger been consummated prior to the periods
indicated. Moreover, the pro forma selected
consolidated financial information and pro forma
consolidated financial statements have been
prepared in reliance upon certain information
prepared and furnished by First Houston and the
Company does not assume and expressly disclaims
any responsibility for the accuracy or
completeness of any information relating to
First Houston.
(c) Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
2.1 Agreement and Plan of Merger dated as of March 18, 1997, by
and among Sterling Bancshares, Inc., SBI Acquisition Corp.,
and First Houston Bancshares, Inc.
99.1 Press Release dated March 18, 1997
</TABLE>
2
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<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
99.2 Consolidated Financial Statements of First Houston and its
subsidiaries for the years ended December 31, 1996 and 1995
and the report of First Houston's independent auditors with
respect thereto
99.3 Selected consolidated financial data for the Company for the
last five fiscal years
99.4 Selected pro forma financial data which combines certain
consolidated financial information of the Company and First
Houston as if the Merger had occurred on January 1, 1994
99.5 Pro forma consolidated financial statements which combine the
historical consolidated financial statements of the Company
and First Houston as if the Merger had occurred on January 1, 1996
after giving effect to the pro forma adjustments described in the
accompanying notes
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STERLING BANCSHARES, INC.
Dated: April 3, 1997 By: /s/ George Martinez
--------------------------
George Martinez, Chairman
3
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
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<S> <C>
2.1 Agreement and Plan of Merger dated as of March 18, 1997, by
and among Sterling Bancshares, Inc., SBI Acquisition Corp.,
and First Houston Bancshares, Inc.
99.1 Press Release dated March 18, 1997.
99.2 Consolidated Financial Statements of First Houston and its
subsidiaries for the years ended December 31, 1996 and 1995
and the report of First Houston's independent auditors with
respect thereto
99.3 Selected consolidated financial data for the Company for the
last five fiscal years
99.4 Selected pro forma financial data which combines certain
consolidated financial information of the Company and First
Houston as if the Merger had occurred on January 1, 1994
99.5 Pro forma consolidated financial statements which combine the
historical consolidated financial statements of the Company
and First Houston as if the Merger had occurred on January
1, 1996, after giving effect to the pro forma adjustments
described in the accompanying notes
</TABLE>
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EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of March
18, 1997, is by and among STERLING BANCSHARES, INC. ("Sterling"), a Texas
corporation and a registered bank holding company under the Bank Holding
Company Act of 1956, as amended (the "BHCA"), SBI ACQUISITION CORP., a Texas
corporation and a wholly owned subsidiary of Sterling ("Merger Subsidiary") and
FIRST HOUSTON BANCSHARES, INC., a Texas corporation and a registered bank
holding company under the BHCA ("First Houston"). Capitalized terms not
otherwise defined herein shall have the meanings ascribed in Article I.
WITNESSETH:
WHEREAS, pursuant to the terms and subject to the conditions of this
Agreement, Sterling will acquire First Houston through the merger of Merger
Subsidiary with and into First Houston, or by such other means as provided for
herein (the "Merger"); and
WHEREAS, pursuant to the Merger, each issued and outstanding share of
First Houston Capital Stock will be converted into shares of Sterling Common
Stock upon the terms and subject to the conditions of this Agreement; and
WHEREAS, for federal income tax purposes the Merger is intended to
qualify as a tax-free reorganization pursuant to Section 368 of the Code; and
WHEREAS, for accounting purposes it is intended that the Merger be
accounted for as a pooling of interests in accordance with APB Opinion 16; and
WHEREAS, (i) the respective Boards of Directors of Sterling, Merger
Subsidiary and First Houston have each determined that this Agreement, the
Merger and the transactions contemplated hereby and thereby are in the best
interests of their respective company and shareholders and have approved this
Agreement, the Merger and the other transactions contemplated hereby and
thereby, (ii) the Board of Directors of First Houston has unanimously (a)
determined that the consideration to be paid for the outstanding shares of
First Houston Common Stock is fair to the shareholders of First Houston and (b)
resolved to recommend to the shareholders of First Houston that they vote in
favor of adoption of this Agreement and (iii) Sterling, as the sole
stockholder of Merger Subsidiary, has approved and adopted this Agreement, the
Merger and the transactions contemplated hereby and thereby; and
WHEREAS, immediately after the Merger, Sterling intends to contribute
the capital stock of the Surviving Corporation to Sterling Bancorporation, a
Delaware corporation and a wholly owned subsidiary of Sterling
("Bancorporation"); and
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WHEREAS, Sterling, Merger Subsidiary and First Houston desire to
provide for certain undertakings, conditions, representations, warranties and
covenants in connection with the Merger and the related transactions
contemplated by this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants and agreements contained herein, the
benefits to be derived by each party hereunder and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
1.01 Certain Definitions. As used in this Agreement, the following
terms shall have the meanings set forth below:
"Acquisition Proposal" shall have the meaning set forth in
Section 8.13.
"Acquisition Transaction" shall have the meaning set forth in
Section 8.13.
"Adjustment Amount" shall have the meaning set forth in
Section 3.02(a).
"Adjustment Date" shall have the meaning set forth in Section
3.02(a).
"Affiliate" shall mean, with respect to any Person, any Person
that, directly or indirectly, controls or is controlled by or is under common
control with such Person.
"Agreement" shall have the meaning set forth in the
introduction to this Agreement and Plan of Merger.
"Allowance" shall have the meaning set forth in Section 5.08.
"Altair" shall have the meaning set forth in Section 9.03(f).
"Approvals" shall mean any and all filings, permits, consents,
authorizations and approvals of any governmental or regulatory authority or of
any other third person necessary to give effect to the arrangement contemplated
by this Agreement or necessary to consummate the Merger.
"Average Closing Price" shall have the meaning set forth in
Section 10.01(g).
"Authorizations" shall have the meaning set forth in Section
5.01.
"BHCA" shall have the meaning set forth in the introduction to
this Agreement.
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"Bancorporation" shall have the meaning set forth in the
recitals to this Agreement.
"Closing" shall have the meaning set forth in Section 2.02.
"Code" shall mean the Internal Revenue Code of 1986, as
amended, and the rules and regulations promulgated thereunder.
"Commissioner" shall mean the Texas Banking Commissioner.
"Condition" shall have the meaning set forth in Section 5.01.
"D&T" shall have the meaning set forth in Section 3.02(c)
"Deferred Compensation Agreement" shall have the meaning set
forth in Section 7.03.
"Dissenting Shares" shall have the meaning set forth in
Section 3.01(f).
"Effective Time" shall have the meaning set forth in Section
2.03.
"Employee" shall mean any current or former employee, officer
or director, independent contractor or retiree of First Houston, its
subsidiaries and any dependent or spouse thereof.
"Environmental Law" shall have the meaning set forth in
Section 5.25.
"ERISA" shall have the meaning set forth in Section 5.12(a).
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
"Exchange Agent" shall have the meaning set forth in Section
4.01.
"Exchange Ratio" shall having the meaning set forth in Section
3.02(b).
"Expenses" shall have the meaning set forth in Section 8.14.
"FDIC" shall mean the Federal Deposit Insurance Corporation.
"Federal Reserve Board" shall mean the Board of Governors of
the Federal Reserve System and any Federal Reserve Bank.
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"Final Sterling Book Value" shall mean the quotient of the
total consolidated shareholders' equity of Sterling at the Adjustment Date as
determined in accordance with GAAP, divided by the total number of shares of
Sterling Common Stock outstanding on the Adjustment Date (determined on a fully
diluted basis).
"First Adjustment Amount" shall have the meaning set forth in
Section 3.02(a).
"First Houston" shall have the meaning set forth in the
introduction to this Agreement.
"First Houston Benefit Plans" shall have the meaning set forth
in Section 5.12(a).
"First Houston Board" shall mean the Board of Directors of
First Houston.
"First Houston Capital Stock" shall mean collectively the
First Houston Common Stock and First Houston Preferred Stock.
"First Houston Common Stock" shall mean the common stock, par
value $1.00 per share, of First Houston.
"First Houston Disclosure Schedule" shall mean that document
containing the written detailed information prepared and delivered by First
Houston to Sterling prior to the execution of this Agreement.
"First Houston ERISA Plan" shall have the meaning set forth in
Section 5.12(a).
"First Houston 401(k) Plan" shall mean the Houston National
Bank 401(k) Savings Plan established January 1, 1991.
"First Houston Financial Statements" shall have the meaning
set forth in Section 5.05(a).
"First Houston Material Adverse Effect" shall have the meaning
set forth in Section 5.01.
"First Houston Stock Options" shall have the meaning set forth
in Section 3.01(f).
"First Houston Preferred Stock" shall mean the Preferred
Stock, par value $40.00 per share, of First Houston.
"First Houston Projected Earnings" shall mean the product of
(i) $126,500 multiplied by (ii) the number of calendar months from January 1,
1997 to the Adjustment Date.
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"First Houston Stock Plan" shall have the meaning set forth in
Section 5.12(a).
"First Houston Unexercised Options" shall mean the First
Houston Stock Options that are unexercised and outstanding on the Adjustment
Date.
"GAAP" shall mean generally accepted accounting principles in
the United States, applied on a consistent basis.
"Indemnified Party" shall have the meaning set forth in
Section 8.07.
"Index" shall have the meaning set forth in Section 10.01(g).
"Known Adjustments" shall have the meaning assigned to such
term in Section 3.02(a) hereof.
"Initial First Houston Designee" shall have the meaning set
forth in Section 8.17.
"Liens" shall have the meaning set forth in Section 5.03.
"Maximum Amount" shall have the meaning set forth in Section
8.07.
"Merger" shall have the meaning set forth in the recitals to
this Agreement.
"Merger Consideration" shall mean the shares of Sterling
Common Stock issuable in accordance with Sections 3.01(b) and (c), subject to
the payment of cash paid in lieu of fractional shares to be issued by Sterling
in the Merger in accordance with Sections 3.01(e) and 4.05.
"Merger Consideration Adjustment" shall have the meaning set
forth in Section 3.02(a).
"Merger Subsidiary" shall have the meaning set forth in the
recitals of this Agreement.
"NASD" shall mean the National Association of Securities
Dealers, Inc.
"NASDAQ" shall the National Market System of the National
Association of Securities Dealers, Inc.
"OCC" shall mean the Office of the Comptroller of the
Currency.
"Permitted Liens" are (i) Liens for current taxes not yet due
and payable and incurred in the ordinary course of business, (ii) with respect
to a lease, the interest of the lessor thereunder, including any Liens on the
interest of such lessor, and (iii) such imperfections of title, Liens,
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restrictions and easements that do not materially impair the use or value of
the properties or assets or otherwise materially impair the current operations
relating to the business of First Houston or its Subsidiaries.
"Person" or "person" shall mean any individual, corporation,
limited liability company, association, partnership, group (as defined in
Section 13(d)(3) of the Exchange Act), joint venture, trust or unincorporated
organization, or a government or any agency or political subdivision thereof.
"Preliminary First Houston Book Value" shall have the meaning
set forth in Section 3.02(a).
"Preliminary Merger Consideration" shall have the meaning set
forth in Section 3.02(a).
"Preliminary Sterling Book Value" shall have the meaning set
forth in Section 3.02(a).
"Pro Forma First Houston Shareholders' Equity" shall mean
First Houston's total shareholders' equity as of the Adjustment Date, minus the
Known Adjustments.
"Proxy Statement" shall have the meaning set forth in Section
5.18.
"Registration Statement" shall have the meaning set forth in
Section 5.18.
"Regulatory Agreement" shall have the meaning set forth in
Section 5.11(b).
"Regulatory Authorities" shall have the meaning set forth in
Section 5.11(b).
"Regulatory Reporting Document" shall have the meaning set
forth in Section 5.05(a).
"Remedies Exception" shall mean any bankruptcy,
reorganization, insolvency, fraudulent conveyance or transfer, moratorium or
similar laws affecting creditors' rights generally and general principles of
equity (regardless of whether enforcement is considered in a proceeding at law
or in equity).
"Reports" shall have the meaning set forth in Section 5.17.
"Restricted Stock" shall have the meaning set forth in Section
8.08(a).
"SEC" shall mean the Securities and Exchange Commission.
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"Second Adjustment Amount" shall have the meaning set forth in
Section 3.02(a).
"Second First Houston Designee" shall have the meaning set
forth in Section 8.17.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"Securities Laws" shall mean individually and collectively the
provisions of applicable state corporate and securities laws, the Securities
Act, and the Exchange Act, including but not limited to rules and regulations
promulgated thereunder.
"Shareholders' Meeting" shall have the meaning set forth in
Section 5.18.
"Split Dollar Life Insurance Agreement" shall have the meaning
set forth in Section 7.03 hereof.
"Sterling" shall have the meaning set forth in the
introduction to this Agreement.
"Sterling Common Stock" shall mean the common stock, par value
$1.00 per share, of Sterling.
"Sterling Financial Statements" shall have the meaning set
forth in Section 6.04.
"Sterling Material Adverse Effect" shall have the meaning set
forth in Section 6.01(a).
"Sterling SEC Documents" shall have the meaning set forth in
Section 6.04.
"Stock Option Plans" shall mean First Houston's 1992, 1994 and
1996 Incentive Stock Option Plans or any other plans pursuant to which stock
options or stock awards have been granted by First Houston.
"Subsidiary" shall mean, in the case of either Sterling or
First Houston, any corporation, association or other entity in which it owns or
controls, directly or indirectly, 25% or more of the outstanding voting
securities or 25% or more of the total equity interest; provided, however, that
the term shall not include any such entity in which such voting securities or
equity interest is owned or controlled in a fiduciary capacity, without sole
voting power, or was acquired in securing or collecting a debt previously
contracted in good faith.
"Subsidiary Bank Merger" shall have the meaning set forth in
Section 2.04.
"Surviving Corporation" shall have the meaning set forth in
Section 2.01.
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"Tax" or "Taxes" shall mean all federal, state, local and
foreign taxes, charges, fees, levies, imposts, duties or other assessments,
including, without limitation, income, gross receipts, excise, employment,
sales, use, transfer, license, payroll, franchise, severance, stamp,
occupation, windfall profits, environmental, federal highway use, commercial
rent, customs duties, capital stock, paid up capital, profits, withholding,
Social Security, single business and unemployment, disability, real property,
personal property, registration, ad valorem, value added, alternative or add-on
minimum, estimated, or other tax or governmental fee of any kind whatsoever,
imposed or required to be withheld by the United States or any state, local,
foreign government or subdivision or agency thereof, including, without
limitation, any interest, penalties or additions thereto.
"Taxable Period" shall mean any period prescribed by any
governmental authority, including, but not limited to, the United States or any
state, local, foreign government or subdivision or agency thereof for which a
Tax Return is required to be filed or Tax is required to be paid.
"Tax Return" shall mean any report, return, information return
or other information required to be supplied to a taxing authority in
connection with Taxes, including, without limitation, any return of an
affiliated or combined or unitary group that includes First Houston or any of
its Subsidiaries.
"TBCA" shall mean the Texas Business Corporation Act, as
amended.
"Termination Fee" shall have the meaning set forth in Section
8.14.
"Third Adjustment Amount" shall have the meaning set forth in
Section 3.02(a).
ARTICLE II
THE MERGER AND RELATED TRANSACTIONS
2.01 Merger.
(a) Upon the terms and subject to the conditions set forth in this
Agreement and in accordance with the TBCA, at the Effective Time Merger
Subsidiary shall be merged with and into First Houston. As a result of the
Merger, the separate existence of Merger Subsidiary shall thereupon cease, and
First Houston shall continue as the surviving corporation of the Merger (the
"Surviving Corporation"). Sterling shall cause the Board of Directors of
Merger Subsidiary (i) to approve this Agreement, the Merger and the
transactions contemplated hereunder and thereunder and (ii) to authorize and
direct an officer of Merger Subsidiary to execute and deliver a counterpart of
this Agreement.
(b) The articles of incorporation of the Surviving Corporation
shall be amended and restated at the Effective Time to be identical to the
articles of incorporation of the Merger Subsidiary
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as in effect immediately prior to the Effective Time, except that the name of
the Surviving Corporation shall be "First Houston Bancshares, Inc."
(c) The bylaws of the Surviving Corporation shall be amended and
restated at the Effective Time to be identical to the bylaws of Merger
Subsidiary as in effect immediately prior to the Effective Time.
(d) The directors of Merger Subsidiary immediately prior to the
Effective Time shall become the directors of the Surviving Corporation and the
officers of Merger Subsidiary immediately prior to the Effective Time shall
become the officers of the Surviving Corporation, in each case until their
respective successors are duly elected and qualified.
(e) The Merger shall have the effects set forth in Article 5.06 of
the TBCA.
2.02 Time and Place of Closing. The closing of the transactions
contemplated hereby (the "Closing") will take place at the offices of Andrews &
Kurth L.L.P. in Houston, Texas at 10:00 a.m. on the date that the Effective
Time occurs, or at such other time, and at such place, as may be mutually
agreed upon by Sterling and First Houston.
2.03 Effective Time. On the business day selected by Sterling
occurring within ten (10) business days following the date on which the
expiration of all applicable waiting periods in connection with approvals of
governmental authorities necessary to effectuate the Merger occurs and all
conditions to the consummation of this Agreement are satisfied or waived,
unless an earlier or later date has been agreed by the parties, appropriate
articles of merger or certificates of merger shall be executed in accordance
with all appropriate legal requirements and shall be filed as required by law,
and the Merger provided for herein shall become effective upon such filing or
at such time as may be specified in such articles or certificates of merger.
The time of such filing or such later effective time is herein called the
"Effective Time."
2.04 Reservation of Right to Revise Transaction; Further Actions.
(a) Notwithstanding anything to the contrary provided elsewhere in
this Agreement, if Sterling notifies First Houston in writing prior to the
Closing that Sterling prefers to change the method of effecting the acquisition
of First Houston by Sterling (including, without limitation, the provisions as
set forth in Article II) the parties hereto shall forthwith execute an
appropriate amendment or restatement of this Agreement to reflect such changes;
provided, however, that no such change shall (i) alter or change the amount or
the kind of the consideration to be received by the holders of First Houston
Common Stock or First Houston Preferred Stock as provided for in this
Agreement; (ii) adversely affect the tax treatment to First Houston
shareholders as a result of receiving the Merger Consideration; (iii) take the
form of an asset purchase; or (iv) adversely affect the timing of the
transaction described herein.
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(b) In addition, the parties hereto agree that if Sterling so
determines, each of the parties will execute such additional agreements and
documents and take such other actions as Sterling determines necessary or
appropriate to facilitate the Merger and the acquisition of First Houston by
Sterling, including, without limitation, entering into agreements to facilitate
the merger of First Houston's banking subsidiary with and into Sterling Bank
simultaneously with or promptly following the consummation of the Merger (the
"Subsidiary Bank Merger").
ARTICLE III
MERGER CONSIDERATION; EXCHANGE PROCEDURES
3.01 Merger Consideration. Subject to the provisions of this
Agreement, at the Effective Time, automatically by virtue of the Merger and
without any action on the part of any party or shareholder, the shares of the
constituent corporations shall be converted as follows:
(a) Each of the shares of common stock of Merger Subsidiary issued
and outstanding immediately prior to the Effective Time shall be converted into
and exchanged for one validly issued, fully paid and nonassessable share of
common stock, par value $0.01 per share, of the Surviving Corporation.
(b) Except as provided in Section 3.01(d), Section 3.01(e) and
Section 3.01(g), each share of First Houston Common Stock issued and
outstanding immediately prior to the Effective Time shall be converted into and
become the right to receive a fractional number of shares of Sterling Common
Stock equal to the Exchange Ratio calculated in accordance with Section 3.02.
(c) Each share of First Houston Preferred Stock issued and
outstanding at the date of this Agreement that has not been converted prior to
the Effective Time shall be converted into and become the right to receive the
number of shares of Sterling Common Stock equal to the Exchange Ratio,
multiplied by a factor of ten (10).
(d) Each share of First Houston Common Stock and First Houston
Preferred Stock held in the treasury of First Houston and each share of First
Houston Common Stock and First Houston Preferred Stock owned by Sterling,
Bancorporation or any direct or indirect wholly owned Subsidiary of Sterling or
First Houston immediately prior to the Effective Time shall be canceled without
any conversion and no payment or distribution shall be made with respect
thereto.
(e) Notwithstanding any other provision of this Agreement, each
holder of shares of First Houston Common Stock or First Houston Preferred Stock
exchanged pursuant to the Merger, who would otherwise have been entitled to
receive or purchase a fraction of a share of Sterling Common Stock (after
taking into account all certificates delivered by such holder) shall receive,
in lieu thereof, cash (without interest) in accordance with Section 4.05
hereof. No such holder will be entitled to dividends, voting rights or any
other rights as a shareholder in respect of any fractional share.
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(f) At the Effective Time, the stock transfer books of First
Houston shall be closed as to holders of First Houston Common Stock and First
Houston Preferred Stock immediately prior to the Effective Time and no transfer
of First Houston Common Stock and First Houston Preferred Stock by any such
holder shall thereafter be made or recognized. If, after the Effective Time,
certificates are properly presented in accordance with Article IV of this
Agreement to the Exchange Agent (as defined in Section 4.01), such certificates
shall be canceled and exchanged for certificates representing the number of
whole shares of Sterling Common Stock and a check representing the amount of
cash in lieu of fractional shares, if any, into which the First Houston Common
Stock or First Houston Preferred Stock represented thereby was converted as a
result of the Merger. Any other provision of this Agreement notwithstanding,
neither Sterling, the Surviving Corporation nor the Exchange Agent shall be
liable to a holder of First Houston Capital Stock for any amount paid or
property delivered in good faith to a public official pursuant to any
applicable abandoned property, escheat, or similar law. From and after the
Adjustment Date, First Houston shall not permit any of the then outstanding
options to purchase First Houston Common Stock (the "First Houston Stock
Options") to be exercised, and in accordance with Section 7.03 hereof,
effective upon consummation of the Merger, each of such First Houston Stock
Options shall thereafter constitute the right to purchase, at the exercise
price specified therein, such number of shares of Sterling Common Stock as is
equal to the product of (i) the number of shares of First Houston Common Stock
for which such option was exercisable immediately prior to the Effective Time
times (ii) the Exchange Ratio, subject to appropriate adjustment for any stock
dividends, splits, or other similar transactions affecting the Sterling Common
Stock.
(g) Notwithstanding anything in this Agreement to the contrary, no
share of First Houston Capital Stock, the holder of which shall have complied
with the provisions of Article 5.12 of the TBCA as to appraisal rights (a
"Dissenting Share"), shall be deemed converted into and to represent the right
to receive Merger Consideration hereunder; and the holders of Dissenting
Shares, if any, shall be entitled to payment, solely from the Surviving
Corporation, of the appraised value of such Dissenting Shares to the extent
permitted by and in accordance with the provisions of Article 5.12 of the TBCA;
provided, however, that (i) if any holder of Dissenting Shares shall, under the
circumstances permitted by the TBCA, subsequently deliver a written withdrawal
of his or her demand for appraisal of such Dissenting Shares, or (ii) if any
holder fails to establish his or her entitlement to rights to payment as
provided in such Article 5.12, or (iii) if neither any holder of Dissenting
Shares nor the Surviving Corporation has filed a petition demanding a
determination of the value of all Dissenting Shares within the time provided in
such Article 5.12, such holder or holders (as the case may be) shall forfeit
such right to payment for such Dissenting Shares pursuant to such Article 5.12
and each such Dissenting Share shall thereupon be converted into and shall
represent the right to receive the Merger Consideration therefor. First
Houston shall give Sterling (i) prompt notice of any written objections to the
Merger submitted to First Houston in accordance with Article 5.12A, attempted
withdrawals of such objections, and any other instruments served pursuant to
applicable law received by First Houston relating to shareholders' rights of
appraisal and (ii) the opportunity to direct all negotiations and proceedings
with respect to demands for appraisal under the TBCA. First Houston shall not,
except with the prior written consent of Sterling,
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voluntarily make any payment with respect to any demands for appraisals of
First Houston Capital Stock, offer to settle or settle any such demands or
approve any withdrawal of any such demands.
3.02 Determination and Adjustment of Merger Consideration and
Exchange Ratio.
(a) Based upon First Houston's estimated book value of total
shareholders' equity at December 31, 1996, of $8,318,986 (the "Preliminary
First Houston Book Value") and Sterling's estimated book value per
fully-diluted share of common stock at December 31, 1996, of $4.82318 (the
"Preliminary Sterling Book Value"), all of the issued and outstanding shares of
First Houston Capital Stock shall be converted as of the Effective Time into
the right to receive an aggregate of 1,724,793 shares of Sterling Common Stock
(the "Preliminary Merger Consideration"), subject to the adjustments described
below. The Preliminary Merger Consideration shall be adjusted (i) to reflect
the respective increase or decrease, as of the month-end preceding the Closing
(the "Adjustment Date"), in First Houston's total shareholders' equity and the
book value per fully-diluted share of Sterling Common Stock, (ii) in accordance
with Annex I hereto (the adjustments set forth on Annex I being herein referred
to as the "Known Adjustments") and (iii) in the event that the net income of
First Houston for the period from January 1, 1997 until the Adjustment Date is
less than the First Houston Projected Earnings. The amount of adjustment to be
made to the Preliminary Merger Consideration pursuant to the immediately
preceding sentence shall be determined (i) by calculating the sum of the Pro
Forma First Houston Shareholders' Equity, minus the Preliminary First Houston
Book Value (the "First Adjustment Amount"); (ii) by calculating the product of
(A) the sum of the Final Sterling Book Value, minus the Preliminary Sterling
Book Value, times (B) the Preliminary Merger Consideration (the "Second
Adjustment Amount"); and (iii) by calculating the amount, if any, by which the
net income of First Houston (computed in accordance with GAAP) for the period
from January 1, 1997 to the Adjustment Date is less than the First Houston
Projected Earnings (the "Third Adjustment Amount"). The Preliminary Merger
Consideration will be increased or decreased by the number of shares of
Sterling Common Stock (such number of shares being referred to herein as the
"Merger Consideration Adjustment") equal to the sum of (in each case rounded to
the nearest whole share) (i) the quotient of the First Adjustment Amount,
divided by either $13.33, if the First Adjustment Amount is positive, or by the
Preliminary Sterling Book Value, if the First Adjustment Amount is negative,
plus (ii) the quotient of the Second Adjustment Amount divided by $13.33,
provided that, no adjustment will be made to the Preliminary Merger
Consideration pursuant to either clause (i) or clause (ii) of this sentence
unless the sum of the First Adjustment Amount and the Second Adjustment Amount
either (A) equals or exceeds $200,000 or (B) equals or is less than
(-$200,000); plus (iii) the quotient of the Third Adjustment Amount divided by
$13.33.
(b) For purposes of this Agreement, the term "Exchange Ratio"
shall mean the amount, calculated as of the Adjustment Date, that is equal to
the quotient of a fraction, of which (i) the numerator is equal to the sum of
(A) the Preliminary Merger Consideration, plus (B) the Merger Consideration
Adjustment, if positive (or minus the Merger Consideration Adjustment, if
negative), plus (C) the First Houston Unexercised Options times the weighted
average exercise price of such First Houston Unexercised Options divided by the
Average Closing Price, and (ii) the denominator is equal to the sum of (A) the
total issued and outstanding shares of First Houston Common Stock as of the
Adjustment Date,
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<PAGE> 13
plus (B) the product of the total issued and outstanding shares of First
Houston Preferred Stock as of the Adjustment Date, multiplied by ten (10), plus
(C) the number of shares of First Houston Common Stock for which the First
Houston Unexercised Options are exercisable.
(c) From and after the date of this Agreement through the
Adjustment Date, each of the parties shall furnish to the other as soon as
practicable, but in no event later than the fifteenth (15th) day of each
calendar month or, if such fifteenth day is not a business day, on the business
day next preceding such fifteenth day, their internal financial statements,
prepared in accordance with GAAP, consisting of a monthly and year-to-date
consolidated balance sheets, and the corresponding statements of income,
shareholders' equity and cash flows. As soon as practicable after the date of
Closing is set in accordance with Sections 2.03 and 2.04 hereof, the Adjustment
Amount shall be determined as of the Adjustment Date based upon the financial
statements prepared and delivered in accordance herewith. If either party
disagrees or objects to the other party's calculation of the Adjustment Amount
and the parties are unable to reach a resolution within five (5) business days
prior to the Closing, Deloitte & Touche LLP ("D&T") shall be engaged to
determine the Adjustment Amount and the determination of D&T shall be
conclusive and binding on First Houston and Sterling. If the determination of
the Adjustment Amount more closely approximates Sterling's calculation, then
First Houston shall be responsible for the fees and expenses of D&T and such
fees and expenses shall be taken into effect in the final determination of the
Adjustment Amount. If the determination of the Adjustment Amount more closely
approximates First Houston's calculation, then Sterling shall be responsible
for the fees and expenses of D&T.
3.03 Anti-Dilution Provisions. The Exchange Ratio, the Preliminary
Merger Consideration, the Preliminary Sterling Book Value and any other stock
based amounts shall be adjusted appropriately to reflect any stock dividends,
splits, recapitalizations or other similar transactions with respect to the
Sterling Common Stock where the record date occurs prior to the Effective Time.
ARTICLE IV
EXCHANGE OF SHARES
4.01 Exchange Agent. As of the Effective Time, Sterling shall
deposit with a bank or trust company designated by Sterling and reasonably
acceptable to First Houston (the "Exchange Agent"), for the benefit of the
holders of shares of First Houston Capital Stock, for exchange in accordance
with this Article IV, through the Exchange Agent, certificates representing the
shares of Sterling Common Stock (such shares of Sterling Common Stock, together
with any dividends or distributions with respect thereto paid in respect of a
record date after the Effective Time, being hereinafter referred to as the
"Exchange Fund") issuable pursuant to Sections 3.01 and 3.02 in exchange for
outstanding shares of First Houston Capital Stock. The Exchange Agent shall,
pursuant to irrevocable instructions, deliver the Sterling Common Stock
contemplated to be issued pursuant hereto out of the Exchange Fund. The
Exchange Fund shall not be used for any other purpose.
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<PAGE> 14
4.02 Exchange Procedures. Promptly after the Effective Time, the
Exchange Agent shall mail to each holder of record of a certificate or
certificates which, immediately prior to the Effective Time, represented
outstanding shares of First Houston Capital Stock (the "Certificates"), other
than shares canceled in accordance with Section 3.01(d): (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the certificates theretofore representing shares of First
Houston Common Stock or First Houston Preferred Stock shall pass, only upon
proper delivery of such certificates to the Exchange Agent, and shall be in
such form and have such other provisions as Sterling shall specify) and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for certificates representing shares of Sterling Common Stock. Upon surrender
of a Certificate for cancellation to the Exchange Agent (or to such other agent
or agents as may be appointed by Sterling), together with such letter of
transmittal, duly executed, and any other required documents, the holder of
such Certificate(s) shall be entitled to receive in exchange therefor a
certificate representing that number of whole shares of Sterling Common Stock
which such holder has the right to receive pursuant to the provisions of this
Article IV and cash in lieu of fractional shares of Sterling Common Stock as
contemplated by Section 3.01(d), and the Certificate(s) so surrendered shall
forthwith be canceled. In the event of a transfer of ownership of First
Houston Capital Stock which is not registered in the transfer records of First
Houston, a certificate representing the appropriate number of shares of
Sterling Common Stock may be issued to a transferee if the Certificate(s)
representing such First Houston Capital Stock is presented to the Exchange
Agent accompanied by all documents required to evidence and effect such
transfer and by evidence that any applicable stock transfer taxes have been
paid. Until surrendered as contemplated by this Section 4.02, each Certificate
shall be deemed at any time after the Effective Time to represent only the
right to receive upon such surrender the certificate representing shares of
Sterling Common Stock and cash in lieu of any fractional shares of Sterling
Common Stock as contemplated by Section 3.01(d) and Section 4.05. The
Certificate(s) for First Houston Common Stock or First Houston Preferred Stock
so surrendered shall be duly endorsed as the Exchange Agent may require.
Sterling shall not be obligated to deliver the consideration to which any
former holder of First Houston Common Stock or First Houston Preferred Stock is
entitled as a result of the Merger until such holder surrenders his
Certificate(s) formerly representing shares of First Houston Common Stock or
First Houston Preferred Stock for exchange as provided in this Article IV. In
addition, certificates surrendered for exchange by any person constituting an
"affiliate" of First Houston for purposes of Rule 145(c) under the Securities
Act shall not be exchanged for certificates representing whole shares of
Sterling Common Stock until Sterling has received a written agreement from such
person as provided in Section 8.06. If any certificate for shares of Sterling
Common Stock, or any check representing cash or declared but unpaid dividends,
is to be issued in a name other than that in which a certificate surrendered
for exchange is issued, the certificate so surrendered shall be properly
endorsed and otherwise in proper form for transfer and the person requesting
such exchange shall affix any requisite stock transfer tax stamps to the
certificate surrendered or provide funds for their purchase or establish to the
satisfaction of the Exchange Agent that such taxes are not payable.
4.03 Voting and Dividends. Former shareholders of record of First
Houston shall be entitled to vote after the Effective Time at any meeting of
Sterling shareholders the number of whole shares of Sterling Common Stock into
which their respective shares of First Houston Capital Stock
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<PAGE> 15
are converted, regardless of whether such holders have exchanged their
certificates representing First Houston Capital Stock for certificates
representing Sterling Common Stock in accordance with the provisions of this
Agreement. Until surrendered for exchange in accordance with the provisions of
Section 4.01, each certificate theretofore representing shares of First Houston
Capital Stock (other than shares to be canceled pursuant to Section 3.01) shall
from and after the Effective Time represent for all purposes only the right to
receive shares of Sterling Common Stock and cash, as set forth in this
Agreement. No dividend or other distribution payable to the holders of record
of Sterling Common Stock, at or as of any time after the Effective Time, shall
be paid to the holder of any certificate representing shares of First Houston
Capital Stock issued and outstanding at the Effective Time until such holder
physically surrenders such certificate for exchange as provided in Section
4.01, promptly after which time all such dividends or distributions shall be
paid (without interest).
4.04 No Further Ownership Rights in First Houston Capital Stock.
All shares of Sterling Common Stock issued upon the surrender for exchange of
shares of First Houston Capital Stock in accordance with the terms hereof
(including any cash paid in lieu of fractional shares of Sterling Common Stock
pursuant to Sections 3.01(e) and Section 4.05) shall be deemed to have been
issued in full satisfaction of all rights pertaining to such shares of First
Houston Capital Stock, subject, however, to the Surviving Corporation's
obligation to pay any dividends or make any other distributions with a record
date prior to the Effective Time that may have been declared or made by First
Houston on such shares of First Houston Capital Stock in accordance with the
terms of this Agreement or prior to the date hereof and which remain unpaid at
the Effective Time, and after the Effective Time there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of First Houston Capital Stock that were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Article IV.
4.05 No Fractional Shares. No certificates or scrip representing
fractional shares of Sterling Common Stock shall be issued upon the surrender
for exchange of certificates for First Houston Capital Stock pursuant to this
Article IV, and no dividend or other distribution, stock split or interest
shall relate to any such fractional security, and such fractional interests
shall not entitle the owner thereof to any voting or other rights of a security
holder of Sterling. In lieu of any fractional security, each holder of shares
of First Houston Capital Stock who would otherwise have been entitled to a
fraction of a share of Sterling Common Stock upon surrender of the
certificate(s) for such First Houston Capital Stock for exchange pursuant to
this Article IV will be paid an amount in cash (without interest) equal to such
holder's proportionate interest in the amount of the net proceeds from the sale
or sales by the Exchange Agent in accordance with the provisions of this
Section 4.05, on behalf of all such holders, of the aggregate fractional shares
of Sterling Common Stock issued pursuant to Article III. As soon as
practicable following the Effective Time, the Exchange Agent shall determine
the excess of (A) the number of whole shares of Sterling Common Stock delivered
to the Exchange Agent by Sterling pursuant to Section 4.01 over (B) the
aggregate number of whole shares of Sterling Common Stock to be distributed to
holders of First Houston
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<PAGE> 16
Capital Stock pursuant to Article III (such excess being herein called the
"Excess Securities") and the Exchange Agent, as agent for the former holders of
First Houston Capital Stock, shall sell the Excess Securities at the prevailing
prices on the NASDAQ. The sale of the Excess Securities by the Exchange Agent
shall be executed on the NASDAQ through one or more member firms of the NASDAQ
and shall be executed in round lots to the extent practicable. Sterling shall
pay all commissions, transfer taxes and other out-of-pocket transaction costs,
including the expenses and compensation of the Exchange Agent, incurred in
connection with such sale of Excess Securities. Until the net proceeds of such
sale of Excess Securities have been distributed to the former stockholders of
First Houston, the Exchange Agent will hold such proceeds and dividends in
trust for such former stockholders. As soon as practicable after the
determination of the amount of cash to be paid to former stockholders of First
Houston in lieu of any fractional interests, the Exchange Agent shall make
available in accordance with this Agreement such amounts to such former
stockholders.
4.06 Termination of Exchange Fund. Any portion of the Exchange
Fund and any cash in lieu of fractional shares of Sterling Common Stock made
available to the Exchange Agent that remain undistributed to the former
stockholders of First Houston for nine months after the Effective Time shall be
delivered to Sterling, upon demand, and any stockholders of First Houston who
have not theretofore complied with this Article IV shall thereafter look only
to Sterling for payment of their claim for Sterling Common Stock, and any cash
in lieu of fractional shares of Sterling Common Stock.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF FIRST HOUSTON
First Houston represents and warrants to Sterling, subject to such
exceptions and limitations as are set forth below or in the First Houston
Disclosure Schedule, as follows:
5.01 Organization, Standing and Authority. First Houston is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Texas. First Houston is duly qualified to do business and
in good standing in all jurisdictions (whether federal, state, local or
foreign) where its ownership or leasing of property or the conduct of its
business requires it to be so qualified and in which the failure to be duly
qualified would have a material adverse effect on the financial condition,
results of operations or business (the "Condition") of First Houston and any of
its Subsidiaries or on the ability of First Houston or its Subsidiaries to
consummate the transactions contemplated hereby (a "First Houston Material
Adverse Effect"). First Houston has all requisite corporate power and authority
to carry on its business as now conducted and to own, lease and operate its
assets, properties and business, except where the failure to have such power
and authority would not have a First Houston Material Adverse Effect, and to
execute and deliver this Agreement and perform the terms of this Agreement.
First Houston is duly registered as a bank holding company under the BHCA.
First Houston has in effect all federal, state, local and foreign
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<PAGE> 17
governmental, regulatory and other authorizations, franchises, permits and
licenses (collectively, "Authorizations") necessary for it to own or lease its
properties and assets and to carry on its business as now conducted, the
absence of which, either individually or in the aggregate, would have a First
Houston Material Adverse Effect.
5.02 First Houston Capital Stock
(a) At December 31, 1996, the authorized and the issued and
outstanding First Houston Capital Stock consisted of the following:
<TABLE>
<CAPTION>
Issued and
Authorized Outstanding
---------- -----------
<S> <C> <C>
First Houston Common Stock: 3,500,000 2,098,238
First Houston Preferred Stock: 200,000 21,375
</TABLE>
Since December 31, 1996, First Houston has issued no additional capital stock
and has no commitments, options or agreements to issue any additional shares,
except as set forth in Section 5.02(a) of the First Houston Disclosure
Schedule. At the same date, First Houston had outstanding shares with a par
value of $2,953,238, capital surplus of $6,183,614 and an accumulated deficit
of $821,754. As of the date hereof, all of the issued and outstanding shares
of First Houston Capital Stock are duly and validly issued and outstanding and
are fully paid and nonassessable. None of the outstanding shares of the First
Houston Capital Stock has been issued in violation of any preemptive rights or
any provision of First Houston's Articles of Incorporation, as amended, or
Bylaws, as amended. As of the date of this Agreement, no shares of First
Houston Capital Stock have been reserved for any purpose except as set forth in
Section 5.02(a) of the First Houston Disclosure Schedule.
(b) Except as set forth in Section 5.02(a) or in Section 5.02(b) of
the First Houston Disclosure Schedule, there are no shares of First Houston
Capital Stock, or other equity securities of First Houston outstanding and no
outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of the capital stock of First
Houston or contracts, commitments, understandings or arrangements by which
First Houston is or may be 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. There are no contracts, commitments,
understandings or arrangements by which First Houston or any of its
Subsidiaries is or may be bound to transfer any shares of the capital stock of
any Subsidiary of First Houston, except for a transfer to First Houston or any
of its wholly owned Subsidiaries and except as set forth in Section 5.02(b) of
the First Houston Disclosure Schedule, and there are no agreements,
understandings or commitments relating to the right of First Houston or any of
its Subsidiaries to vote or to dispose of any such shares.
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<PAGE> 18
(c) Except as set forth in Section 5.02(c) of the First Houston
Disclosure Schedule, there are no securities required to be issued by First
Houston under any First Houston Stock Plan, dividend reinvestment or similar
plan.
5.03 Subsidiaries. Section 5.03 of the First Houston Disclosure
Schedule contains a complete list of First Houston's Subsidiaries. Except as
provided in Section 5.03 the First Houston Disclosure Schedule, all of the
outstanding shares of each Subsidiary are owned by First Houston and no equity
securities are or may become required to be issued by reason of any options,
warrants, scrip, rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into or
exchangeable for, shares of any Subsidiary, and there are no contracts,
commitments, understandings or arrangements by which any 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. All of the
shares of capital stock of each Subsidiary are fully paid and nonassessable and
are owned free and clear of any claim, lien, pledge or encumbrance of
whatsoever kind ("Liens"). Each Subsidiary (i) is duly organized, validly
existing and in good standing under the laws of the jurisdiction in which it is
incorporated or organized, (ii) is duly qualified to do business and in good
standing in all jurisdictions (whether federal, state, local or foreign) where
its ownership or leasing of property or the conduct of its business requires it
to be so qualified and in which the failure to be so qualified would have a
First Houston Material Adverse Effect, (iii) has all requisite corporate power
and authority to own or lease its properties and assets and to carry on its
business as now conducted, and (iv) has in effect all Authorizations necessary
for it to own or lease its properties and assets and to carry on its business
as now conducted.
5.04 Authorization of Merger and Related Transactions.
(a) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby (including, without
limitation, the consummation of the Merger) have been duly and validly
authorized by all necessary corporate action in respect thereof on the part of
First Houston, including unanimous approval of the Merger by the First Houston
Board, subject to the approval of the Merger by the shareholders of First
Houston to the extent required by applicable law. The First Houston Board has
unanimously determined that the Merger is fair to and in the best interests of
First Houston and its shareholders and the First Houston Board has unanimously
determined to submit this Agreement, the Merger and the transactions
contemplated hereby and thereby for approval by the shareholders of First
Houston and unanimously recommends that such shareholders approve and adopt
same. The only shareholder approval required for the approval of the Merger is
the approval of two-thirds of the outstanding shares of First Houston Common
Stock voting as a single class and two-thirds of the outstanding shares of
First Houston Preferred Stock voting as a single class. This Agreement,
subject to any requisite shareholder approval hereof with respect to the
Merger, represents a valid and legally binding obligation of First Houston,
enforceable against First Houston in accordance with its terms, except as such
enforcement may be limited by the Remedies Exception.
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<PAGE> 19
(b) Except as set forth in Section 5.04(b) of the First Houston
Disclosure Schedule, neither the execution and delivery of this Agreement by
First Houston, nor the consummation by First Houston of the transactions
contemplated hereby or thereby nor compliance by First Houston with any of the
provisions hereof or thereof will (i) conflict with or result in a breach of
any provision of First Houston's Articles of Incorporation, as amended, or
bylaws, as amended, or (ii) constitute or result in a breach or violation of
any term, condition or provision of, or constitute a default (or an event which
with notice or lapse of time or both would become a default) under, or give
rise to any right of termination, cancellation or acceleration with respect to,
or result in the creation of any Lien upon, any property or assets of First
Houston or any of its Subsidiaries pursuant to any note, bond, mortgage,
indenture, license, agreement, lease or other instrument or obligation to which
any of them is a party or by which any of them or any of their properties or
assets may be subject and that would have, individually or in the aggregate, a
First Houston Material Adverse Effect, or (iii) subject to receipt of the
requisite approvals referred to in Sections 9.01(a) and 9.01(b) of this
Agreement, violate any order, writ, injunction, decree, statute, rule or
regulation applicable to First Houston or its Subsidiaries or any of their
properties or assets.
(c) Other than consents, authorizations, approvals or exemptions
required from the Commissioner, the OCC, the FDIC, or the Federal Reserve Board
and the filing of a Certificate or Articles of Merger with the Secretary of
State of the State of Texas and filings with the SEC, no notice to, filing
with, authorization of, exemption by, or consent or approval of any public body
or authority is necessary for the consummation by First Houston of the Merger
and the other transactions contemplated in this Agreement.
5.05 Financial Statements and Regulatory Reports.
(a) First Houston (i) has delivered to Sterling copies of the
consolidated balance sheets and the related consolidated statements of income,
shareholders' equity and cash flows (including related notes and schedules) of
First Houston and its consolidated Subsidiaries as of and for the periods ended
December 31, 1995 and December 31, 1996 (the "First Houston Financial
Statements"), and (ii) has furnished Sterling with a true and complete copy of
each material report filed by First Houston with the Federal Reserve Board or
by any of its Subsidiaries with any Regulatory Authorities from and after
January 1, 1994 (each a "Regulatory Reporting Document"), which are all the
material documents that First Houston was required to file with the Regulatory
Authorities since such date and all of which complied when filed in all
material respects with all applicable laws and regulations.
(b) The First Houston Financial Statements (as of the dates
thereof and for the periods covered thereby) (i) are or will be in accordance
with the books and records of First Houston and its Subsidiaries, which are or
will be complete and accurate in all material respects and which have been or
will have been maintained in accordance with good business practices, and (ii)
present or will present fairly the consolidated financial position and the
consolidated results of operations, changes in shareholders' equity and cash
flows of First Houston and its Subsidiaries as of the dates and for the periods
indicated, in accordance with GAAP except as disclosed, subject in the case of
interim
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<PAGE> 20
financial statements to normal recurring year-end adjustments and except for
the absence of certain footnote information in the unaudited statements. First
Houston has delivered to Sterling (i) copies of all management letters prepared
by D&T and delivered to First Houston since January 1, 1994 and (ii) copies of
audited balance sheets and related statements of income, shareholders' equity
and cash flows for any Subsidiary of First Houston since January 1, 1994 for
which a separate audit has been performed.
5.06 Absence of Undisclosed Liabilities. Except as set forth
in Section 5.06 of the First Houston Disclosure Schedule, neither First Houston
nor any of its Subsidiaries has any obligations or liabilities (contingent or
otherwise) in the amount of $50,000 in the aggregate, except obligations and
liabilities (i) which are fully accrued or reserved against in the consolidated
balance sheet of First Houston and its Subsidiaries as of December 31, 1996,
included in the First Houston Financial Statements or reflected in the notes
thereto, or (ii) which were incurred after December 31, 1996, in the ordinary
course of business consistent with past practice. Except as set forth in the
First Houston Disclosure Schedule, since December 31, 1996, neither First
Houston nor any of its Subsidiaries has incurred or paid any obligation or
liability which would have a First Houston Material Adverse Effect.
5.07 Tax Matters. Except as set forth in Section 5.07 of the First
Houston Disclosure Schedule:
(a) All Tax Returns required to be filed by or on behalf of First
Houston or any of its Subsidiaries have been timely filed, or requests for
extensions have been timely filed, granted and have not expired, all such
returns filed are complete and accurate in all material respects and all Taxes
shown as due on those Tax Returns have been paid.
(b) First Houston is not involved in any audit examination,
deficiency or refund litigation or matter in controversy with respect to any
Taxes. All Taxes due with respect to completed and settled examinations or
concluded litigation have been paid or adequately reserved for.
(c) Neither First Houston nor any of its Subsidiaries has executed
an extension or waiver of any statute of limitations on the assessment or
collection of any Tax due that is currently in effect.
(d) Adequate provision for any Taxes due or to become due for
First Houston and any of its Subsidiaries for any period or periods through and
including December 31, 1996, has been made and is reflected on the December 31,
1996 financial statements included in the First Houston Financial Statements.
Deferred Taxes of First Houston and its Subsidiaries have been provided for in
the First Houston Financial Statements in accordance with GAAP.
(e) First Houston and its Subsidiaries have collected and withheld
all Taxes which they have been required to collect or withhold and have timely
submitted all such collected and withheld amounts to the appropriate
authorities. First Houston and its Subsidiaries are in compliance with
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<PAGE> 21
the back-up withholding and information reporting requirements under (i) the
Code, and (ii) any state, local or foreign laws, and the rules and regulations,
thereunder.
(f) Neither First Houston nor any of its Subsidiaries has made any
payments, is obligated to make any payments, or is a party to any contract,
agreement or other arrangement that could obligate it to make any payments that
would not be deductible under Section 280G of the Code.
(g) No consent has been filed under Section 341(f) of the Code
with respect to First Houston or any of its Subsidiaries; none of the
Subsidiaries was acquired in a "qualified stock purchase" under Section
338(d)(3) of the Code, and no elections under Section 338(g) of the Code,
protective carryover basis elections or offset prohibition elections are
applicable to First Houston or any of its Subsidiaries; neither First Houston
nor any of the Subsidiaries has participated in, or cooperated with, an
international boycott within the meaning of Section 999 of the Code, nor has
any such corporation had operations which are or may hereafter become
reportable under Section 999 of the Code; neither First Houston nor any of the
Subsidiaries owns no interest in an entity or arrangement characterized as a
partnership for United States federal income tax purposes; no election under
Section 1504(d) of the Code has been made with respect to First Houston or any
of its Subsidiaries; none of the assets of First Houston or any of its
Subsidiaries is required to be treated as being owned by some other person
pursuant to Section 168(f)(8) of the Code, neither First Houston nor any of the
Subsidiaries is a United States real property holding company under Section 897
of the Code; and no debt of First Houston or any of its Subsidiaries is
"corporate acquisition indebtedness" within the meaning of Section 279(b) of
the Code.
5.08 Allowance for Credit Losses. The allowance for credit losses
(the "Allowance") shown in the consolidated balance sheet of First Houston and
its Subsidiaries as of December 31, 1996, and included in the First Houston
Financial Statements, complies in all material respects with GAAP and OCC Bank
Circular 201 (and comparable regulations applicable to First Houston).
5.09 Other Tax and Regulatory Matters. Neither First Houston nor
any of its Subsidiaries has taken or agreed to take any action or has any
knowledge of any fact or circumstance that would (i) prevent the transactions
contemplated hereby, including the Merger, from qualifying as a reorganization
within the meaning of Section 368 of the Code, (ii) materially impede or delay
receipt of any approval referred to in Section 9.01(b) or (iii) prevent the
Merger and the other transactions contemplated hereby from qualifying as a
pooling of interests for purposes of APB Opinion 16.
5.10 Properties. Except as disclosed in any Regulatory Reporting
Document filed since December 31, 1994 and prior to the date hereof and except
for Permitted Liens and Liens arising in the ordinary course of business after
the date hereof, First Houston and its Subsidiaries have good and indefeasible
title, free and clear of all Liens that are material to the Condition of First
Houston and its Subsidiaries on a consolidated basis, to all their material
properties and assets whether tangible or intangible, real, personal or mixed,
reflected in the First Houston Financial Statements as being owned by First
Houston and its Subsidiaries as of the date hereof. All buildings, and all
fixtures, equipment and other property and assets which are material to its
business on a consolidated
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basis, held under leases or subleases by any of First Houston or its
Subsidiaries are held under valid instruments enforceable in accordance with
their respective terms, subject to the Remedies Exception. Except where a
failure to maintain would not have a First Houston Material Adverse Effect,
substantially all of First Houston's and First Houston's Subsidiaries'
equipment in regular use has been well maintained and is in good serviceable
condition, reasonable wear and tear excepted.
5.11 Compliance with Laws.
(a) Except as set forth in Section 5.11(a) of the First Houston
Disclosure Schedule, each of First Houston and its Subsidiaries is in
compliance with all laws, rules, regulations, policies, guidelines, reporting
and licensing requirements and orders applicable to its business or to its
employees conducting its business, and with its internal policies and
procedures except for failures to comply which will not result in a First
Houston Material Adverse Effect.
(b) Except as set forth in Section 5.11(b) of the First Houston
Disclosure Schedule, neither First Houston nor any of its Subsidiaries has
received any notification or communication from any agency or department of any
federal, state or local government, including the Federal Reserve Board, the
OCC, the FDIC, the SEC and the staffs thereof (collectively, the "Regulatory
Authorities") (i) asserting that since January 1,1994, any of First Houston or
its Subsidiaries is not in substantial compliance with any of the statutes,
regulations, or ordinances which such agency, department or Regulatory
Authority enforces, or the internal policies and procedures of First Houston or
its Subsidiaries, (ii) threatening to revoke any license, franchise, permit or
governmental authorization which is material to the Condition of First Houston
or any of its Subsidiaries, (iii) requiring or threatening to require First
Houston or any of its Subsidiaries, or indicating that First Houston or any of
its Subsidiaries may be required, to enter into a cease and desist order,
agreement or memorandum of understanding or any other agreement restricting or
limiting or purporting to restrict or limit in any manner the operations of
First Houston or any of its Subsidiaries, including, without limitation, any
restriction on the payment of dividends, or (iv) directing, restricting or
limiting, or purporting to direct, restrict or limit in any manner the
operations of First Houston or any of its Subsidiaries, including, without
limitation, any restriction on the payment of dividends (any such notice,
communication, memorandum, agreement or order described in this sentence herein
referred to as a "Regulatory Agreement").
(c) Except as set forth in Section 5.11(c) of the First Houston
Disclosure Schedule, since January 1, 1994, neither First Houston nor any of
its Subsidiaries has been a party to any effective Regulatory Agreement or
memorandum of understanding.
(d) Neither First Houston nor any of its Subsidiaries is required
by Section 32 of Federal Deposit Insurance Act to give prior notice to a
federal banking agency of the proposed addition of an individual to its Board
of Directors or the employment of an individual as a senior executive officer.
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5.12 Employee Benefit Plans.
(a) First Houston has delivered to Sterling prior to the execution
of this Agreement true and complete copies (and, in the case of each material
plan, financial data with respect thereto) of all pension, retirement, profit-
sharing, deferred compensation, stock option, employee stock ownership,
severance pay, vacation, bonus or other incentive plans, all other employee
programs, arrangements or agreements, all material medical, vision, dental or
other health plans, all life insurance plans and all other material employee
benefit plans or fringe benefit plans, including, without limitation, all
"employee benefit plans" as that term is defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), whether
or not terminated, and trust agreements and insurance contracts under or with
respect to which First Houston or any of its Subsidiaries has or could have any
liability, contingent, secondary or otherwise (collectively, the "First Houston
Benefit Plans"). Any of the First Houston Benefit Plans which is an "employee
pension benefit plan," as that term is defined in Section 3(2) of ERISA, is
referred to herein as a "First Houston ERISA Plan." Any of the First Houston
Benefit Plans pursuant to which First Houston is or may become obligated to, or
obligated to cause any of its Subsidiaries or any other Person to, issue,
deliver or sell shares of capital stock of First Houston or any of its
Subsidiaries, or grant, extend or enter into any option, warrant, call, right,
commitment or agreement to issue, deliver or sell shares, or any other interest
in respect of capital stock of First Houston or any of its Subsidiaries, is
referred to herein as a "First Houston Stock Plan." No First Houston Benefit
Plan is or has been a multi-employer plan within the meaning of Section 3(37)
of ERISA. First Houston has set forth in Section 5.12 of the First Houston
Disclosure Schedule (i) a list of all of the First Houston Benefit Plans, (ii)
a list of the First Houston Benefit Plans that are First Houston ERISA Plans,
(iii) a list of the First Houston Benefit Plans that are First Houston Stock
Plans, and (iv) a list of the number of shares covered by, exercise prices for,
and holders of, all stock options granted and available for grant under the
First Houston Stock Plans.
(b) Except as set forth in Section 5.12(b) of the First Houston
Disclosure Schedule, from their inception, all First Houston Benefit Plans have
been and are in substantial compliance with the applicable terms of ERISA and
the Code and any other applicable laws, rules and regulations, including the
terms of such plans, the breach or violation of which, individually or in the
aggregate, could reasonably be expected to result in a Material Adverse Effect.
(c) All liabilities (contingent or otherwise) under any First
Houston Benefit Plan are fully accrued or reserved against in the First Houston
Financial Statements in accordance with GAAP. No First Houston ERISA Plan is
or has ever been subject to Title IV of ERISA or Section 412 of the Code.
(d) Neither First Houston nor any of its Subsidiaries has any
obligations for retiree health or other welfare benefits under any First
Houston Benefit Plan or otherwise, except as set forth in the First Houston
Disclosure Schedule. There are no restrictions on the rights of First Houston
or its Subsidiaries to unilaterally amend or terminate any such First Houston
Benefit Plan at any time without incurring any material liability thereunder.
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(e) Except as set forth in Section 5.12 of the First Houston
Disclosure Schedule, neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby or thereby will (i)
result in any payment (including, without limitation, severance, golden
parachute or otherwise) becoming due to any person under any First Houston
Benefit Plan or otherwise, (ii) increase any benefits otherwise payable under
any First Houston Benefit Plan or (iii) result in any acceleration of the time
of payment or vesting of any such benefits. No amounts payable under any First
Houston Benefit Plan will be nondeductible pursuant to either Section 280G or
162(m) of the Code.
5.13 Commitments and Contracts. Except as set forth in Section
5.13 of the First Houston Disclosure Schedule, neither First Houston nor any of
its Subsidiaries is a party or subject to, or has amended or waived any rights
under, any of the following (whether written or oral, express or implied):
(a) any employment contract or understanding (including any
understandings or obligations with respect to severance or termination pay
liabilities or fringe benefits) with any Employees, including in any such
person's capacity as a consultant (other than those which either (i) are
terminable at will by First Houston or such Subsidiary or (ii) do not involve
payments with a present value of more than $10,000 by First Houston or such
Subsidiary during the remaining term thereof without giving effect to
extensions or renewals of the existing term thereof that may be made at the
election or with the consent or concurrence of First Houston);
(b) any labor contract or agreement with any labor union;
(c) any contract not made in the usual, regular and ordinary
course of business containing non-competition covenants which limit the ability
of First Houston or any of its Subsidiaries to compete in any line of business
or which involve any restriction of the geographical area in which First
Houston or its Subsidiaries may carry on its business (other than as may be
required by law or applicable Regulatory Authorities);
(d) any other contract or agreement for which First Houston or any
Subsidiary was or is required to obtain the approval of any Regulatory
Authority prior to becoming bound or consummating the transactions contemplated
thereby;
(e) any real property lease with annual rental payments
aggregating $5,000 or more;
(f) any contract requiring the payment of any penalty, termination
or other additional amounts as "change of control" payments or otherwise as a
result of transactions contemplated by this Agreement, or providing for the
vesting or accrual of benefits or rights upon a "change of control" or
otherwise as a result of the transactions contemplated by this Agreement;
(g) any agreement with respect to (i) the acquisition of any bank
branches or other assets or stock of another financial institution or any other
Person or (ii) the sale of one or more bank
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branches which would require additional payments by First Houston after the
date of this Agreement; or
(h) any outstanding interest rate exchange or other derivative
contracts.
5.14 Material Contract Defaults. Except as set forth in Section
5.14 of the First Houston Disclosure Schedule, neither First Houston nor any of
its Subsidiaries is, or has received any notice or has any knowledge that any
party is, in breach, violation or default in any respect under any contract,
agreement, commitment, arrangement, lease, insurance policy or other instrument
to which First Houston or any of its Subsidiaries is a party or by which First
Houston or any of its Subsidiaries or the assets, business or operations
thereof may be bound or affected or under which it or its respective assets,
business or operations receives benefits, except for those breaches, violations
or defaults which would not have, individually or in the aggregate, a First
Houston Material Adverse Effect; and there has not occurred any event that with
the lapse of time or the giving of notice of both would constitute such a
default.
5.15 Legal Proceedings. Except as set forth in Section 5.15 of the
First Houston Disclosure Schedule, there are no claims or charges filed with,
or Proceedings or investigations by, Regulatory Authorities or actions or suits
instituted or pending or, to the best knowledge of First Houston's management,
threatened against First Houston or any of its Subsidiaries, or against any
property, asset, interest or right of any of them, that might reasonably be
expected to result in a judgment in excess of $10,000 or that might reasonably
be expected to threaten or impede the consummation of the transactions
contemplated by this Agreement. Neither First Houston nor any of its
Subsidiaries is a party to any agreement or instrument or is subject to any
charter or other corporate restriction or any judgment, order, writ,
injunction, decree, rule, regulation, code or ordinance that, individually or
in the aggregate, might reasonably be expected to have a First Houston Material
Adverse Effect or might reasonably be expected to threaten or impede the
consummation of the transactions contemplated by this Agreement.
5.16 Absence of Certain Changes or Events Since December 31, 1994,
except (i) as disclosed in any Regulatory Reporting Document filed since
December 31,1994 and prior to the date hereof or (ii) as set forth in Section
5.16 of the First Houston Disclosure Schedule, neither First Houston nor any of
its Subsidiaries has (A) incurred any liability which has had a First Houston
Material Adverse Effect, (B) suffered any change in its Condition which would
have a First Houston Material Adverse Effect, other than changes after the date
hereof which affect the banking industry as a whole, (C) failed to operate its
business consistent in all material respects in the ordinary course in
accordance with past practice, or (D) changed any accounting practices.
5.17 Reports. Since January 1, 1994, First Houston and each of its
Subsidiaries have filed on a timely basis all reports and statements, together
with all amendments required to be made with respect thereto (collectively
"Reports"), that they were required to file with (i) the Federal Reserve Board,
(ii) the OCC, (iii) the FDIC, and (iv) any other applicable federal, state,
municipal, local or foreign government, securities, banking, savings and loan
or other governmental or regulatory
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authority. No Regulatory Reporting Document with respect to periods beginning
on or after January 1, 1994, contained any information that was false or
misleading with respect to any material fact or omitted to state any material
fact necessary in order to make the statements therein not misleading.
5.18 Statements True and Correct. None of the information supplied
or to be supplied by First Houston for inclusion in the registration statement
on Form S-4, or other appropriate form, to be filed with the SEC by Sterling
under the Securities Act in connection with the transactions contemplated by
this Agreement (the "Registration Statement"), or the proxy statement to be
used by First Houston to solicit any required approval of its shareholders as
contemplated by this Agreement (the "Proxy Statement") will, in the case of the
Proxy Statement, when it is first mailed to the shareholders of First Houston,
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements made therein, in light of the
circumstances under which such statements are made, not misleading, or, in the
case of the Registration Statement, when it becomes effective or at the
Effective Time, 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 the shareholders
of First Houston to be held pursuant to Section 8.03 of this Agreement,
including any adjournments thereof (the "Shareholders' Meeting"), be false or
misleading with respect to any material fact or omit to state any material fact
necessary to correct any statement or remedy any omission in any earlier
communication with respect to the solicitation of any proxy for the
Shareholders' Meeting. The Proxy Statement, insofar as it relates to
information supplied by First Houston for inclusion therein, will comply as to
form in all material respects with the applicable provisions of the Securities
Laws. All documents that First Houston is responsible for filing with any
Regulatory Authority in connection with the transactions contemplated hereby
will comply as to form in all material respects with the provisions of
applicable law. The information which is deemed to be set forth in the First
Houston Disclosure Schedule by First Houston for the purposes of this Agreement
is true and accurate in all material respects.
5.19 Insurance. First Houston and each of its Subsidiaries are
presently insured, and during each of the past five calendar years have been
insured, for reasonable amounts against such risks as companies engaged in a
similar business would, in accordance with good business practice, customarily
be insured. The policies of fire, theft, liability (including directors and
officers liability insurance) and other insurance maintained with respect to
the assets or businesses of First Houston and its Subsidiaries provide adequate
coverage against all pending or threatened claims, and the fidelity bonds in
effect as to which any of First Houston or any of its Subsidiaries is a named
insured are sufficient for their purpose.
5.20 Labor. No material work stoppage involving First Houston or
its Subsidiaries is pending or, to the best knowledge of First Houston's
management, threatened. Neither First Houston nor any of its Subsidiaries is
involved in, or, to the best knowledge of First Houston's management,
threatened with or affected by, any labor or other employment-related dispute,
arbitration, lawsuit or administrative proceeding. Employees of First Houston
and its Subsidiaries are not represented
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by any labor union, and, to the best knowledge of First Houston's management,
no labor union is attempting to organize employees of First Houston or any of
its Subsidiaries.
5.21 Material Interests of Certain Persons. Except as set forth in
Section 5.21 of the First Houston Disclosure Schedule, no executive officer or
director of First Houston, or any "associate" (as such term is defined in Rule
14a-1 under the Exchange Act) of any such executive officer or director, has
any material interest in any material contract or property (real or personal),
tangible or intangible, used in or pertaining to the business of First Houston
or any of its Subsidiaries.
5.22 Registration Obligations. Neither First Houston nor any of
its Subsidiaries is under any obligation, contingent or otherwise, presently in
effect or which will survive the Merger by reason of any agreement to register
any of its securities under the Securities Act.
5.23 Brokers and Finders. Except as set forth in Section 5.23 of
the First Houston Disclosure Schedule, neither First Houston nor any of its
Subsidiaries 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 First Houston or any of its
Subsidiaries in connection with this Agreement or the transactions contemplated
hereby.
5.24 State Takeover Laws. To the best of First Houston's
knowledge, the transactions contemplated by this Agreement are exempt from any
applicable state takeover law and from any applicable charter or contractual
provision containing change of control or anti-takeover provisions.
5.25 Environmental Matters. To the best of First Houston's
knowledge, neither First Houston, any of its Subsidiaries, nor any properties
owned or operated by First Houston or any of its Subsidiaries or held as
collateral by any of its Subsidiaries has been or is in violation of or liable
under any Environmental Law (as hereinafter defined), except for such
violations or liabilities that, individually or in the aggregate, are not
reasonably likely to have a Material Adverse Effect. There are no actions,
suits or proceedings, or demands, claims, notices or investigations (including
without limitation notices, demand letters or requests for information from any
environmental agency) instituted or pending, or to the best knowledge of First
Houston's management, threatened relating to the liability of any properties
owned or operated by First Houston or any of its Subsidiaries under any
Environmental Law, except for liabilities or violations that would not
reasonably be expected to have, individually or in the aggregate, a First
Houston Material Adverse Effect.
"Environmental Law" means any federal, state, local or foreign law,
statute, ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, order, judgment, decree, injunction or agreement with any
Regulatory Authority relating to (i) the protection, preservation or
restoration of the environment (including, without limitation, air, water
vapor, surface water, groundwater, drinking water supply, surface soil,
subsurface soil, plant and animal life or any other natural resource), and/or
(ii) the use, storage, recycling, treatment, generation, transportation,
processing, handling, labeling, production, release or disposal of any
substance presently listed,
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defined, designated or classified as hazardous, toxic radioactive or dangerous,
or otherwise regulated, whether by type or by quantity, including any material
containing any such substance as a component.
5.26 First Houston Action. The First Houston Board of Directors
(at a meeting duly called and held on March 13, 1997) unanimously (a)
determined that the Merger is fair to and in the best interests of First
Houston and its shareholders, (b) approved this Agreement and the Merger in
accordance with the TBCA, (c) resolved to recommend approval and adoption of
this Agreement and the Merger and the other transactions contemplated hereby
and thereby by First Houston's shareholders and (d) directed that this
Agreement and the Merger be submitted to First Houston's shareholders for
approval.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF STERLING
Each of Sterling and Merger Subsidiary represent and warrant to First
Houston as follows:
6.01 Organization Standing and Authority.
(a) Each of Sterling and Merger Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Texas. Each of Sterling and Merger Subsidiary is duly qualified to do business
and in good standing in all jurisdictions (whether federal, state, local or
foreign) where its ownership or leasing of property or the conduct of its
business requires it to be so qualified and in which the failure to be duly
qualified would have a material adverse effect on the Condition of Sterling and
its Subsidiaries taken as a whole or on the ability of Sterling or the Merger
Subsidiary to consummate the transactions contemplated hereby (a "Sterling
Material Adverse Effect"). Each of Sterling and Merger Subsidiary has all
requisite corporate power and authority to carry on its business as now
conducted and to own, lease and operate its assets, properties and business,
and to execute and deliver this Agreement and perform the terms of this
Agreement. Sterling is duly registered as a bank holding company under the
BHCA. Sterling has in effect all Authorizations necessary for it to own or
lease its properties and assets and to carry on its business as now conducted,
the absence of which, either individually or in the aggregate, would have a
Material Adverse Effect on the Condition of Sterling and its Subsidiaries on a
consolidated basis. Since its formation, Merger Subsidiary has not conducted
any business other than in connection with the negotiation and execution of
this Agreement and the transactions contemplated hereby. At the Effective
Time, Sterling will directly own all of the issued and outstanding shares of
Merger Subsidiary's capital stock.
(b) Bancorporation is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
all requisite corporate power and authority to carry on its business as now
conducted and to perform the applicable terms of this Agreement.
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6.02 Sterling and Merger Subsidiary Capital Stock. The authorized
capital stock of Sterling consists of 20,000,000 shares of Sterling Common
Stock and 1,000,000 shares of Sterling Preferred Stock. As of the date hereof,
there were outstanding approximately 11,999,643 shares of Sterling Common Stock
and 88,380 shares of Sterling Preferred Stock and no other shares of capital
stock of any class. The authorized capital stock of Merger Subsidiary consists
of 1,000 shares of common stock, par value $0.01 per share, of which 1,000
shares are issued and outstanding and owned by Sterling. All of the issued and
outstanding shares of Sterling Capital Stock and Merger Subsidiary capital
stock are duly and validly issued and outstanding and are fully paid and
nonassessable.
6.03 Authorization of Merger and Related Transactions.
(a) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action in respect thereof on the part of
each of Sterling and Merger Subsidiary, to the extent required by applicable
law. This Agreement represents a valid and legally binding obligation of each
of Sterling and Merger Subsidiary, enforceable against Sterling and Merger
Subsidiary in accordance with its terms except as such enforcement may be
limited by the Remedies Exception.
(b) Neither the execution and delivery of this Agreement by
Sterling or Merger Subsidiary, nor the consummation by Sterling or Merger
Subsidiary of the transactions contemplated hereby or thereby nor compliance by
Sterling or Merger Subsidiary with any of the provisions hereof or thereof will
(i) conflict with or result in a breach of any provision of Sterling's Articles
of Incorporation, as amended, or restated bylaws or the articles of
incorporation or bylaws of Merger Subsidiary or (ii) constitute or result in a
breach or violation of any term, condition or provision of, or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give rise to any right of termination, cancellation or
acceleration with respect to, or result in the creation of any Lien upon any
property or assets of any of Sterling or its Subsidiaries pursuant to any note,
bond, mortgage, indenture, license, agreement, lease or other instrument or
obligation to which any of them is a party or by which any of them or any of
their properties or assets may be subject, and that would, in any such event,
have a Sterling Material Adverse Effect or (iii) subject to receipt of the
requisite approvals referred to in Section 9.01 of this Agreement, violate any
order, writ, injunction, decree, statute, rule or regulation applicable to
Sterling or any of its Subsidiaries or any of their properties or assets.
6.04 Financial Statements. Sterling (i) has delivered to First
Houston copies of the consolidated balance sheets and the related consolidated
statements of income, consolidated statements of shareholders' equity and
consolidated statements of cash flows (including related notes and schedules)
of Sterling and its consolidated Subsidiaries as of and for the periods ended
September 30, 1996 and December 31, 1995 included in a quarterly report filed
on Form 10-Q or an annual report filed on Form 10-K, as the case may be, filed
by Sterling pursuant to the rules and regulations of the SEC promulgated
thereunder (a "Sterling SEC Document"), and (ii) until the Closing will deliver
to First Houston promptly upon the filing thereof with the SEC copies of the
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consolidated balance sheets and related consolidated statements of income,
consolidated statements of shareholders' equity and consolidated statements of
cash flows (including related notes and schedules) included in any Sterling SEC
Documents filed subsequent to the execution of this Agreement (clauses (i) and
(ii) collectively, the "Sterling Financial Statements"). The Sterling Financial
Statements (as of the dates thereof and for the periods covered thereby) (A)
are or will be in accordance with the books and records of Sterling and its
consolidated Subsidiaries, which are or will be complete and accurate in all
material respects and which have been or will have been maintained in
accordance with good business practices, and (B) present or will present fairly
the consolidated financial position and the consolidated statements of income,
changes in shareholders' equity and cash flows of Sterling and its Subsidiaries
as of the dates and for the periods indicated, in accordance with GAAP, subject
in the case of interim financial statements to normal recurring year-end
adjustments and except for the absence of certain footnote information in the
unaudited statements.
6.05 Sterling SEC Reports. Since January 1, 1994, Sterling has
filed on a timely basis all reports and statements, together with all
amendments required to be made with respect thereto that as an issuer it is
required to file with the SEC. No Sterling SEC Document with respect to
periods beginning on or after January 1, 1994 and until the Closing contained
or will contain any information that was false or misleading with respect to
any material fact or omitted or will omit to state any material fact necessary
in order to make the statements therein not misleading.
6.06 Statements True and Correct. None of the information supplied
or to be supplied by Sterling for inclusion in the Registration Statement or
the Proxy Statement will, in the case of the Proxy Statement, when it is first
mailed to the shareholders of First Houston, contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which such
statements are made, not misleading or, in the case of the Registration
Statement, when it becomes effective or at the Effective Time, 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 Shareholders' Meeting, be false or misleading with respect
to any material fact or omit to state any material fact necessary to correct
any statement or remedy any omission in any earlier communication with respect
to the solicitation of any proxy for the Shareholders' Meeting. All documents
that Sterling is responsible for filing with any Regulatory Authority in
connection with the transactions contemplated hereby will comply as to form in
all material respects with the provisions of applicable law, including
applicable provisions of the Securities Laws.
6.07 Common Stock. At the Effective Time, the Sterling Common
Stock issued pursuant to the Merger will be duly authorized, validly issued,
fully paid and nonassessable and not subject to preemptive rights.
6.08 Tax and Regulatory Matters. Neither Sterling nor any of its
Subsidiaries has taken or agreed to take any action or has any knowledge of any
fact or circumstance that would (i) prevent
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the transactions contemplated hereby, including the Merger, from qualifying as
a reorganization within the meaning of Section 368 of the Code, (ii) materially
impede or delay receipt of any approval referred to in Section 9.0l(b) or (iii)
jeopardize the treatment of the business combination to be effected by the
Merger as a pooling of interests for accounting purposes.
6.09 Litigation. There are no judicial proceedings of any kind or
nature pending or, to the knowledge of Sterling, threatened against Sterling
before any court or administrative tribunal or before or by any governmental
department, agency or instrumentality involving the validity of the Sterling
Common Stock or the transactions contemplated by this Agreement.
6.10 Brokers and Finders. Neither Sterling nor any of its
Subsidiaries 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 Sterling or any of its Subsidiaries
in connection with this Agreement or the transactions contemplated hereby.
ARTICLE VII
CONDUCT OF FIRST HOUSTON'S BUSINESS
7.01 Conduct of Business Prior to the Effective Time. During the
period from the date of this Agreement to the Effective Time, First Houston
shall, and shall cause each of its Subsidiaries to, (i) conduct its business in
the usual, regular and ordinary course consistent with past practice (other
than transactions made pursuant to contracts in existence on the date hereof
and described in Sections 7.01 or 7.02 of the First Houston Disclosure
Schedule) and (ii) use its best efforts to maintain current customer
relationships and preserve intact its business organization, employees,
advantageous business relationships and retain the services of its officers and
key Employees.
7.02 Forbearances. During the period from the date of this
Agreement to the Effective Time, First Houston shall not, and shall not permit
any of its Subsidiaries to, without the prior written consent of Sterling,
which consent (in the case of subparagraphs (c), (d), (e), (h) and (o)) shall
not be unreasonably withheld (and First Houston shall provide Sterling with
prompt notice of any events referred to in this Section 7.02 occurring after
the date hereof):
(a) other than in the ordinary course of business consistent with
past practice, incur any indebtedness for borrowed money (other than short-term
indebtedness incurred to refinance short-term indebtedness and indebtedness of
First Houston or any of its Subsidiaries to First Houston or any of its
Subsidiaries; it being understood and agreed that incurrence of indebtedness in
the ordinary course of business shall include, without limitation, the creation
of deposit liabilities, purchases of federal funds, and sales of certificates
of deposit), assume, guarantee, endorse or otherwise as an accommodation become
responsible for the obligations of any other Person, or make any loan or
advance other than in the ordinary course of business consistent with past
practice;
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(b) adjust, split, combine or reclassify any capital stock; make,
declare or pay any dividend (other than regular semi-annual cash dividends at a
rate not in excess of $1.60 per share of First Houston Preferred Stock,
provided that the amount of such dividend shall have been paid or accrued in
the financial statements of First Houston on or prior to the Adjustment Date)
or make any other distribution on, or directly or indirectly redeem, purchase
or otherwise acquire, any shares of its capital stock or any securities or
obligations convertible into or exchangeable for any shares of its capital
stock (other than conversion into shares of First Houston Common Stock of
shares of First Houston Preferred Stock issued and outstanding as of December
31, 1996), grant any stock options or stock awards, or grant any Person any
right to acquire any shares of its capital stock; or issue any additional
shares of capital stock, or any securities or obligations convertible into or
exchangeable for any shares of its capital stock;
(c) sell, transfer, mortgage, encumber or otherwise dispose of any
of its properties or assets to any Person, or cancel, release or assign any
indebtedness to such Person or any claims held by any such Person, except in
the ordinary course of business consistent with past practice or pursuant to
contracts or agreements in force at the date of this Agreement;
(d) make any material investment (other than trades in investment
securities in the ordinary course) either by purchase of stock or securities,
contributions to capital, property transfers, or purchase of any property or
assets of any other Person;
(e) enter into, terminate or fail to exercise any material right
under, any contract or agreement involving annual payments in excess of $10,000
and which cannot be terminated without penalty upon 30 days' notice, or make
any change in, or extension of (other than automatic extensions), any of its
leases or contracts involving annual payments in excess of $10,000 and which
cannot be terminated without penalty upon 30 days' notice;
(f) modify the terms of any First Houston Benefit Plan (including
any severance pay plan) or increase or modify in any manner the compensation or
fringe benefits of any of its Employees or pay any pension or retirement
allowance not required by any existing plan or agreement to any such Employees,
or become a party to, amend or commit itself to any pension, retirement,
profit-sharing or welfare benefit plan or agreement or employment agreement
with or for the benefit of any Employee other than routine adjustments in
compensation and fringe benefits in the ordinary course of business consistent
with past practice, or accelerate the vesting of any stock options or other
stock-based compensation;
(g) take any action that would prevent or impede the Merger from
qualifying as a reorganization within the meaning of Section 368(a)(1)(A) by
reason of Section 368(a)(2)(E) of the Code;
(h) settle any claim, action or proceeding involving the payment
of money damages in excess of $10,000;
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(i) amend its Articles of Incorporation, as amended, or its bylaws
as amended;
(j) fail to maintain its Regulatory Agreements, material
Authorizations or to file in a timely fashion all federal, state, local and
foreign Tax Returns;
(k) make any capital expenditures of more than $10,000
individually or $50,000 in the aggregate;
(1) fail to maintain or administer each First Houston Benefit Plan
in accordance with all applicable law or timely make all contributions or
accruals required thereunder in accordance with GAAP;
(m) issue any additional shares of First Houston Capital Stock,
except for shares of First Houston Common Stock issuable upon (i) the
conversion of shares of First Houston Preferred Stock issued and outstanding at
December 31, 1996 or (ii) exercise of stock options granted prior to and
outstanding at December 31, 1996;
(n) take any action that is intended or may reasonably be expected
to result in any of its representations and warranties set forth in this
Agreement being or becoming untrue in any material respect at any time prior to
the Effective Time, or in any of the conditions to the Merger set forth in
Article IX not being satisfied or in a violation of any provision of this
Agreement, except, in every case, as may be required by applicable law;
(o) change any methods of accounting from those used in the First
Houston Financial Statements;
(p) take any action that would jeopardize the treatment of the
Merger as a pooling of interests for accounting purposes in accordance with APB
Opinion 16; or
(q) agree, or make any commitment, to take, in writing or
otherwise, any of the actions described in clauses (a) through (p) of this
Section 7.02.
7.03 Plan Terminations; Deferred Compensation Expense Accrual.
Prior to the Effective Time, First Houston shall have taken all steps, subject
to Sterling's approval, necessary or appropriate so that (i) the Stock Option
Plans shall continue in full force and effect after the Merger and all First
Houston Stock Options issued and outstanding thereunder shall represent the
right to purchase, at the exercise price specified therein, such number of
shares of Sterling Common Stock as is equal to the product of the number of
shares of First Houston Common Stock subject to purchase thereunder immediately
prior to the Merger times the Exchange Ratio and (ii) the First Houston 401(k)
Plan shall have been terminated. That certain Deferred Compensation Agreement
dated July 6, 1995 (the "Deferred Compensation Agreement"), between Houston
National Bank and Charles M. Neff, Jr., and that certain Split Dollar Life
Insurance Agreement dated July 6, 1995, between Houston National Bank and
Charles M. Neff, Jr. (the "Split Dollar Life Insurance
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Agreement") may at First Houston's option (i) be terminated and all obligations
of First Houston with respect thereto terminated or (ii) continue in effect
after the Effective Time; provided, however, that prior to the Adjustment Date,
the expense incurred in terminating and discharging First Houston's obligations
or, if not terminated, the net present value of the maximum benefits that may
be paid under the Deferred Compensation Agreement discounted at six percent
(6%) per annum shall be treated as a Known Adjustment for purposes of
determining the Merger Consideration.
ARTICLE VIII
ADDITIONAL AGREEMENTS
8.01 Access and Information.
(a) During the period from the date of this Agreement through the
Effective Time:
(i) First Houston shall, and shall cause its Subsidiaries to,
afford Sterling, and its accountants, counsel and other
representatives, full access during normal business hours to
the properties, books, contracts, tax returns, commitments and
records of First Houston and its Subsidiaries at any time, and
from time to time, for the purpose of conducting any review or
investigation reasonably related to this Agreement or the
Merger, and First Houston and its Subsidiaries will cooperate
fully with all such reviews and investigations.
(ii) Sterling shall upon reasonable notice make personnel and
copies of its SEC reports available to First Houston and its
advisors for purposes of any review or report to the First
Houston Board in evaluating the Merger.
(b) During the period from the date of this Agreement through the
Effective Time, First Houston shall furnish to Sterling (i) all Reports
referred to in Section 5.17 promptly upon the filing thereof, (ii) a copy of
each Tax Return filed by it, and (iii) monthly and other interim financial
statements in the form prepared by First Houston for its internal use. During
this period, First Houston also shall notify Sterling promptly of any material
change in the Condition of First Houston or any of its Subsidiaries.
(c) Notwithstanding the foregoing provisions of this Section 8.01,
no investigation by the parties hereto made heretofore or hereafter shall
affect the representations and warranties of the parties which are contained
herein and each such representation and warranty shall survive such
investigation.
(d) Sterling agrees that it will keep confidential any information
furnished to it in connection with the transactions contemplated by this
Agreement which is reasonably designated as confidential at the time of
delivery, except to the extent that such information (i) was already
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known to Sterling and was received from a source other than First Houston or
any of its Subsidiaries, directors, officers, employees or agents, (ii)
thereafter was lawfully obtained from another source or was publicly disclosed
by First Houston or its agent or representative, or (iii) is required to be
disclosed to the OCC, the FDIC, the Federal Reserve Board, or any other
Regulatory Authority, or is otherwise required to be disclosed by law.
Sterling agrees not to use such confidential information, and to implement
safeguards and procedures that are reasonably designed to prevent such
confidential information from being used, for any purpose other than in
connection with the transactions contemplated by this Agreement. Upon any
termination of this Agreement, Sterling will return to First Houston all
documents furnished Sterling for its review and all copies of such documents
made by Sterling.
(e) First Houston shall cooperate, and shall cause its
Subsidiaries, accountants, counsel and other representatives to cooperate, with
Sterling and its accountants, counsel and other representatives, in connection
with the preparation by Sterling of any applications and documents required to
obtain the Approvals which cooperation shall include providing all information,
documents and appropriate representations as may be necessary in connection
therewith and, when requested by Sterling, preparing and filing of regulatory
applications.
(f) From and after the date of this Agreement, each of Sterling
and First Houston shall use its reasonable best efforts to satisfy or cause to
be satisfied all conditions to their respective obligations under this
Agreement. While this Agreement is in effect, neither Sterling nor First
Houston shall take any actions, or omit to take any actions, which would cause
this Agreement to become unenforceable in accordance with its terms.
8.02 Registration Statement; Regulatory Matters.
(a) Sterling shall (i) prepare and file the Registration Statement
and the Proxy Statement with the SEC as soon as is reasonably practicable, (ii)
use its best efforts to cause the Registration Statement to become effective,
and (iii) take any action required to be taken under any applicable state blue
sky or securities laws in connection therewith. First Houston and its
Subsidiaries shall furnish Sterling with all information concerning First
Houston, its Subsidiaries and the holders of First Houston Capital Stock as
Sterling may reasonably request in connection with the foregoing.
(b) Sterling and First Houston shall cooperate and use their
respective best efforts (i) to prepare all documentation, to effect all filings
and to obtain all permits, consents, approvals and authorizations of all third
parties, Regulatory Authorities necessary to consummate the transactions
contemplated by this Agreement, including, without limitation, any such
approvals or authorizations required by the Federal Reserve, the OCC, the FDIC
and the Commissioner and (ii) to cause the Merger to be consummated as
expeditiously as reasonably practicable.
8.03 Shareholders' Approval. First Houston shall, as promptly as
practicable, call a meeting of its shareholders to be held as soon as
practicable for the purpose of voting upon the Merger and related matters. The
Shareholders' Meeting shall be held as soon as practicable following
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the date on which the Registration Statement becomes effective. The Board of
Directors of First Houston shall, submit for approval of its shareholders the
matters to be voted upon at the Shareholders' Meeting, and shall recommend
approval of such matters and use its best efforts (including, without
limitation, soliciting proxies for such approvals) to obtain such shareholder
approvals. The covenants under this Section 8.03 are subject to the exercise
by the First Houston Board of its fiduciary obligations. First Houston (i)
acknowledges that a breach of its covenant contained in this Section 8.03 to
convene a meeting of its shareholders and call for a vote thereat with respect
to the approval of this Agreement, the Merger and the transactions contemplated
hereby and thereby will result in irreparable harm to Sterling and Merger
Subsidiary which will not be compensable in monetary damages and (ii) agrees
that such covenant shall be specifically enforceable and that specific
performance and injunctive relief shall be a remedy properly available to
Sterling for a breach of such covenant.
8.04 Press Releases. Prior to the public dissemination of any
press release or other public disclosure of information about this Agreement,
the Merger or any other transaction contemplated hereby, the parties to this
Agreement shall mutually agree as to the form and substance of such release or
disclosure, except as otherwise provided by applicable law or by rules of the
NASDAQ.
8.05 Notice of Defaults. First Houston shall promptly notify
Sterling of (i) any material change in its business, operations or prospects,
(ii) any complaints, investigations or hearings (or communications indicating
that the same may be contemplated) of any Regulatory Authority, (iii) the
institution or the threat of litigation involving such party, or (iv) any event
or condition that might be reasonably expected to cause any of its
representations, warranties or covenants set forth herein not to be true and
correct in all material respects as of the Effective Time. For purposes of
this Section 8.05, the term material litigation shall mean any claim involving
$10,000 or more. Upon any such notice, if any event or condition stated in
such notice shall entitle Sterling to terminate this Agreement pursuant to
Section 10.01(c), Sterling shall not be entitled to terminate this Agreement by
reason thereof unless Sterling exercises such right on or before the later of
(i) the date ten (10) business days after such notification or (ii) the
expiration of the cure period described in such Section 10.01(c).
8.06 Miscellaneous Agreements and Consents; Affiliates Agreements.
Subject to the terms and conditions of this Agreement, each of the parties
hereto agrees to use its respective best efforts to take, or cause to be taken,
all action, and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement as expeditiously as
reasonably practicable, including, without limitation, using their respective
best efforts to lift or rescind any injunction or restraining order or other
order adversely affecting the ability of the parties to consummate the
transactions contemplated hereby. Sterling and First Houston shall, and shall
cause each of their respective Subsidiaries to, use their best efforts to
obtain consents of all third parties and Regulatory Authorities necessary or,
in the reasonable opinion of Sterling or First Houston, desirable for the
consummation of the transactions contemplated by this Agreement. In case at
any time after the Effective Time any further action is necessary or desirable
to carry out the purposes of this Agreement, the proper
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officers and directors of Sterling shall be deemed to have been granted
authority in the name of First Houston to take all such necessary or desirable
action. Without limiting the foregoing, First Houston will take such actions
as may be reasonably necessary to identity each of its "affiliates" for
purposes of Rule 145 under the Securities Act and to cause each person so
identified to deliver to Sterling prior to the Effective Time a written
agreement in form and substance satisfactory to Sterling providing that such
person shall not sell, pledge, transfer or otherwise dispose of any capital
stock to be received by such person as part of the Merger Consideration except
in compliance with the applicable provisions of the Securities Act. For a
period of not less than three years after the date hereof (or such shorter
period of time as may be applicable for such "affiliates" to sell shares of
Sterling Common Stock in accordance with Rule 144 under the Securities Act),
Sterling will continue to file in a timely manner all securities reports
required to be filed by it pursuant to Section 13 and Section 15(d) of the
Exchange Act.
8.07 Indemnification.
(a) Sterling shall indemnify, defend, and hold harmless the
directors, officers, employees, and agents of First Houston and its
Subsidiaries (each, an "Indemnified Party") against all losses, expenses
(including reasonable attorneys' fees), claims, damages or liabilities and
amounts paid in settlement arising out of actions or omissions or alleged acts
or omissions occurring at or prior to the Effective Time (including the
transactions contemplated by this Agreement) to the full extent permitted under
the TBCA and by First Houston's Articles of Incorporation, as amended, and
bylaws as in effect on the date hereof, including provisions relating to
advances of expenses incurred in the defense of any proceeding to the full
extent permitted by the TBCA upon receipt of any undertaking required by the
TBCA, except that the right to indemnification shall not arise in those
instances in which the party seeking indemnification has participated in the
breach of any covenant or agreement contained herein or knowingly caused any
representation or warranty of First Houston contained herein to be false or
inaccurate in any respect and the claim arises principally from such breach or
the falsity or inaccuracy of such representation or warranty. Without limiting
the foregoing, in any case in which a determination by Sterling is required to
effectuate any indemnification, Sterling shall direct, at the election of the
Indemnified Party, that the determination shall be made by independent counsel
mutually agreed upon between Sterling and the Indemnified Party.
(b) Sterling shall use its reasonable efforts (and First Houston
shall cooperate prior to the Effective Time in these efforts) to maintain in
effect for a period of four years after the Effective Time First Houston's
existing directors' and officers' liability insurance policy (provided that
Sterling may substitute therefor (i) policies of at least the same coverage and
amounts containing terms and conditions which are substantially no less
advantageous in the aggregate or (ii) with the consent of First Houston given
prior to the Effective Time, any other policy) with respect to claims arising
from facts or events which occurred prior to the Effective Time and covering
persons who are currently covered by such insurance; provided, that Sterling
shall not be obligated to make premium payments for such four-year period in
respect of such policy (or coverage replacing such policy) which exceed, for
the portion related to First Houston's directors and officers, 100% of the
annual premium payments on First Houston's current policy in effect as of the
date of this
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Agreement (the "Maximum Amount"). If the amount of the premiums necessary to
maintain or procure such insurance coverage exceeds the Maximum Amount,
Sterling shall use its reasonable efforts to maintain the most advantageous
policies of directors' and officers' liability insurance obtainable for a
premium equal to the Maximum Amount.
(c) If Sterling or any of its successors or assigns shall
consolidate with or merge into any other person and shall not be the continuing
or surviving person of such consolidation or merger or shall transfer all or
substantially all of its assets to any person, then and in each case, proper
provision shall be made so that the successors and assigns of Sterling shall
assume the obligations set forth in this Section 8.07.
(d) The provisions of this Section 8.07 are intended to be for the
benefit of and shall be enforceable by, each Indemnified Party, his or her
heirs and representatives.
(e) Sterling shall pay all expenses, including reasonable
attorneys' fees, that may be incurred by any Indemnified Party in successfully
enforcing the indemnity and other obligations provided for in this Section 8.07
if Sterling has been finally determined to have acted in bad faith in refusing
such indemnity. The Indemnified Party shall pay all expenses, including
reasonable attorneys' fees, incurred by Sterling if the indemnification or
other obligations provided in this Section 8.07 are denied by a court of
competent jurisdiction by final and nonappealable order, unless such court
determines that Sterling acted in bad faith in refusing such indemnity.
8.08 Stock Plans; Restricted Stock.
(a) All restrictions or limitations on transfer with respect to
First Houston Common Stock awarded under a First Houston Stock Plan or any
other plan, program or arrangement ("Restricted Stock"), to the extent that
such restrictions or limitations shall not have already lapsed, shall remain in
full force and effect with respect to the Sterling Common Stock into which such
Restricted Stock is converted pursuant to Section 3.01.
(b) As soon as practicable following the date of this Agreement,
the Board of Directors of First Houston shall adopt such resolutions or take
such other actions as may be required to effect the following:
(i) cause all First Houston Stock Options outstanding
immediately prior to the Effective Time of the Merger to be deemed to
constitute an option to acquire, on the same terms and conditions as
were applicable under such First Houston Stock Option, such number of
shares of Sterling Common Stock as is specified in Section 7.03;
(ii) make such other changes to the Stock Option Plans as
it deems appropriate to give effect to the Merger (subject to the
approval of Sterling).
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(c) As soon as practicable after the Effective Time, Sterling
shall deliver to the holders of First Houston Stock Options appropriate notices
setting forth such holders' rights pursuant to the respective Stock Option
Plans and the agreements evidencing the grants of such First Houston Stock
Options shall continue in effect on the same terms and conditions (subject to
the adjustments required by this Section 8.08 and Section 7.03 after giving
effect to the Merger). Sterling shall comply with the terms of the Stock
Option Plans.
(d) Sterling shall take all corporate action necessary to reserve
for issuance a sufficient number of shares of Sterling Common Stock for
delivery upon exercise of the First Houston Stock Options assumed in accordance
with this Section 8.08 and Section 7.03.
8.09 Certain Change of Control Matters. From and after the date
hereof, First Houston shall take all action necessary so that none of the
execution and delivery of this Agreement, the consummation of the Merger or the
consummation of the other transactions contemplated hereby or thereby will
increase any benefits otherwise payable under any First Houston Benefit Plan
except (a) as set forth in Sections 5.12 and 5.13 of the First Houston
Disclosure Schedule or (b) for increases made with the prior written consent of
Sterling.
8.10 Stock Exchange Listing. Sterling shall use its best efforts
to have the shares of Sterling Common Stock to be issued to holders of First
Houston Capital Stock in the Merger included for quotation on NASDAQ prior to
the Effective Time.
8.11 Employee Benefits. As soon as practicable following the
Effective Time, Sterling shall provide generally to officers and employees of
First Houston and its Subsidiaries employee benefits, including without
limitation health and welfare benefits, life insurance and vacation
arrangements, on terms and conditions which when taken as a whole are
substantially similar to those provided from time to time by Sterling and its
Subsidiaries to their similarly situated officers and employees. In that
regard, such officers and employees of First Houston shall be credited under
the employee benefit plans of Sterling for their years of "eligibility service"
and "vesting service" earned under the First Houston Benefit Plans as if such
service had been earned with Sterling, while such officers and employees of
First Houston shall be credited with "benefit service" under the employee
benefit plans of Sterling only with respect to their period of employment with
Sterling and its Subsidiaries after the Effective Time in accordance with the
terms and conditions of such employee benefit plans. As of the Effective Time,
the employees and their dependents, if any, previously covered as of the
Effective Time under First Houston's health insurance plan shall be covered
under Sterling's health insurance plan and, to the extent possible under the
terms of Sterling's then current health insurance plan, will not be subject to
any pre-existing condition limitations or exclusions, except those excluded
under Sterling's health insurance plan. First Houston's employees shall not be
required to satisfy the deductible and employee payments required by Sterling's
comprehensive medical and/or dental plans for the calendar year of the
Effective Time to the extent of amounts previously credited during such
calendar year under comparable plans maintained by First Houston.
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8.12 Certain Actions. No party shall take any action which would
adversely affect or delay the ability of either Sterling or First Houston to
obtain any necessary approvals of any Regulatory Authority or other
governmental authority required for the transactions contemplated hereby or to
perform its covenants and agreements under this Agreement. No party shall take
any action that would prevent or impede the Merger from qualifying as a
reorganization within the meaning of Section 368 of the Code or jeopardize the
treatment of the business combination effected by the Merger as a pooling of
interests for accounting purposes under APB Opinion 16.
8.13 No Solicitation. (a) Neither First Houston nor any of its
Subsidiaries shall, nor shall it authorize or permit any of its officers,
directors or employees or any investment banker, financial advisor, attorney,
accountant or other representative retained by it or any of its Subsidiaries to
initiate, solicit, encourage (including by way of furnishing information), or
take any other action to facilitate, any inquiries or the making of any
proposal which constitutes, or may reasonably be expected to lead to, any
Acquisition Proposal (as defined below), or enter into or maintain or continue
discussions or negotiate with any person in furtherance of such inquiries or to
obtain an Acquisition Proposal, or agree to or endorse any Acquisition
Proposal, and First Houston shall notify Sterling orally (within one business
day) and in writing (as promptly as practicable), in reasonable detail, as to
any inquiries and proposals which it or any of its Subsidiaries or any of their
respective representatives or agents may receive; provided, however, that (i)
First Houston may furnish or cause to be furnished confidential and non-public
information concerning First Houston and its businesses, properties or assets
to a third party (subject to execution by such third party of a confidentiality
agreement containing confidentiality provisions substantially similar to those
of the letter agreement entered into between First Houston and Sterling dated
February 5, 1997), (ii) First Houston may engage in discussions or negotiations
with a third party, (iii) following receipt of an Acquisition Proposal, First
Houston may take and disclose to its shareholders a position with respect to
such Acquisition Proposal, including, if such Acquisition Proposal is a tender
offer, First Houston's Board of Directors may take and disclose to First
Houston's shareholders a position contemplated by Rule 14e-2 under the Exchange
Act, and/or (iv) following receipt of an Acquisition Proposal, First Houston's
Board of Directors may withdraw or modify its recommendation referred to in
Section 5.26, but in each case referred to in the foregoing clauses (i) through
(iv) only to the extent that First Houston's Board of Directors shall conclude
in good faith on the basis of advice from Chamberlain, Hrdlicka L.L.P. (or
other outside counsel) that such action is required in order for First
Houston's Board of Directors to satisfy its fiduciary obligations under
applicable law; provided, further, that First Houston's Board of Directors
shall not take any of the foregoing actions referred to in clauses (i) through
(iv) until after reasonable notice to and consultation with Sterling with
respect to such action and that First Houston's Board of Directors shall
continue to consult with Sterling after taking such action and, in addition, if
the First Houston Board of Directors receives an Acquisition Proposal or any
request for confidential and non-public information or for access to the
properties, books or records of First Houston or any Subsidiary for the purpose
of making, or in connection with, an Acquisition Proposal, then First Houston
shall promptly inform Sterling as provided above of the terms and conditions of
such proposal or request and the identity of the person making it. As used
herein, the term "Acquisition Proposal" means: (x) any acquisition or purchase
of a significant amount of the assets of First Houston and its Subsidiaries on
a consolidated basis,
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Agreement is terminated either (i) by First or any equity interest in First
Houston or any of its Subsidiaries or any take-over bid or tender offer
(including an issuer bid or self tender offer) or exchange offer, merger, plan
of arrangement, reorganization, consolidation, business combination, sale of
substantially all of the assets, sale of securities, recapitalization,
liquidation, dissolution or similar transaction involving First Houston or any
of its Subsidiaries (other than the transactions contemplated by this
Agreement) or any other transaction the consummation of which would or could
reasonably be expected to impede, interfere with, prevent or materially delay
the consummation of the Merger or which would or could reasonably be expected
to materially dilute the benefits to Sterling and the Merger Subsidiary of the
transactions contemplated hereby or (y) any proposal, plan or intention to do
any of the foregoing either publicly announced or communicated to First Houston
or any agreement to engage in any of the foregoing. First Houston will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing. "Acquisition Transaction" means the transaction(s) by
which an Acquisition Proposal is consummated. Nothing in this Section 8.13
shall (A) permit First Houston to terminate this Agreement or (B) permit First
Houston or any of its Subsidiaries to enter into any written agreement with
respect to an Acquisition Proposal during the term of this Agreement (it being
agreed that during the term of this Agreement neither First Houston nor any of
its Subsidiaries shall enter into any written agreement with any person that
provides for, or in any way facilitates, an Acquisition Proposal, other than a
confidentiality agreement in the form referred to above), it being understood
that Section 10.01 sets forth the rights of First Houston to terminate this
Agreement.
(b) Without limiting the foregoing, it is understood that
any violation of the restrictions set forth in the first sentence of Section
8.13(a) by any employee, officer or director or authorized employee, agent or
representative of First Houston or any of its Subsidiaries (including, without
limitation, any investment banker, financial advisor, attorney or accountant or
other representative retained by First Houston or any of its Subsidiaries), or
otherwise shall be deemed to be a breach of Section 8.13(a) by First Houston.
8.14 Termination Fee. To compensate Sterling for entering into
this Agreement, taking actions to consummate the transactions contemplated
hereunder and incurring the costs and expenses related thereto and other losses
and expenses, including the foregoing the pursuit of other opportunities by
Sterling, First Houston and Sterling agree as follows:
(a) Provided that neither Sterling nor Merger Subsidiary shall be
in material breach of its obligations under this Agreement (which breach has
not been cured promptly following receipt of written notice thereof by First
Houston specifying in reasonable detail the basis of such alleged breach),
First Houston shall pay to Sterling the sum of $1,500,000 (the "Termination
Fee"), plus reasonable out-of-pocket expenses, not in excess of $500,000
(including, without limitation, amounts paid or payable to banks and investment
bankers, fees and expenses of counsel and printing expenses) (such expenses are
hereinafter referred to as the "Expenses") incurred by Sterling or any of its
affiliates in connection with or arising out of the transactions contemplated
by this Agreement, regardless of when those expenses are incurred, if this
Agreement is terminated either (i) by First
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Houston under the provisions of Section 10.01(f) or (ii) by Sterling under the
provisions of Section 10.01(h). Sterling shall provide First Houston with an
itemization of Expenses.
(b) Any payment required by paragraph (a) of this Section shall
become payable within two business days after termination of the Agreement or,
in the case of reimbursement to Sterling of the Expenses, promptly after (but
in no event later than 3 business days following) delivery to First Houston of
the itemization of Expenses.
(c) First Houston acknowledges that the agreements contained in
this Section 8.14 are an integral part of the transactions contemplated in this
Agreement, and that, without these agreements, Sterling would not enter into
this Agreement; accordingly, if First Houston fails to promptly pay the
Termination Fee or Expenses when due, First Houston shall in addition thereto
pay to Sterling all costs and expenses (including fees and disbursements of
counsel) incurred in collecting such Termination Fee or Expenses, as the case
may be, together with interest on the amount of the Termination Fee or Expenses
(or any unpaid portion thereof) from the date such payment was required to be
made until the date such payment is received by Sterling at the prime rate of
NationsBank of Texas, National Association as in effect from time to time
during such period.
8.15 Accruals. Prior to the Effective Time and after consultation
with Sterling, First Houston shall, consistent with GAAP, make such changes and
modifications to its loan, accrual and reserve policies and practices
(including loan classification and allowance for credit losses levels) to bring
such policies and practices into line with those presently followed by
Sterling, including appropriate increases in its allowance for credit losses;
provided, that all such changes or modifications shall be disregarded in
determining (i) the truth or correctness of the representations and warranties
contained herein, or (ii) except as set forth on Schedule 3.01(a), determining
the Adjustment Amount unless such changes are required in order for the
financial statement to conform with GAAP.
8.16 Post-Closing Actions. None of the parties shall take, or
permit any of their Subsidiaries or Affiliates to take, any action after the
Closing that would disqualify the Merger as a reorganization within the meaning
of Section 368(a) of the Code.
8.17 Future Board Representations. As soon as practicable
following the Effective Time and subject to the Articles of Incorporation, as
amended, and bylaws of Sterling, Sterling shall increase the size of its Board
of Directors by one and shall appoint or nominate for election to the vacancy
on the board of directors of Sterling created thereby one representative
designated by the First Houston Board prior to the Effective Time (the "Initial
First Houston Designee"), which designee shall serve until the annual meeting
of Sterling's shareholders held in 1998 or until his earlier resignation,
removal or retirement. Subject to Sterling's Articles of Incorporation and
bylaws, each as amended, Sterling agrees to nominate one person (the "Second
First Houston Designee") from a list of not less than three candidates
identified by the Initial First Houston Designee (which list may include the
Initial First Houston Designee) for election to the Board of Directors of
Sterling
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<PAGE> 43
such Second First Houston Designee to be proposed for election at the annual
meeting of Sterling's shareholders to be held in 1998 to succeed to the
position on Sterling's Board of Directors formerly held by the Initial First
Houston Designee. The Second First Houston Designee shall, if approved by the
Sterling shareholders at the 1998 annual meeting be elected to serve until the
annual meeting of Sterling's shareholders to be held in 1999 or until his
earlier resignation, removal or retirement. Sterling further agrees to
nominate annually for election to the Board of Directors of Sterling Bank for a
period of two years following the Effective Time a person who shall be
designated by the Initial First Houston Designee.
8.18 Certain Agreements. Neither First Houston nor any Subsidiary
(nor any of their agents or representatives) will waive any provision of any
confidentiality or standstill or similar agreement to which it is a party
without the prior written consent of Sterling, unless First Houston's Board of
Directors or the board of directors of such Subsidiary concludes in good faith
and based upon the advice of Chamberlain, Hrdlicka L.L.P. (or other independent
counsel) that waiving such provision is necessary or appropriate in order for
such board of directors to act in a manner which is consistent with its
fiduciary obligations under applicable law. First Houston will immediately
advise Sterling of the termination or waiver of any confidentiality or
standstill or similar agreement to which it is a party by the other party or
parties to such agreement.
8.19 Notification; Updated Disclosure Schedules. First Houston
shall give prompt notice to Sterling, and Sterling or Merger Subsidiary shall
give prompt notice to First Houston, of (i) any representation or warranty made
by it in this Agreement becoming untrue or inaccurate in any respect,
including, without limitation, as a result of any change in the First Houston
or the Sterling Disclosure Schedule, as applicable, or (ii) the failure by it
to comply with or satisfy in any material respect any covenant, condition or
agreement to be complied with or satisfied by it under this Agreement;
provided, however, that no such notification shall affect the representations,
warranties, covenants or agreements of the parties or the conditions to the
obligations of the parties under this Agreement.
8.20 Amendment of Articles of Incorporation. At the Shareholders'
Meeting, the First Houston Board shall submit for and recommend the approval of
the First Houston shareholders an amendment to the Articles of Incorporation of
First Houston previously adopted by the First Houston Board deleting paragraph
(h)(4) of the Certificate of Designation establishing and designating the First
Houston Preferred Stock. Prior to the Effective Time, First Houston shall so
amend its Articles of Incorporation.
8.21 Allowance for Credit Losses. First Houston shall, for the
period from January 1, 1997 through and including the Adjustment Date, make
appropriate provisions for an allowance for credit losses which shall be
reflected on its consolidated financial statements in an amount equal to 0.5
percent per annum of its total loans outstanding.
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<PAGE> 44
ARTICLE IX
CONDITIONS TO MERGER
9.01 Conditions to Each Party's Obligation to Effect the Merger.
The respective obligations of each of Sterling and First Houston to effect the
Merger and the other transactions contemplated hereby shall be subject to the
fulfillment or waiver at or prior to the Effective Time of the following
conditions:
(a) Shareholders of First Houston shall have approved and adopted
all matters relating to this Agreement, the Merger and the transactions
contemplated hereby and thereby as required under applicable law at the
Shareholders' Meeting.
(b) This Agreement, the Merger and the other transactions
contemplated hereby and thereby shall have been approved by the Federal Reserve
Board, the OCC, the Commissioner, the FDIC and any other Regulatory Authorities
whose approval is required for consummation of the transactions contemplated
hereby and all applicable waiting periods shall have expired. No such approval
or consent shall be conditioned or restricted in any manner (including
requirements relating to the disposition of assets) which in the good faith
judgment of Sterling would so adversely impact the economic or business
benefits of the transactions contemplated by this Agreement that, had such
condition or restriction been known, it would not have entered into this
Agreement.
(c) The Registration Statement shall have been declared effective
and shall not be subject to a stop order or any threatened stop order.
(d) Neither Sterling nor First Houston shall be subject to any
active litigation which seeks any order, decree or injunction of a court or
agency of competent jurisdiction to enjoin or prohibit the consummation of the
Merger.
(e) The shares of Sterling Common Stock issuable pursuant to the
Merger shall have been approved for quotation on the NASDAQ and no such order,
decree or conjunction shall have been issued and remain in effect.
(f) D&T, independent public accountants for Sterling, shall have
delivered a letter, dated the date of Closing, addressed to Sterling, in form
and substance reasonably satisfactory to Sterling, to the effect that the
Merger will qualify for pooling of interests accounting treatment if
consummated in accordance with this Agreement.
(g) D&T, independent public accountants for First Houston, shall
have delivered a letter, dated the Closing Date, addressed to First Houston, in
form and substance reasonably satisfactory to First Houston, stating that the
Merger will qualify for pooling of interests accounting treatment if
consummated in accordance with this Agreement.
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<PAGE> 45
9.02 Conditions to Obligations of First Houston to Effect the
Merger. The obligations of First Houston to effect the Merger shall be subject
to the fulfillment or waiver at or prior to the Effective Time of the following
additional conditions:
(a) Representations and Warranties. The representations and
warranties of Sterling set forth in Article VI hereof shall be true and correct
in all respects as of the date of this Agreement and as of the Effective Time
(as though made on and as of the Effective Time except to the extent such
representations and warranties are by their express provisions made as of a
specified date) and except that any representation and warranty not modified by
reference to a Sterling Material Adverse Effect that is not true in all
respects shall nevertheless be deemed, for purposes of this Section 9.02(a), to
be true in all respects unless the failure of such representation or warranty
to be so true has had, or is reasonably likely to have, a Sterling Material
Adverse Effect and First Houston shall have received a certificate signed by
the chairman and chief executive officer, president or other duly authorized
officer of Sterling to that effect.
(b) Performance of Obligations. Sterling shall have performed in
all material respects all obligations required to be performed by it under this
Agreement prior to the Effective Time, and First Houston shall have received a
certificate signed by the chairman and chief executive officer, vice president
or other duly authorized officer of Sterling to that effect and as to the
absence of litigation as described in Section 9.01(d).
(c) Material Adverse Change. Prior to the Closing, there shall
not have occurred any material adverse change in the financial condition,
business, operations or properties of Sterling or any of its Subsidiaries, nor
shall any event have occurred which, with the lapse of time, may cause or
create any material adverse change in the financial condition, business,
operations or properties of Sterling or any of its Subsidiaries in the
reasonable and good faith judgment of the First Houston Board; provided,
however, that a decrease in the market price of Sterling Common Stock as quoted
on NASDAQ shall not be deemed to be a material adverse change if it does not
meet the conditions for termination by First Houston specified in Article X.
First Houston shall have received a certificate signed by the chairman or the
chief executive officer, president or other duly authorized officer of Sterling
to that effect.
(d) Tax Opinion. First Houston shall have received an opinion of
Chamberlain, Hrdlicka LLP, counsel to First Houston, to the effect that the
Merger will constitute a reorganization within the meaning of Section 368 of
the Code and no gain or loss will be recognized by the shareholders of First
Houston to the extent that they receive Sterling Common Stock solely in
exchange for their First Houston Common Stock and First Houston Preferred Stock
in the Merger.
9.03 Conditions to Obligations of Sterling to Effect the Merger.
The obligations of Sterling to effect the Merger shall be subject to the
fulfillment at or prior to the Effective Time of the following additional
conditions:
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<PAGE> 46
(a) Representations and Warranties. The representations and
warranties of First Houston set forth in Article V hereof shall be true and
correct in all material respects as of the date of this Agreement and as of the
Effective Time (as though made on and as of the Effective Time except to the
extent such representations and warranties are by their express provisions made
as of a specified date) and except that any representation and warranty not
modified by reference to a First Houston Material Adverse Effect that is not
true in all respects shall nevertheless be deemed, for purposes of this Section
9.03(a), to be true in all respects unless the failure of such representation
or warranty to be so true has had, or is reasonably likely to have, a First
Houston Material Adverse Effect and Sterling shall have received a certificate
signed by the chairman or the chief executive officer, president or other duly
authorized officer of First Houston to that effect.
(b) Performance of Obligations. First Houston shall have performed
in all material respects all obligations required to be performed by it under
this Agreement prior to the Effective Time, and Sterling shall have received a
certificate signed by the chairman or the chief executive officer, president or
other duly authorized officer of First Houston to that effect and as to the
absence of litigation as described in Section 9.01(d).
(c) Material Adverse Change. Prior to the Closing, there shall
not have occurred any material adverse change in the financial condition,
business, operations or properties of First Houston or any of its Subsidiaries,
nor shall any event have occurred which, with the lapse of time, may cause or
create any material adverse change in the financial condition, business,
operations or properties of First Houston or any of its Subsidiaries in the
reasonable and good faith judgment of the Board of Directors of Sterling, and
Sterling shall have received a certificate signed by the chairman or the chief
executive officer, president or other duly authorized officer of First Houston
to that effect.
(d) Opinion of Counsel. Sterling shall have received an opinion of
counsel for First Houston addressed to Sterling and in form reasonably
satisfactory to it as to the validity of the approvals of the Merger by the
First Houston Board and the shareholders of First Houston.
(e) Opinion of Tax Counsel. Sterling shall have received an
opinion of Andrews & Kurth L.L.P., counsel to Sterling, to the effect that
neither Sterling nor First Houston will recognize any gain by virtue of
consummation of the Merger.
(f) Dissenting Shares. The number of Dissenting Shares shall not
exceed 9.9 percent (9.9%) of the total issued and outstanding shares as of the
Effective Time of either class of First Houston Capital Stock.
(g) Amendment of Articles of Incorporation. First Houston shall
have amended its Articles of Incorporation as provided in Section 8.20.
(h) The agreements of Rule 145 "affiliates" required to be
delivered to Sterling pursuant to Section 8.06 shall have been furnished as
required by Section 8.06.
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<PAGE> 47
ARTICLE X
TERMINATION
10.01 Termination. Notwithstanding any other provision of this
Agreement, and notwithstanding the approval of this Agreement, the Merger and
the transactions contemplated hereby and thereby by the shareholders of
Sterling and First Houston or both, this Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time:
(a) by mutual consent of the Board of Directors of Sterling and
the First Houston Board; or
(b) by the First Houston Board or the Board of Directors of
Sterling if (i) the Federal Reserve, the OCC, the FDIC or the Commissioner has
denied approval of the Merger and such denial has become final and
nonappealable or has approved the Merger subject to conditions that in the
judgment of Sterling would restrict it or its Subsidiaries or affiliates in
their respective spheres of operations and business activities after the
Effective Time or (ii) the Effective Time does not occur by October 31, 1997;
or
(c) by Sterling (if it is not in breach of any of its obligations
hereunder) pursuant to notice in the event of a breach or failure by First
Houston that would cause a failure of the conditions in Section 9.03, which
breach or failure has not been, or cannot be, cured within 30 days after
written notice of such breach is given to First Houston; or
(d) by First Houston (if it is not in breach of any of its
obligations hereunder) pursuant to notice in the event of a breach or failure
by Sterling that would cause a failure of the conditions in Section 9.02, which
breach or failure has not been, or cannot be, cured within 30 days after
written notice of such breach is given to Sterling; or
(e) by Sterling if the shareholders of First Houston fail to
approve the Merger at the Shareholders' Meeting; or
(f) by First Houston if (i) there shall not have been a material
breach of any covenant or agreement on the part of First Houston under this
Agreement and (ii) prior to the Effective Time, First Houston shall have
received a bona fide Acquisition Proposal and the First Houston Board
determines in its good faith judgment and in the exercise of its fiduciary
duties, based as to legal matters on the written opinion of independent legal
counsel and as to financial matters on the written opinion of an investment
banking firm of national reputation, that such Alternative Proposal (if
consummated pursuant to its terms) would result in an Alternative Transaction
that is more favorable to the First Houston shareholders than the Merger
("Superior Proposal") and that the failure to terminate this Agreement and
accept such alternative Acquisition Proposal would be inconsistent with the
proper exercise of such fiduciary duties; provided, however, that termination
under this
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<PAGE> 48
clause (ii) shall not be deemed effective until payment of the Termination Fee
and Expenses required by Section 8.14; or
(g) by either First Houston or Sterling as provided below upon the
occurrence of the following respective events:
(i) by First Houston by a vote of a majority of the members of the
entire First Houston Board, at any time during the ten-day
period commencing two days after the Adjustment Date, that both
of the following conditions are satisfied: (A) the Average
Closing Price of Sterling Common Stock as of the Adjustment
Date is less than $10.66 (appropriately adjusted for stock
splits or stock dividends effected after the date of this
Agreement); and (B) the NASDAQ Composite Bank Index (the
"Index") as of the Adjustment Date is not less than 1150; or
(ii) by Sterling by a vote of a majority of the members of its
entire Board of Directors, at any time during the ten-day
period commencing two days after the Determination Date, that
both of the following conditions are satisfied: (A) the Average
Closing Price of Sterling Common Stock as of the Adjustment
Date is more than $16.00 (approximately adjusted for stock
splits or stock dividends effected after the date of this
Agreement); and (B) the NASDAQ Composite Bank Index as of the
Adjustment Date is less than 1557.
For purposes of this Section 10.01(g), the following terms shall have
the meanings indicated:
"Average Closing Price" shall mean the average of the daily closing
sales prices of Sterling Common Stock on the NASDAQ (as reported by The Wall
Street Journal or, if not reported thereby, another authoritative source as
chosen by Sterling) for the ten consecutive trading days in which such shares
are quoted on the NASDAQ ending at the close of trading on the Determination
Date.
"Determination Date" shall mean the later to occur of (i) the date on
which the Federal Reserve Board (or its delegate) shall have issued its order
approving the Merger and (ii) the date that the condition set forth in Section
9.01(a) is satisfied.
"Index" shall mean the NASDAQ Bank Composite Index.
(h) by Sterling if the Board of Directors of First Houston shall
have (A) resolved to accept a Superior Proposal, or (B) recommended to the
shareholders of First Houston that they tender their shares in a tender or
exchange offer commenced by a third party or (C) withdrawn or modified, in any
manner that is adverse to Sterling or Merger Subsidiary, its recommendation or
approval of this Agreement or the Merger or recommended to First Houston
shareholders acceptance or approval of any Alternative Proposal, or shall have
resolved to do the foregoing.
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<PAGE> 49
10.02 Effect of Termination. In the event of the termination and
abandonment of this Agreement pursuant to Section 10.01, this Agreement shall
become void and have no effect, except that (i) the provisions of this Section
10.02 and Sections 8.01(d), 8.14 and 11.01 shall survive any such termination
and abandonment; and (ii) no party shall be relieved or released from any
liability arising out of an intentional breach of any provision of this
Agreement.
10.03 Non-Survival of Representations, Warranties and Covenants
Following the Effective Time. Except for Articles III and IV and Sections
8.07, 8.08, 8.16 and 11.01, none of the respective representations, warranties,
obligations, covenants and agreements of the parties shall survive the
Effective Time.
ARTICLE XI
GENERAL PROVISIONS
11.01 Expenses. Except as provided in Section 8.14, unless
otherwise agreed by the parties in writing, each party hereto shall bear its
own expenses incident to preparing, entering into and carrying out this
Agreement and to consummating the Merger and Sterling shall pay all printing
expenses and filing fees incurred in connection with this Agreement, the
Registration Statement and the Proxy Statement.
11.02 Entire Agreement; Parties in Interest. Except as otherwise
expressly provided herein, this Agreement contains the entire agreement between
the parties hereto with respect to the transactions contemplated hereunder and
thereunder, and such agreements supersede all prior arrangements or
understandings with respect thereto, written or oral. The terms and conditions
of this Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective successors. Other than Section 8.07, nothing in
this Agreement, expressed or implied, is intended to confer upon any
individual, corporation or other entity (including, without limitation, any
shareholder of First Houston), other than Sterling, Merger Subsidiary, First
Houston and Houston National Bank or their respective successors, any rights,
remedies, obligations or liabilities under or by reason of this Agreement.
11.03 Amendments. To the extent permitted by law, this Agreement
may be amended by a subsequent writing signed by each of Sterling, Merger
Subsidiary, and First Houston; provided however, that the provisions hereof
relating to the manner or basis in which shares of First Houston Common Stock
or First Houston Preferred Stock will be exchanged for the Merger Consideration
shall not be amended after the Shareholders' Meeting without any requisite
approval of the holders of the issued and outstanding shares of First Houston
Capital Stock entitled to vote thereon.
11.04 Waivers. Prior to or at the Effective Time, each of Sterling,
Merger Subsidiary, and First Houston shall have the right to waive any default
in the performance of any term of this Agreement by the other, to waive or
extend the time for the compliance or fulfillment by the other
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<PAGE> 50
of any and all of the other's obligations under this Agreement and to waive any
or all of the conditions precedent to its obligations under this Agreement,
except any condition which, if not satisfied, would result in the violation of
any law or applicable governmental regulation.
11.05 No Assignment. None of the parties hereto may assign any of
its rights or delegate any of its obligations under this Agreement to any other
person or entity. Any such purported assignment or delegation that is made
without the prior written consent of the other parties to this Agreement shall
be void and of no effect.
11.06 Notices. All notices or other communications which are
required or permitted hereunder shall be in writing and sufficient if delivered
by hand, by facsimile transmission, or by registered or certified mail, postage
prepaid to the persons at the addressees set forth below (or at such other
address as may be provided hereunder), and shall be deemed to have been
delivered as of the date so delivered:
First Houston: First Houston Bancshares, Inc.
5757 Memorial Drive
Houston, Texas 77007
Attention: John B. Carter, Jr., Chairman
Telecopy: (713) 868-0958
Copy to Counsel: C. Thomas Scott
Chamberlain, Hrdlicka, White, Williams & Martin
1200 Smith Street, Suite 1400
Houston, Texas 77002
Telecopy: (713) 658-2553
Sterling: Sterling Bancshares, Inc.
15000 Northwest Freeway
Houston, Texas 77040
Attention: George Martinez, Chairman
Telecopy: (713) 849-5498
Copy to Counsel: Sterling Bancshares, Inc.
15000 Northwest Freeway
Houston, Texas 77040
Attention: Michael A. Roy, General Counsel
Telecopy: (713) 849-5498
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<PAGE> 51
With a copy to: Andrews & Kurth L.L.P.
Texas Commerce Tower
600 Travis, Suite 4200
Houston, Texas 77002
Attention: G. Michael O'Leary, Jr.
Telecopy: (713) 220-4593
11.07 Specific Performance. The parties hereby acknowledge and
agree that the failure of either party to fulfill any of its covenants and
agreements hereunder, including the failure to take all such actions as are
necessary on its part to cause the consummation of the Merger, will cause
irreparable injury for which damages, even if available, will not be an
adequate remedy. Accordingly, each party hereby consents to the issuance of
injunctive relief by any court of competent jurisdiction to compel performance
of the other party's obligations or any arbitration award hereunder and to the
granting by any such court of the remedy of the specific performance hereunder.
11.08 Governing Law. This Agreement shall in all respects be
governed by and construed in accordance with the laws of the State of Texas.
All actions and proceedings arising out of or relating to this Agreement shall
be heard and determined in any state or federal court sitting in Houston,
Harris County, Texas.
11.09 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to constitute an original but all
of which together shall constitute one and the same instrument.
11.10 Captions. The captions contained in this Agreement are for
reference purposes only and are not part of this Agreement.
11.11 Severability. In the event that any one or more of the
provisions contained in this Agreement, or in any other instrument referred to
herein, shall for any reason be held to be invalid, illegal or unenforceable in
any respect, such invalidity, illegality or unenforceability shall not affect
any other provision of this Agreement or any other such instrument.
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<PAGE> 52
IN WITNESS WHEREOF, Sterling and First Houston have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the date first written above.
STERLING BANCSHARES, INC.
By: /s/ George Martinez
--------------------------------------------
George Martinez, Chairman
SBI ACQUISITION CORP.
By: /s/ George Martinez
--------------------------------------------
George Martinez, President
FIRST HOUSTON BANCSHARES, INC.
By: /s/ John B. Carter, Jr.
--------------------------------------------
John B. Carter, Jr., Chairman
By: /s/ Charles M. Neff, Jr.
--------------------------------------------
Charles M. Neff, Jr., President
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<PAGE> 1
EXHIBIT 99.1 TO FORM 8-K CURRENT REPORT
STERLING BANCSHARES, INC.
NEWS RELEASE
For More Information, Call 713/466-8300 For Release March 18, 1997
George Martinez
Michael A. Roy
STERLING BANCSHARES TO ACQUIRE HOUSTON NATIONAL BANK
HOUSTON, Texas, March 18, 1997 - Sterling Bancshares, Inc.
(NASDAQ:SBIB) announced today that it has entered into a definitive agreement
to acquire First Houston Bancshares, Inc. and its subsidiary, Houston National
Bank, in a stock-for-stock merger. Based upon First Houston's financial
statements at December 31, 1996, the transaction will add to Sterling's
expanding franchise $132 million in assets and $123 million in deposits, as
well as a well-located bank office at 5757 Memorial Drive in Houston.
The definitive agreement, which follows negotiations that commenced in
November 1996, provides that the shareholders of First Houston will receive
0.707 shares of common stock of Sterling for each share of First Houston common
stock, subject to certain possible adjustments prior to closing. The
transaction has been structured and is expected to qualify as a tax-free
exchange to First Houston's shareholders and will be accounted for as a pooling
of interests. The proposed merger is subject to customary closing conditions,
including receipt of all requisite regulatory approvals and the approval of
First Houston's shareholders. The transaction is expected to close during the
second or third quarter of 1997.
Simultaneously with the execution of the definitive agreement,
Sterling entered into a letter of intent with Altair Corporation, a software
development company that specializes in developing, marketing and supporting
financial services software products. The letter of intent grants Sterling the
right to acquire up to 20% of Altair. Altair was originally formed by First
Houston but was spun off to First Houston's shareholders in December 1995. A
substantial part of Houston National's growth in the last two years has been
attributable to its licensing relationship with Altair which has enabled
Houston National to attract and retain approximately $55 million in deposits of
United States bankruptcy trustees. Under the terms of the letter of intent
with Altair, Sterling has the option, exercisable over four years, to acquire
20% of the stock of Altair or a common stock purchase warrant exercisable into
such stock interest, or a combination thereof. Based upon the outstanding
capital stock of Altair, the total purchase price for the interest in Altair is
approximately $750,000 but could increase if Sterling elects to purchase the
warrant and delay its purchase of Altair stock.
(more)
<PAGE> 2
EXHIBIT 99.1 TO FORM 8-K CURRENT REPORT
STERLING BANCSHARES, INC.
Sterling Bancshares, Inc., New Release
March 18, 1997
Page 2
George Martinez, Chairman of Sterling, said, "The acquisition of
Houston National Bank is a meaningful enhancement to the Sterling franchise and
a natural fit with our supercommunity bank strategy. The addition of Houston
National further solidifies Sterling's marketplace advantage in serving
Houston's owner-operated businesses. Our commitment to local office
decision-making and personal service will make the integration of our two
companies seamless to Houston National's customers, while providing them with
enhanced convenience, a broader array of products and services, and the
benefits of customer-oriented new technologies. We are excited by the
opportunities presented by Altair and believe that Sterling's size and
diversification will enable us to take full advantage of the unique
computer-oriented products that have been developed by Houston National and
Altair."
John B. Carter, Jr., Chairman of First Houston, commented, "While we
have been extremely pleased with our results and our substantial growth over
the last few years, we have recognized for some time long-term market forces,
such as heightening competitive pressures and the major technological
investments that would be required in the future. We firmly believe that our
union with Sterling serves the best interests of all of our
constituencies--shareholders, customers and employees. We are extremely
confident that Sterling's proven track record in meeting the expectations of
its customers will serve our customers well."
Following the proposed merger, Mr. Carter will be appointed to
Sterling's board of directors. Charles M. Neff, Jr., President of Houston
National Bank, will serve as CEO of the new Sterling Bank office and as a
director of Sterling Bank.
Sterling Bancshares, Inc., is a Houston-based bank holding company
that operates fourteen community banking offices in the Houston area through
its subsidiary, Sterling Bank. Sterling Bank has opened three new offices
within the last nine months and will continue to seek acquisition possibilities
among independent banks in Houston, Texas. Sterling's common stock is traded
through the NASDAQ National Market System under the symbol SBIB.
#####
<PAGE> 1
EXHIBIT 99.2
- -------------------------------------------------------------------------------
FIRST HOUSTON BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Financial Statements for the
Years Ended December 31, 1996 and 1995
and Independent Auditors' Report
<PAGE> 2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
First Houston Bancshares, Inc.:
We have audited the accompanying consolidated balance sheets of First Houston
Bancshares, Inc. and subsidiaries (the "Company") as of December 31, 1996 and
1995, and the related consolidated statements of income, stockholders' equity
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
Management has elected not to disclose the fair value of stock options. In our
opinion, disclosure of such information is required by generally accepted
accounting principles.
In our opinion, except for the omission of the disclosure described in the
preceding paragraph, such consolidated financial statements present fairly, in
all material respects, the financial position of First Houston Bancshares, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
January 27, 1997
(February 5, 1997 as to Note 21)
<PAGE> 3
FIRST HOUSTON BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS,
DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks (Note 3) $ 6,848,593 $ 4,991,384
Federal funds sold 10,562,900 13,633,236
------------- -------------
Cash and cash equivalents 17,411,493 18,624,620
Interest-bearing deposits 95,000
Investment securities available for sale, at fair value
(amortized cost of $53,355,460 and $48,992,487
at December 31, 1996 and 1995, respectively) (Note 4) 53,212,387 48,863,899
Loans held for sale 237,789 213,962
Loans (Notes 5 and 6) 56,658,101 48,516,344
Less allowance for credit losses (Note 7) (474,834) (558,464)
------------- -------------
Loans, net 56,183,267 47,957,880
Premises and equipment, net (Note 8) 2,773,446 2,631,899
Real estate acquired by foreclosure 37,246
Accrued interest receivable 1,266,598 1,359,642
Other assets 1,134,885 876,588
------------- -------------
TOTAL $ 132,257,111 $ 120,623,490
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing $ 27,012,016 $ 24,750,594
Interest-bearing (Note 9) 95,919,404 87,650,004
------------- -------------
Total deposits 122,931,420 112,400,598
Accrued interest payable 119,527 164,719
Net deferred tax (asset) liability (Note 15) (4,258) 276,480
Payable to Altair 77,586 106,049
Other liabilities 1,535,664 86,555
------------- -------------
Total liabilities 124,659,939 113,034,401
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY (Notes 13, 14 and 17):
Common stock, $1 par value; 3,500,000 shares authorized
and 2,098,238 and 2,096,238 shares issued and
outstanding at December 31, 1996 and 1995, respectively 2,098,238 2,096,238
Cumulative convertible 8% preferred stock, $40 par and
liquidation value; 200,000 shares authorized and 21,375
shares issued and outstanding 855,000 855,000
Capital surplus 6,183,614 6,178,994
Accumulated deficit (Note 2) (1,445,255) (1,456,275)
Unrealized loss on available-for-sale investment securities,
net of taxes of $48,647 and $43,720 at December 31, 1996
and 1995, respectively (94,426) (84,868)
------------- -------------
Total stockholders' equity 7,597,171 7,589,089
------------- -------------
TOTAL $ 132,257,111 $ 120,623,490
============= =============
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE> 4
FIRST HOUSTON BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
INTEREST INCOME:
<S> <C> <C>
Loans, including fees $5,464,927 $5,025,868
Taxable investment securities 2,672,769 2,190,159
Federal funds sold 620,666 317,993
---------- ----------
Total interest income 8,758,362 7,534,020
---------- ----------
INTEREST EXPENSE:
Deposits 3,080,182 2,673,540
Federal funds purchased 40,671
---------- ----------
Total interest expense 3,080,182 2,714,211
---------- ----------
NET INTEREST INCOME 5,678,180 4,819,809
PROVISION FOR CREDIT LOSSES (Note 7) 230,000 230,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 5,448,180 4,589,809
---------- ----------
NONINTEREST INCOME:
Customer service fees 453,836 401,212
Other 180,231 130,609
---------- ----------
Total noninterest income 634,067 531,821
---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits 2,839,612 2,078,395
Net occupancy expense 441,129 364,676
Licensing fees 409,834 337,500
Data processing 320,690 294,189
Legal and professional 273,190 233,601
Federal Deposit Insurance Corporation assessment 2,152 92,606
Other 933,387 646,899
---------- ----------
Total noninterest expense 5,219,994 4,047,866
---------- ----------
INCOME BEFORE INCOME TAXES 862,253 1,073,764
PROVISION FOR INCOME TAXES (Note 15) 363,184 256,957
---------- ----------
NET INCOME $ 499,069 $ 816,807
========== ==========
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE (Note 18) $ 0.20 $ 0.43
========== ==========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE> 5
FIRST HOUSTON BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
----------------------- -------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995 1,231,738 $1,231,738 21,375 $855,000
Net income
Sale of common stock, at $4.00 per share 864,500 864,500
Cash dividends paid on common stock,
at $.20 per share
Cash dividends paid on preferred stock,
at $3.20 per share
Dividend-in-kind
Change in unrealized loss on available-for-
sale investment securities, net of tax
--------- ---------- -------- --------
BALANCE AT DECEMBER 31, 1995 2,096,238 2,096,238 21,375 855,000
Net income
Stock options exercised, at $3.31 per share 2,000 2,000
Cash dividends paid on common stock,
at $.20 per share
Cash dividends paid on preferred stock,
at $3.20 per share
Change in unrealized loss on available-for-
sale investment securities, net of tax
--------- ---------- -------- --------
BALANCE AT DECEMBER 31, 1996 2,098,238 $2,098,238 21,375 $855,000
========= ========== ======== ========
</TABLE>
-4-
<PAGE> 6
<TABLE>
<CAPTION>
UNREALIZED LOSS ON
AVAILABLE-FOR-SALE TOTAL
CAPITAL ACCUMULATED SECURITIES, STOCKHOLDERS'
SURPLUS DEFICIT NET OF TAXES EQUITY
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995 $3,754,861 $ (904,438) $ (651,655) $4,285,506
Net income 816,807 816,807
Sale of common stock, at $4.00 per share 2,424,133 3,288,633
Cash dividends paid on common stock,
at $.20 per share (405,874) (405,874)
Cash dividends paid on preferred stock,
at $3.20 per share (68,400) (68,400)
Dividend-in-kind (894,370) (894,370)
Change in unrealized loss on available-for-
sale investment securities, net of tax 566,787 566,787
---------- ----------- ---------- ----------
BALANCE AT DECEMBER 31, 1995 6,178,994 (1,456,275) (84,868) 7,589,089
Net income 499,069 499,069
Stock options exercised, at $3.31 per share 4,620 6,620
Cash dividends paid on common stock,
at $.20 per share (419,649) (419,649)
Cash dividends paid on preferred stock,
at $3.20 per share (68,400) (68,400)
Change in unrealized loss on available-for-
sale investment securities, net of tax (9,558) (9,558)
---------- ----------- ---------- ----------
BALANCE AT DECEMBER 31, 1996 $6,183,614 $(1,445,255) $ (94,426) $7,597,171
========== =========== ========== ==========
</TABLE>
-5-
<PAGE> 7
FIRST HOUSTON BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 499,069 $ 816,807
Adjustments to reconcile net income to net cash provided by
operating activities:
(Gain) loss on sale of available-for-sale investment securities (86,621) 645
Amortization and accretion of premiums and discounts on
investment securities, net 268,398 123,249
Provision for credit losses 230,000 230,000
Deferred income tax expense 280,738 166,899
Depreciation and amortization 302,795 351,280
Decrease (increase) in accrued interest receivable 93,044 (662,175)
Increase in other assets (814,849) (418,129)
(Decrease) increase in accrued interest payable (45,192) 57,875
Increase in other liabilities 1,449,109 91,579
(Decrease) increase in payable to Altair (28,463) 106,049
----------- -----------
Total adjustments 1,648,959 47,272
----------- -----------
Net cash provided by operating activities 2,148,028 864,079
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in interest-bearing deposits in banks 95,000 (95,000)
Proceeds from sales of available-for-sale investment securities 19,433,913 5,401,110
Proceeds from maturities of available-for-sale investment securities 30,521,429 35,100,000
Purchases of available-for-sale investment securities (54,506,251) (66,190,212)
Proceeds from paydowns on investments secured by mortgages 6,160 96,667
Net increase in loans (8,516,460) (4,930,855)
Purchase of premises and equipment (471,054) (716,701)
Disposal of premises and equipment 26,714
Increase in deferred software costs (8,448)
----------- -----------
Net cash used in investing activities (13,410,549) (31,343,439)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 10,530,822 42,836,953
Proceeds from issuance of common stock 6,620 3,288,633
Dividend-in-kind (648,555)
Payment of cash dividends (488,048) (474,274)
----------- -----------
Net cash provided by financing activities 10,049,394 45,002,757
----------- -----------
</TABLE>
(Continued)
-6-
<PAGE> 8
FIRST HOUSTON BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS $ (1,213,127) $ 14,523,397
CASH AND CASH EQUIVALENTS:
Beginning of year 18,624,620 4,101,223
------------ ------------
End of year $ 17,411,493 $ 18,624,620
============ ============
SUPPLEMENTAL INFORMATION:
Income taxes paid $ 134,741 $ 78,702
Interest paid 3,125,374 2,708,636
NONCASH INVESTING AND FINANCING ACTIVITIES:
During the year ended December 31, 1996 the
Bank acquired real estate through
foreclosure of collateral on loans in the
amount of $37,246. There were no such
transactions during the year ended December
31, 1995.
During the years ended December 31, 1996 and
1995 the net change in the unrealized loss
on investment securities available for sale,
net of tax was ($9,558) and $566,787,
respectively.
During December 1995 Bancshares distributed
239,500 shares of $1 par value common stock in
Altair representing all of the issued and
outstanding common stock to a trustee to be held
for distribution to holders of Bancshares common
and preferred stock on December 29, 1995 and
holders of Bancshares stock options. No gain or
loss was recognized from the distribution and the
book value of Altair was eliminated against
Bancshares retained earnings.
</TABLE>
See notes to consolidated financial statements.
(Concluded)
-7-
<PAGE> 9
FIRST HOUSTON BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
NATURE OF OPERATIONS - First Houston Bancshares, Inc. ("Bancshares") is a
bank holding company that provides retail and commercial banking services
through Houston National Bank (the "Bank"), its Texas-chartered bank
subsidiary. Bancshares and the Bank are hereafter collectively referred
to as the "Company." The Bank provides a broad line of financial products
and services to small-to medium-sized businesses and consumers. The
Company had an additional subsidiary First Houston Financial Services
("Altair") in 1995 that provided computer software services. Altair was
formed in 1994 and was engaged in the development of computer software
which serves certain of the Bank's customers. Altair became an
independent trust on December 28, 1995.
SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES - The accounting
and reporting policies of the Company conform to generally accepted
accounting principles ("GAAP") and the prevailing practices within the
banking industry except in regards to the disclosure related to Statement
of Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock
Based Compensation" in Note 14. A summary of significant accounting and
reporting policies is as follows:
BASIS OF PRESENTATION - The consolidated financial statements include
Bancshares and the Bank. All significant intercompany transactions have
been eliminated upon consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
INVESTMENT SECURITIES - All investment securities are classified as
available for sale. Investment securities available for sale are carried
at fair value. Unrealized gains and losses are excluded from earnings and
reported, net of tax, as a separate component of stockholders' equity
until realized. Securities within the available-for-sale portfolio may be
used as part of the Company's asset and liability strategy and may be
sold in response to changes in interest rate risk, prepayment risk or
other similar economic factors.
Premiums and discounts are amortized and accreted to operations using the
straight-line method of accounting, adjusted for prepayments as
applicable. This method of accounting approximates the interest method.
The specific identification method of accounting is used to compute gains
or losses on the sales of these assets.
LOANS HELD FOR SALE - Loans originated and intended for sale in the
secondary market are carried at the lower of cost or fair value. Net
unrealized losses are recognized in a valuation allowance by charges to
income.
-8-
<PAGE> 10
LOANS - Loans are stated at the principal amounts outstanding, net of
unearned discount. Unearned discount relates principally to consumer
installment loans and is amortized using the "sum of the digits" method
which records interest in proportion to the declining outstanding
balances of the loans. This method approximates the interest method. For
other loans, such income is recognized using the simple interest method.
Effective January 1, 1995, the Bank adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosure." SFAS No. 114 applies only to impaired loans, with the
exception of groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment. SFAS No. 114 defines a loan as
impaired if, based on current information and events, it is probable that
a creditor will be unable to collect all amounts due, both interest and
principal, according to the contractual terms of the loan agreement.
Specifically, SFAS No. 114 requires that the allowance for credit losses
related to impaired loans be determined based on the present value of
expected cash flows discounted at the loan's effective interest rate or,
as a practical expedient, the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. Prior to the
adoption of SFAS No. 114, the Bank's methodology for determining the
adequacy of the allowance for credit losses did not incorporate the
concept of the time value of money and the expected future interest cash
flow.
As permitted by SFAS No. 118, interest revenue received on impaired loans
continues to be either applied against principal or realized as interest
revenue, according to management's judgment as to the collectibility of
principal.
NONPERFORMING LOANS AND PAST DUE LOANS - Included in the nonperforming
loan category are loans which have been categorized by management as
nonaccrual because collection of interest is doubtful and loans which
have been restructured to provide a reduction in the interest rate or a
deferral of interest or principal payments.
When the payment of principal or interest on a loan is delinquent for 90
days, or earlier in some cases, the loan is placed on nonaccrual status,
unless the loan is in the process of collection and the underlying
collateral fully supports the carrying value of the loan. If the decision
is made to continue accruing interest on the loan, periodic reviews are
made to confirm the accruing status of the loan. When a loan is placed on
nonaccrual status, interest accrued during the current year prior to the
judgment of uncollectibility is charged to operations. Interest accrued
during prior periods is charged to the allowance for credit losses.
Generally, any payments received on nonaccrual loans are applied first to
outstanding loan amounts and next to the recovery of charged-off loan
amounts. Any excess is treated as recovery of lost interest.
ALLOWANCE FOR CREDIT LOSSES - The allowance for credit losses is a
valuation allowance available for losses incurred on loans. All losses
are charged to the allowance for credit losses when the loss actually
occurs or when a determination is made that a loss is likely to occur.
Recoveries are credited to the allowance at the time of recovery.
Throughout the year, management estimates the likely level of future
losses to determine whether the allowance for credit losses is adequate
to absorb losses in the existing portfolio. Based on these estimates, an
amount is charged to the provision for credit losses and credited to the
allowance for credit losses in order to adjust the allowance to a level
determined to be adequate to absorb losses.
Management's judgment as to the level of losses on existing loans
involves the consideration of current and anticipated economic conditions
and their potential effects on specific borrowers; an evaluation of
-9-
<PAGE> 11
the existing relationships among loans, potential credit losses and the
present level of the allowance; results of examinations of the loan
portfolio by regulatory agencies; and management's internal review of the
loan portfolio. In determining the collectibility of certain loans,
management also considers the fair value of any underlying collateral.
The amounts ultimately realized may differ from the carrying values of
these assets due to economic, operating, or other conditions beyond the
Bank's control.
It should be understood that estimates of credit losses involve an
exercise of judgment. While it is reasonably possible that in the short
term the Bank may sustain losses which are substantial in relation to the
allowance for credit losses, it is the judgment of management that the
allowance for credit losses reflected in the consolidated balance sheets
is adequate to absorb estimated losses that exist in the current loan
portfolio.
PREMISES AND EQUIPMENT - Land is carried at cost. Premises and equipment
are carried at cost less accumulated depreciation and amortization.
Depreciation expense is computed principally using the straight-line
method over the estimated useful lives of the assets. Leasehold
improvements are amortized using the straight-line method over the
periods of the leases or the estimated useful lives, whichever is
shorter.
REAL ESTATE ACQUIRED BY FORECLOSURE - Real estate properties acquired
through, or in lieu of, loan foreclosure are to be sold and are initially
recorded at fair value at the date of foreclosure establishing a new cost
basis. After foreclosure, valuations are performed by management and the
real estate is carried at the lower of the carrying amount or fair value
less cost to sell.
FEDERAL INCOME TAXES - Bancshares files a consolidated federal income tax
return. The Bank computes federal income taxes as if it filed a separate
return and remits to, or is reimbursed by, Bancshares based on the
portion of taxes currently due or refundable.
Deferred income taxes are accounted for by applying statutory tax rates
in effect at the balance sheet date to differences between the book basis
and the tax basis of assets and liabilities. The resulting deferred tax
assets and liabilities are adjusted to reflect changes in enacted tax
laws or rates.
Realization of net deferred tax assets is dependent on generating
sufficient future taxable income. Although realization is not assured,
management believes it is more likely than not that all of the net
deferred tax assets will be realized. The amount of the net deferred tax
asset considered realizable, however, could be reduced in the short term
if estimates of future taxable income are reduced.
RECENTLY ISSUED ACCOUNTING STANDARDS - Effective January 1, 1996, the
Bank adopted SFAS No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." This statement
establishes accounting standards for recognizing and measuring impairment
of long-lived assets to be held and used and for such assets held for
disposal. The implementation of this pronouncement did not have a
materially adverse effect on the Company's consolidated financial
statements.
STATEMENT OF CASH FLOWS - For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from banks and federal
funds sold. Generally, federal funds are purchased and sold for one-day
periods.
-10-
<PAGE> 12
EARNINGS PER SHARE - Earnings per common share and common equivalent
share were computed by dividing net income less dividends payable on the
cumulative, convertible preferred stock by the weighted average number of
shares of common stock and common stock equivalents outstanding during
the year. The convertible preferred stock is not considered to be the
equivalent of common stock because the effective yield of 8% is not less
than 66 2/3% of the average Aa corporate bond yield at the time of
issuance.
RECLASSIFICATIONS - Certain amounts in the accompanying consolidated
financial statements and related notes as of December 31, 1995 have been
reclassified to conform to the current year's presentation.
2. DIVIDEND IN KIND
On December 29, 1995, Bancshares spun off its computer software service
business to its stockholders through a transfer of 239,500 shares of $1
par value common stock, constituting all of the issued and outstanding
shares of Altair, to a trustee to be held for future distribution to
Bancshares stockholders. On May 21, 1996 the Trustee distributed 1 share
of Altair common stock for each share of Bancshares preferred stock and 1
share of Altair common stock for every 10 shares of Bancshares common
stock owned by Bancshares stockholders of record on December 29, 1995.
Holders of options to purchase Bancshares common stock received the right
to purchase 1 share of Altair common stock for each option held on
December 29, 1995. No gain or loss was recognized from the distribution,
and the book value of Altair of $894,370 was eliminated against
Bancshares' retained earnings. The following supplemental information is
provided regarding the accounts of Altair spun off at the close of
business on December 31, 1995:
<TABLE>
Assets:
<S> <C>
Cash and cash equivalents $648,555
Property and equipment 32,265
Deferred software costs 98,641
Other assets 126,409
--------
Total assets 905,870
--------
Liabilities - Other liabilities 11,500
--------
Net assets of Altair $894,370
========
</TABLE>
-11-
<PAGE> 13
SUPPLEMENTAL PRO FORMA FINANCIAL INFORMATION (UNAUDITED) - As a result of
the aforementioned distribution, the Company believes that the following
pro forma financial information is important to enable the reader to
obtain a meaningful understanding of the Company's results of operations.
The pro forma financial statements are for informational purposes only to
illustrate the estimated effects of the distribution of Altair on the
Company on a stand-alone basis and may not necessarily reflect the future
results of operations of the Company or what the earnings or results of
operations of the Company would have been had Altair operated as a
separate, independent company.
<TABLE>
<CAPTION>
1995
---------------------------------------------
YEARS ENDED DECEMBER 31, HISTORICAL ADJUSTMENTS PRO FORMA
<S> <C> <C> <C>
Interest income $ 7,534,020 $ 7,534,020
Interest expense 2,714,211 2,714,211
----------- -----------
Net interest income 4,819,809 4,819,809
Provision for credit losses 230,000 230,000
----------- -----------
Net interest income after provision for
credit losses 4,589,809 4,589,809
Noninterest income 531,821 $ 360,188 171,633
Noninterest expense 4,047,866 615,902 3,431,964
----------- ----------- -----------
Income (loss) before income taxes 1,073,764 (255,714) 1,329,478
Provision (benefit) for income taxes 256,957 (106,049)(a) 363,006
----------- ----------- -----------
Net income (loss) $ 816,807 $ (149,665) $ 966,472
=========== =========== ===========
Net income per common and common
equivalent share $ 0.43 $ 0.51
=========== ===========
</TABLE>
The following is a summary of adjustments reflected on the pro forma
condensed statements of income. Following the distribution, in the
opinion of management, expenses of the Company would not have differed
materially from the amounts remaining in the consolidated financial
statements after eliminating those expenses attributable to Altair.
Notes:
(a) To record the estimated income tax effect for the pro forma
adjustments for the year ended December 31, 1995.
3. CASH AND DUE FROM BANKS
The Bank is required by the Federal Reserve Bank to maintain average
reserve balances. "Cash and due from banks" in the consolidated balance
sheets include amounts so restricted of approximately $524,000 and
$526,000 at December 31, 1996 and 1995, respectively.
-12-
<PAGE> 14
4. INVESTMENT SECURITIES
The amortized cost and fair value of investments in debt securities are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities and
obligations of U.S. government
securities $53,051,262 $ 24,154 $ 155,234 $52,920,182
Mortgage-backed securities 304,198 11,993 292,205
----------- ----------- ----------- -----------
Total $53,355,460 $ 24,154 $ 167,227 $53,212,387
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities and
obligations of U.S. government
securities $48,682,042 $ 65,290 $ 187,424 $48,559,908
Mortgage-backed securities 310,445 6,454 303,991
----------- ----------- ----------- -----------
Total $48,992,487 $ 65,290 $ 193,878 $48,863,899
=========== =========== =========== ===========
</TABLE>
The amortized cost and fair value of debt securities at December 31,
1996, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED
COST FAIR VALUE
<S> <C> <C>
Due in one year or less $31,126,905 $31,107,325
Due after one year through five years 21,924,357 21,812,857
----------- -----------
Total 53,051,262 52,920,182
Mortgage-backed securities 304,198 292,205
----------- -----------
Total $53,355,460 $53,212,387
=========== ===========
</TABLE>
Proceeds from sales of investments in available-for-sale debt securities
during 1996 and 1995 were $19,433,913 and $5,401,110, respectively. Gross
gains of $87,332 and $4,890 and gross losses of $711 and $5,535,
respectively, were realized on those sales.
Investment securities with an amortized cost of $45,223,555 and
$46,075,176 and a fair value of $45,176,034 and $45,960,057 at December
31, 1996 and 1995, respectively, were pledged to secure public deposits,
trustee deposits and for other purposes required or permitted by law.
-13-
<PAGE> 15
5. LOANS
The loan portfolio consists of various types of loans made principally to
borrowers located in Harris County, Texas, classified by major type as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
<S> <C> <C>
Commercial, financial and industrial $18,696,559 $18,123,468
Real estate - mortgage 30,570,344 22,498,077
Real estate - construction 2,998,316 1,657,167
Installment 4,364,273 4,947,400
Purchased receivables 242,874 1,501,928
----------- -----------
Total 56,872,367 48,728,040
Less unearned discount 214,266 211,696
----------- -----------
Total $56,658,101 $48,516,344
=========== ===========
</TABLE>
As discussed in Note 1, the Bank adopted SFAS No. 114 and SFAS No. 118
effective January 1, 1995. Adoption of these statements had no impact on
the Company's financial statements including the level of the allowance
for credit losses. Instead, it resulted only in a reallocation of the
existing allowance for credit losses.
At December 31, 1996, the Bank had a recorded investment in impaired
loans of approximately $1,485,000 under SFAS No. 114. Such impaired loans
did not require an allowance for credit losses. At December 31, 1995, the
recorded investment in impaired loans under SFAS No. 114 was
approximately $1,028,000. These impaired loans required an allowance for
credit losses of approximately $183,000.
The average recorded investment in impaired loans for the year ended
December 31, 1996 and 1995 was $592,318 and $671,278, respectively. The
Bank recognized interest income on these impaired loans of approximately
$31,000 in 1995. No interest income was recognized on impaired loans
during 1996.
-14-
<PAGE> 16
Loan maturities and rate sensitivity of the loan portfolio, excluding
installment loans before unearned income and purchased receivables were
as follows at December 31, 1996:
<TABLE>
<CAPTION>
Within One- After
One Year Five Years Five Years Total
<S> <C> <C> <C> <C>
Commercial, financial and
industrial $12,937,610 $ 5,549,389 $ 209,560 $18,696,559
Real estate - mortgage 8,325,559 18,125,990 4,118,795 30,570,344
Real estate - construction 1,352,792 1,574,515 71,009 2,998,316
----------- ----------- ----------- -----------
Total $22,615,961 $25,249,894 $ 4,399,364 $52,265,219
=========== =========== =========== ===========
Loans at fixed interest rates $10,998,024 $ 1,700,165
Loans at variable interest
rates 14,251,870 2,699,199
----------- -----------
Total $25,249,894 $ 4,399,364
=========== ===========
</TABLE>
Loans outstanding to directors, executive officers and their affiliates
as of December 31, 1996 and 1995 were $3,671,040 and $3,344,568,
respectively. In the opinion of management, all transactions entered into
between the Bank and such related parties have been and are, in the
ordinary course of business, made on the same terms and conditions as
similar transactions with unaffiliated persons.
An analysis of activity with respect to these related-party loans is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
1996 1995
<S> <C> <C>
Beginning balance $ 3,344,568 $ 604,119
New loans 837,854 3,020,578
Repayments (511,382) (280,129)
----------- -----------
Ending balance $ 3,671,040 $ 3,344,568
=========== ===========
</TABLE>
6. NONPERFORMING LOANS
The following table presents information relating to nonperforming loans
and past due loans:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1996 1995
<S> <C> <C>
Nonaccrual loans $ 97,298 $ 369,009
90 days or more past due loans, not on nonaccrual 139,137 173,317
--------- ---------
Total $ 236,435 $ 542,326
========= =========
</TABLE>
There were no restructured loans during the years ended December 31, 1996
or 1995.
-15-
<PAGE> 17
With respect to these nonperforming loans, the following table presents
interest income actually earned and additional interest income that would
have been earned under the original terms of the loans:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995
<S> <C> <C>
Nonaccrual loans:
Income earned $12,253 $ 2,355
Forgone income 41,375 43,616
</TABLE>
7. ALLOWANCE FOR CREDIT LOSSES
An analysis of activity in the allowance for credit losses is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
<S> <C> <C>
Balance at beginning of year $ 558,464 $ 507,316
Additions - provision charged to operations 230,000 230,000
Deductions:
Loans charged off (341,494) (186,069)
Loan recoveries 27,864 7,217
--------- ---------
Net charge-offs (313,630) (178,852)
--------- ---------
Balance at end of year $ 474,834 $ 558,464
========= =========
</TABLE>
8. PREMISES AND EQUIPMENT
Premises and equipment are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
<S> <C> <C>
Land $1,134,210 $1,134,210
Buildings 831,251 831,251
Building improvements 265,004 261,878
Tenant lease improvements 15,545 8,394
Furniture, fixtures and equipment 2,025,654 1,589,955
---------- ----------
Total 4,271,664 3,825,688
Less accumulated depreciation and amortization 1,498,218 1,193,789
---------- ----------
Premises and equipment, net $2,773,446 $2,631,899
========== ==========
</TABLE>
-16-
<PAGE> 18
9. DEPOSITS
Included in interest-bearing deposits are certificates of deposit in
amounts of $100,000 or more. These certificates and their remaining
maturities at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
<S> <C> <C>
Three months or less $ 806,164 $ 4,395,434
Four through six months 2,195,318 2,341,170
Seven through twelve months 1,637,277 1,904,763
Thereafter 3,221,711 1,596,405
----------- -----------
Total $ 7,860,470 $10,237,772
=========== ===========
</TABLE>
Interest expense for certificates of deposit in excess of $100,000 was
$490,579 and $389,136 for the years ended December 31, 1996 and 1995,
respectively.
The Bank has no brokered deposits and there are no major concentrations
of deposits.
10. EMPLOYEE BENEFITS
The Bank maintains a 401(k) plan (the "Plan") for substantially all
employees having tenure of three months or more. The Bank matches
contribution by the employee dollar-for-dollar up to a maximum
contribution by the Bank of an amount equal to 6% of the employee's
annual salary. The Bank's contributions to the Plan were approximately
$72,000 and $29,000 for the years ended December 31, 1996 and 1995,
respectively.
During June 1995 the Bank entered into a deferred compensation agreement
with a key employee of the Bank. The agreement provided for total
payments of $690,000, payable in five annual installments beginning in
the year 2011, provided that such employee met certain conditions of
continued employment.
In connection with the deferred compensation agreement the Bank was
making payments on a life insurance policy on behalf of the key employee.
Upon reaching age 65, provided such employee met certain conditions of
continued employment, the employee would receive the cash surrender value
of this policy upon reimbursement to the Bank of all premiums paid by the
Bank on behalf of the employee. In addition, the life insurance policy
had an annuity feature which would pay $80,000 per year for 15 years.
In exchange for the cancellation of these deferred compensation
agreements the Bank agreed to contribute $650,000 to a new deferred
compensation plan. During 1996 the Bank recognized $650,000 in connection
with the settlement.
11. INTEREST RATE RISK
The Bank is principally engaged in providing short-term commercial loans
with interest rates that fluctuate with various market indices and
long-term, fixed rate real estate loans. These loans are primarily funded
through short-term demand deposits and longer-term certificates of
deposit with variable and fixed rates. The real estate loans are more
sensitive to interest rate risk than the commercial loans due to their
fixed rates and longer maturities.
-17-
<PAGE> 19
12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to various financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include
commitments to extend credit and standby letters of credit. Those
instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amounts recognized in the consolidated balance
sheets. The contract or notional amounts of those instruments reflect the
extent of involvement the Bank has in particular classes of financial
instruments. The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is represented
by the contractual amount of those instruments. The Bank uses the same
credit policies in making these commitments and conditional obligations
as it does for on-balance sheet instruments.
The following is a summary of the various financial instruments entered
into by the Bank:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
<S> <C> <C>
Financial instruments whose contract amount represents
credit risk:
Commitments to extend credit $9,573,000 $8,063,000
Standby letters of credit 88,000 356,000
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being fully drawn upon, the total
commitment amounts disclosed above do not necessarily represent future
cash requirements.
The Bank evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if considered necessary by the
Bank upon extension of credit, is based on management's credit evaluation
of the customer.
Standby letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to the Bank's customers.
13. STOCKHOLDERS' EQUITY
The Company's 8% Class A Cumulative Convertible Preferred Stock may be
converted into common stock at the option of the holder at a ratio of one
share of $40 par value cumulative convertible preferred stock for ten
shares of Company common stock. Bancshares may redeem this preferred
stock at par value or convert this preferred stock to common stock any
time after July 1, 1998.
During 1995 Bancshares completed an offering of 864,500 shares of its $1
par value common stock at a price of $4 per share. The proceeds of the
offering after deducting all associated costs were $3,288,633 or $3.80
per share.
-18-
<PAGE> 20
14. STOCK OPTIONS
Options have been granted to key employees, officers and directors at
prices determined by the Board of Directors which approximate the book
value of the common stock at the date of grant. Options granted under the
plan vest immediately and must be exercised no later than ten years from
the date of grant. No more than 135,515 shares of common stock may be
issued under this plan. A summary of changes in outstanding options is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------
1996 1995
<S> <C> <C>
Shares under option, beginning of period 75,000 75,000
Changes during the period:
Granted 60,500
Cancelled/expired (2,000)
Exercised (2,000)
------------ ------------
Shares under option, end of period 131,500 75,000
============ ============
Average option price $ 3.21 $ 3.20
============ ============
</TABLE>
15. INCOME TAXES
The components of the provision for federal income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1996 1995
<S> <C> <C>
Current $ 82,446 $ 90,058
Deferred 280,738 166,899
---------- ----------
Total $ 363,184 $ 256,957
========== ==========
</TABLE>
The provision for federal income taxes differs from the amount computed
by applying the federal income tax statutory rate on income as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1996 1995
<S> <C> <C>
Taxes calculated at statutory rate $ 303,366 $ 365,080
Increase (decrease) resulting from other, net 59,818 (108,123)
--------- ---------
Total $ 363,184 $ 256,957
========= =========
</TABLE>
-19-
<PAGE> 21
Deferred income taxes and benefits are provided for differences between
the financial statement carrying amount of existing assets and
liabilities and their respective tax basis. Significant deferred tax
assets and liabilities at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses $ 12,245 $ 65,949
Net operating loss carryforward 17,262 75,043
Investment tax credit 28,915 28,915
Unrealized loss on securities available for sale 48,647 43,720
Deferred compensation 280,500
Other 18,683 13,134
--------- ---------
Total deferred tax assets 406,252 226,761
--------- ---------
Deferred tax liabilities:
Depreciable assets 69,000 59,707
Cash to accrual 332,994 443,534
--------- ---------
Total deferred tax liabilities 401,994 503,241
--------- ---------
Net deferred tax asset (liability) $ 4,258 $(276,480)
========= =========
</TABLE>
During 1988 Bancshares sold shares of common stock which resulted in a
change in ownership as defined under tax law. This change in ownership
caused a severe limitation on the Company's ability to utilize its net
operating loss carryforwards. In general, the current tax law limits the
Company's annual utilization of its net operating loss carryforwards to
an amount approximating 7% of the fair market value of the Company at the
date the change in ownership occurred. Management currently estimates
that the maximum annual utilization of the net operating loss
carryforward will approximate $170,000. The Company's net operating loss
carryforwards of $51,000 as of December 31, 1996 will begin to expire in
the year ending December 31, 2003, if not utilized. The Company's
investment tax credit carryforward of $29,000 will expire in the year
ending December 31, 2000.
16. DIVIDEND RESTRICTIONS
Dividends paid by Bancshares and by the Bank to Bancshares are subject to
restrictions by certain regulatory agencies. There was an aggregate of
approximately $651,000 and $955,000, respectively available for payment
of dividends at December 31, 1996 under these restrictions.
17. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Any
institution that fails to meet its minimum capital requirements is
subject to actions by regulators that could have a direct material effect
on the Company's and the Bank's financial statements. Under the capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines based on the
Bank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company's and the
Bank's capital amounts and the Bank's classification under the regulatory
framework for prompt corrective action are also subject to qualitative
judgments by the regulators about the components, risk weightings and
other factors.
-20-
<PAGE> 22
To meet the capital adequacy requirements, the Company and the Bank must
maintain minimum capital amounts and ratios as defined in the
regulations. Management believes, as of December 31, 1996, that the
Company and the Bank met all capital adequacy requirements to which they
are subject.
At December 31, 1996, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes have changed the Bank's category.
The following is a summary of the Company's and the Bank's capital ratios
at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
----------------------- ------------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C>
CONSOLIDATED:
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $8,072,005 13.2% $5,290,635 8.0% N/A N/A
Tier I Capital
(to Risk Weighted Assets) 7,597,171 12.4% 2,645,318 4.0% N/A N/A
Tier I Capital
(to Average Assets) 7,597,171 5.7% 3,967,713 3.0% N/A N/A
As of December 31, 1995:
Total Capital
(to Risk Weighted Assets) 8,186,214 14.3% 4,575,601 8.0% N/A N/A
Tier I Capital
(to Risk Weighted Assets) 7,627,751 13.3% 2,287,800 4.0% N/A N/A
Tier I Capital
(to Average Assets) 7,627,751 6.3% 3,617,727 3.0% N/A N/A
</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>
BANK ONLY:
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $8,032,685 12.2% $5,268,830 8.0% $6,586,037 10.0%
Tier I Capital
(to Risk Weighted Assets) 3,557,851 11.5% 2,643,819 4.0% 3,965,729 6.0%
Tier I Capital
(to Average Assets) 3,557,851 5.7% 3,980,300 3.0% 3,980,300 5.0%
As of December 31, 1995:
Total Capital
(to Risk Weighted Assets) 7,611,361 13.4% 4,559,601 8.0% 5,699,501 10.0%
Tier I Capital
(to Risk Weighted Assets) 7,052,897 12.4% 2,279,800 4.0% 3,419,701 6.0%
Tier I Capital
(to Average Assets) 7,052,897 6.0% 3,550,138 3.0% 5,916,896 5.0%
</TABLE>
-21-
<PAGE> 23
18. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
The following table presents information necessary for the computation of
earnings per common and common equivalent share for the years ended
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net income $ 499,069 $ 816,807
Less preferred stock dividends 68,400 68,400
---------- ----------
Net income available to common stockholders $ 430,669 $ 748,407
========== ==========
Weighted average number of common and common equivalent
shares outstanding 2,153,281 1,745,821
========== ==========
</TABLE>
19. DISCLOSURE ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair values of financial
instruments is made in accordance with SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments." The estimated fair value amounts
have been determined by the Company using available market information
and appropriate valuation methodologies. However, considerable judgment
is necessarily required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts that the Company could realize
in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
The following methods and assumptions were used to estimate the fair
values of each class of financial instruments for which it is practicable
to estimate that value.
CASH AND CASH EQUIVALENTS - For these short-term instruments, the
carrying amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES - For securities held as investments, fair value
equals quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
LOAN RECEIVABLES - The fair value of loans is estimated by discounting
the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities.
DEPOSIT LIABILITIES - The fair value of demand deposits, savings accounts
and certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit
is estimated using the rates currently offered for deposits of similar
remaining maturities.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND FINANCIAL
GUARANTEES WRITTEN - The fair value of commitments is estimated using the
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed-rate loan commitments,
fair value also considers the difference between current levels of
interest rates and the committed rates. The fair value of guarantees and
letters
-22-
<PAGE> 24
of credit is based on fees currently charged for similar agreements or on
the estimated cost to terminate them or otherwise settle the obligations
with the counterparties at the reporting date.
The estimated fair values of the Company's financial instruments were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------ ------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash
equivalents $ 17,411,493 $ 17,411,493 $ 18,624,620 $ 18,624,620
Interest-bearing
deposits 95,000 95,000
Investment securities
available for sale 53,212,387 53,212,387 48,863,899 48,863,899
Loans held for sale 237,789 237,789 213,962 213,962
Loans 56,658,101 56,658,000 48,516,344 48,371,000
Less allowance for
credit losses (474,834) (474,834) (558,464) (558,464)
------------- ------------- ------------- -------------
Total $ 127,044,936 $ 127,044,835 $ 115,755,361 $ 115,610,017
============= ============= ============= =============
Financial liabilities -
deposits $ 122,931,420 $ 123,169,042 $ 112,400,598 $ 112,364,498
------------- ------------- ------------- -------------
Total $ 122,931,420 $ 123,169,042 $ 112,400,598 $ 112,365,498
============= ============= ============= =============
</TABLE>
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1996 and 1995.
Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since
that date and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
-23-
<PAGE> 25
20. PARENT-COMPANY-ONLY FINANCIAL INFORMATION
The following are parent-company-only condensed balance sheets as of
December 31, 1996 and 1995 and condensed statements of income and
condensed statements of cash flows for the years then ended.
FIRST HOUSTON BANCSHARES, INC.
CONDENSED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
-------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Cash $ 200 $ 311,757
Investment in subsidiary 7,506,243 7,031,040
Receivable from Bank 540,118 152,341
Other assets 90,000 200,000
----------- -----------
TOTAL $ 8,136,561 $ 7,695,138
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Payable to Altair $ 77,586 $ 106,049
Federal income tax payable 461,804
----------- -----------
Total liabilities 539,390 106,049
STOCKHOLDERS' EQUITY:
Common stock 2,098,238 2,096,238
Preferred stock 855,000 855,000
Capital surplus 6,183,614 6,178,994
Accumulated deficit (1,445,255) (1,456,275)
Unrealized loss on securities, net of tax (94,426) (84,868)
----------- -----------
Total stockholders' equity 7,597,171 7,589,089
----------- -----------
TOTAL $ 8,136,561 $ 7,695,138
=========== ===========
</TABLE>
-24-
<PAGE> 26
FIRST HOUSTON BANCSHARES, INC.
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
INCOME - Dividends from subsidiary $ 90,000 $ 420,000
OPERATING EXPENSE - Other expense 59,703 50,110
---------- ----------
INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED EARNINGS OF SUBSIDIARY 30,297 369,890
INCOME TAX EXPENSE (BENEFIT) 15,990 (233)
---------- ----------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARY 14,307 370,123
EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY 484,762 446,684
---------- ----------
NET INCOME $ 499,069 $ 816,807
========== ==========
</TABLE>
-25-
<PAGE> 27
FIRST HOUSTON BANCSHARES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 499,069 $ 816,807
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiary (484,762) (446,684)
Increase in receivable from Bank (387,777) (158,090)
Decrease (increase) in other assets 110,000 (182,773)
Increase in federal income taxes payable 461,804
(Decrease) increase in payable to Altair (28,463) 111,798
------------ ------------
Total adjustments (329,198) (675,749)
------------ ------------
Net cash provided by operating activities 169,871 141,058
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in prepaid offering expense 35,000
Dividends paid (488,048) (474,274)
Capital contribution to subsidiary (2,750,000)
Proceeds from stock offering 3,288,633
Proceeds from exercise of stock options 6,620
------------ ------------
Net cash (used in) provided by financing activities (481,428) 99,359
------------ ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (311,557) 240,417
CASH AND CASH EQUIVALENTS:
Beginning of year 311,757 71,340
------------ ------------
End of year $ 200 $ 311,757
============ ============
</TABLE>
21. SUBSEQUENT EVENT
On February 5, 1997, the Company entered into a letter of intent with
a Bank Holding Company to exchange all of the Company's outstanding common
stock for common stock of the Bank Holding Company. The letter of intent
does not constitute a binding agreement and is subject to due diligence
investigations, completion of a merger agreement, regulatory approval and
approval from the Bank Holding Company's and the Company's board of
directors and stockholders.
******
-26-
<PAGE> 1
Exhibit 99.3 to Form 8-K Current Report
STERLING BANCSHARES, INC.
SELECTED CONSOLIDATED FINANCIAL DATA - STERLING BANCSHARES, INC.
The selected consolidated financial data below summarizes historical
consolidated financial information of the Company for the periods indicated and
should be read in connection with the financial information included in the
Company's 1996 Annual Report on Form 10-K for the year ended
December 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF INCOME:
Interest income.................................. $53,413 $46,734 $39,735 $27,231 $26,136
Interest expense................................. 16,727 14,557 11,140 7,301 8,699
Net interest income.............................. 36,686 32,177 28,595 19,930 17,437
Provision for credit losses...................... 2,113 919 921 856 808
Non-interest income.............................. 7,964 7,536 7,135 4,424 3,690
Non-interest expense............................. 27,134 25,781 24,458 15,661 13,266
Income before income taxes....................... 15,403 13,013 10,351 7,837 7,053
Income taxes..................................... 4,749 4,147 3,200 2,474 2,274
Net income....................................... 10,654 8,866 7,151 5,363 4,779
PER SHARE DATA:(1)
Net income per share (fully diluted)............. $0.86 $0.73 $0.60 $0.45 $0.52
Book value per common share...................... 4.97 4.22 3.38 3.09 3.58
Tangible book value per share.................... 4.82 4.03 3.17 2.85 2.93
Weighted average common and common equivalent
shares......................................... 12,340 12,117 11,883 11,824 9,248
BALANCE SHEET DATA:
Total assets..................................... $790,073 $647,349 $598,654 $553,196 $380,435
Loans, net of unearned discount.................. 497,429 392,645 328,560 291,762 205,356
Allowance for credit losses...................... 6,578 5,907 5,810 5,044 3,373
Investment securities............................ 152,253 167,512 191,957 192,919 115,135
Deposits......................................... 717,413 574,724 538,335 481,677 337,631
Notes payable and senior debentures.............. 4,000 5,800 8,050 12,900 2,300
Shareholders' equity............................. 59,407 49,691 39,623 35,792 33,077
SELECTED PERFORMANCE RATIOS:
Return on average assets......................... 1.53% 1.48% 1.26% 1.37% 1.42%
Return on average shareholders' equity........... 19.40% 19.87% 18.76% 15.24% 20.83%
Dividend payout ratio............................ 21.54% 19.38% 19.85% 23.53% 0.00%
Net interest margin (tax equivalent)............. 6.03% 6.10% 5.72% 5.72% 5.81%
ASSET QUALITY RATIOS:
Non-performing loans to total period-end loans... 0.55% 0.87% 0.80% 1.04% 0.60%
Period-end non-performing assets to total
assets......................................... 0.64% 0.80% 0.72% 1.03% 1.30%
Period-end allowance for credit losses to
non-performing loans........................... 242.56% 173.38% 221.09% 166.91% 271.80%
Period-end allowance for credit losses to total
loans.......................................... 1.32% 1.50% 1.77% 1.73% 1.64%
Net charge-offs to average loans................. 0.33% 0.23% 0.05% 0.34% 0.18%
LIQUIDITY AND CAPITAL RATIOS:
Average loans to average deposits................ 70.40% 68.69% 61.22% 61.31% 60.87%
Period-end shareholders' equity to total
assets......................................... 7.52% 7.68% 6.62% 6.47% 8.69%
Average shareholders' equity to average assets... 7.89% 7.46% 6.71% 8.99% 6.84%
Period-end Tier 1 capital to risk weighted
assets(2)...................................... 10.27% 10.82% 10.41% 9.75% 13.13%
Period-end total capital to risk weighted
assets(2)...................................... 11.44% 12.07% 11.67% 10.99% 14.38%
Period-end Tier 1 leverage ratio (tangible
shareholders' equity to total average
assets)(2)..................................... 8.03% 7.66% 6.57% 5.96% 8.69%
</TABLE>
- ---------------
(1) Per share data for all periods and dates have been adjusted retroactively to
give effect to the three-for-two split effected as a stock dividend to
common shareholders distributed on February 24, 1997.
(2) Calculated in accordance with regulations in effect at December 31, 1996.
12
<PAGE> 1
Exhibit 99.4 to Form 8-K Current Report
STERLING BANCSHARES, INC.
SELECTED CONSOLIDATED FINANCIAL DATA - PRO FORMA
The following pro forma consolidated financial data combines the historical
consolidated financial statements of the Company and First Houston as if the
Merger has occurred as of January 1, 1994, after giving effect to the pro forma
adjustments described in the notes of the pro forma financial statements
included as Exhibit 99.5 of this Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS,
EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C>
SUMMARY OF INCOME:
Interest income............................................. $ 62,171 $ 54,268 $ 44,475
Interest expense............................................ 19,807 17,271 12,444
Net interest income......................................... 42,364 36,997 32,031
Provision for credit losses................................. 2,343 1,149 1,426
Non-interest income......................................... 8,598 8,068 7,740
Non-interest expense........................................ 32,354 29,829 27,171
Income before income taxes.................................. 16,265 14,087 11,174
Income taxes................................................ 5,112 4,404 3,472
Net income.................................................. 11,153 9,683 7,702
PER SHARE DATA:(1)
Net income per share (fully diluted)........................ $ 0.79 $ 0.70 $ 0.57
Book value per common share................................. 4.90 4.24 3.26
Tangible book value per share............................... 4.77 4.08 3.08
Weighted average common and common equivalent shares........ 14,064 13,841 13,607
BALANCE SHEET DATA:
Total assets................................................ $922,330 $767,972 $672,616
Loans, net of unearned discount............................. 554,325 441,375 372,538
Allowance for credit losses................................. 7,053 6,465 6,317
Investment securities....................................... 205,465 216,376 214,494
Deposits.................................................... 840,344 687,125 607,899
Notes payable and senior debentures......................... 4,000 5,800 8,050
Shareholders' equity........................................ 67,004 57,280 43,909
SELECTED PERFORMANCE RATIOS:
Return on average assets.................................... 1.37% 1.38% 1.22%
Return on average shareholders' equity...................... 17.74% 19.03% 18.00%
Net interest margin (tax equivalent)........................ 5.80% 5.84% 5.63%
ASSET QUALITY RATIOS:
Non-performing loans to total period-end loans.............. 0.53% 0.90% 0.71%
Period-end non-performing assets to total assets............ 0.58% 0.74% 0.65%
Period-end allowance for credit losses to non-performing
loans..................................................... 239.25% 162.64% 238.11%
Period-end allowance for credit losses to total loans....... 1.27% 1.46% 1.70%
Net charge-offs to average loans............................ 0.36% 0.25% 0.17%
LIQUIDITY AND CAPITAL RATIOS:
Average loans to average deposits...........................
Period-end shareholders' equity to total assets............. 7.26% 7.46% 6.53%
Average shareholders' equity to average assets.............. 7.70% 7.25% 6.76%
Period-end Tier 1 capital to risk weighted assets(2)........ 10.48% 11.11% 10.42%
Period-end total capital to risk weighted assets (2)........ 11.61% 12.33% 11.91%
Period-end Tier 1 leverage ration (tangible shareholders'
equity to total average assets)(2)........................ 7.99% 7.88% 6.99%
</TABLE>
- ---------------
(1) Per share data for all periods and dates have been adjusted retroactively to
give effect to the three-for-two split effected as a stock dividend to
common shareholders distributed on February 24, 1997.
(2) Calculated in accordance with regulations in effect at December 31, 1996.
13
<PAGE> 1
Exhibit 99.5 to Form 8-K Current Report
STERLING BANCSHARES, INC. AND SUBSIDIARIES
FIRST HOUSTON BANCSHARES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 1996
The following Pro Forma Consolidated Balance Sheet as of December 31,
1996 and the Pro Forma Consolidated Statement of Income for the year ended
December 31, 1996 combine the historical consolidated financial statements of
the Company and First Houston as if the Merger had occurred on January 1, 1996.
The Pro forma Consolidated Balance Sheet and the Pro Forma Consolidated
Statement of Income are not necessarily indicative of the consolidated
financial position or results of future operations of the combined entity or of
the actual results that would have been achieved had the Merger been
consummated prior on January 1, 1996.
<TABLE>
<CAPTION>
STERLING FIRST HOUSTON PRO FORMA PRO FORMA
BANCSHARES BANCSHARES ADJUSTMENTS CONSOLIDATED
------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks $ 78,442 $ 6,849 $ -- $ 85,291
Federal funds sold 30,000 10,563 -- 40,563
Interest-bearing deposits in financial institutions 22 -- -- 22
Available-for-sale investment securities 4,170 53,212 -- 57,382
Held-to-maturity investment securities 148,083 -- -- 148,083
Equity in unconsolidated subsidiary 2,316 -- -- 2,316
Loans held for sale 40,731 238 -- 40,969
Loans 456,698 56,658 -- 513,356
Allowance for credit losses (6,578) (475) -- (7,053)
Accrued interest receivable 4,725 1,267 -- 5,992
Real estate acquired by foreclosure 2,035 37 -- 2,072
Premises and equipment, net 23,100 2,773 -- 25,873
Goodwill 1,839 -- -- 1,839
Other assets 4,490 1,135 -- 5,625
------------ ------------ ------------ ------------
Total assets $ 790,073 $ 132,257 $ -- $ 922,330
============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Deposits $ 717,413 $ 122,931 $ -- $ 840,344
Securities sold under agreements to repurchase 3,751 -- -- 3,751
Accrued interest payable and other liabilities 5,502 1,729 -- 7,231
Notes payable 4,000 -- -- 4,000
------------ ------------ ------------ ------------
Total liabilities 730,666 124,660 -- 855,326
------------ ------------ ------------ ------------
SHAREHOLDERS' EQUITY:
Preferred stock 88 855 (855)(a) 88
Common stock 7,966 2,098 (374)(a) 9,690
Capital surplus 16,058 6,183 1,229 (a) 23,470
Retained earnings 35,426 (1,445) -- 33,981
Net unrealized losses on held-to-maturity investment securities --
transferred from available-for-sale (131) (94) -- (225)
------------ ------------ ------------ ------------
Total shareholders' equity 59,407 7,597 -- 67,004
------------ ------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 790,073 $ 132,257 $ -- $ 922,330
============ ============ ============ ============
</TABLE>
(a) Acquisition adjustment includes the conversion of shares of preferred,
$40.00 par value per share, and 2,098,000 shares of common stock of First
Houston Bancshares, Inc., and the issuance of 1,724,000 shares of the
Company's common stock. The excess par value of the retired shares over
the issued shares has been adjusted to capital surplus.
<PAGE> 2
Exhibit 99.5 to Form 8-K Current Report
STERLING BANCSHARES, INC. AND SUBSIDIARIES
FIRST HOUSTON BANCSHARES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
STERLING FIRST HOUSTON PRO FORMA
BANCSHARES BANCSHARES CONSOLIDATED
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $ 42,861 $ 5,465 $ 48,326
Investment securities 9,280 2,673 11,953
Federal funds sold 732 620 1,352
Deposits in financial institutions 540 -- 540
----------- ----------- -----------
Total interest income 53,413 8,758 62,171
----------- ----------- -----------
INTEREST EXPENSE:
Deposits 16,024 3,080 19,104
Securities sold under agreements to repurchase 318 -- 318
Notes payable 384 -- 384
Senior debentures 1 -- 1
----------- ----------- -----------
Total interest expense 16,727 3,080 19,807
----------- ----------- -----------
Net interest income 36,686 5,678 42,364
Provision for credit losses 2,113 230 2,343
----------- ----------- -----------
Net interest income after provision for credit losses 34,573 5,448 40,021
----------- ----------- -----------
NON-INTEREST INCOME:
Customer service fees 5,141 454 5,595
Net gain (loss) on sale of investment securities -- 87 87
Earnings of unconsolidated subsidiary 316 -- 316
Other 2,507 93 2,600
----------- ----------- -----------
Total non-interest income 7,964 634 8,598
----------- ----------- -----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 16,606 2,840 19,446
Depreciation and amortization 2,520 303 2,823
Occupancy and equipment expense, net 2,165 267 2,432
(Gains) losses and carrying costs of real estate acquired by foreclosure 155 -- 155
FDIC assessment 2 2 4
Data processing 537 321 858
Professional fees 490 273 763
Other 4,659 1,214 5,873
----------- ----------- -----------
Total non-interest expense 27,134 5,220 32,354
----------- ----------- -----------
Income before income taxes 15,403 862 16,265
Income taxes 4,749 363 5,112
----------- ----------- -----------
Net Income $ 10,654 $ 499 $ 11,153
=========== =========== ===========
Net Income Per Common Share:
Primary $ 0.87 $ 0.29 $ 0.80
=========== =========== ===========
Fully diluted $ 0.86 $ 0.29 $ 0.79
=========== =========== ===========
Weighted Average Common Shares Outstanding
Primary 12,251 1,724 13,975
Fully diluted 12,340 1,724 14,064
</TABLE>
