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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 29, 1997
REGISTRATION NO. 333-28153
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 3 TO
FORM S-4/A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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STERLING BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
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TEXAS 6712 74-2175590
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
MICHAEL A. ROY
SECRETARY
STERLING BANCSHARES, INC.
15000 NORTHWEST FREEWAY 15000 NORTHWEST FREEWAY
HOUSTON, TEXAS 77040 HOUSTON, TEXAS 77040
(713) 466-8300 (713) 466-8300
(Address, Including Zip Code, and Telephone (Name, Address, Including Zip Code and
Number, Including Area Code, of Registrant's Telephone Number, Including Area
Principal Executive Offices) Code, of Agent For Service)
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Copies to:
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G. MICHAEL O'LEARY, JR., ESQ. C. THOMAS SCOTT, ESQ.
ANDREWS & KURTH L.L.P. CHAMBERLAIN HRDLICKA WHITE
600 TRAVIS, SUITE 4200 WILLIAMS & MARTIN
HOUSTON, TEXAS 77002 1200 SMITH STREET
(713) 220-4200 HOUSTON, TEXAS 77002
(713) 658-1818
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If the securities being registered on this Form are being offer in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED
MAXIMUM PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE REGISTRATION FEE
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Common Stock, par value $.01 per
share................................ 1,730,000 $3.50 $6,055,000 $1,835(3)
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(1) Represents the maximum number of shares of Common Stock of Sterling
Bancshares, Inc. issuable to holders of Common and Preferred Stock of First
Houston Bancshares, Inc. upon consummation of the merger of First Houston
Bancshares, Inc. with a wholly owned subsidiary of Sterling Bancshares, Inc.
(2) Calculated in accordance with Rule 457(f)(2) of Regulation C. Based on the
book value per fully diluted share (computed as of April 30, 1997, the most
recent date for which such information is available) of the capital stock of
First Houston Bancshares, Inc. to be exchanged in the merger for the shares
of the registrant registered hereby.
(3) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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FIRST HOUSTON BANCSHARES, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER , 1997
To the Shareholders of First Houston Bancshares, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting (the "Meeting") of the
shareholders of First Houston Bancshares, Inc. ("First Houston"), will be held
at the principal executive offices of First Houston, 5757 Memorial Drive,
Houston, Texas 77007, at 10 a.m. local time, on September , 1997, for the
following purposes:
1. To consider and vote on a proposal (the "Merger Proposal") to
approve and adopt the Agreement and Plan of Merger, dated as of March 18,
1997, by and among First Houston, Sterling Bancshares, Inc., a Texas
corporation ("Sterling"), and SBI Acquisition Corp., a Texas corporation
and a wholly-owned subsidiary of Sterling, pursuant to which First Houston
will become a wholly-owned subsidiary of Sterling (such transaction being
hereinafter referred to as the "Merger").
2. To consider and vote on a proposal (the "Charter Proposal") to
amend the Articles of Incorporation of First Houston to delete a provision
therefrom in respect of the outstanding shares of First Houston convertible
preferred stock. The Charter Proposal will not be implemented, even if
approved at the Meeting, unless the Merger Proposal is also approved.
3. To transact any other business properly coming before the special
meeting or any adjournment thereof.
Only shareholders of record at the close of business on August 15, 1997,
are entitled to notice of and to vote at the Meeting and any adjournment
thereof. The affirmative vote of the holders of at least two-thirds of the
issued and outstanding shares of each the common stock, $1.00 par value per
share, and of the preferred stock, $40.00 par value per share, of First Houston
each voting separately as a class, is required to approve the Merger Proposal
and the Charter Proposal.
Under the Texas Business Corporation Act (the "TBCA"), a shareholder who
objects to the Merger can assert statutory dissenter's rights of appraisal by
strict and complete compliance with the requirements of the TBCA. See
"Dissenters' Rights" and Appendix C to the attached Joint Proxy
Statement/Prospectus.
Please date, complete and sign the enclosed proxy and return it promptly to
First Houston in the enclosed postage prepaid envelope. You may revoke your
proxy at any time prior to the time it is voted and, if you attend the meeting,
you may vote in person.
By Order of the Board of Directors,
ARISTA ZACZEK,
Secretary
Houston, Texas
August , 1997
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 29, 1997
PROSPECTUS/PROXY STATEMENT
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FIRST HOUSTON BANCSHARES, INC.
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER , 1997
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STERLING BANCSHARES, INC.
PROSPECTUS
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THIS DOCUMENT SERVES AS A PROSPECTUS FOR UP TO 1,730,000 SHARES OF COMMON
STOCK OF STERLING BANCSHARES, INC. AND ALSO AS A PROXY STATEMENT FOR A SPECIAL
MEETING OF THE SHAREHOLDERS OF FIRST HOUSTON BANCSHARES, INC.
---------------------
This Prospectus and Proxy Statement ("Proxy Statement") relates to the
proposed merger (the "Merger") of First Houston Bancshares, Inc. ("First
Houston") with and into a wholly owned subsidiary of Sterling Bancshares, Inc.
("Sterling"). Upon consummation of the Merger, the Sterling subsidiary will be
merged with and into First Houston. Following the Merger, Sterling will own all
of the outstanding capital stock of First Houston's banking subsidiary, Houston
National Bank ("Houston National Bank"). The principal executive offices of
Sterling are located at 15000 Northwest Freeway, Houston, Texas 77040, telephone
number (713) 466-8300.
The Merger will be effected pursuant to an Agreement and Plan of Merger,
dated March 18, 1997 (the "Merger Agreement"). At the effective time of the
Merger (the "Effective Time"), (i) each of the outstanding shares of First
Houston's common stock, par value $1.00 per share ("First Houston Common Stock")
(other than shares with respect to which statutory dissenters' rights have been
perfected), will be converted into and become the right to receive the number of
shares of Sterling common stock, par value $1.00 per share (the "Sterling Common
Stock") equal to the Exchange Ratio (as defined herein) and (ii) each of the
outstanding shares of First Houston's preferred stock, par value $40.00 per
share ("First Houston Preferred Stock" and, together with First Houston Common
Stock, "First Houston Capital Stock"), will be converted into and become the
right to receive the number of shares of Sterling Common Stock equal to the
product of the Exchange Ratio times 10. The "Exchange Ratio" is defined in the
Merger Agreement and is a fraction, the numerator of which is 1,724,793 shares
of Sterling Common Stock, plus or minus certain adjustments specified in the
Merger Agreement, and the denominator of which is 2,443,488 shares of First
Houston Common Stock (the number of fully diluted shares of First Houston Common
Stock outstanding as of June 30, 1997). The Exchange Ratio is subject to
adjustment based upon the book value of the Sterling Common Stock and First
Houston's shareholders' equity and net income, as of the end of the month
preceding the date of closing of the Merger (the "Adjustment Date"). As of July
31, 1997, the Exchange Ratio would have been 0.689. See "Proposal No. 1:
Approval of the Merger Proposal -- Information About the Merger -- General."
Because the Exchange Ratio remains subject to adjustment through the Adjustment
Date based on, among other things, certain shareholders' equity and net income
tests of First Houston and Sterling's shareholders' equity, the final Exchange
Ratio will not be determined until the Adjustment Date and First Houston
shareholders will not know at the time of their vote the exact number of shares
of Sterling Common Stock they will receive pursuant to the Merger. Cash will be
paid in lieu of issuing fractional shares of Sterling Common Stock. See
"Summary -- The Merger" and "Information About the Merger -- General."
A special meeting of the shareholders of First Houston has been called to
convene on August 20, 1997 at the principal executive offices of First Houston
in Houston, Texas (the "Meeting") to consider and vote on each of the Merger
Proposal and the Charter Proposal, and proxies for use in connection with such
meeting are being solicited by the Board of Directors of First Houston pursuant
to this Proxy Statement. Consummation of the Merger requires, among other
things, the affirmative vote of holders of two-thirds of the outstanding shares
of First Houston Common Stock and two-thirds of the outstanding shares of First
Houston Preferred Stock, each voting separately as a class, entitled to vote at
the Meeting for each of the Merger Proposal and the Charter Proposal. The Merger
will not be consummated unless each of the Merger Proposal and the Charter
Proposal is approved (unless all outstanding shares of First Houston Preferred
Stock (21,375 shares at the date of this Proxy Statement) have been converted
into First Houston Common Stock, in which case only the Merger Proposal needs to
be approved). See "Information About the Merger -- Conditions to Consummation of
the Merger." The Board of Directors of First Houston may terminate the Merger
Agreement in certain instances, including at any time during the 10-day period
commencing two days after the Adjustment Date if the average closing price of
Sterling Common Stock for the ten consecutive trading days preceding the
Adjustment Date is less than $10.66 and the Nasdaq Composite Bank Index as of
the Adjustment Date is not less than 1150. On August , 1997, the last trading
day prior to the date of this Proxy Statement, the closing sales price of the
Sterling Common Stock was $ and the Nasdaq Composite Bank Index was . If
an event allowing the First Houston Board of Directors to terminate the Merger
Agreement occurs prior to the Meeting, the First Houston Board of Directors will
consider such matters as it considers to be appropriate in light of its
fiduciary duties to act on an informed basis, in the best interests of First
Houston shareholders and in a disinterested manner. If such a termination right
becomes exercisable and the First Houston Board determines not to exercise such
right, then in certain instances, a supplement to this Proxy Statement will be
distributed to First Houston shareholders and proxies will be resolicited. See
"Proposal No. 1: Approval of the Merger Proposal -- Termination and
Amendment -- Termination." Sterling and First Houston anticipate that the
closing of the Merger will occur as soon as possible following approval of the
Merger Proposal and the Charter Proposal by the First Houston shareholders.
Sterling's Common Stock is publicly traded in the over-the counter market
and quoted on the Nasdaq National Market System under the trading symbol "SBIB."
On August , 1997, the last trading day prior to the date of this Proxy
Statement, the closing sales price per share of Sterling Common Stock was $ .
No active market exists for either the First Houston Common Stock or the First
Houston Preferred Stock. See "Market Prices of Sterling Common Stock and
Dividend Policy of Sterling."
No person has been authorized to give any information or to make any
representations other than those contained in this Proxy Statement, and, if
given or made, such information or representations must not be relied upon as
having been authorized by Sterling or First Houston. This Proxy Statement shall
not constitute an offer by Sterling to sell, or the solicitation of an offer by
Sterling to buy, any securities other than the securities to which this Proxy
Statement relates nor shall there be any sale of the securities offered by this
Proxy Statement in any state to any person to whom it would be unlawful prior to
registration or qualification under the laws of such state for Sterling to make
such an offer or solicitation. Neither the delivery of this Proxy Statement nor
any sale made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of Sterling or First Houston since
the date hereof.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE SHARES OF STERLING COMMON STOCK OFFERED HEREBY ARE NOT OBLIGATIONS OF A BANK
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
HOLDERS OF FIRST HOUSTON CAPITAL STOCK SHOULD CAREFULLY CONSIDER THE FACTORS SET
FORTH UNDER "RISK FACTORS" BEGINNING ON PAGE 15 OF THIS PROXY STATEMENT.
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The date of this Proxy Statement is September , 1997.
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AVAILABLE INFORMATION
Sterling is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations thereunder, and, in accordance therewith, files reports, proxy
statements and other information with the Securities and Exchange Commission
(the "SEC"). Reports, proxy statements and other information filed by Sterling
can be inspected and copied at Room 1024 of the SEC's office at 450 Fifth Street
N.W., Washington, D.C. 20549, and at the SEC's Regional Offices in New York (7
World Trade Center, 13th Floor, New York, New York 10048) and Chicago (Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661) and copies
of such material may also be obtained from the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, upon payment
of prescribed rates. If available, such information also may be accessed through
the SEC's electronic data gathering, analysis and retrieval system ("EDGAR") via
electronic means, including the SEC's home page on the Internet
(http://www.sec.gov). The Sterling Common Stock is included for quotation on the
Nasdaq's National Market System under the trading symbol "SBIB" and such
reports, proxy statements and other information concerning Sterling should be
available for inspection and copying at the offices of the National Association
of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
Sterling has filed with the SEC a Registration Statement on Form S-4 (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the shares of Sterling Common Stock offered
by this Proxy Statement. This Proxy Statement does not contain all of the
information set forth in the Registration Statement and the exhibits thereto.
For further information with respect to Sterling and the securities offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto. The Registration Statement, including exhibits, may be inspected
without charge at the SEC public reference facilities listed above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Proxy Statement incorporates the following documents filed by Sterling
with the SEC by reference and certain of such documents will be delivered with
this Proxy Statement as indicated:
1. Sterling's Annual Report on Form 10-K for the year ended December
31, 1996 (delivered herewith);
2. Sterling's Current Report on Form 8-K filed on April 3, 1997 and
the amendments thereto on Form 8-K/A filed on April 7, 1997 and July 28,
1997;
3. Sterling's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1997 and the amendment thereto on Form 10-Q/A filed on May
23, 1997 (delivered herewith); and
4. Sterling's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1997.
5. The description of Sterling's Common Stock contained in Sterling's
Registration Statement on Form 8-A, dated October 19, 1992.
All documents subsequently filed by Sterling pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date hereof and prior to the
filing of a post-effective amendment that indicates that all securities have
been sold or which deregisters all securities then remaining unsold shall be
deemed to be incorporated by reference into this Proxy Statement and to be a
part of this Proxy Statement from the date of filing of such document. Any
statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement from the date of filing of such document.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed to
be incorporated by reference herein modified or
2
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supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this Proxy
Statement.
As used herein, the terms "Proxy Statement" and "herein" mean this Proxy
Statement, including the documents incorporated or deemed to be incorporated
herein by reference, as the same may be amended, supplemented or otherwise
modified from time to time. Statements contained in this Proxy Statement as to
the contents of any contract or other document referred to herein do not purport
to be complete, and where reference is made to the particular provisions of such
contract or other document, such provisions are qualified in all respects by
reference to all of the provisions of such contract or other document.
STERLING WILL PROVIDE WITHOUT CHARGE TO ANY PERSON TO WHOM THIS PROXY
STATEMENT IS DELIVERED, ON THE WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY OF
ANY OR ALL OF THE FOREGOING DOCUMENTS INCORPORATED BY REFERENCE HEREIN WHICH
HAVE NOT BEEN FURNISHED TO SUCH PERSON (OTHER THAN EXHIBITS, UNLESS SUCH
EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE IN SUCH DOCUMENTS). REQUESTS
FOR SUCH DOCUMENTS SHOULD BE DIRECTED TO: STERLING BANCSHARES, INC., 15000
NORTHWEST FREEWAY, SUITE 200, HOUSTON, TEXAS 77040, ATTENTION: CORPORATE
SECRETARY (TELEPHONE: (713) 466-8300). UPON RECEIPT OF SUCH A REQUEST, DOCUMENTS
WILL BE SENT BY FIRST CLASS MAIL WITHIN ONE BUSINESS DAY. IN ORDER TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE AT LEAST FIVE DAYS
PRIOR TO THE MEETING.
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TABLE OF CONTENTS
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SUMMARY................................. 7
The Parties........................... 7
The Meeting........................... 7
Proposal No. 1: The Merger............ 8
Accounting Treatment.................. 11
Comparative Rights of Shareholders and
Charter Documents.................. 11
Interests of Certain Persons in the
Merger............................. 11
Risk Factors.......................... 12
Proposal No. 2: The Charter
Proposal........................... 12
Voting and Principal Shareholders..... 12
Summary Historical Consolidated
Financial Data of Sterling......... 14
Summary Historical Consolidated
Financial Data of First Houston.... 15
Summary Pro Forma Consolidated
Financial Data..................... 16
Recent Developments................... 17
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RISK FACTORS............................ 18
Dependence upon Local Economic
Conditions......................... 18
Reliance on Owner-Operated Business
Market............................. 18
Governmental Regulation............... 18
Indebtedness of Sterling.............. 18
Restrictions on Paying Dividends...... 19
Preemptive Rights Denied and
Dilution........................... 19
Anti-Takeover Provisions.............. 19
Competition........................... 20
PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS............................ 21
THE MEETING............................. 25
General............................... 25
Persons Entitled to Vote and Voting
Rights............................. 25
Proxies............................... 25
Principal Shareholders................ 26
PROPOSAL NO. 1: APPROVAL OF THE MERGER
PROPOSAL.............................. 26
Background of the Transaction......... 26
Reasons for Approval of the Merger.... 27
Information About the
Merger -- General.................. 30
Conditions to Consummation of the
Merger............................. 33
Regulatory Approval................... 34
Representations and Warranties of
First Houston and Sterling......... 35
Conduct of First Houston's Business... 35
Accounting Treatment.................. 36
No Solicitation of Acquisition
Transactions....................... 37
Termination and Amendment............. 38
Expenses.............................. 39
Operations of First Houston Following
the Merger......................... 40
Other Agreements...................... 40
Interests of Certain Persons in the
Merger............................. 40
DISSENTERS' RIGHTS...................... 42
FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER................................ 44
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COMPARATIVE RIGHTS OF SHAREHOLDERS...... 46
Sterling Stock........................ 46
First Houston Capital Stock........... 46
Dividends............................. 46
Preemptive Rights..................... 47
Voting Rights and Other Matters....... 47
RESTRICTIONS ON SALES OF STERLING COMMON
STOCK BY AFFILIATES OF FIRST
HOUSTON............................... 48
MARKET PRICES OF STERLING COMMON STOCK
AND DIVIDEND POLICY OF STERLING....... 48
ABSENCE OF TRADING MARKET FOR FIRST
HOUSTON CAPITAL STOCK................. 48
BUSINESS OF STERLING.................... 49
General............................... 49
Competition........................... 50
Recent Developments................... 50
MANAGEMENT OF STERLING.................. 50
Board of Directors.................... 50
SUPERVISION AND REGULATION.............. 52
Sterling.............................. 52
Permissible Activities................ 52
Non-Banking Activities................ 52
Safety and Soundness Standards........ 52
Capital Adequacy, Requirements........ 53
Imposition of Liability for
Undercapitalized Subsidiaries...... 53
Audit Reports......................... 54
Acquisitions by Bank Holding
Companies.......................... 54
Interstate Banking.................... 55
Sterling Bank......................... 55
Permissible Activities for
State-Chartered Institutions....... 55
Branching............................. 55
Restrictions on Subsidiary Banks...... 55
Examinations.......................... 56
Deposit Insurance Assessments......... 56
Expanding Enforcement Authority....... 57
Effect on Economic Environment........ 57
Consumer Laws and Regulations......... 57
SELECTED CONSOLIDATED STATEMENTS OF
EARNINGS OF FIRST HOUSTON............. 58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF FIRST HOUSTON........... 59
Performance Summary................... 59
Net Interest Income and Net Interest
Margin............................. 59
Noninterest Income.................... 61
Noninterest Expense................... 61
Income Taxes.......................... 62
Impact of Inflation................... 62
Loan Portfolio........................ 62
Nonperforming Loans and Assets........ 64
Allowance for Credit Losses........... 65
Allocation of the Allowance for Credit
Losses............................. 67
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Investments........................... 68
Deposits.............................. 69
Borrowings............................ 70
Interest Rate Sensitivity and
Liquidity.......................... 70
Capital Resources..................... 71
BUSINESS OF FIRST HOUSTON............... 72
Business of the Bank.................. 72
Market Area........................... 73
Competition of Houston National
Bank............................... 73
Employees of Houston National Bank.... 74
Property.............................. 74
Continuity of Management.............. 74
MANAGEMENT OF FIRST HOUSTON............. 75
Board of Directors and Executive
Officers........................... 75
Principal Shareholders of First
Houston............................ 77
Executive Compensation................ 78
First Houston Stock Option Plans...... 79
Interests of Management and Others in
Certain Transactions............... 79
DESCRIPTION OF STERLING CAPITAL STOCK... 80
Authorized Capital Stock.............. 80
Sterling Common Stock................. 80
Preferred Stock....................... 81
Classified Board of Directors......... 81
Blank Check Preferred Stock........... 81
Statutory Provisions.................. 81
PROPOSAL NO. 2: APPROVAL OF THE CHARTER
PROPOSAL.............................. 82
General............................... 82
Reasons for the Charter Proposal...... 82
Description of First Houston Preferred
Stock.............................. 82
Effect of the Charter Proposal........ 82
Timing of Implementation of the
Amendment.......................... 83
VALIDITY OF SECURITIES.................. 83
EXPERTS................................. 83
ADDITIONAL INFORMATION.................. 83
INDEMNIFICATION......................... 84
INDEX TO FINANCIAL STATEMENTS........... F-1
APPENDIX A -- THE MERGER AGREEMENT...... A-1
APPENDIX B -- CHARTER PROPOSAL.......... B-1
APPENDIX C -- TEXT OF TBCA sec.sec.
5.11-5.13............................. C-1
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SUMMARY
The following summary sets forth information concerning the Meeting of the
holders (collectively, "Shareholders") of First Houston Common Stock and of
First Houston Preferred Stock to which this Proxy Statement relates and the
Merger described herein. This Summary does not purport to be complete and should
be read in conjunction with, and is qualified in its entirety by reference to,
the more detailed information appearing elsewhere or incorporated by reference
in this Proxy Statement and the Appendices hereto. Shareholders are urged to
read this Proxy Statement, including such Appendices, in its entirety.
Capitalized terms used herein but not defined shall have the meanings assigned
to such terms in the Merger Agreement, a copy of which is included as Appendix A
to this Proxy Statement.
THE PARTIES
Sterling
Sterling is a Texas corporation and a registered bank holding company under
the Bank Holding Company Act of 1956, as amended ("BHC Act"), that provides
commercial and retail banking services through the community banking offices of
Sterling Bank, a banking association chartered under the laws of the State of
Texas ("Sterling Bank") and headquartered in Houston, Texas. Sterling owns all
of the capital stock of Sterling Bank through its ownership of all of the
capital stock of Sterling's second tier holding company, Sterling
Bancorporation, Inc. ("Sterling Bancorporation"), a Delaware corporation and
registered bank holding company under the BHC Act. Sterling Bank has 14
community banking offices, all of which are located in the greater Houston
metropolitan area. See "Business of Sterling" and "Management of Sterling."
At June 30, 1997, Sterling had total assets of $924.2 million, deposits of
$792.8 million and shareholders' equity of $65.4 million. See "Incorporation of
Certain Documents by Reference" and "Selected Financial Data -- Sterling
Bancshares, Inc. and Subsidiaries."
The principal executive offices of Sterling are located at 15000 Northwest
Freeway, Houston, Texas 77040, telephone number (713) 466-8300. Sterling was
incorporated under the laws of the State of Texas in 1980 and became a parent
bank holding company of Sterling Bank in 1981. Sterling Bank was chartered in
1974. Sterling completed its initial public offering in 1992.
First Houston
First Houston is a Texas corporation and a registered bank holding company
under the BHC Act which was organized on October 9, 1984 as a one-bank holding
company for Houston National Bank ("Houston National"). Houston National is a
national banking association that offers commercial banking services through its
single office located 5757 Memorial Drive in Houston, Texas. First Houston's
only business activities are the ownership and management of the Bank. At June
30, 1997, First Houston had total consolidated assets of approximately $136.5
million, deposits of approximately $126.1 million, and shareholders' equity of
approximately $8.8 million. First Houston's executive offices are located at
5757 Memorial Drive, Houston, Texas 77007, telephone (713) 868-5757. See
"Business of First Houston" and "Management of First Houston."
THE MEETING
General
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of First Houston from the Shareholders of
First Houston for use at the Meeting. The Meeting is a special meeting of the
First Houston shareholders at which the Shareholders will consider (i) the
Merger whereby First Houston will become a wholly owned subsidiary of Sterling
pursuant to the Merger Agreement, and following the Merger, will be merged into
a wholly owned subsidiary of Sterling and (ii) an amendment to the Articles of
Incorporation of First Houston (the "First Houston Charter") to delete
paragraph(h)(4) from the Certificate of Designation establishing the First
Houston Preferred Stock (the "Charter Proposal"). This Proxy Statement also
constitutes a prospectus for the shares of Sterling Common Stock that will be
issued in
7
<PAGE> 10
exchange for First Houston Capital Stock if the Merger is consummated. See "The
Meeting -- General." A complete copy of the Merger Agreement is attached to this
Proxy Statement in Appendix A.
It is anticipated that proxy solicitation materials will first be mailed to
Shareholders on or about August , 1997. The Meeting will be held on September
, 1997 at 10 a.m., at the principal executive offices of First Houston, 5757
Memorial Drive, Houston, Texas 77007.
Persons Entitled to Vote and Voting Rights
The holders of record of outstanding First Houston Common Stock and
outstanding First Houston Preferred Stock at the close of business on August 15,
1997 (the "Record Date") will be entitled to notice of and to vote at the
Meeting. At the close of business on the Record Date, 2,229,738 shares of First
Houston Common Stock and 21,375 shares of First Houston Preferred Stock were
issued and outstanding and entitled to vote at the Meeting. Each holder of First
Houston Capital Stock will be entitled to one vote for each share of First
Houston Common Stock or each share of First Houston Preferred Stock,
respectively, owned of record on the Record Date on each of the Merger Proposal
and the Charter Proposal. The holders of First Houston Common Stock and the
holders of First Houston Preferred Stock will vote as separate classes and the
affirmative vote of two-thirds of each class is required to approve and adopt
the Merger Agreement, the Merger and the consummation of the transactions
contemplated thereby (the "Merger Proposal") and the Charter Proposal, pursuant
to which the First Houston Charter to delete paragraph (h)(4) of the Certificate
of Designation establishing the First Houston Preferred Stock. The form of the
Charter Proposal is attached hereto as Appendix B to this Proxy Statement.
Proxies
Proxies, in the form enclosed, which are properly executed by the
Shareholders and returned to First Houston and not subsequently revoked, will be
voted at the Meeting in accordance with the directions specified thereon, and
otherwise in accordance with the judgment of the persons designated as proxies.
Any properly executed proxy on which voting instructions are not specified will
be voted for approval of each of the Merger Proposal and the Charter Proposal. A
proxy may be revoked at any time before it is voted by giving written notice to
the Secretary of First Houston, by execution of a proxy of a later date filed
with the Secretary of First Houston at or before the Meeting or by voting in
person at the Meeting.
PROPOSAL NO. 1: THE MERGER
The terms of the Merger Agreement provide that at the effective time of the
Merger (the "Effective Time"), (i) each of the outstanding shares of First
Houston's common stock, par value $1.00 per share ("First Houston Common Stock")
(other than shares with respect to which statutory dissenters' rights have been
perfected), will be converted into and become the right to receive the number of
shares of Sterling common stock, par value $1.00 per share (the "Sterling Common
Stock") equal to the Exchange Ratio (as defined herein) and (ii) each of the
outstanding shares of First Houston's preferred stock, par value $40.00 per
share ("First Houston Preferred Stock" and, together with First Houston Common
Stock, "First Houston Capital Stock"), will be converted into and become the
right to receive the number of shares of Sterling Common Stock equal to the
product of the Exchange Ratio times 10. The Exchange Ratio is subject to
adjustment based upon the book value of the Sterling Common Stock and First
Houston's shareholders' equity and the net income of First Houston, as of the
end of the month preceding the date of closing of the Merger (the "Adjustment
Date"). The "Exchange Ratio" is defined in the Merger Agreement and is a
fraction, the numerator of which is 1,724,793 shares of Sterling Common Stock,
plus or minus certain adjustments specified in the Merger Agreement, and the
denominator of which is 2,443,488 shares of First Houston Common Stock (the
number of fully diluted shares of First Houston Common Stock outstanding as of
June 30, 1997). As of July 31, 1997, the Exchange Ratio would have been 0.689.
As a result, if the Merger had been consummated in August 1997, First Houston
shareholders would have received 0.689 of a share of Sterling Common Stock for
each share of First Houston Common Stock. See "Proposal No. 1: Approval of the
Merger Proposal -- Information About the Merger -- General -- Merger
Consideration." Because the Exchange Ratio remains subject to adjustment through
the Adjustment Date based on, among other things,
8
<PAGE> 11
certain shareholders equity and net income tests of First Houston, the Exchange
Ratio and the Merger consideration will not be finally determined until the
Adjustment Date. Accordingly, Shareholders of First Houston will not know at the
time of their vote the exact number of shares of Sterling Common Stock they will
receive pursuant to the Merger. Cash will be paid in lieu of issuing fractional
shares of First Houston Common Stock. Sterling currently estimates that
approximately 1.7 million shares of Sterling Common Stock will be issued to the
Shareholders of First Houston. If prior to the Meeting, the Exchange Ratio
decreases materially below 0.689, a supplement to this Proxy Statement will be
distributed to First Houston shareholders describing such decrease and the
reasons for such decrease, and proxies will be resolicited. For a more detailed
description of the merger consideration and the computation of the Exchange
Ratio, see "Information About the Merger -- General." A copy of the Merger
Agreement is attached to this Proxy Statement as Appendix A, and the statements
with respect thereto contained in this Proxy Statement are intended only to
indicate the general scope and intent of the Merger Agreement. Each Shareholder
should read the Merger Agreement for a complete description of the proposed
transaction.
The following table sets forth, as of March 18, 1997 (the date of the
Merger Agreement) and July 31, 1997, the Exchange Ratio and the consideration
per share for First Houston Common Stock (assuming the conversion of all of the
First Houston Preferred Stock) based upon such Exchange Ratio and the closing
sales price of Sterling Common Stock on such dates. For a discussion of the
computation of the Exchange Ratio, see "Proposal No. 1: Approval of the Merger
Proposal -- Information About the Merger -- General."
<TABLE>
<CAPTION>
CONSIDERATION PER
EXCHANGE SHARE OF FIRST HOUSTON
DATE RATIO COMMON STOCK
---- -------- ----------------------
<S> <C> <C>
March 18, 1997........................................... 0.707 $10.90(1)
July 31, 1997............................................ 0.689 $12.23(2)
</TABLE>
- ---------------
(1) On March 18, 1997, the closing sales price of Sterling Common Stock was
$15.50.
(2) On July 31, 1997, the closing sales price of Sterling Common Stock was
$17.75.
Directors' Approval. The Board of Directors of First Houston, after due
consideration and evaluation, has concluded that the Merger Agreement, the
Merger and the consummation of the transactions contemplated thereby are fair to
and in the best interests of First Houston and its Shareholders and, by
resolution, has unanimously approved the Merger Proposal and recommends that it
be approved and adopted by the Shareholders at the Meeting. First Houston did
not engage a financial advisor to render a fairness opinion with respect to the
Merger Proposal. See "Proposal No. 1: Approval of the Merger
Proposal -- Background of the Transaction" and " -- Reasons for Approval of the
Merger." In addition, the First Houston Board has unanimously approved the
proposed amendment to the First Houston Charter, the form of which is attached
as Appendix B to this Proxy Statement and recommends that the Charter Proposal
be approved by the Shareholders at the Meeting.
Following the Merger, First Houston will become a subsidiary of a larger,
multi-bank holding company, which the Board of Directors of First Houston
believes will enable First Houston to better serve the needs of its existing
community and better compete with other financial institutions in its market
area. In addition, the holders of First Houston Common Stock and First Houston
Preferred Stock will benefit from acquiring an equity interest in a profitable,
well-run banking organization whose shares are actively traded on the Nasdaq
National Market under the trading symbol "SBIB." See "Proposal No. 1: Approval
of the Merger Proposal -- Reasons for Approval of the Merger" and "Market Prices
of Sterling Common Stock and Dividend Policy of Sterling."
Merger Consideration. Subject to the provisions of the Merger Agreement, at
the Effective Time each share of First Houston Common Stock issued and
outstanding immediately prior to the Effective Time will be converted into and
become the right to receive a fractional number of shares of Sterling Common
Stock equal to the Exchange Ratio and each share of First Houston Preferred
Stock issued and outstanding prior to the Effective Time 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
product of the Exchange Ratio times 10.
9
<PAGE> 12
Sterling will not issue any certificates for fractional shares of Sterling
Common Stock in connection with Merger 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 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 (as defined herein), on behalf of all such holders, of the
aggregate fractional shares of Sterling Common Stock otherwise issuable pursuant
to the Merger Agreement. All capitalized terms not previously defined in this
Proxy are defined in the section of this Proxy Statement titled "Proposal No. 1:
Approval of the Merger Proposal." See "Proposal No. 1: Approval of the Merger
Proposal."
Description of Sterling Common Stock. There are 12,040,942 shares of
Sterling Common Stock outstanding as of June 30, 1997. Each holder of Sterling
Common Stock is entitled to one vote for each share of the Sterling Common Stock
held of record. Cumulative voting in the election of directors is not permitted.
No holder of Sterling Common Stock has a preemptive right to acquire his pro
rata portion of any additional unissued or treasury securities issued by
Sterling. See "Description of Sterling Capital Stock." Dividends on the Sterling
Common Stock are paid if and when the Board of Directors of Sterling, in its
sole discretion, shall declare such dividends out of funds legally available
therefor. The Sterling Common Stock is quoted on the Nasdaq National Market
under the symbol "SBIB". See "Risk Factors -- Restrictions on Paying Dividends"
and "Market Prices of Sterling Common Stock and Dividend Policy of Sterling."
Dissenters' Rights. Under the Texas Business Corporation Act ("TBCA"), a
Shareholder has the right to dissent from the Merger and receive payment in cash
of the fair value of his shares of First Houston Common Stock or First Houston
Preferred Stock, as the case may be, by (i) filing a written objection to the
Merger with Sterling prior to the Meeting and by not voting in favor of the
Merger at the Meeting; and (ii) within 10 days after receiving notice that the
Merger was effected, making a written demand on Sterling for payment of the fair
value of his shares. A Shareholder must follow the exact procedure required by
the TBCA in order to properly exercise his dissenter's rights of appraisal and
avoid waiver of those rights. See "Dissenters' Rights." For a more detailed
description of the statutory dissenters' rights procedure, see the applicable
provisions of the TBCA which are reproduced in full as Appendix C to this Proxy
Statement.
Federal Income Taxes. The Merger has been structured to qualify as a
reorganization within the meaning of Section 368(a)(1)(A) of the Internal
Revenue Code of 1986, as amended (the "Code"). Chamberlain, Hrdlicka, White,
Williams & Martin, special counsel to First Houston, will render an opinion to
First Houston that the exchange of stock with Sterling in the Merger will be a
tax-free exchange with no current federal income tax consequences to either
First Houston or the First Houston Shareholders. Accordingly, a Shareholder who
receives only Sterling Common Stock in exchange for his First Houston Common
Stock or First Houston Preferred Stock will not realize taxable gain or loss
upon consummation of the Merger. Cash received by a Shareholder in lieu of
fractional shares of Sterling Common Stock or in connection with a Shareholder's
exercise of dissenters' rights of appraisal will be taxable to such a
Shareholder. Receipt by First Houston of such opinion is a condition to
consummation of the Merger, which condition could be waived by Sterling if such
law firm is unable to render such opinion. If prior to the Effective Time the
federal income tax consequences are expected to be materially different than
those described in this Proxy Statement and the Merger Agreement has not been
terminated, a supplement to this Proxy Statement, containing a description of
such expected tax consequences, will be distributed to, and proxies will be
resolicited from, First Houston's shareholders. See "Federal Income Tax
Consequences of the Merger."
Conditions to Consummation of the Merger. The Merger Agreement provides
that the consummation of the Merger is subject to a number of conditions,
including the approval by the Shareholders of First Houston of each of the
Merger Proposal and the Charter Proposal, the amendment of the First Houston
Charter as contemplated by the Charter Proposal, the qualification of the Merger
for treatment under applicable accounting rules as a pooling of interests and
the receipt of all regulatory approvals. An additional condition is that the
holders of more than 9.9% of either class of the First Houston Common Stock or
the First Houston Preferred Stock, may not have exercised their dissenters'
rights of appraisal in connection with the Merger. In
10
<PAGE> 13
addition to these requirements, the individual obligations of First Houston and
Sterling are each subject to compliance by the other with their respective
covenants, confirmation of their respective representations and warranties and
certain legal matters as set forth in the Merger Agreement. If the Merger is not
consummated by October 31, 1997, either First Houston or Sterling may terminate
the Merger Agreement without liability to the other party. See "Proposal No. 1:
Approval of the Merger Proposal -- Conditions to Consummation of the Merger."
For a more detailed description of the conditions to the Merger, see the Merger
Agreement attached to this Proxy Statement as Appendix A. Sterling and First
Houston anticipate that the closing of the Merger will occur as soon as possible
following approval of the Merger Proposal and the Charter Proposal by the First
Houston shareholders.
Termination. The First Houston Board may terminate the Merger Agreement in
certain instances, including at any time during the 10-day period commencing two
days after the Adjustment Date if the average closing price of Sterling Common
Stock for the ten consecutive trading days preceding the Adjustment Date is less
than $10.66 and the Nasdaq Composite Bank Index as of the Adjustment Date is not
less than 1150. On August , 1997, the last trading day prior to the date of
this Proxy Statement, the closing price of the Sterling Common Stock was $
and the Nasdaq Composite Bank Index was . If an
event allowing the First Houston Board of Directors to terminate the Merger
Agreement occurs prior to the Meeting, the Board of Directors of First Houston,
in making a determination whether to exercise such termination right, will
consider such matters as it then determines to be appropriate in light of its
fiduciary duties to act on an informed basis, in the best interests of First
Houston's stockholders and in a disinterested manner. If such a termination
right becomes exercisable and the First Houston Board of Directors determines
not to exercise such right (other than in the case of the breach of a
representation or warranty of Sterling or the failure by Sterling to perform an
obligation which, in either case, the First Houston Board of Directors believes
will not have a material adverse effect on the First Houston shareholders), a
supplement to this Proxy Statement containing a description of such matter and
the conclusion(s) of First Houston's Board of Directors with respect to such
matter will be distributed to First Houston shareholders, and proxies will be
resolicited. See "Proposal No. 1: Approval of the Merger Proposal -- Termination
and Amendment -- Termination."
Regulatory Approval. Among other approvals, the approval of the Board of
Governors of the Federal Reserve System ("Federal Reserve Board") is required to
consummate the Merger. On June 18, 1997, Sterling filed an application with the
Federal Reserve Board for prior approval to acquire First Houston. On August 7,
1997, the Federal Reserve Board granted such approval.
ACCOUNTING TREATMENT
It is expected (and is a condition to Sterling's obligation to consummate
the Merger) that the Merger be accounted for under the pooling of interest
method. See "Proposal No. 1: Approval of the Merger Proposed -- Accounting
Treatment."
COMPARATIVE RIGHTS OF SHAREHOLDERS AND CHARTER DOCUMENTS
There are no material differences between the rights of holders of Sterling
Common Stock and First Houston Common Stock and between the Sterling Charter and
the First Houston Charter.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of First Houston's management and the First Houston Board
may be deemed to have interests in the Merger in addition to their interests as
First Houston shareholders generally, which may cause potential conflicts of
interest. The First Houston Board was aware of these factors and considered
them, among other factors, in approving the Merger. Among these factors are (i)
the indemnification provisions of the Merger Agreement as described under
"Proposal No. 1: Approval of the Merger Agreement -- Interests of Certain
Persons in the Merger", (ii) the payment by Sterling of premiums for directors'
and officers' liability insurance for First Houston directors and officers as
described under "Proposal No. 1: Approval of the Merger Agreement -- Interest of
Certain Persons in the Merger." and (iii) certain bonus and severance payments
as described under "Proposal No. 1: Approval of the Merger
Agreement -- Interests of Certain
11
<PAGE> 14
Persons in the Merger." Charles M. Neff, the President, Chief Executive Officer
and a director of First Houston, will serve as an officer and director of
Sterling Bank and the Chairman of the First Houston Board will serve as a
Sterling director. See "Proposal No. 1: Approval of the Merger
Agreement -- Interests of Certain Persons in the Merger."
As of June 30, 1997, the principal shareholders, executive officers and
directors of First Houston beneficially owned an aggregate of 921,762 shares of
the outstanding First Houston Common Stock (including First Houston Preferred
Stock). Based upon the Exchange Ratio computed as of July 31, 1997, such
directors and officers would be entitled to receive an aggregate of
approximately 635,094 shares of Sterling Common Stock pursuant to the Merger.
Sterling intends to offer a severance package consisting of two weeks base
salary for each year of service to those First Houston employees who are
terminated without cause within six months following the Effective Time.
Pursuant to such arrangement, Mr. Neff, James L. Hall, Executive Vice President,
Chief Financial Officer and a director of First Houston, and Michael J. Moser,
Executive Vice President of Houston National and an advisory director of First
Houston, would be entitled to payments of approximately $43,800, $36,900 and
$14,200, respectively, if they were so terminated. The First Houston Board of
Directors has also approved the payment, as of December 31, 1996, of bonuses to
employees to reward such employees for their services prior to such date. The
payment of such bonuses is not contingent upon the Merger, and such bonuses are
expected to be paid in the third quarter of 1997. Messrs. Hall and Moser will be
entitled to bonuses of $40,000 and $15,000, respectively. Mr. Neff will not be
entitled to any such bonus.
RISK FACTORS
Ownership of Sterling Common Stock involves certain risks. In considering
how to vote with respect to the Merger and whether to dissent therefrom,
Shareholders should carefully examine the "Risk Factors" section of this Proxy
Statement, as well as other pertinent information set forth in this Proxy
Statement. See "Risk Factors."
PROPOSAL NO. 2: THE CHARTER PROPOSAL
Pursuant to the Merger Agreement, First Houston has agreed to amend the
First Houston Charter to delete paragraph (h)(4) of the Certificate of
Designation establishing the First Houston Preferred Stock. Approval and
implementation of the Charter Proposal is a condition to consummation of the
Merger (unless all shares of First Houston Preferred Stock have been converted
into First Houston Common Stock). Such paragraph (h)(4) generally provides that
if First Houston engages in certain specified transactions (which includes a
merger such as the Merger), then as a condition to consummation of such
transaction provision must be made such that the holders of the First Houston
Preferred Stock would be entitled to receive in such transaction securities of
the surviving corporation of such transaction having the rights to receive upon
conversion the same consideration as such holder would have received if the
shares had been converted into First Houston Common Stock immediately prior to
consummation of the transaction.
As a condition to consummation of the Merger, Sterling has required that
the Charter Proposal be approved and implemented. In addition, as a condition to
entering into the Merger Agreement, Sterling required that First Houston agree
to solicit the affirmative vote of the Shareholders "FOR" the Charter Proposal
at the Meeting.
If the Merger Proposal and the Charter Proposal are both approved, the
amendment to the First Houston Charter authorized in the Charter Proposal will
be filed with the Office of the Secretary of State of Texas, and will be
effective, immediately prior to the effective Time of the Merger. For additional
information regarding the Charter Proposal, see "Proposal No. 2: Approval of the
Charter Proposal."
THE BOARD OF DIRECTORS OF FIRST HOUSTON RECOMMENDS THAT THE SHAREHOLDERS
VOTE "FOR" APPROVAL OF THE MERGER PROPOSAL AND THE CHARTER PROPOSAL.
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<PAGE> 15
VOTING AND PRINCIPAL SHAREHOLDERS
Unless a Shareholder otherwise specifies thereon, proxies will be voted in
favor of the Merger Proposal and the Charter Proposal. In each case where the
Shareholder has appropriately specified how his proxy is to be voted, it will be
voted in accordance with such specification. Any Shareholder has the power to
revoke his proxy at any time before it is voted by giving written notice of such
revocation to the Secretary of First Houston at 5757 Memorial Drive, Houston,
Texas 77007, by executing a new proxy filed with the Secretary of First Houston
at or prior to the Meeting or by voting in person at the Meeting.
The Record Date for the determination of Shareholders entitled to notice of
and to vote at the Meeting has been fixed at 5:00 p.m. on August 15, 1997. First
Houston has advised Sterling that, as of such Record Date, there were 2,229,738
shares of First Houston Common Stock and 21,375 shares of First Houston
Preferred Stock issued and outstanding, and that each share is entitled to one
vote at the Meeting.
There are no other classes of capital stock of First Houston authorized or
outstanding. As of the Record Date, there were approximately 139 holders of
record of First Houston Common Stock and 14 holders of record of First Houston
Preferred Stock. The affirmative vote of the holders of not less than (i)
two-thirds of the outstanding shares of First Houston Common Stock and (ii)
two-thirds of the outstanding shares of First Houston Preferred Stock is
required for the approval of each of the Merger Proposal and the Charter
Proposal. Each share of First Houston Common Stock and First Houston Preferred
Stock is entitled to one vote, and the holders of First Houston Common Stock and
First Houston Preferred Stock shall vote separately and not as a single class. A
failure to vote, either by abstention or non-vote, will have the same effect as
a vote against the approval of the Merger Proposal and the Charter Proposal.
As of the date of this Proxy Statement, the following persons own
beneficially 5% or more of the outstanding First Houston Common Stock: John B.
Carter, Jr., Gordon Cain, Michael T. Judd and John E. McFarlane. In addition,
Messrs. Carter and Judd own beneficially 11.7% and 9.4%, respectively, of the
outstanding First Houston Preferred Stock. All of the executive officers and
directors of First Houston as a group (15 persons) own 864,262 shares, or
approximately 38.8%, of the issued and outstanding First Houston Common Stock
and 5,750 shares, or approximately 26.9%, of the outstanding First Houston
Preferred Stock. See "Management of First Houston -- Stock Ownership of
Executive Officers and Directors." All of the executive officers and directors
of First Houston have indicated an intention to vote in favor of the Merger and
the Charter Proposal. Since the executive officers and directors of First
Houston, as a group, own less than two-thirds of the issued and outstanding
shares of the First Houston Common Stock and the First Houston Preferred Stock,
the votes of Shareholders of First Houston other than the executive officers and
directors will be requested to achieve the necessary votes required to approve
the Merger Proposal and the Charter Proposal. The Board of Directors of First
Houston recommends that the Shareholders vote "FOR" approval of the Merger
Proposal and the Charter Proposal. See "Information About the Merger -- Reasons
for Approval of the Merger."
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<PAGE> 16
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA OF STERLING
The following table sets forth summary consolidated historical data for the
periods indicated and should be read in connection with the financial
information included in Sterling's 1996 Annual Report on Form 10-K for the year
ended December 31, 1996 delivered in connection with this Proxy Statement. The
data for the six months ended June 30, 1997, and 1996 has been derived from, and
should be read in connection with, the Quarterly Report on Form 10-Q, as
amended, for the six months ended June 30, 1997 delivered in connection with
this Proxy Statement. See "Available Information" and "Incorporation of Certain
Documents by Reference." In the opinion of Sterling management, all adjustments
considered necessary for a fair presentation have been included in the unaudited
interim data. Interim results for the six months ended June 30, 1997 are not
necessarily indicative of results which may be expected for future periods,
including the year ending December 31, 1997.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF INCOME:
Interest income................................ $ 31,755 $ 25,362 $ 53,413 $ 46,734 $ 39,735 $ 27,231 $ 26,136
Interest expense............................... 9,835 8,059 16,727 14,557 11,140 7,301 8,699
Net interest income............................ 21,920 17,303 36,686 32,177 28,595 19,930 17,437
Provision for credit losses.................... 1,210 1,033 2,113 919 921 856 808
Non-interest income............................ 4,157 3,766 7,964 7,536 7,135 4,424 3,690
Non-interest expense........................... 16,736 12,866 27,134 25,781 24,458 15,661 13,266
Income before income taxes..................... 8,131 7,170 15,403 13,013 10,351 7,837 7,053
Income taxes................................... 2,684 2,236 4,749 4,147 3,200 2,474 2,274
Net income..................................... 5,447 4,934 10,654 8,866 7,151 5,363 4,779
PER SHARE DATA(1):
Net earnings per share (fully diluted)......... $ 0.44 $ 0.41 $ 0.86 $ 0.73 $ 0.60 $ 0.45 $ 0.52
Cash dividend paid per common share............ 0.055 0.048 0.19 0.14 0.12 0.11 --
Book value per share at period-end............. 5.43 4.53 4.97 4.22 3.38 3.09 3.58
Tangible book value per share at period-end.... 5.30 4.38 4.82 4.03 3.17 2.85 3.48
Weighted average common and common equivalent
shares....................................... 12,512 11,975 12,340 12,117 11,883 11,824 9,248
BALANCE SHEET DATA (AT PERIOD END):
Total assets................................... $924,229 $690,877 $790,073 $647,349 $598,654 $553,196 $380,435
Loans, net of unearned discount................ 582,807 448,434 497,429 392,645 328,560 291,762 205,356
Allowance for credit losses.................... 6,960 6,334 6,578 5,907 5,810 5,044 3,373
Investment securities.......................... 215,708 153,209 152,253 167,512 191,957 192,919 115,135
Deposits....................................... 792,780 625,231 717,413 574,724 538,335 481,677 337,631
Notes payable and senior debentures............ -- 4,800 4,000 5,800 8,050 12,900 2,300
Trust preferred securities..................... 28,750 -- -- -- -- -- --
Shareholders' equity........................... 65,372 54,087 59,407 49,691 39,623 35,792 33,077
SELECTED PERFORMANCE RATIOS:
Return on average assets....................... 1.33% 1.50% 1.53% 1.48% 1.26% 1.37% 1.42%
Return on average shareholders' equity......... 17.58 19.04 19.40 19.87 18.76 15.24 20.83
Net interest margin (tax equivalent)........... 6.09 5.99 6.03 6.10 5.72 5.72 5.81
Dividend payout ratio.......................... 25.48 23.25 21.54 19.38 19.85 23.53 --
ASSET QUALITY RATIOS:
Non-performing loans to total period-end
loans........................................ 0.51% 0.61% 0.55% 0.87% .80% 1.04% 0.60%
Period-end non-performing assets to total
assets....................................... 0.54 0.74 0.64 0.80 0.72 1.03 1.30
Period-end allowance for credit losses to non-
performing loans............................. 234.98 233.55 242.56 173.38 221.09 166.91 271.80
Period-end allowance for credit losses to total
loans........................................ 1.21 1.43 1.32 1.50 1.77 1.73 1.64
Net charge-offs to average loans............... 0.32 0.30 0.33 0.23 .05 0.34 0.18
LIQUIDITY AND CAPITAL RATIOS:
Average loans to average deposits.............. 69.16% 69.64% 70.4% 68.69% 61.22% 61.31% 60.87%
Period-end shareholders' equity to total
assets....................................... 7.07 7.83 7.52 7.68 6.62 6.47 8.69
Average shareholders' equity to average
assets....................................... 7.55 7.86 7.89 7.46 6.71 8.99 6.84
Period-end Tier 1 capital to risk weighted
assets(2).................................... 12.43 10.59 10.27 10.82 10.41 9.75 13.13
Period-end total capital to risk weighted
assets(2).................................... 14.45 11.88 11.44 12.07 11.67 10.99 14.38
Period-end Tier 1 leverage ratio (tangible
shareholders' equity to total average
assets)(2)................................... 11.60 8.68 8.03 7.66 6.57 5.96 8.69
</TABLE>
- ---------------
(1) Per share data for all periods and dates have been adjusted to give effect
to a three-for-two stock split in the form of a stock dividend paid in
February 1997.
(2) Calculated in accordance with regulations in effect at December 31, 1996.
14
<PAGE> 17
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA OF FIRST HOUSTON
The following table sets forth summary financial information for First
Houston for the periods of January 1, 1992 through December 31, 1996 and for the
six months ended June 30, 1996 and June 30, 1997. This table and the information
set forth therein are qualified in their entirety by, and should be read in
conjunction with, the detailed financial information set forth elsewhere in this
Proxy Statement. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Interim results for the
six months ended June 30, 1997 are not necessarily indicative of results which
may be expected for future periods, including the year ending December 31, 1997.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- ----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF INCOME:
Interest income............................. $ 4,879 $ 4,041 $ 8,758 $ 7,534 $ 4,740 $ 3,474 $ 3,499
Interest expense............................ 1,672 1,437 3,080 2,714 1,304 913 1,112
Net interest income......................... 3,207 2,604 5,678 4,820 3,436 2,561 2,387
Provision for credit losses................. 190 98 230 230 505 195 627
Non-interest income......................... 298 298 634 532 605 632 733
Non-interest expense........................ 2,300 2,025 5,220 4,048 2,713 2,422 2,422
Income before income taxes.................. 1,015 779 862 1,074 823 576 51
Income taxes................................ 344 234 363 257 272 23 --
Net income.................................. 671 545 499 817 551 553 51
PER SHARE DATA:
Net income per share (fully diluted)........ $ 0.31 $ 0.26 $ 0.23 $ 0.47 $ 0.45 $ 0.45 $ 0.04
Cash dividends paid per common share........ -- 0.10 0.20 0.20 0.15 0.12 0.06
Book value per common share................. 3.58 3.40 3.26 3.25 3.31 3.07 2.64
Tangible book value per share............... 3.56 3.26 3.21 3.21 2.79 3.07 2.64
Weighted average common and common
equivalent shares......................... 2,163 2,098 2,097 1,746 1,232 1,232 1,232
BALANCE SHEET DATA:
Total assets................................ $ 136,452 $119,365 $132,257 $120,623 $ 73,962 $ 56,879 $ 50,928
Loans, net of unearned discount............. 64,857 49,855 56,896 48,730 43,978 33,506 30,210
Allowance for credit losses................. 548 463 475 558 507 434 515
Investment securities....................... 50,714 45,500 53,212 48,864 22,537 8,536 7,585
Deposits.................................... 126,064 110,762 122,931 112,401 69,564 52,024 46,641
Notes payable and senior debentures......... -- -- -- -- -- -- --
Shareholders' equity........................ 8,791 7,686 7,597 7,589 4,286 4,631 4,112
SELECTED PERFORMANCE RATIOS:
Return on average assets.................... 1.03% 0.95% 0.41% 0.79% 0.85% 1.11% 0.11%
Return on average shareholders' equity.... 16.41 13.94 6.28 13.02 11.79 12.41 1.18
Net interest margin (tax equivalent)........ 5.26 4.89 5.08 5.04 5.87 5.79 5.72
Dividend payout ratio....................... 0.00 38.50 86.96 42.55 33.33 26.67 150.00
ASSET QUALITY RATIOS:
Non-performing loans to total period-end
loans..................................... 0.00% 1.02% 0.41% 1.16% 0.25% 0.97% 2.49%
Period-end non-performing assets to total
assets.................................... 0.06 0.58 0.21 0.47 0.15 0.57 1.48
Period-end allowance for credit losses to
nonperforming loans....................... 27,400.00 90.96 201.27 98.24 460.91 133.54 68.48
Period-end allowance for credit losses to
total loans............................... 0.84 0.93 0.83 1.14 1.15 1.29 1.69
Net charge-offs to average loans............ 0.19 0.39 0.61 0.37 1.13 0.86 1.74
LIQUIDITY AND CAPITAL RATIOS:
Average loans to average deposits........... 51.48% 46.32% 45.63% 49.68% 63.26% 70.22% 66.12%
Period-end shareholders' equity to total
assets.................................... 6.44 6.44 5.74 6.29 5.79 8.16 8.07
Average shareholders' equity to average
assets.................................... 6.29 6.84 6.61 6.06 7.17 8.90 9.13
Period-end Tier 1 capital to risk weighted
assets(1)................................. 12.30 14.38 12.40 13.30 9.45 12.84 13.15
Period-end total capital to risk weighted
assets(1)................................. 13.07 15.21 13.20 14.30 10.35 14.09 14.40
Period-end Tier 1 leverage ratio (tangible
share holders' equity to total average
assets)(1)................................ 6.79 6.99 6.31 7.33 6.58 9.25 8.67
</TABLE>
- ---------------
(1) Calculated in accordance with regulations in effect at December 31, 1996.
15
<PAGE> 18
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA
The following summary pro forma consolidated financial data combines the
historical consolidated financial statements of Sterling and First Houston as if
the Merger had occurred on January 1, 1996 after giving effect to the pro forma
adjustments described in the notes to the pro forma consolidated financial
statements included elsewhere in this Proxy Statement. See the Pro Forma
Consolidated Financial Statements included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
AT OR FOR THE SIX
MONTHS ENDED AT OR FOR THE
JUNE 30, YEAR ENDED
---------------------- DECEMBER 31,
1997 1996 1996
---------- -------- -------------
(IN THOUSANDS, EXCEPT FOR PER SHARE
AMOUNTS AND RATIOS)
<S> <C> <C> <C>
SUMMARY OF INCOME:
Interest income............................................. $ 36,634 $ 29,403 $ 62,171
Interest expense............................................ 11,507 9,496 19,807
Net interest income......................................... 25,127 19,907 42,364
Provision for credit losses................................. 1,400 1,131 2,343
Non-interest income......................................... 4,455 4,064 8,598
Non-interest expense........................................ 19,036 14,891 32,354
Income before income taxes.................................. 9,146 7,949 16,265
Income taxes................................................ 3,028 2,470 5,112
Net income.................................................. 6,118 5,479 11,153
PER SHARE DATA:(1)
Net income per share (fully diluted)........................ $ 0.43 $ 0.40 $ 0.80
Cash dividends paid per common share........................ 0.055 0.048 0.19
Book value per common share................................. 5.40 4.56 4.91
Tangible book value per share............................... 5.29 4.45 4.79
Weighted average common and common equivalent shares........ 14,196 13,659 14,024
BALANCE SHEET DATA:
Total assets................................................ $1,060,681 $810,242 $922,330
Loans, net of unearned discount............................. 647,664 491,954 554,325
Allowance for credit losses................................. 7,508 6,797 7,053
Investment securities....................................... 266,422 199,244 205,465
Deposits.................................................... 918,844 735,993 840,344
Notes payable and senior debentures......................... -- 4,800 4,000
Trust preferred securities.................................. 28,750 -- --
Shareholders' equity........................................ 74,163 62,069 67,004
SELECTED PERFORMANCE RATIOS:
Return on average assets.................................... 1.29% 1.42% 1.37%
Return on average shareholders' equity...................... 17.46 18.39 17.74
Net interest margin......................................... 6.02 5.83 5.80
Dividend payout ratio....................................... 25.48 23.25 21.54
ASSET QUALITY RATIOS:
Non-performing loans to total period-end loans.............. 0.46% 0.65% 0.53%
Period-end non-performing assets to total assets............ 0.48 0.71 0.58
Period-end allowance for credit losses to non-performing
loans..................................................... 253.31 211.02 239.25
Period-end allowance for credit losses to total loans....... 1.16 1.38 1.27
Net charge-offs to average loans............................ 0.33 0.35 0.36
LIQUIDITY AND CAPITAL RATIOS:
Average loans to average deposits........................... 66.70% 66.10% 66.68%
Period-end shareholders' equity to total assets............. 6.99 7.66 7.26
Average shareholders' equity to average assets.............. 7.38 7.71 7.70
Period-end Tier 1 capital to risk weighted assets(2)........ 12.42 10.98 10.41
Period-end total capital to risk weighted assets(2)......... 14.32 12.22 11.53
Period-end Tier 1 leverage ratio (tangible shareholders'
equity to total average assets)(2)........................ 11.02 8.49 7.79
</TABLE>
- ---------------
(1) Per share data for all periods and dates have been adjusted retroactively to
give effect to a three-for-two stock split in the form of a stock dividend
distributed by Sterling in February 1997.
(2) Calculated in accordance with regulations in effect at December 31, 1996.
16
<PAGE> 19
RECENT DEVELOPMENTS
On June 6, 1997 Sterling sold $28,750,000 of trust preferred securities
(the "Preferred Securities") issued by Sterling Bancshares Capital Trust I, a
Delaware business trust (the "Trust"), in an underwritten public offering.
Proceeds from the sale by the Trust of the Preferred Securities were used by the
Trust to purchase $28,750,000 principal amount of 9.28% Junior Subordinated
Debentures due 2027 issued by Sterling. Under certain circumstances, the
maturity date of the Junior Subordinated Debentures may be shortened to 2002 if
certain conditions are met. The Preferred Securities will have a preference over
the common trust securities (all of which are owned by Sterling) under certain
circumstances with respect to cash distributions and amounts payable on
liquidation, redemption or otherwise. So long as an event of default has not
occurred, Sterling can elect to defer payments of interest on the Junior
Subordinated Debentures at any time and from time to time for a period not
exceeding 20 consecutive quarterly periods. Sterling has guaranteed all of the
Trust's obligations under the Preferred Securities. Such guarantee is unsecured
and will rank junior and subordinate in right of payment to specified senior
indebtedness. Sterling expects that Preferred Securities having an aggregate
liquidation amount of approximately $20 million will be eligible to qualify as
Tier I capital under the capital guidelines of the Federal Reserve, and that the
balance will be eligible to qualify as Tier 2 capital. Sterling used $3.6
million of the net proceeds from the sale of the Junior Subordinated Debentures
to repay existing indebtedness. The balance will be used for general corporate
purposes. The pro forma financial data included in this Proxy Statement does not
give effect to the completion of such issuance and sale of the Preferred
Securities and Junior Subordinated Debentures.
17
<PAGE> 20
RISK FACTORS
In connection with their consideration of the proposed Merger, Shareholders
should carefully examine this entire Proxy Statement and give particular
consideration to the risks set forth below.
DEPENDENCE UPON LOCAL ECONOMIC CONDITIONS
Sterling's profitability is dependent on the profitability of Sterling
Bank. Sterling Bank derives substantially all of its loans, deposits and other
business from the greater Houston metropolitan area. The banking industry in
Texas and Houston is affected by general economic conditions such as inflation,
recession, unemployment and other factors beyond Sterling's control. During the
mid-1980's, severely depressed oil and gas and real estate prices materially and
adversely affected the Texas and Houston economies, causing a severe recession
and significant unemployment in the region. More recently, the Houston and Texas
economies have improved considerably which has been partially attributable to
expansion into non-energy related industries. As Houston has diversified, its
economy has become more susceptible to adverse developments affecting the
national economy. There can be no assurance, however, that Sterling will be able
to withstand adverse changes in the Houston economy should they occur, or that
adverse developments in general economic conditions in the national or local
economy will not adversely affect Sterling's financial condition or results of
operations. Accordingly, Sterling will remain subject to risks associated with
prolonged declines in either the local or national economies.
RELIANCE ON OWNER-OPERATED BUSINESS MARKET
Sterling's business development and marketing strategy is primarily
targeted toward serving the banking and financial services needs of
owner-operated businesses. The owner-operated business market, which Sterling
defines as businesses with annual sales between $300,000 and $30 million,
represents a major sector of the Houston economy that has played an important
role in recent years in generating job growth and improving the overall health
of the Houston economy. While Sterling believes that this market niche will
continue to play a key role in the future success of the Houston economy, there
can be no assurances that economic conditions affecting this market will
continue to be favorable or that this market will not experience any adverse
developments, which, in time, could adversely affect Sterling's financial
condition or results of operations. In addition, no assurance can be given that
Sterling's financial condition or results of operations will not be adversary
affected if Sterling is unable to maintain or expand its share of the
owner-operated business market or is required, due to changing business and
economic conditions, to serve other market sectors.
GOVERNMENTAL REGULATION
Sterling and its subsidiaries will continue to be subject to extensive
federal and state governmental supervision and regulation, which are intended
primarily for the protection of depositors. In addition, Sterling and its
subsidiaries are subject to changes in federal and state law, as well as changes
in regulations, governmental polices and accounting principles. The effects of
any such potential changes cannot be predicted but could adversely affect the
business and operations of Sterling and its subsidiaries in the future. See
"Supervision and Regulation."
INDEBTEDNESS OF STERLING
Like most banks, Sterling Bank realizes income primarily from the spread
between interest earned on loans and investments and the interest paid on
deposits and borrowings. It is expected that Sterling, from time to time, will
experience "gaps" in the interest rate sensitivities of its assets and
liabilities, meaning that either its interest-bearing liabilities will be more
sensitive to changes in market interest rates than its interest-earning assets,
or vice versa. In either event, if market interest rates should move contrary to
Sterling's position, the "gap" will work against Sterling and its earnings may
be negatively affected. Management actively monitors the interest rate
sensitivities of the assets and liabilities of Sterling and works to prevent any
gaps from approaching imprudent levels.
18
<PAGE> 21
RESTRICTIONS ON PAYING DIVIDENDS
Sterling's ability to pay dividends to its shareholders depends to a large
extent upon the dividends Sterling receives from Sterling Bank (and subsequent
to the Merger from Houston National Bank). Dividends paid by Sterling Bank are
subject to restrictions under various federal and state banking laws. In
addition, both Sterling and Sterling Bank must maintain certain capital levels
which may restrict the ability of Sterling Bank to pay dividends to Sterling and
Sterling to pay dividends to its shareholders. See "Supervision and Regulation"
and "Market Prices of Sterling Common Stock and Dividend Policy of Sterling."
PREEMPTIVE RIGHTS DENIED AND DILUTION
Sterling's Articles of Incorporation, as amended, (the "Sterling Charter")
do not provide shareholders with a preemptive right to subscribe for additional
shares of Sterling Common Stock upon any increase thereof. See "Description of
Sterling Capital Stock -- Sterling Common Stock" and "Comparative Rights of
Shareholders -- Preemptive Rights." Thus, upon the issuance of any additional
shares of Sterling Common Stock or other voting securities of Sterling, or
securities convertible into Sterling Common Stock or other voting securities of
Sterling, Shareholders of First Houston who receive shares of Sterling Common
Stock in the Merger may be unable to maintain their pro rata voting or ownership
interest in Sterling.
ANTI-TAKEOVER PROVISIONS
The Sterling Charter, as well as Texas and certain federal laws and
regulations, will assist Sterling in maintaining its status as an independent
publicly-owned corporation. The Sterling Charter provides for non-cumulative
voting for directors and authorize the Board of Directors to issue shares of
preferred stock without shareholder approval. Shares of preferred stock may be
issued by Sterling in the future without shareholder approval and upon such
terms as the Board of Directors may determine. The rights of the holders of
Sterling Common Stock will be subject to, and may be adversely affected by, the
rights of the holders of any preferred stock of Sterling that may be issued in
the future. The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisition, financings and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, a
controlling interest in Sterling. See "Description of Sterling Capital Stock."
These provisions in Sterling's governing instruments may discourage potential
proxy contests and other takeover attempts, particularly those which have not
been negotiated with the Board of Directors of Sterling. Accordingly, holders of
Sterling Common Stock may be deprived of an opportunity to sell their shares of
Sterling Common Stock at a substantial premium over the market price of such
shares. In addition, federal law also requires the approval of the Federal
Reserve Board prior to the acquisition of "control" of a bank holding company.
See "Supervision and Regulation."
The Board of Directors of Sterling is divided into three classes,
designated Class I, Class II and Class III. Each class of directors consists, as
nearly as possible, of one-third of the total number of directors constituting
the entire Board of Directors. The Sterling Charter provides that the number of
directors will be fixed by, or in the manner provided in, the Bylaws. The Bylaws
provide that the number of directors may be fixed from time to time by
resolution of the Board of Directors. Currently, the Board of Directors of
Sterling consists of 16 members. The term for directors in Class I expires at
the annual meeting of shareholders to be held in 1999; the term for directors in
Class II expires at the annual meeting of shareholders to be held in 2000; and
the term for directors in Class III expires at the annual meeting of
shareholders to be held in 1998. A director of the Company may be removed only
for cause and only upon the affirmative vote of the holders of a majority of the
outstanding capital stock entitled to vote at an election of directors.
Part Thirteen, a recently enacted provision of the TBCA, restricts certain
transactions between a corporation organized under Texas law (or its
majority-owned subsidiaries) and any person holding 20% or more of the
corporation's outstanding voting stock, together with the affiliates or
associates of such person (an "Affiliated Shareholder"). Part Thirteen generally
prohibits a publicly held Texas corporation from engaging in the following
transactions with an Affiliated Shareholder, for a period of three years from
the date the shareholder becomes an Affiliated Shareholder unless certain
conditions described below are met: (a) any
19
<PAGE> 22
merger, share exchange or conversion, (b) sales, leases, exchanges or other
transfers of 10% or more of the aggregate assets of the corporation, (c)
issuances or transfers by the corporation of any stock of the corporation which
would have the effect of increasing the Affiliated Shareholder's proportionate
share of the stock of the corporation, (d) the adoption of a plan or proposal
for the liquidation or dissolution of the corporation proposed by or pursuant to
any arrangement with the Affiliated Shareholder, (e) any other transaction which
has the effect of increasing the proportionate share of the stock of the
corporation which is owned by the Affiliated Shareholder, and (f) receipt by the
Affiliated Shareholder of the benefit (except proportionately as a shareholder)
of loans, advances, guarantees, pledges or other financial benefits provided by
the corporation. Part Thirteen is effective September 1, 1997.
The three-year ban does not apply if either the proposed transaction or the
transaction by which the Affiliated Shareholder became an Affiliated Shareholder
is approved by the board of directors of the corporation prior to the date such
shareholder becomes an Affiliated Shareholder. Business combinations are also
permitted within the three-year period if authorized at a meeting of
shareholders called for that purpose within six months after such shareholder
becomes an Affiliated Shareholder, by the holders of at least 66 2/3% of the
outstanding voting stock not owned by the Affiliated Shareholder.
Prior to December 31, 1997, a corporation has the option of electing to
exclude itself from the coverage of Part Thirteen by amending its articles of
incorporation or bylaws. After December 31, 1997, a corporation may, at its
option, exclude itself from the coverage of Part Thirteen by amending its
articles of incorporation or bylaws by action of its shareholders to exempt
itself from coverage, provided that such charter or bylaw amendment shall not
become effective until 18 months after the date it is adopted and will not apply
to any business combination with an Affiliated Shareholder who became such prior
to the effective date of such amendment. Sterling has not adopted such a charter
or bylaw amendment.
COMPETITION
Sterling and its subsidiaries are subject to vigorous competition in all
aspects and areas of its business from banks and other financial institutions,
including savings and loan associations, savings banks, finance companies,
credit unions and other providers of financial services, such as money market
mutual funds, brokerage firms, consumer finance companies and insurance
companies. Sterling also competes with non-financial institutions, including
retail stores that maintain their own credit programs and governmental agencies
that make available low cost or guaranteed loans to certain borrowers. Sterling
competes in its market area with a number of much larger financial institutions
with substantially greater resources, lending limits, larger branch systems and
a wider array of commercial banking services. See "Business of Sterling --
Competition." Sterling has been able to compete effectively with other financial
institutions by emphasizing customer service, including local office
decision-making on loans, by establishing long term customer relationships and
building customer loyalty, and by providing products and services designed to
address the specific needs of its customers. No assurances may be given,
however, that Sterling will continue to be able to compete effectively with
other financial institutions in the future.
20
<PAGE> 23
PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
The following Pro Forma Consolidated Balance Sheet as of June 30, 1997, and
Consolidated Statements of Income for the year ended December 31, 1996 and the
six months ended June 30, 1997 combine the historical consolidated financial
statements of Sterling and First Houston and are presented as if the Merger had
occurred on January 1, 1996 (in the case of the information relating to 1996)
and January 1, 1997 (in the case of the information relating to 1997), after
giving effect to the pro forma adjustments described in the accompanying notes.
The pro forma consolidated financial statements 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 as of January 1, 1996 or January 1,
1997.
21
<PAGE> 24
STERLING BANCSHARES, INC. AND SUBSIDIARIES
FIRST HOUSTON BANCSHARES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
UNAUDITED
<TABLE>
<CAPTION>
STERLING FIRST HOUSTON
BANCSHARES BANCSHARES PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS CONSOLIDATED
------------ ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks....................... $ 89,113 $ 4,377 $ -- $ 93,490
Federal funds sold............................ -- 11,244 -- 11,244
Interest-bearing deposits in financial
institutions............................... 42 -- -- 42
Available-for-sale investment securities...... 4,327 50,714 -- 55,041
Held-to-maturity investment securities........ 211,381 -- -- 211,381
Equity in unconsolidated subsidiary........... 2,296 -- -- 2,296
Loans held for sale........................... 46,377 227 -- 46,604
Loans, net of unearned discount............... 536,430 64,630 -- 601,060
Allowance for credit losses................... (6,960) (548) -- (7,508)
Accrued interest receivable and other
assets..................................... 11,655 2,906 -- 14,561
Real estate acquired by foreclosure........... 1,733 77 -- 1,810
Premises and equipment, net................... 26,158 2,825 -- 28,983
Goodwill...................................... 1,677 -- -- 1,677
-------- -------- ------ ----------
Total assets.......................... $924,229 $136,452 $ -- $1,060,681
======== ======== ====== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Deposits...................................... $792,780 $126,064 $ -- $ 918,844
Securities sold under agreements to
repurchase................................. 33,790 -- -- 33,790
Accrued interest payable and other
liabilities................................ 3,537 1,597 -- 5,134
-------- -------- ------ ----------
Total liabilities..................... 830,107 127,661 -- 957,768
======== ======== ====== ==========
Company-obligated mandatorily redeemable trust
preferred securities of subsidiary trust... 28,750 -- -- 28,750
SHAREHOLDERS' EQUITY:
Preferred stock............................... 177 855 (855)(a) 177
Common stock.................................. 12,040 2,230 (546)(a) 13,724
Capital surplus............................... 17,718 6,560 1,401(a) 25,679
Retained earnings............................. 35,549 (808) -- 34,741
Unrealized loss on available for sale
securities................................. (46) (46)
Net unrealized losses on held-to-maturity
investment securities transferred from
available-for-sale......................... (112) -- -- (112)
-------- -------- ------ ----------
Total shareholders' equity............ 65,372 8,791 -- 74,163
-------- -------- ------ ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...... $924,229 $136,452 $ -- $1,060,681
======== ======== ====== ==========
</TABLE>
- ---------------
(a) Represents the acquisition adjustment which includes the conversion and
elimination of 21,375 shares of First Houston Preferred Stock and the
elimination 2,230,000 shares of First Houston Common Stock, and the issuance
of 1,684,000 shares of Sterling Common Stock. The excess par value of the
converted shares of First Houston Capital Stock over the shares of Sterling
Common Stock into which such shares are converted has been added to capital
surplus.
22
<PAGE> 25
STERLING BANCSHARES, INC. AND SUBSIDIARIES
FIRST HOUSTON BANCSHARES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
STERLING FIRST HOUSTON PRO FORMA
BANCSHARES BANCSHARES CONSOLIDATED
---------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
INTEREST INCOME:
Loans, including fees.................................. $25,277 $3,259 $28,536
Investment securities.................................. 5,318 1,454 6,772
Federal funds sold..................................... 663 166 829
Deposits in financial institutions..................... 497 -- 497
------- ------ -------
Total interest income.......................... 31,755 4,879 36,634
------- ------ -------
INTEREST EXPENSE:
Deposits............................................... 9,520 1,667 11,187
Securities sold under agreements to repurchase......... 168 5 173
Notes payable.......................................... 147 -- 147
------- ------ -------
Total interest expense......................... 9,835 1,672 11,507
------- ------ -------
Net interest income............................ 21,920 3,207 25,127
Provision for credit losses............................ 1,210 190 1,400
------- ------ -------
Net interest income after provision for credit
losses.............................................. 20,710 3,017 23,727
------- ------ -------
NON-INTEREST INCOME:
Customer service fees.................................. 2,782 235 3,017
Other.................................................. 1,375 63 1,438
------- ------ -------
Total non-interest income...................... 4,157 298 4,455
------- ------ -------
NON-INTEREST EXPENSE:
Salaries and employee benefits......................... 9,737 925 10,662
Depreciation and amortization.......................... 1,585 193 1,778
Occupancy and equipment expense, net................... 1,365 173 1,538
Technology............................................. 369 73 442
Professional fees...................................... 243 255 498
Minority interest expense.............................. 178 -- 178
Other.................................................. 3,259 681 3,940
------- ------ -------
Total non-interest expense..................... 16,736 2,300 19,036
------- ------ -------
Income before income taxes............................... 8,131 1,015 9,146
Income taxes............................................. 2,684 344 3,028
------- ------ -------
Net income............................................... $ 5,447 $ 671 $ 6,118
======= ====== =======
NET INCOME PER COMMON SHARE:
Primary................................................ $ 0.44 $ 0.40 $ 0.43
======= ====== =======
Fully diluted.......................................... $ 0.44 $ 0.40 $ 0.43
======= ====== =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Primary................................................ 12,442 1,684 14,126
Fully diluted.......................................... 12,519 1,684 14,203
</TABLE>
23
<PAGE> 26
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
---------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<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
Net occupancy and equipment expense...................... 2,165 267 2,432
(Gains) losses and carrying costs of real estate acquired
by foreclosure........................................ 155 -- 155
FDIC assessment.......................................... 2 2 4
Technology............................................... 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 $ 0.30 $ 0.80
======= ====== =======
Fully diluted............................................ $ 0.86 $ 0.30 $ 0.80
======= ====== =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Primary.................................................. 12,251 1,684 13,935
Fully diluted............................................ 12,340 1,684 14,024
</TABLE>
- ---------------
(a) Represents the acquisition adjustment which includes the conversion and
elimination of 21,375 shares of First Houston Preferred Stock and the
elimination of 2,230,000 shares of First Houston Common Stock, and the
issuance of 1,684,000 shares of Sterling Common Stock. The excess par value
of the converted shares of First Houston Capital Stock over the shares of
Sterling Common Stock into which such shares are converted has been added to
capital surplus.
24
<PAGE> 27
THE MEETING
GENERAL
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of First Houston from the Shareholders of
First Houston for use at the Meeting. The Meeting is a special meeting of the
Shareholders of First Houston at which the Shareholders will consider the Merger
Proposal (pursuant to which the Merger will be effected whereby First Houston
will become a wholly owned indirect subsidiary of Sterling pursuant to the
Merger Agreement) and the Charter Proposal (whereby the First Houston Charter
will be amended immediately prior to the Effective Time of the Merger). The
Merger will not be effected unless the Merger Proposal and the Charter Proposal
are both approved by the requisite vote of Shareholders (unless all shares of
First Houston Preferred Stock are converted into First Houston Common Stock
prior to the Meeting, in which case approval of the Charter Proposal will no
longer be a condition to consummation of the Merger). A complete copy of the
Merger Agreement is attached to this Proxy Statement as Appendix A and a copy of
the form of the Charter Proposal is attached as Appendix B to this Proxy
Statement.
For a discussion of the Merger Proposal, see "Proposal No. 1: Approval of
the Merger Proposal." For a discussion of the Charter Proposal, see "Proposal
No. 2: Approval of the Charter Proposal."
It is anticipated that proxy solicitation materials will first be mailed to
Shareholders on or about July 31, 1997. The Meeting will be held on September ,
1997 at 10 a.m., at the principal executive offices of First Houston, 5757
Memorial Drive, Houston, Texas 77007.
PERSONS ENTITLED TO VOTE AND VOTING RIGHTS
The holders of record of outstanding First Houston Common Stock and
outstanding First Houston Preferred Stock at the close of business on the Record
Date will be entitled to notice of and to vote at the Meeting. At the close of
business on the Record Date, 2,229,738 shares of First Houston Common Stock and
21,375 shares of First Houston Preferred Stock were issued and outstanding and
entitled to vote at the Meeting. Each holder of First Houston Capital Stock will
be entitled to one vote for each share of First Houston Capital Stock owned of
record on the Record Date. The holders of First Houston Common Stock and the
holders of First Houston Preferred Stock will vote as separate classes and the
affirmative vote of two-thirds of each class is required to approve and adopt
the (i) Merger Proposal, and (ii) the Charter Proposal pursuant to which First
Houston's Charter will be amended to delete paragraph (h)(4) of the Certificate
of Designation establishing the First Houston Preferred Stock. The form of the
Charter Proposal is attached hereto as Appendix B to this Proxy Statement.
PROXIES
Proxies, in the form enclosed, which are properly executed by the
Shareholders and returned to First Houston and not subsequently revoked, will be
voted at the Meeting in accordance with the directions specified thereon, and
otherwise in accordance with the judgment of the persons designated as proxies.
Any properly executed proxy on which voting instructions are not specified will
be voted in favor of the Merger Proposal and the Charter Proposal. A proxy may
be revoked at any time before it is voted by giving written notice to the
Secretary of First Houston, by execution of a proxy of a later date filed with
the Secretary of First Houston at or before the Meeting or by voting in person
at the Meeting.
This proxy solicitation is made by the Board of Directors of First Houston.
Sterling and First Houston are responsible for their respective expenses
incurred in preparing, assembling, printing, and mailing this Proxy Statement.
Directors, officers and regular employees of First Houston intend to solicit
proxies personally or by telephone without receiving special compensation
therefor. First Houston will reimburse banks, brokers and other custodians,
nominees and fiduciaries for their reasonable expenses in forwarding the proxy
materials to beneficial owners.
25
<PAGE> 28
PRINCIPAL SHAREHOLDERS
As of the date of this Proxy Statement, the following persons own
beneficially 5% or more of First Houston Common Stock: John B. Carter, Jr.
(7.6%), Gordon Cain (7.5%), Michael T. Judd (7.6%) and John E. McFarlane (6.1%).
In addition, Messrs. Carter and Judd own beneficially 11.7% and 9.4%,
respectively, of the First Houston Preferred Stock. See "Management of First
Houston -- Principal Shareholders." All of the executive officers and directors
of First Houston as a group (15 persons) own 864,262 shares, or approximately
38.8%, of the issued and outstanding First Houston Common Stock and 5,750 shares
(26.9%) of the issued and outstanding shares of First Houston Preferred Stock.
See "Management of First Houston -- Stock Ownership of Executive Officers and
Directors." All of the executive officers and directors of First Houston have
indicated an intention to vote in favor of the Merger Proposal and the Charter
Proposal. Since the executive officers and directors of First Houston, as a
group, own less than two-thirds of the issued and outstanding shares of each of
the First Houston Common Stock and the First Houston Preferred Stock, the votes
of Shareholders of First Houston other than the executive officers and directors
will be required to achieve the necessary votes required to approve the Merger
Proposal and the Charter Proposal. The Board of Directors of First Houston
recommends that the Shareholders vote in favor of the Merger Proposal and the
Charter Proposal. See "Information About the Merger -- Reasons for Approval of
the Merger."
PROPOSAL NO. 1: APPROVAL OF THE MERGER PROPOSAL
BACKGROUND OF THE TRANSACTION
In April 1996, the First Houston Board of Directors decided to consider
possible strategic alternatives, including a sale of First Houston, in light of
changing conditions in the banking industry and the success of First Houston's
business plan in increasing the attractiveness of its banking operations to
potential buyers. Beginning in July, 1995, Sterling had from time to time
expressed its interest in a possible acquisition of First Houston. In November
1996, the First Houston Board of Directors, as part of First Houston's strategic
planning process, authorized Charles M. Neff, Jr., the President and Chief
Executive Officer of First Houston, to contact George Martinez, the Chairman of
Sterling, and to advise Mr. Martinez that First Houston was in the process of
considering and evaluating various strategic options, including a potential
merger.
In December 1996, the First Houston Board authorized Mr. Neff to explore
the possibility of a merger of First Houston and Sterling. During December 1996,
Mr. Martinez met with Mr. Neff and John B. Carter, Jr., the Chairman of First
Houston, to (i) discuss the general parameters for a possible merger between
Sterling and First Houston, (ii) identify potential revenue enhancements and
costs savings that could be derived from a business combination and (iii)
provide each company with a thorough understanding of Sterling's and First
Houston's respective business and strategic plans, corporate cultures, customer
profiles and portfolio compositions. Based upon these preliminary discussions
and the exchange of substantial information, on December 31, 1996, the
management of Sterling presented a letter of intent to First Houston which
outlined the basic terms and conditions of a proposed merger of First Houston
with a wholly owned subsidiary of Sterling (subject to the approval of
Sterling's Board of Directors) pursuant to which First Houston shareholders
would receive Sterling Common Stock, based upon an exchange ratio computed
substantially as set forth in the Merger Agreement.
During January 1997, Mr. Martinez held additional meetings with Messrs.
Carter and Neff to provide First Houston with a detailed understanding of
Sterling's methodology for the valuation of First Houston and to discuss merger
price considerations and other critical issues. Sterling also provided First
Houston with substantial information regarding its financial performance,
reports from various market analysts regarding Sterling Common Stock and long
term prospects and Sterling's strategic plan.
On January 16, 1997, the Board of Directors of First Houston met to discuss
and evaluate Sterling's offer. The Board of Directors of First Houston, with the
assistance of its outside counsel, reviewed the terms of the letter of intent,
analyzed the benefits of a stock-for-stock merger rather than a cash merger from
both a tax and capital appreciation perspective, and discussed essential terms
and conditions of the transaction. The First Houston Board of Directors also
spent a substantial amount of time evaluating Sterling's financial perform-
26
<PAGE> 29
ance, stock market history, valuation, trading activity and long term prospects,
weighing the benefits and risks of remaining independent and analyzing
comparable bank merger transactions. After extensive deliberations, the Board of
Directors authorized management of First Houston to (i) enter into the letter of
intent subject to certain modifications, (ii) negotiate a definitive merger
agreement, (iii) conduct due diligence with respect to Sterling, its financial
condition and its long term prospects, and (iv) make a final proposal that would
enable the First Houston Board to determine whether the proposed merger was fair
to and in the best interest of the First Houston shareholders and that the
merger consideration in the form of Sterling Common Stock was fair to the First
Houston shareholders from a financial point of view.
On January 27, 1997, the Sterling Board of Directors discussed a proposed
offer to acquire First Houston for Sterling Common Stock by a merger with a
wholly-owned subsidiary of Sterling, based upon an exchange ratio computed
substantially as set forth in the Merger Agreement.
Following a meeting between Messrs. Martinez, Carter, Neff and Michael A.
Roy, Sterling's General Counsel, on February 7, 1997, at which Sterling agreed
to make certain modifications to the letter of intent at the request of First
Houston, First Houston and Sterling entered into a non-binding letter of intent.
The letter of intent provided that Sterling would acquire First Houston for
Sterling Common Stock by a merger with a wholly owned subsidiary of Sterling
based upon an exchange ratio computed substantially as set forth in the Merger
Agreement. The offer set forth in the letter of intent was subject to the
satisfaction of certain conditions, including satisfactory completion of due
diligence by both companies, the negotiation of a definitive merger agreement
and the approval of the merger agreement by the Sterling and First Houston
Boards of Directors and the First Houston shareholders. Pursuant to the terms of
the letter of intent, during February 1997 representatives of First Houston and
Sterling undertook extensive due diligence investigations of the respective
companies and began negotiating the terms of the Merger Agreement.
Beginning in December 1996 and continuing through January 1997, Mr. Neff,
on behalf of the First Houston Board of Directors, held preliminary discussions
with two other privately held financial institutions regarding the possible
combination of such parties and First Houston. In view of the definitive offer
from Sterling and the significant benefits perceived to accrue from a merger
with Sterling as discussed below, the First Houston Board of Directors decided
to pursue the Sterling offer to acquire First Houston and not to pursue a
transaction with such third parties.
On March 4, 1997, the Sterling Board approved a merger agreement with First
Houston pursuant to which Sterling would acquire First Houston for Sterling
Common Stock at an exchange ratio computed substantially as set forth in the
Merger Agreement, and authorized Sterling's management to negotiate further
changes in such merger agreement with First Houston.
Between March 6, 1997 and March 14, 1997, representatives of First Houston
met to discuss a definitive merger agreement and to resolve various issues
relating to the transaction, including adjustments to the Exchange Ratio,
termination provisions and breakup fees, and board representation.
On March 20, 1997, the First Houston Board of Directors met and reviewed
the Merger Agreement with outside counsel and accountants. In its deliberations,
the First Houston Board of Directors considered the valuation of Sterling's
Common Stock and of First Houston and the results of comparable bank
acquisitions and mergers in Texas and surrounding states discussed below under
"Reasons for Approval of the Merger -- Attractive Price and Fairness." After
full discussion of the terms of the Merger Agreement and after considering the
advice of outside counsel and determining that the Merger Consideration was fair
to the shareholders of First Houston from a financial point of view, the First
Houston Board of Directors unanimously approved the Merger Agreement.
REASONS FOR APPROVAL OF THE MERGER
The Board of Directors of each of Sterling and First Houston believes that
the terms of the Merger Agreement are fair to, and are in the best interests of,
their respective shareholders. The Board of Directors of First Houston consulted
with its accounting and legal advisors and considered a number of factors in
deciding whether to enter into the Merger Agreement with Sterling, including the
following significant factors. The
27
<PAGE> 30
First Houston Board of Directors did not assign any relative or specific weights
to the factors considered, but considered the following significant factors:
Improved Liquidity of the First Houston Shareholders'
Investment. First Houston's capital stock has not been registered for
trading on any national securities exchange. As a result, there has not
been an active trading market for the First Houston Common Stock. The
absence of a liquid market has resulted in infrequent and isolated
transactions in First Houston Capital Stock at prices that reflected the
particular circumstances of the buyer and seller and not necessarily at the
fair market value of the stock. The absence of an active trading market for
First Houston Common Stock has adversely affected the attractiveness to
First Houston shareholders of the First Houston Capital Stock for various
purposes, such as collateral for loans to such persons. By exchanging First
Houston Capital Stock for shares of Sterling Common Stock, First Houston
shareholders will receive capital stock for which an active trading market
exists on the Nasdaq National Market, thereby providing First Houston
shareholders with substantially enhanced liquidity for their stock.
Furthermore, the availability of a liquid trading market for Sterling
Common Stock will result in a greater opportunity for purchases and sales
of capital stock (as compared with sales or purchases of First Houston
Capital Stock). Although the average weekly trading volume in Sterling
Common Stock has increased in recent years and a number of firms make a
market in Sterling Common Stock, Sterling Common Stock is subject to
fluctuations in trading volume. There is no assurance that all of such
firms will continue to make a market in Sterling Common Stock or that a
Sterling shareholder will be able to sell all or a substantial quantity of
his shares in a timely manner should the need arise.
Tax-free Nature of the Exchange. Chamberlin, Hrdlicka, White, Williams
& Martin, special counsel to First Houston, will render an opinion that the
exchange of stock with Sterling in the Merger will be a tax-free exchange
with no current federal income tax consequences to the Shareholders.
Consequently, First Houston shareholders will be able to exchange their
First Houston Capital Stock for an equity investment in a combined entity
with a larger, more diversified asset base and customer base, without
incurring federal income tax in the exchange. See "Tax Consequences of the
Merger."
Attractive Price and Fairness. The First Houston Board of Directors
believes that the consideration to be paid by Sterling for First Houston
Capital Stock (based upon the market price of the Sterling Common Stock on
the day that First Houston entered into the Merger Agreement with
Sterling), represents an attractive premium for First Houston Capital Stock
and is fair to the First Houston shareholders from a financial point of
view. The determination of the First Houston Board of Directors is based on
(i) a comparison of the Merger Proposal with other bank merger and
acquisitions in Texas and surrounding states over the previous 18 months,
(ii) the evaluation of publicly available analyst reports regarding the
Sterling Common Stock, (iii) the review and evaluation of other information
concerning the valuation of banks and analyses of bank acquisitions since
January 1996 and (iv) the review and evaluation of financial information
and analyses regarding Sterling and First Houston. See "-- Background of
the Transaction." The First Houston Board of Directors determined that such
premium is equal to or greater than the premium in comparable bank
transactions in the State of Texas during the previous 18 months. The First
Houston Board of Directors did not, however, engage a financial advisor to
render a fairness opinion on the Merger.
Bank Industry Consolidation Phase Will Likely Abate. For the last five
years, the U.S. banking industry has been in the midst of a consolidation
phase during which many banking institutions have been combined to form
larger, more diversified institutions. Although the consolidation phase may
continue for some time longer, the First Houston Board of Directors
believes that the phase will begin to abate in the near future. If and when
this occurs, the "favorable" environment for the purchase price premiums
paid by acquiring institutions that has prevailed will also change. The
First Houston Board of Directors believed that it was in the best interests
of the First Houston shareholders to take advantage of current economic
circumstances and realize the higher premiums that have been paid in the
current consolidation phase before those circumstances changed for the
worse and the premiums offered for banking institutions such as First
Houston are reduced. If this consolidation phase does abate in the future,
there can be no assurance that, in the event that Sterling considers a
possible sale, it will be able to obtain a
28
<PAGE> 31
favorable premium or that the premium would be comparable to that being
paid to First Houston shareholders.
Enhanced Growth Prospects. In recent years, all of First Houston's
growth has resulted from internally-generated increases in deposits and
loans. The management of First Houston has discovered that First Houston's
present size and market position make acquisitions by First Houston of
other banking institutions difficult. Nevertheless, First Houston's Board
of Directors wanted to afford the First Houston shareholders an opportunity
to own stock in an institution that has successfully expanded and attained
prudent growth. First Houston's Board of Directors determined that a merger
with Sterling will allow the First Houston shareholders who accept and
retain Sterling Common Stock, the opportunity to own stock in an
institution that has demonstrated meaningful and consistent growth in
recent years. Sterling has been able to achieve meaningful growth primarily
through (i) internally generated increases in loans and deposits at
existing offices, (ii) the opening of new banking offices and (iii) the
acquisition of other banks. Although Sterling intends to continue to pursue
this growth strategy, there can be no assurance that Sterling will achieve
such growth or will grow at comparable rates in the future. See "Risk
Factors -- Dependence Upon Local Economic Conditions" and "-- Reliance on
Owner Operated Business Market." Any material decrease in Sterling's growth
rate could have an adverse effect on the market value of the Sterling
Common Stock. See "Future Stock Appreciation."
Competition. The First Houston Board of Directors believes that the
U.S. banking industry is undergoing dramatic change. For example, U.S.
banks expect to be permitted to offer new products such as investment and
insurance services some time in the near future. Additionally, with
relaxation of state limitations on branch banking, interstate banking is
expected to become a reality in the near future. In this new environment,
the First Houston Board believes that to compete effectively a bank will
need to have attained a certain size to create efficiencies, deploy
important technological initiatives and offer additional products and
services to their customers and communities without unduly compromising its
safety and soundness. The First Houston Board of Directors determined that
the shareholders of First Houston should be provided the opportunity to
share in the benefits of the ongoing diversification of the banking
industry and determined that the most effective way to do so was to enter
into a business combination with a larger financial institution that shared
First Houston's commitment to customer service and enhancement of
shareholder value. First Houston shareholders should be aware that Sterling
is subject to rigorous competition. See "Risk Factors -- Competition."
The First Houston Board Believes that Sterling is a Well-Run, Stable
Institution with the Same Institutional Values as First Houston. In
considering whether to enter into a business combination with another
financial institution and, if so, which institution to combine with, the
First Houston Board of Directors wanted to ensure that the surviving
institution of the combination would have the institutional values of
customer service and shareholder value similar to those that have
historically driven First Houston. In addition, the First Houston directors
wanted to assure that the surviving institution of any entity with which
First Houston would combine would be well managed, have a proven track
record of safe operations and have demonstrated a high level of concern and
support for its employees. The First Houston Board believes that Sterling
meets all of these criteria.
Future Stock Appreciation. In considering the Merger Proposal, the
First Houston Board of Directors also considered Sterling's record in
enhancing shareholder value. The First Houston Board of Directors wanted to
assure that the securities received by the First Houston shareholders in
any combination would have the potential for further appreciation in value.
Given the historic performance of the Sterling Common Stock and the
marketplace advantage it has created, the First Houston Board of Directors
determined that the Sterling Common Stock to be received by the First
Houston shareholders in the Merger will provide an opportunity for further
enhancement in value. However, a number of factors could have an adverse
effect on the future value of the Sterling Common Stock, including a
decrease in Sterling's earnings or the rate of growth of such earnings,
adverse developments affecting the banking industry and a sustained decline
in overall stock market values. See "Enhanced Growth Prospects."
29
<PAGE> 32
Interests of Certain Persons in the Merger. Certain members of First
Houston's management and the First Houston Board of Directors may be deemed
to have interests in the Merger in addition to their interests as First
Houston shareholders generally, which may cause potential conflicts of
interest. The First Houston Board of Directors was aware of these factors
and considered them, among other factors, in approving the Merger. Among
these factors are (i) the indemnification provisions of the Merger
Agreement as described under "Proposal No. 1: Approval of the Merger
Agreement -- Interest of Certain Persons in the Merger" and (ii) the
payment by Sterling of premiums for directors' and officers' liability
insurance for First Houston directors and officers as described under
"Proposal No. 1: Approval of the Merger Agreement -- Interest of Certain
Persons in the Merger" and (iii) certain bonus and severance payments as
described under "Proposal No. 1: Approval of the Merger
Agreement -- Interest of Certain Persons in the Merger." The chief
executive officer of First Houston will serve as an officer and director of
Sterling Bank and the Chairman of First Houston's Board of Directors will
serve as a Sterling director. See "Proposal No. 1: Approval of the Merger
Agreement -- Interest of Certain Persons in the Merger." In addition, the
directors and executive officers of First Houston will be entitled to an
aggregate of approximately 635,094 shares of Sterling Common Stock pursuant
to the Merger, based upon their ownership of First Houston Common Stock at
June 30, 1997.
The foregoing discussion of the information and factors considered by the
First Houston Board of Directors is not intended to be exhaustive. In view of
the variety of factors considered in connection with its evaluation of the
Merger, the First Houston Board of Directors did not find it practicable to, and
did not, quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination. In addition, individual members of the
First Houston Board of Directors may have given different weights to different
factors.
INFORMATION ABOUT THE MERGER -- GENERAL
Merger. At the time of the filing (or at such time as may be specified by
law) of executed Articles of Merger (the "Effective Time"), SBI Acquisition
Corp., a subsidiary of Sterling ("SBI"), will be merged with and into First
Houston. As a result of the Merger, First Houston will continue as the surviving
corporation of the Merger (the "Surviving Corporation"). Following the Merger,
Sterling intends to merge First Houston into a wholly owned subsidiary of
Sterling. The Merger will become effective at such time as stated in Articles of
Merger to be filed with the Secretary of State of the State of Texas. It is
anticipated that if the Merger Proposal and the Charter Proposal are approved at
the First Houston Meeting and all other conditions (including the expiration of
all applicable waiting periods in connection with governmental approvals) to the
Merger have been satisfied or waived, the Effective Time will occur as soon as
possible after the First Houston Meeting. If all other conditions to the Merger
have not been satisfied prior to the Meeting, however, it is anticipated that
the Effective Time will occur as soon as practicable after the date on which the
last of the conditions to closing contained in the Merger Agreement is fulfilled
or waived. See "Information About the Merger -- Conditions to Consummation of
the Merger."
Merger Consideration. At the Effective Time, each share of First Houston
Common Stock issued and outstanding immediately prior to the Effective Time will
be converted into and become the right to receive a fractional share of Sterling
Common Stock equal to the Exchange Ratio. Each share of First Houston Preferred
Stock issued and outstanding at the date of the Merger Agreement that has not
been converted prior to the Effective Time will 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 10. 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 shall receive, in lieu thereof, cash
(without interest). No such holder will be entitled to dividends, voting rights
or any other rights as a shareholder in respect of any fractional share. See "No
Fractional Shares."
From and after the Adjustment Date, First Houston will not permit any of
the then outstanding options to purchase First Houston Common Stock (the "First
Houston Stock Options") to be exercised, and, effective upon consummation of the
Merger, each of such First Houston Stock Options shall thereafter constitute the
30
<PAGE> 33
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 multiplied by (ii) the Exchange Ratio.
Determination and Adjustment of Merger Consideration. Based upon First
Houston's estimated 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
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
the known adjustments set forth on Annex I of the Merger Agreement (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 (as defined below). The amount of adjustment to be
made to the Preliminary Merger Consideration shall be determined (i) by
calculating the sum of the Pro Forma First Houston Shareholders' Equity (as
defined below), 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 (as defined below), 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 generally accepted accounting
principles, consistently applied ("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) 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.
Based upon (i) the number of shares of First Houston Capital Stock issued
and outstanding on June 30, 1997, (ii) Sterling's and First Houston's
shareholders' equity as of July 31, 1997, and (iii) First Houston's net income
for the seven months ended July 31, 1997, the Exchange Ratio would have been
0.689. Because the Exchange Ratio remains subject to adjustment through the
Adjustment Date based on, among other things, certain shareholders' equity and
net income tests of First Houston, the Exchange Ratio and the Merger
Consideration will not be finally determined until the Adjustment Date. Cash
will be paid in lieu of issuing fractional shares of First Houston Common Stock.
Sterling currently estimates that approximately 1.68 million shares of Sterling
Common Stock will be issued to the Shareholders of First Houston.
"Final Sterling Book Value" means 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 Houston Projected Earnings" means the product of (i) $126,500
multiplied by (ii) the number of calendar months from January 1, 1997 to the
Adjustment Date.
"Pro Forma First Houston Shareholders' Equity" means First Houston's total
shareholders' equity as of the Adjustment Date, minus the Known Adjustments.
Exchange Ratio. For purposes of the Merger Agreement, the term "Exchange
Ratio" means the amount, calculated as of the Adjustment Date, that is equal to
the quotient of a fraction, of which (i) the numerator is
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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), 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, plus (B) the product of the total issued and outstanding shares
of First Houston Preferred Stock as of the Adjustment Date, multiplied by 10.
"Average Closing Price" means the average of the daily closing sales prices
of Sterling Common Stock listed on the Nasdaq National Market as "SBIB" (as
reported by The Wall Street Journal or, if not reported thereby, another
authoritative source as chosen by Sterling) for the 10 consecutive trading days
in which such shares are quoted on the Nasdaq National Market ending at the
close of trading on the later of the day on which the Federal Reserve Board
approves the Merger, or the day on which the last of the conditions to closing
contained in the Merger Agreement is fulfilled or waived.
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,
recapitalization or other similar transactions with respect to the Sterling
Common Stock where the record date for such stock dividends, splits,
recapitalizations or other transactions occurs prior to the Effective Time.
Exchange Procedures. As of the Effective Time, Sterling will 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. The Exchange Agent will have 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 in exchange for outstanding shares of First
Houston Capital Stock.
Promptly after the Effective Time, the Exchange Agent will 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"): (i) a letter of transmittal (which will specify that
delivery will 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 (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, together with such letter of transmittal, duly executed, and any other
required documents, the holder of such Certificate will be entitled to receive
in exchange therefor a certificate representing the number of whole shares of
Sterling Common Stock which such holder has the right to receive pursuant to the
Merger Agreement (based upon the Exchange Ratio) and cash in lieu of fractional
shares of Sterling Common Stock. Each Certificate so surrendered will 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 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, each
Certificate is 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. Sterling will 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 formerly representing shares of First Houston Common Stock or First
Houston Preferred Stock, as the case may be, for exchange. 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 will 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
the Merger Agreement. 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 must
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be properly endorsed and otherwise in proper form for transfer and the person
requesting such exchange must 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.
Voting and Dividends. Former shareholders of record of First Houston will
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 are converted, whether or
not such holders have exchanged their Certificates representing First Houston
Capital Stock for certificates representing Sterling Common Stock in accordance
with the exchange procedures. Until surrendered, each Certificate previously
representing shares of First Houston Capital Stock will from and after the
Effective Time represent for all purposes only the right to receive shares of
Sterling Common Stock and cash. 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, will 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,
promptly after which time all such dividends or distributions shall be paid
(without interest).
No Fractional Shares. No certificates or scrip representing fractional
shares of Sterling Common Stock will be issued upon the surrender for exchange
of Certificates for First Houston Capital Stock, and no dividend or other
distribution, stock split or interest will relate to any such fractional
security, and such fractional interests will 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 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, on behalf of all such holders, of the aggregate
fractional shares of Sterling Common Stock issued.
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 shareholders of First
Houston for nine months after the Effective Time will be delivered to Sterling,
upon demand, and any shareholders of First Houston who have not theretofore
complied with these exchange procedures set forth herein must 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.
CONDITIONS TO CONSUMMATION OF THE MERGER
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 thereby are subject to the fulfillment or waiver at or
prior to the Effective Time of a number of conditions, including the following:
(a) Shareholders of First Houston shall have approved and adopted all matters
relating to the Merger Agreement, the Merger and the transactions contemplated
thereby as required under applicable law at the Meeting; (b) the Merger
Agreement, the Merger and the other transactions contemplated thereby shall have
been approved by the Federal Reserve Board, the Office of the Comptroller of the
Currency (the "OCC"), the Texas Banking Commissioner (the "Commissioner"), the
Federal Deposit Insurance Corporation (the "FDIC") and any other Regulatory
Authorities whose approval is required for consummation of the transactions
contemplated by the Merger Agreement and all applicable waiting periods shall
have expired (and 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 the Merger
Agreement that, had such condition or restriction been known, Sterling would not
have entered into the Merger Agreement); (c) the Registration Statement filed in
connection with the transactions contemplated by the Merger Agreement shall have
been declared effective by the SEC 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
National Market and no such order, decree or conjunction shall have been issued
and remain in effect;
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and (f) Deloitte & Touche, L.L.P., independent public accountants for Sterling
(and First Houston), shall have delivered a letter, dated the date of Closing,
addressed to each addressee, 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 the Merger Agreement.
Conditions to Obligations of First Houston to Effect the Merger. The
obligations of First Houston to effect the Merger are subject to the fulfillment
or waiver at or prior to the Effective Time of the following additional
conditions: (a) the representations and warranties of Sterling set forth in the
Merger Agreement shall have been true and correct in all respects as of March
18, 1997 and be true and correct as of the Effective Time; (b) Sterling shall
have performed in all material respects all obligations required to be performed
by it under the Merger Agreement prior to the Effective Time; (c) 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 Board of Directors
of First Houston; provided, however, that a decrease in the market price of
Sterling Common Stock as quoted on the Nasdaq National Market shall not be
deemed to be a material adverse change if it does not meet the conditions for
termination by First Houston specified in the Merger Agreement, see "Information
about the Merger -- Termination or Amendment"; and (d) First Houston shall have
received an opinion of Chamberlain Hrdlicka White Williams & Martin, counsel to
First Houston, to the effect that the Merger will constitute a reorganization
within the meaning of Section 368 of the Internal Revenue Code of 1986, as
amended ("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.
Conditions to Obligations of Sterling to Effect the Merger. The obligations
of Sterling to effect the Merger are subject to the fulfillment at or prior to
the Effective Time of the following additional conditions: (a) the
representations and warranties of First Houston set forth in the Merger
Agreement shall have been true and correct in all material respects as of March
18, 1997 and be true and correct as of the Effective Time; (b) First Houston
shall have performed in all material respects all obligations required to be
performed by it under the Merger Agreement prior to the Effective Time; (c)
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; (d) 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) 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) holders of more than 9.9 percent (9.9%) of the total issued and
outstanding shares of either First Houston Common Stock or First Houston
Preferred Stock shall have exercised their dissenters' rights of appraisal in
connection with the Merger; (g) First Houston shall have amended the First
Houston Charter in accordance with the Charter Proposal; and (h) the agreements
of Rule 145 "affiliates" of First Houston required to be delivered to Sterling
pursuant to the Merger Agreement shall have been furnished.
REGULATORY APPROVAL
Among other approvals, the approval of the Federal Reserve Board is
required to consummate the Merger. On June 18, 1997, Sterling filed an
application with the Federal Reserve Board for prior approval to acquire First
Houston. On August 7, 1997, the Federal Reserve Board granted such approval.
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REPRESENTATIONS AND WARRANTIES OF FIRST HOUSTON AND STERLING
In the Merger Agreement, First Houston and Sterling have made various
representations and warranties relating to, among other things, their respective
business and financial condition, the satisfaction of certain legal requirements
for the Merger and the absence of undisclosed liabilities or material litigation
matters.
In addition, except for provisions relating to the method of calculation of
the number of shares of Sterling Common Stock to be received by Shareholders of
First Houston in the Merger, procedures for exchange of First Houston Capital
Stock for Sterling Common Stock, indemnification provisions, actions with
respect to stock plans and restricted stock, the prohibition of any action
disqualifying the Merger as a reorganization under Section 368(a) of the Code
and the payment of expenses, none of the respective representations, warranties,
obligations, covenants and agreements of the parties as set forth in the Merger
Agreement survive the Effective Time.
CONDUCT OF FIRST HOUSTON'S BUSINESS
Pursuant to the Merger Agreement, First Houston has agreed that, prior 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 March 18, 1997 and specifically understood and agreed
to by Sterling) 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.
In addition, First Houston has agreed that prior to the Effective Time, it
shall not, and shall not permit any of its subsidiaries to, without the prior
written consent of Sterling: (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), assume, guarantee, endorse or otherwise as an
accommodation become responsible for the obligations of any other Person (as
defined below) or make any loan or advance other than in the ordinary course of
business consistent with past practice; (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) 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 as
of March 18, 1997; (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 benefit plan of First Houston
(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 Sec-
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tion 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; (i) amend First Houston's Charter or Bylaws; (j) fail to maintain its
Regulatory Agreements (as defined below), material Authorizations (as defined
below) 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 benefit plan
of First Houston in accordance with applicable law or timely make all
contributions or accruals required under any such plan 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 the Merger
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 not being
satisfied or in a violation of any provision of the Merger 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's financial statements for
periods ended December 31, 1995 and December 31, 1996; (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, to take any of the actions
described in clauses (a) through (p).
"Authorizations" means all federal, state, local and foreign governmental,
regulatory and other authorizations, franchises, permits and licenses that First
Houston has in effect.
"Person" means 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.
"Regulatory Agreement" means any notification or communication from any
agency or department of any federal, state or local government 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.
Pursuant to the Merger Agreement, First Houston has agreed that, 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
will continue in full force and effect after the Merger and all First Houston
Stock Options issued and outstanding thereunder represent the right to purchase,
at the exercise price specified therein, such number of shares of Sterling
Common Stock as is appropriate and consistent with the Merger Agreement and (ii)
the First Houston 401(k) Plan will be terminated.
ACCOUNTING TREATMENT
The Merger is to be accounted for as a pooling of interests. Under the
pooling of interests accounting method, as of the Effective Time, the assets and
liabilities of First Houston are added to those of Sterling at their recorded
book values, the shareholders' equity accounts of Sterling and First Houston are
combined on Sterling's consolidated balance sheet, and the accounting basis for
such assets and liabilities remains virtually unchanged. The combined capital
structure of Sterling following the pooling will not be the same as the
components of the individual companies since new shares of Sterling Common Stock
will be issued in exchange for shares of First Houston Common Stock and First
Houston Preferred Stock. On a pooling of interests accounting basis, financial
statements of Sterling issued after consummation of the Merger are restated
retroactively to reflect the consolidated combined financial position and
results of operations of Sterling and First Houston as if the Merger had taken
place prior to the periods covered by such financial statements. See
"Capitalization" and "Pro Forma Financial Information."
The unaudited pro forma financial information contained in this Proxy
Statement has been prepared using the pooling of interests accounting basis to
account for the Merger. See "Pro Forma Financial Information" included elsewhere
in this Proxy Statement.
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NO SOLICITATION OF ACQUISITION TRANSACTIONS
The Merger Agreement provides that prior to the Effective Time, 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. First Houston, however,
may (i) 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),
(ii) engage in discussions or negotiations with a third party, (iii) following
receipt of an Acquisition Proposal, take and disclose to its shareholders a
position with respect to such Acquisition Proposal, including, if such
Acquisition Proposal is a tender offer, the taking and disclosure to First
Houston's Shareholders of a position contemplated by Rule 14e-2 under the
Exchange Act, and/or (iv) following receipt of an Acquisition Proposal, the
withdrawal or modification of a recommendation with respect to the Merger, 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 outside counsel that such action is required in order
for First Houston's Board of Directors to satisfy its fiduciary obligations
under applicable law. In addition, 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.
"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, 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 the Merger 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 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 has agreed to immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any parties
conducted prior to March 18, 1997 with respect to any of the foregoing.
The foregoing provisions do not permit First Houston to terminate the
Merger Agreement or allow any of its subsidiaries to enter into any written
agreement with respect to an Acquisition Proposal during the term of the Merger
Agreement, and, during the term of the Merger 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 described above. See "Termination and
Amendment."
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TERMINATION AND AMENDMENT
Termination. The Merger Agreement may be terminated under certain
circumstances, including:
(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 non-appealable 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 under the Merger Agreement) in the event of a breach
or failure by First Houston that would cause a failure of First Houston's
obligations necessary for Sterling to effect the Merger, and the 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) in the event of a breach
or failure by Sterling that would cause a failure of its obligations
necessary for First Houston to effect the Merger, and the 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 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 the Merger 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 (an "Alternative
Proposal") 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 the Merger Agreement and
accept such alternative Acquisition Proposal would be inconsistent with the
proper exercise of such fiduciary duties (but any such termination will not
be deemed effective until payment of the Termination Fee (as defined below)
and Expenses (as defined below)); or (g) by either First Houston or
Sterling upon the occurrence of any of the following 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 10-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 the Merger 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 10-day period
commencing two days after the Determination Date (as defined below), 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 the Merger Agreement); and (B) the Index as of the
Adjustment Date is less than 1557; or (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, its recommendation or approval of the Merger Agreement or the
Merger or recommended to First Houston Shareholders acceptance or approval
of any Alternative Proposal, or has resolved to do so.
If an event allowing the First Houston Board of Directors to terminate the
Merger Agreement were to occur prior to the Meeting, the Board of Directors of
First Houston, in making a determination whether to exercise such termination
right, will consider such matters as they then determine to be appropriate,
which will include the following factors: (i) the materiality of the decline, if
any, in the price of Sterling Common Stock (and the resulting decline in the
consideration to be received by the First Houston shareholders), (ii) the
possibility of renegotiating the Exchange Ratio, (iii) the likelihood of a
merger or other strategic combination with a third party on more favorable price
and other terms than that available under the Merger Agreement and (iv) the
ability of First Houston to continue as an independent entity. In evaluating
these
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factors, the First Houston Board of Directors will consider its fiduciary duties
to act on an informed basis, in the best interests of First Houston's
stockholders and in a disinterested manner.
If such a termination right becomes exercisable and the First Houston Board
of Directors determines not to exercise such right (other than in the case of
the breach of a representation or warranty of Sterling or the failure by
Sterling to perform an obligation which, in either case, the First Houston Board
of Directors believes will not have a material adverse effect on the First
Houston shareholders), a supplement to this Proxy Statement containing a
description of such matter and the conclusion(s) of First Houston's Board of
Directors with respect to such matter will be distributed to First Houston
shareholders, and proxies will be resolicited.
In the event of the termination of the Merger Agreement, it shall become
void and have no effect, except that (i) the provisions relating to termination,
confidentiality, Termination Fees and the payment of expenses shall survive any
termination; and (ii) no party shall be relieved or released from any liability
arising out of an intentional breach of any provision of the Merger Agreement.
"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 Shareholders of First Houston shall have
approved and adopted all matters relating to the Merger Agreement, the Merger
and the transactions contemplated thereby as required under applicable law at
the Meeting.
Amendments. To the extent permitted by law, the Merger Agreement may be
amended by a subsequent writing signed by each of Sterling, SBI, and First
Houston. However, none of the provisions of the Merger Agreement relating to the
manner or basis in which shares of First Houston Capital Stock will be exchanged
for the Merger Consideration may be amended after the Meeting without any
requisite approval of the holders of the issued and outstanding shares of First
Houston Capital Stock entitled to vote on such an amendment.
Termination Fee. To compensate Sterling for entering into the Merger
Agreement, taking actions to consummate the transactions contemplated by the
Merger Agreement and incurring the costs and expenses related thereto and other
losses and expenses, and the pursuit of other opportunities by Sterling, First
Houston and Sterling have agreed that: (a) provided that neither Sterling nor
SBI shall be in material breach of its obligations under the Merger Agreement,
First Houston has agreed to 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 amounts paid or payable to banks and investment bankers,
fees and expenses of counsel and printing expenses, collectively the "Expenses")
incurred by Sterling or any of its affiliates in connection with or arising out
of the transactions contemplated by the Merger Agreement, regardless of when
those Expenses are incurred, if the Merger Agreement is terminated either (i) by
First Houston due to receipt Superior Proposal (consistent with the terms
described in clause (f) under "Termination") or (ii) 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, its
recommendation or approval of the Merger 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. See "Termination."
In addition, First Houston has agreed that, if it fails to promptly pay the
Termination Fee or Expenses when due, First Houston shall also 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) from the date payment was required to be made until the date 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.
EXPENSES
Other than any applicable Termination Fee or Expenses, Sterling and First
Houston have each agreed to bear its own expenses incident to preparing,
entering into and carrying out the Merger Agreement and to consummating the
Merger. Sterling has agreed to pay all printing expenses and filing fees
incurred in connection with the Merger Agreement, the Registration Statement and
this Proxy Statement.
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OPERATIONS OF FIRST HOUSTON FOLLOWING THE MERGER
Following the Merger, First Houston will be merged with and into a wholly
owned subsidiary of Sterling, and the stock of Houston National will be
contributed to Sterling Bancorporation, Inc., a wholly owned subsidiary of
Sterling. Houston National will operate as a separate subsidiary of Sterling for
approximately 30 days, after which (subject to appropriate regulatory approvals)
it will be merged with and into Sterling Bank. The banking office of Houston
National located at 5757 Memorial Drive will become Sterling Bank's fifteenth
banking office. Charles M. Neff, Jr., the President of First Houston and Houston
National, will serve as the chief executive officer of the new office and is
also expected to be elected an officer of Sterling Bank and appointed to serve
on the Board of Directors of Sterling Bank. John B. Carter, Jr., Chairman of the
First Houston Board of Directors, will be appointed to fill a vacancy that
exists on the Sterling Board of Directors. See "-- Interests of Certain Persons
in the Merger."
The operations, data processing and backroom functions of Houston National
will be consolidated with those of Sterling Bank. Houston National will operate
as Sterling Bank's other offices, and will be subject to similar policies and
guidelines. Sterling believes that this will not result in any substantial
difference in Houston National's daily business activities.
Although the initial staffing plan for the Houston National office has not
been finalized, Sterling anticipates that substantially all of the staffing
needs of the office will be met with the existing employees of Houston National.
THE BOARD OF DIRECTORS OF FIRST HOUSTON UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER PROPOSAL.
OTHER AGREEMENTS
Future Board Representation. As soon as practicable following the Effective
Time and subject to the Sterling Charter and Bylaws of Sterling (the "Sterling
Bylaws"), Sterling has agreed to increase the size of its board of directors by
one and will appoint or nominate for election to this vacancy on the board of
directors of Sterling 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 the
Sterling Charter and the Sterling Bylaws, Sterling has agreed 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 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. Sterling also has agreed 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.
Amendment of Articles of Incorporation. At the Meeting, the First Houston
Board shall submit for and recommend the approval of the Shareholders an
amendment to the First Houston Charter 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 has agreed to so amend the First Houston Charter if approved by a
vote of two-thirds of the Shareholders of each class of First Houston Capital
Stock. The form of the Charter Proposal is attached hereto as Appendix B to this
Proxy Statement. For a further description of the Charter Proposal, see
"Proposal No. 2: Approval of the Charter Proposal."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
General. Certain members of First Houston's management and the First
Houston Board of Directors may be deemed to have interests in the Merger in
addition to their interests as First Houston shareholders generally, which may
cause potential conflicts of interest. The First Houston Board of Directors was
aware of these factors and considered them, among others, in approving the
Merger. Among these factors are (i) the
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indemnification provisions of the Merger Agreement as described below under
"Indemnification and Insurance", (ii) the payment by Sterling of premiums for
directors' and officers' liability insurance for First Houston directors and
officers as described below under "Indemnification and Insurance" and (iii)
certain cash payments related to the termination of a deferred compensation
agreement and a life insurance agreement and certain bonus and severance
payments as described below under "Other Agreements."
Management and Share Ownership. Sterling intends to retain Mr. Neff as
chief executive officer of Houston National, to elect Mr. Neff as an officer of
Sterling Bank and to appoint Mr. Neff to the Board of Directors of Sterling
Bank. Pursuant to the Merger Agreement, the Sterling Board of Directors will
appoint Mr. Carter, currently a director and Chairman of the Board of First
Houston, to the Sterling Board of Directors.
As of June 30, 1997, the executive officers and directors of First Houston
(15 persons) beneficially owned an aggregate of 864,262 shares of First Houston
Common Stock and 5,750 shares of First Houston Preferred Stock. All such shares
will be treated in the Merger in the same manner as shares of First Houston
Common Stock and First Houston Preferred Stock held by other First Houston
shareholders, and will be converted into an aggregate of approximately 635,094
shares of Sterling Common Stock.
First Houston Employee Benefit Plans. The Merger Agreement also provides
that Sterling will provide or will cause to be provided to each current employee
(presently entitled to benefits) of First Houston or its subsidiaries employee
benefits substantially similar to those provided by Sterling and its
subsidiaries to their similarly situated officers and employees.
Indemnification and Insurance. Pursuant to the Merger Agreement, Sterling
will indemnify the directors, officers and employees of First Houston and its
subsidiaries against all losses, expenses, 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 the Merger Agreement) to the extent permitted by
the TBCA and by First Houston's Charter and Bylaws. In addition, Sterling will
maintain for a period of four years after the Effective Time directors' and
officers' liability insurance of the same coverage and amounts and containing
terms no less advantageous to the indemnified parties than existing insurance.
If the premiums on such insurance for such four-year period exceed the annual
premiums on First Houston's current policy, Sterling is only obligated to use
its reasonable efforts to maintain the most advantageous policies of directors'
and officers' liability insurance obtainable for an amount equal to such annual
premiums.
Other Agreements. Sterling intends to offer a severance package consisting
of two weeks base salary for each year of service to those First Houston
employees who are terminated without cause within six months following the
Effective Time. Pursuant to such arrangement, Mr. Neff, James L. Hall, Executive
Vice President, Chief Financial Officer and a director of First Houston, and
Michael J. Moser, Executive Vice President of Houston National and an advisory
director of First Houston, would be entitled to payments of approximately
$43,800, $36,900 and $14,200, respectively, if they were so terminated. The
First Houston Board of Directors has also approved the payment, as of December
31, 1996, of bonuses to employees to reward such employees for their services
prior to such date. The payment of such bonuses is not contingent upon the
Merger, and such bonuses are expected to be paid in the third quarter of 1997.
First Houston believes that by delaying the payment of these bonuses it will
encourage employees to remain through the integration of Houston National into
the Sterling organization. Messrs. Hall and Moser, will be entitled to bonuses
of $40,000 and $15,000, respectively. Mr. Neff will not be entitled to any such
bonus.
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DISSENTERS' RIGHTS
First Houston Shareholders. The TBCA, Articles 5.11 through 5.13, entitles
any Shareholder who objects to the Merger and who follows the procedures
prescribed by such Articles, in lieu of receiving the consideration proposed
under the Merger Agreement, to receive cash equal to the "fair value" of his
shares as determined by appraisal. Set forth below is a summary of the
procedures relating to the exercise of the right to dissent as provided in the
TBCA, which have been reproduced in full as Appendix C to this Proxy Statement.
The summary does not purport to be complete and is qualified in its entirety by
reference to Articles 5.11, 5.12 and 5.13 of the TBCA as set forth in Appendix
C. Failure to comply with any of the required steps may result in the
termination of any such right to dissent the Shareholder may have under the
TBCA.
Shareholders who follow the procedures set forth in Articles 5.12 and 5.13
of the TBCA may receive a cash payment equal to the fair value of their shares
of First Houston Capital Stock determined as of the day immediately preceding
the Meeting, excluding any appreciation or depreciation in anticipation of the
Merger. Unless all the procedures set forth in Articles 5.12 and 5.13 are
followed by a Shareholder who wishes to exercise dissenters' rights, such
Shareholder will be bound by the terms of the Merger. To be entitled to a cash
payment upon exercise of dissenters' rights, a Shareholder must (i) file with
First Houston, prior to the Meeting, a written objection to the Merger, setting
out that the Shareholder's right to dissent will be exercised if the Merger is
effected and giving the Shareholder's address to which notice thereof shall be
delivered or mailed in the event the Merger is consummated; (ii) not vote his
shares of First Houston Capital Stock in favor of the Merger Proposal, and (iii)
demand such cash payment in writing within 10 days after the delivery or mailing
by First Houston of a notice that the Merger has become effective, which notice
must be delivered or mailed to the Shareholder within 10 days after the Merger
is effected. The failure of a Shareholder to vote such Shareholder's shares
against the Merger Proposal will not constitute a forfeiture of such
Shareholder's dissenters' rights, so long as the Shareholder does not vote such
shares in favor of the Merger and the other statutory requirements are met. The
demand must state the number and class of shares owned by the Shareholder and
the fair value of such shares as estimated by the Shareholder. Any Shareholder
failing to make demand within the 10-day period shall be bound by the Merger
Agreement. The failure of holders of such certificates to do so shall at the
option of Sterling, terminate such Shareholders' rights to dissent unless a
court of competent jurisdiction for good and sufficient cause shall otherwise
direct.
Within 20 days after receipt by Sterling of a demand for payment made by a
dissenting Shareholder, Sterling shall deliver or mail to the dissenting
Shareholder a written notice that shall either set out that Sterling accepts the
amount claimed in the demand and agrees to pay that amount within 90 days after
the Effective Time of the Merger, upon the surrender of the share certificates
duly endorsed, or shall contain an estimate by Sterling of the fair value of
such Shareholder's shares of First Houston Capital Stock, together with an offer
to pay the amount of that estimate within 90 days after the Effective Time of
the Merger, upon the surrender of the Certificates for shares of Sterling
Capital Stock duly endorsed, and upon receipt of notice within 60 days after the
Effective Time of the Merger from the Shareholder that the shareholder agrees to
accept that amount.
If within 60 days after the Effective Time of the Merger, Sterling and the
Shareholder agree upon the value of the shares of First Houston Capital Stock,
Sterling shall pay for the shares within 90 days after the Effective Time of the
Merger and upon surrender of the certificates for the shares duly endorsed. Upon
such payment, the Shareholder shall cease to have any interest in the shares or
in Sterling.
If, within the period of 60 days after the Effective Time of the Merger,
the dissenting Shareholder and Sterling do not so agree, then the Shareholder or
Sterling may, within 60 days after the expiration of such 60 day period, file a
petition in any court of competent jurisdiction in Harris County, Texas, asking
for a finding and determination of the fair value of the Shareholder's shares of
First Houston Capital Stock. The clerk of the court shall give notice of the
time and place fixed for the hearing of the petition by registered mail to
Sterling and to the Shareholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
Sterling. Sterling and all Sterling shareholders so notified shall be bound by
the final judgment of the court.
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After the hearing of the petition, the court shall determine the
Shareholders who have complied with the provisions of Article 5.12 of the TBCA
and have become entitled to the valuation of and payment for their shares of
First Houston Capital Stock, and shall appoint one or more qualified appraisers
to determine that value. In addition to having the power to examine the books
and records of Sterling, the appraisers shall afford reasonable opportunity to
the parties interested to submit to the appraisers pertinent evidence as to the
value of their shares.
The appraisers shall determine the fair value of the shares of First
Houston Capital Stock of the Shareholders adjudged by the court to be entitled
to payment for their shares and shall file their report of that value in the
office of the clerk of the court. Notice of the filing of the report shall be
given by the clerk to the parties in interest. The report shall be subject to
exceptions to be heard before the court both upon the law and the facts. The
court shall by its judgment determine the fair value of the shares of First
Houston Capital Stock of the Shareholders entitled to payment for their shares
and shall direct the payment of that value by Sterling together with interest
thereon, beginning 91 days after the date of the Merger to the date of such
judgment, to the Shareholders entitled to payment. The judgment shall be payable
to the holders of shares only upon, and simultaneously with, the surrender of
Sterling of duly endorsed certificates for those shares. Upon payment of the
judgment, the dissenting Shareholders shall cease to have any interest in those
shares or in Sterling. The court shall allow the appraisers a reasonable fee as
court costs, and all costs shall be allotted between the parties in the manner
that the court determines to be fair and equitable.
Any Shareholder who has demanded for his or her shares in accordance with
the TBCA shall not thereafter be entitled to vote or exercise any other rights
of a shareholder, except the right to receive payment for his or her shares in
accordance with the TBCA and the right to maintain an appropriate action to
obtain relief on the ground that the Merger would be or was fraudulent. The
shares for which payment has been demanded shall not thereafter be considered
outstanding for the purposes of any subsequent vote of shareholders.
Any Shareholder who has demanded payment for his or her shares of First
Houston Capital Stock in accordance with Article 5.12 may withdraw such demand
at any time before payment for his or her shares or before any petition has been
filed pursuant to the TBCA asking for a finding and determination of the fair
value of such shares, but no such demand may be withdrawn after such payment has
been made or, unless Sterling shall consent thereto, after any such petition has
been filed. If, however, (i) such demand shall be withdrawn as provided above,
(ii) pursuant to Article 5.13, Sterling shall terminate the Shareholder's rights
under Article 5.12, (iii) no petition asking for a finding and determination of
fair value of such shares by a court shall have been filed within the time
provided in Article 5.12 or (iv) after the hearing of a petition filed pursuant
to Article 5.12, the court shall determine that such Shareholder is not entitled
to the relief provided by Article 5.12, then, in any such case, (A) such
Shareholder and all persons claiming under such Shareholder shall be
conclusively presumed to have approved and ratified the Merger Proposal and
shall be bound thereby, (B) the right of such Shareholder to be paid the fair
value of his or her shares shall cease, and his or her status as shareholder
shall be restored without prejudice to any corporate proceedings that may have
been taken during the interim and (C) such Shareholder shall be entitled to
receive any dividends or other distributions made to shareholders of Sterling
Common Stock in the interim.
A vote against approval and adoption of the Merger Proposal will not
satisfy the requirement for a written objection to approval and adoption of the
Merger Proposal by the dissenting Shareholder or a written demand for payment of
the "fair value" of the shares owned by a dissenting shareholder. Failure to
vote against approval and adoption of the Merger Proposal (i.e., abstention from
voting) will not constitute a waiver of a shareholder's dissenters' rights. If
the holders of 9.9% or more of either class of First Houston Capital Stock shall
have taken steps to perfect their dissenters' rights respecting the Merger in
accordance with the TBCA, Sterling has the right, under the Merger Agreement, to
terminate the Merger Agreement. If Sterling exercises its termination right in
such event, the Merger will not take place and First Houston Shareholders who
have perfected their dissenters' rights would not receive any cash payment, but
would continue to hold such shares in First Houston.
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Exercise of the right to dissent under the TBCA may result in a judicial
determination that the "fair value" of a dissenting Shareholder's shares is
higher or lower than the value of the Sterling Common Stock to be received
pursuant to the Merger Agreement.
The TBCA provides that, in the absence of fraud in the transaction, the
right to an appraisal as set forth above of a Shareholder objecting to the
Merger is the exclusive remedy for the recovery of the value of such
Shareholder's shares of First Houston Capital Stock or for money damages to such
Shareholder with respect to the Merger. If Sterling complies with the
requirements of the TBCA, any Shareholder who fails to comply with the
requirements of the TBCA shall not be entitled to bring suit for the recovery of
the value of his shares or for money damages to the shareholder with respect to
the Merger.
HOLDERS OF FIRST HOUSTON CAPITAL STOCK WHO SEEK TO ASSERT THEIR DISSENTERS'
RIGHTS MUST FOLLOW THE STATUTORY PROCEDURES PRECISELY. FAILURE TO FOLLOW ANY OF
THE STATUTORY PROCEDURES MAY RESULT IN A TERMINATION OR WAIVER OF DISSENTERS'
RIGHTS. IN VIEW OF THE COMPLEXITY OF THESE PROVISIONS OF TEXAS LAW, ANY FIRST
HOUSTON SHAREHOLDER WHO IS CONSIDERING DISSENTING FROM THE MERGER SHOULD CONSULT
A LEGAL ADVISER.
THE FOREGOING IS MERELY A SUMMARY. ALTHOUGH THIS SUMMARY DISCUSSES ALL
MATERIAL PROVISIONS OF THE TBCA WITH WHICH SHAREHOLDERS MUST COMPLY TO EXERCISE
DISSENTERS' RIGHTS, IT DOES NOT PURPORT TO BE A COMPLETE STATEMENT OF THE RIGHTS
OF DISSENTING SHAREHOLDERS. SUCH SUMMARY IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE APPLICABLE STATUTORY PROVISIONS OF ARTICLES 5.11, 5.12 AND 5.13
OF THE TEXAS BUSINESS CORPORATION ACT WHICH ARE SET FORTH IN FULL IN APPENDIX C
TO THIS PROXY STATEMENT.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
A federal income tax ruling with respect to this transaction was not
requested from the Internal Revenue Service. Instead, Chamberlain Hrdlicka White
Williams & Martin, special counsel to First Houston, will render an opinion to
First Houston concerning certain federal income tax consequences of the proposed
Merger under Federal income tax law. It is such firm's opinion that:
1. The Merger will be a reorganization within the meaning of Section
368(a)(1)(A) of the Code. Sterling and First Houston will each be "a party
to a reorganization" within the meaning of Section 368(b) of the Code.
2. The Merger will qualify as a statutory merger under the TBCA.
3. The shareholders of First Houston will recognize no gain or loss
upon the exchange of their First Houston Capital Stock solely for shares of
Sterling Common Stock.
4. The basis of the Sterling Capital Stock received by the First
Houston shareholders in the Merger will, in each instance, be the same as
the basis of the First Houston Capital Stock surrendered in exchange
therefor, less the basis of any fractional shares of Sterling Common Stock
settled by the cash payment.
5. The holding period of the Sterling Capital Stock received by the
First Houston shareholders will, in each instance, include the period
during which the First Houston Capital Stock surrendered in exchange
therefor was held, provided that the First Houston Capital Stock was held
as a capital asset on the date of the exchange.
6. The payment of cash to First Houston shareholders in lieu of
fractional share interests of Sterling Common Stock will be treated for
federal income tax purposes as if the fractional shares were distributed as
part of the exchange and then were redeemed by Sterling. These cash
payments will be treated as having been received as distributions in full
payment in exchange for the stock redeemed. Generally, any gain or loss
recognized upon such exchange will be capital gain or loss, provided the
fractional share would constitute a capital asset in the hands of the
exchanging shareholder.
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7. Where solely cash is received by a First Houston shareholder in
exchange for First Houston Capital Stock pursuant to the exercise of
dissenters' rights, such cash will be treated as having been received in
redemption of such holder's First Houston Capital Stock. Generally, subject
to the provisions and limitations of Section 302 of the Code, a Shareholder
receiving cash pursuant to the exercise of dissenter's rights will be
entitled to capital gain (or loss) treatment for federal income tax
purposes measured by the difference between the cash received and such
Shareholder's basis in the First Houston Capital Stock redeemed.
THE TAX OPINION DOES NOT ADDRESS ANY STATE, LOCAL, OR OTHER TAX
CONSEQUENCES OF THE MERGER. FIRST HOUSTON SHAREHOLDERS SHOULD CONSULT THEIR OWN
TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES OF THE PROPOSED TRANSACTION TO
THEM INDIVIDUALLY, INCLUDING TAX CONSEQUENCES UNDER STATE OR LOCAL LAW.
Receipt by First Houston of such opinion is a condition to consummation of
the Merger, which condition could be waived by Sterling if such law firm is
unable to render such opinion. If prior to the Effective Time the federal income
tax consequences are expected to be materially different than those described in
this Proxy Statement and the Merger Agreement has not been terminated, a
supplement to this Proxy Statement, containing a description of such expected
tax consequences, will be distributed to, and proxies will be solicited from,
First Houston's shareholders.
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COMPARATIVE RIGHTS OF SHAREHOLDERS
STERLING STOCK
Sterling is incorporated under the TBCA. Sterling is authorized to issue
30,000,000 shares of $1.00 par value common stock, of which 12,040,942 were
issued and outstanding as of June 30, 1997. As of March 31, 1997, an additional
766,258 shares of Sterling Common Stock were issuable pursuant to options
granted by Sterling to officers of Sterling and Sterling Bank under existing
stock option plans. See "Management of Sterling." All outstanding shares of
Sterling Common Stock are, and the shares of Sterling Common Stock to be issued
pursuant to the Merger when issued in exchange for the First Houston Capital
Stock will be, fully paid and non-assessable.
Sterling also has authorized 1,000,000 shares of $1.00 par value preferred
stock ("Sterling Preferred Stock"). The Sterling Preferred Stock is issuable in
one or more series and, upon issuance of any series, Sterling's Board of
Directors, subject to certain limitations, is authorized to fix the number of
shares, dividend rate, liquidation price, redemption, conversion, sinking fund,
voting rights and other terms of the series. As of June 30, 1997, four series of
150,000 shares each have been designated, of which 49,500 shares of Series A
Convertible Preferred Stock, 38,880 shares of Series B Convertible Preferred
Stock, 38,500 shares of Series C Convertible Preferred Stock and 50,655 shares
of Series D Convertible Preferred Stock were issued and outstanding. Sterling's
Board of Directors may at any time, without additional approval of the holders
of Sterling Common Stock, issue either authorized but unissued shares of
Sterling Preferred Stock in series or additional authorized but unissued shares
of Sterling Common Stock. See "Description of Sterling Capital Stock." Upon
liquidation, each holder of Sterling Common Stock is entitled to receive a pro
rata distribution of any assets remaining after distributions have been made in
respect of the holders of Sterling Preferred Stock, if any, and provision has
been made for the payment of debts.
FIRST HOUSTON CAPITAL STOCK
First Houston is incorporated under the TBCA. First Houston is authorized
to issue 3,500,000 shares of $1.00 par value common stock, of which 2,229,738
shares were issued and outstanding on the date of this Proxy Statement. First
Houston also has authorized 200,000 shares of $40.00 par value preferred stock,
21,375 shares of which were issued and outstanding on the date of this Proxy
Statement. The preferred stock of First Houston is issuable in series and, upon
issuance of any series, First Houston's Board of Directors, subject to certain
limitations contained in the First Houston Charter and the TBCA, is authorized
to divide the First Houston Preferred Stock into series, to designate each
series, to fix and determine the number of shares and to establish rights and
preferences and other terms of the series. First Houston's Board of Directors
may at any time, without additional approval of the holders of each class of
First Houston Capital Stock, issue either authorized but unissued shares of
preferred stock in series or additional authorized but unissued shares of First
Houston Common Stock. Upon liquidation, each holder of First Houston Common
Stock is entitled to receive pro rata distribution of any assets remaining after
distributions have been made in respect of the holders of First Houston
Preferred Stock and provision has been made for the payment of debts. In the
event that the assets of First Houston available for distribution is
insufficient to make the payment to all holders of First Houston Preferred Stock
in full, the assets will be distributed to the holder of the respective shares
of the First Houston Preferred Stock on a pro rata basis. There is no sinking
fund provided for the redemption of the First Houston Preferred Stock.
DIVIDENDS
Holders of Sterling Common Stock and holders of First Houston Common Stock
are entitled to receive dividends when, as and if declared by their respective
Boards of Directors from funds legally available therefor, after payment in full
of all accrued but unpaid dividends on any outstanding preferred stock. Under
Texas law, each of Sterling and First Houston may pay dividends if after such
payment it is solvent and the dividends do not exceed surplus. Dividends paid by
their respective subsidiary banks are Sterling's and First Houston's current
primary source of available funds for debt service, payment of dividends to its
shareholders and for other needs. First Houston will not pay or declare a
dividend on First Houston Common Stock unless full dividends on outstanding
First Houston Preferred Stock for all past dividend periods and the current
dividend
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period have been declared and paid. The holders of First Houston Preferred Stock
are entitled to receive, when and as declared by the First Houston Board of
Directors, out of funds legally available therefor, cumulative preferential
dividends in cash, at a rate of 8% per annum.
Federal and state banking regulations applicable to Sterling and First
Houston require minimum levels of capital which limit the amounts available for
payment of dividends. Sterling and First Houston are also subject to legal
requirements for minimum levels of capital which limit the amounts payable as
dividends. See "Supervision and Regulation;" "Market Prices of Sterling Common
Stock and Dividend Policy of Sterling;" and "Description of Sterling Capital
Stock."
PREEMPTIVE RIGHTS
The holders of Sterling Common Stock, First Houston Common Stock and First
Houston Preferred Stock do not have preemptive rights to subscribe for a
proportionate share of any additional unissued or treasury securities issued by
Sterling or First Houston, respectively. The absence of preemptive rights
increases Sterling's flexibility to issue additional shares of Sterling Common
Stock, or securities convertible into Sterling Common Stock, in connection with
acquisitions, employee benefit plans and for other purposes without affording
Sterling's shareholders a right to subscribe for their proportionate share of
those additional securities. Any further issuance of Sterling Common Stock after
the Effective Time may reduce the proportionate interests in Sterling acquired
by First Houston shareholders as a result of the Merger. See "Risk
Factors -- Preemptive Rights Denied and Dilution."
VOTING RIGHTS AND OTHER MATTERS
The holders of Sterling Common Stock and the holders of First Houston
Common Stock are each entitled to one vote per share on all matters presented to
shareholders. Holders of Sterling Common Stock and First Houston Common Stock
are not entitled to cumulate their votes in the election of directors.
The First Houston Charter and the Sterling Charter, and the First Houston
Bylaws and Sterling Bylaws, both contain several provisions which may make
Sterling and First Houston less attractive targets for an acquisition of control
by an outsider who does not have the support of the Board of Directors. These
provisions of the Sterling Charter and First Houston Charter, and the Sterling
Bylaws and First Houston Bylaws, are briefly summarized as follows:
(1) Authority to Issue Preferred Stock: The Sterling Charter and First
Houston Charter each authorize the Board of Directors to issue shares of
preferred stock, and fix the voting rights and other relative rights
thereof, without shareholder approval.
(2) Amendments to Bylaws: The Sterling Charter and First Houston
Charter each permit the Board of Directors to alter, amend, or repeal the
bylaws, or to adopt new bylaws only upon a majority vote of the Board of
Directors.
(3) Shareholder Action by Consent: The Sterling Charter and the bylaws
of First Houston (the "First Houston Bylaws") allow shareholders to take
actions without a meeting only with unanimous written shareholder consent.
The First Houston Charter is silent on this issue, but Article 9.10 of the
TBCA allows shareholders to taken actions without a meeting with the
unanimous written consent of the shareholders.
(4) Non-cumulative Voting: Shareholders of Sterling and First Houston
are not allowed to cumulate their votes in the election of directors.
The foregoing summary is qualified in its entirety by reference to the
Sterling Charter and the First Houston Charter, and the Sterling Bylaws and
First Houston Bylaws, which are available upon written request from Sterling and
First Houston.
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<PAGE> 50
RESTRICTIONS ON SALES OF STERLING COMMON
STOCK BY AFFILIATES OF FIRST HOUSTON
The Sterling Common Stock to be issued to First Houston Shareholders in the
Merger has been registered under the Securities Act, but that registration does
not cover resales of those shares by persons who control, are controlled by, or
are under common control with, First Houston (such persons are referred to
hereinafter as "affiliates" and generally include executive officers, directors,
and 10% shareholders) at the time of the Meeting. Affiliates may not sell shares
of Sterling Common Stock acquired in connection with the Merger, except pursuant
to an effective registration statement under the Securities Act, in compliance
with Rule 145 thereunder or in accordance with a legal opinion satisfactory to
Sterling that such sale or transfer is otherwise exempt from the Securities Act
registration requirements.
First Houston has agreed to cause each person who is an affiliate of First
Houston to deliver to Sterling prior to the Effective Time a written agreement
providing that such person will not sell, pledge, transfer, or otherwise dispose
of any Sterling Common Stock to be received by such person upon consummation of
the Merger, except in compliance with the Securities Act and the rules and
regulations of the SEC promulgated thereunder.
MARKET PRICES OF STERLING COMMON STOCK AND DIVIDEND POLICY OF STERLING
Sterling Common Stock is traded on the Nasdaq National Market System under
the symbol "SBIB". As of August 1, 1997, Sterling's Common Stock was held of
record by approximately 617 shareholders.
The following table sets forth, per share of Sterling Common Stock, the
high and the low closing stock prices for, and the cash dividend paid per share
of, Sterling Common Stock for the periods ended below.
<TABLE>
<CAPTION>
CASH
HIGH(1) LOW(1) DIVIDENDS(1)
-------- ------- ------------
<S> <C> <C> <C>
1997
Third Quarter (through August 21, 1997)............ $ 19.63 $ 17.50 $ .055
Second Quarter..................................... 18.75 13.63 .055
First Quarter...................................... 16.25 12.20 .055
1996
Fourth Quarter..................................... $ 12.59 $ 9.33 $ .048
Third Quarter...................................... 10.17 9.17 .048
Second Quarter..................................... 10.33 8.83 .048
First Quarter...................................... 9.33 7.50 .048
1995
Fourth Quarter..................................... $ 8.11 $ 7.33 $ .035
Third Quarter...................................... 8.00 5.78 .035
Second Quarter..................................... 6.00 5.22 .035
First Quarter...................................... 6.11 4.99 .035
</TABLE>
- ---------------
(1) Adjusted to reflect a 3-for-2 stock split in the form of a stock dividend
paid by Sterling in February 1997.
On March 17, 1997, the day before the announcement of the Merger, the
closing sale price for Sterling Common Stock was $15 5/8 per share, and on
August , 1997, the last trading date immediately prior to the date of this
Proxy Statement, the closing sale price for Sterling Common Stock was
$ per share.
ABSENCE OF TRADING MARKET FOR FIRST HOUSTON CAPITAL STOCK
The last sales transaction in First Houston Common Stock known to First
Houston's management to have occurred prior to the announcement of the Merger
was a private placement of common stock exempt from registration under the
Securities Act by First Houston in March 1995, at a price of $4.00 per share.
There have been no sales of First Houston Preferred Stock since the preferred
stock was offered by First Houston in a private placement exempt from
registration under the Securities Act in March 1991.
48
<PAGE> 51
BUSINESS OF STERLING
GENERAL
Sterling is a bank holding company that provides commercial and retail
banking services through the community banking offices of Sterling Bank, a
banking association Chartered under the laws of the State of Texas ("Sterling
Bank") and headquartered in Houston, Texas. Sterling Bank has fourteen community
banking offices, all of which are located in the greater Houston metropolitan
area. Sterling was incorporated under the laws of the State of Texas in 1980 and
became the parent bank holding company of Sterling Bank in 1981. Sterling Bank
was chartered in Texas in 1974. Sterling completed its initial public offering
on October 22, 1992. At June 30, 1997, Sterling had total assets of $924.2
million, deposits of $792.8 million and shareholders' equity of $65.4 million.
Sterling Bank provides a wide range of retail and commercial banking
services, including demand, savings and time deposits; commercial, real estate
and consumer loans; merchant credit card services; letters of credit; cash
management services and drive-in banking services. In addition, Sterling Bank
facilitates sales of brokerage, mutual funds and insurance products through
third-party vendors. The primary lending focus of Sterling Bank is on commercial
loans and owner-occupied real estate loans to local businesses with annual sales
ranging from $300,000 to $30 million. Typically, borrowers' financing
requirements are between $100,000 and $500,000. Sterling does not seek loans
larger than $2 million per relationship, but will consider larger lending
relationships in cases which involve exceptional levels of credit quality.
Sterling Bank believes that its self-imposed lending limits allow for greater
diversity in the loan portfolio, less competition from large banks and better
pricing opportunities.
Sterling Bank employs a business strategy that is generally known in the
industry as supercommunity banking. Under this strategy, Sterling Bank provides
a broad line of financial products and services to small and medium-sized
businesses and consumers through full service community banking offices. Each
banking office has senior management, with significant lending experience, who
exercise substantial autonomy over credit and pricing decisions, subject to loan
committee approval for larger credits. This decentralized management approach,
coupled with continuity of service by the same staff members, enables Sterling
Bank to develop long-term customer relationships, maintain high quality service
and respond quickly to customer needs. As a result of the development of broad
banking relationships with their customers and the convenience and service of
Sterling Bank's fourteen full-service banking offices, lending and investing
activities are funded almost entirely by core deposits, approximately
three-fourths of which are demand and savings deposits.
Sterling Bank's growth strategy has been concentrated on increasing its
community banking presence in its existing Houston markets, and expanding into
new markets within the greater Houston area in response to the expressed needs
of those markets. Sterling Bank has grown through a combination of internally
generated growth, mergers and acquisitions of additional banking operations, and
the opening of new banking offices.
During 1996, Sterling Bank opened two new community banking offices: one in
the Upper Kirby district of central Houston, and the other in the Galleria area
of Houston. In January 1997, Sterling Bank opened its fourteenth banking office
in the Cypress Station area, north of Houston. Sterling intends to pursue
selected acquisitions of existing banking operations where available and
consistent with its supercommunity banking philosophy. To accommodate
anticipated growth, Sterling continues to upgrade its data processing and
telecommunication systems in order to provide Sterling with the technological
capacity necessary to meet the needs and expectations of its customers and
accommodate growth in Sterling's assets and number of offices.
Sterling does not presently have plans to open additional banking offices
or to make specific additional acquisitions other than First Houston and its
acquisition of a minority interest in Altair. See "Recent Developments."
The principal executive office of Sterling is located at 15000 Northwest
Freeway, Suite 200, Houston, Texas 77040, its telephone number is (713)
466-8300.
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<PAGE> 52
COMPETITION
Sterling Bank engages in highly competitive activities. Each activity and
market served involves competition with other banks, as well as with non-banking
financial and non-financial enterprises. Sterling Bank actively competes with
other banks in its efforts to obtain deposits and make loans, in the scope and
types of services offered, in interest rates paid on time deposits and charged
on loans and in other aspects of banking.
In addition to competing with other commercial banks within and outside
their primary service area, Sterling Bank competes with other financial
institutions engaged in the business of making loans or accepting deposits, such
as savings and loan associations, credit unions, industrial loan associations,
insurance companies, small loan companies, financial companies, mortgage
companies, real estate investment trusts, certain governmental agencies, credit
card organizations and other enterprises. In recent years, competition for funds
from securities brokers for money market accounts has also intensified.
Additional competition for deposits comes from government and private issues of
debt obligations and other investment alternatives for depositors such as money
market funds. Sterling Bank also competes with a variety of other institutions
in the provision of discount brokerage services.
RECENT DEVELOPMENTS
At the time it entered into the Merger Agreement, Sterling also entered
into a letter of intent to acquire a minority interest in Altair Corporation
("Altair"), a company engaged in the developing, marketing and supporting of
financial services software products. A portion of First Houston's total
deposits represent deposits from United States bankruptcy trustees that First
Houston has successfully obtained pursuant to a licensing agreement with Altair.
The consummation of the transaction with Altair is subject to the execution of a
definitive agreement and, as applicable, the approval of banking regulatory
authorities. See "Supervision and Regulation -- Permissible Activities."
MANAGEMENT OF STERLING
BOARD OF DIRECTORS
The following table sets forth certain information concerning Sterling's
directors and senior officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
George Martinez(1)(3)(5).............. 55 Chairman, Chief Financial Officer and
Director of Sterling and Sterling
Bank
Mark T. Giles(1)(3)................... 42 President and Director of Sterling and
Sterling Bank
C.P. Bryan, Jr.(3)(5)(6).............. 47 Executive Vice President and Director
of Sterling and Vice Chairman of
Sterling Bank
John H. Buck(1)(4).................... 55 Director
James M. Clepper(3)................... 51 Director
Walter P. Gibbs, Jr.(1)............... 64 Director
Bruce J. Harper(2).................... 62 Director
Glenn H. Johnson(2)................... 56 Director
James J. Kearney(3)................... 54 Director
Russell I. Orr(2)..................... 63 Director
Christian A. Rasch.................... 34 Director
Steven F. Retzloff(1)(4).............. 57 Director
Raimundo Riojas....................... 57 Director
Cuba Wadlington, Jr.(3)............... 53 Director
</TABLE>
- ---------------
(1) Member of the Executive Committee
(2) Member of the Audit Committee
(3) Member of the Asset/Liability Management
(4) Member of the Compensation Committee
(5) Member of the Director Compensation Committee
(6) Member of the Employee Savings Plan Committee
50
<PAGE> 53
In accordance with the terms of the Agreement, immediately prior to the
Effective Time Sterling will increase the size of its Board of Directors by one,
which vacancy will be filled concurrently with the Merger by a representative
designated by the First Houston Board of Directors prior to the Effective Time.
John B. Carter, Jr. is expected to be designated to fill such vacancy.
The following is a brief biographical summary of the directors and
executive officers of Sterling.
George Martinez has been Chairman of Sterling since 1994, Chairman of
Sterling Bank since December 1989, and Chief Financial Officer of Sterling and
Sterling Bank since January 1997. Prior to 1994, Mr. Martinez was President of
Sterling.
Mark T. Giles has been President of Sterling and Sterling Bank since
January 1995. He was formerly President of Charter Bancshares, Inc., from 1988
to 1995 and President/Chief Executive Officer of Charter National
Bank -- Houston from 1989 to 1995. He also served as director of Charter
Bancshares, Inc. and its subsidiary banks for more than five years preceding the
date he joined Sterling Bank.
C.P. Bryan, Jr. has been Executive Vice President of Sterling since
February 1989 and Vice Chairman of Sterling Bank since December 1989. He is also
Chief Executive Officer of the Champions Office of Sterling Bank. He was
Chairman and President of Sterling Bank from January 1989 to December 1989 and
President of Jersey Village Bank from January 1985 to January 1989.
John H. Buck has been a partner since 1990 in the Houston law firm of Buck,
Keenan & Owens, LLP.
James M. Clepper has been President, Chief Executive Officer and sole
shareholder of Southwest Solvents & Chemicals, an independent chemical
distributor based in Houston, Texas, since 1986.
Walter P. Gibbs, Jr. is retired. He was Chairman of the Sterling Bank
Mangum Office from March 1994 to July 1995. From 1970 to March 1994, Mr. Gibbs
was the President of Guardian Bancshares, Inc. and its subsidiary, Guardian
Bank, prior to the merger of Guardian Bancshares, Inc. with Sterling in March
1994.
Bruce J. Harper has been President and Chief Executive Officer of Harper &
Pearson Company, CPAs, an accounting and consulting firm in Houston, Texas, with
emphasis on serving financial institutions and owner-managed businesses, since
1962.
Glenn H. Johnson has been a principal shareholder in the Houston law firm
of Johnson & Wurzer, P.C. since 1973.
James J. Kearney has been Senior Vice President and Director of the Private
Client Group for the Houston, Texas office of Cowen & Co., a New York Stock
Exchange investment banking and securities brokerage firm, since 1974.
Russell I. Orr has been a certified public accountant practicing in
Houston, Texas with his own firm, Orr & Co., since 1976.
Christian A. Rasch has been a Director of Sucsova Investments Corp., an
investment company with interests primarily in agricultural, trading and
financial enterprises, for the past five years.
Steven F. Retzloff has been President of Retzloff Industries, Inc., a
manufacturer of trailers based in Houston, Texas, for the past five years.
Raimundo Riojas has been President of Duwest, Inc., a joint venture of
Westrade, Inc. and E.I. Dupont de Nemours engaged in the distribution of
agricultural chemical products, for the past five years.
Cuba Wadlington, Jr. has been Senior Vice President, General Manager and a
Director of Transcontinental Gas Pipe Line Corporation since 1995. From 1988 to
1995, he served as Senior Vice President and General Manager of Williams Western
Pipeline Company and Executive Vice President of Kern River Gas Transmission
Company. Mr. Wadlington was elected to the Board of Directors of Sterling on
January 27, 1997, to fill an open position in the Class II Directors.
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<PAGE> 54
SUPERVISION AND REGULATION
References herein to applicable statutes and regulations are brief
summaries thereof, do not purport to be complete and are qualified in their
entirety by reference to such statutes and regulations.
STERLING
Sterling and its second tier holding company, Sterling Bancorporation,
Inc., as well as First Houston (together, the "Companies"), are bank holding
companies registered under the Bank Holding Company Act of 1956, as amended
("BHCA"), and are subject to supervision and regulation by the Federal Reserve
Board. Federal laws subject bank holding companies to particular restrictions on
the types of activities in which they may engage, and to a range of supervisory
requirements and activities, including regulatory enforcement actions for
violations of laws and policies. In addition, Texas law authorizes the Texas
Department of Banking to supervise and regulate a holding company controlling a
state bank.
PERMISSIBLE ACTIVITIES
As bank holding companies, the activities of the Companies, as well as the
activities of entities which are controlled by the Companies or of which any of
the Companies owns 5% or more of the voting securities, are limited by the BHCA
to banking, management and control of banks, furnishing or performing services
for its subsidiaries, or any other activity which the Federal Reserve Board
determines to be incidental or closely related to banking or managing or
controlling banks. In approving acquisitions by any of the Companies of entities
engaged in banking-related activities, the Federal Reserve Board considers a
number of factors, including the expected benefits to the public, such as
greater convenience and increased competition or gains in efficiency, which are
weighed against the risks of possible adverse effects, such as an attempt to
monopolize the business of banking, undue concentration of resources, decreased
or unfair competition, conflicts of interest, or unsound banking practices.
NON-BANKING ACTIVITIES
The BHCA sets forth exceptions to its general prohibition against bank
holding company ownership of voting shares in companies engaged in non-banking
activities. The exceptions include certain activities exempt by grandfather
rights, type of activity and those determined by the Federal Reserve Board to be
closely related to banking or managing or controlling banks. The Economic Growth
and Regulatory Paperwork Reduction Act of 1996 ("EGRPRA"), signed into law on
September 30, 1996, streamlined the non-banking activities application process
for bank holding companies which qualified as well-capitalized and well-managed.
Under the EGRPRA, qualified bank holding companies may commence a regulatory
approved non-banking activity without prior notice to the Federal Reserve Board,
but must provide written notice within 10 days of commencing the activity. Bank
holding companies may acquire a company engaged in a non-banking related
activity if they provide 12 days prior notice to the Federal Reserve Board,
assuming the size of the acquisition does not exceed 10% of risk-weighted assets
of the acquiring bank holding company and the consideration does not exceed 15%
of Tier 1 capital (as described below).
SAFETY AND SOUNDNESS STANDARDS
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") expanded the Federal Reserve Board's authority to prohibit activities
of bank holding companies and their non-banking subsidiaries which represent
unsafe and unsound banking practices or which constitute violations of laws or
regulations. Notably, FIRREA increased the amount of civil money penalties which
the Federal Reserve Board can assess for certain activities conducted on a
knowing and reckless basis, if those activities cause a substantial loss to a
depository institution. The penalties can be as high as $1 million per day.
FIRREA also expanded the scope of individuals and entities against which such
penalties may be assessed.
On July 10, 1995, the four federal agencies that regulate banks and savings
associations (FDIC, Federal Reserve Board, OCC and the Office of Thrift
Supervision) jointly issued guidelines for safe and sound banking operations
(Interagency Guidelines Establishing Standards for Safety and Soundness) as
required by
52
<PAGE> 55
Section 132 of the Federal Deposit Insurance Corporation Improvement Act
("FDICIA"). The guidelines, which became effective August 9, 1995, identify the
fundamental standards that the four agencies have traditionally used to evaluate
operational and managerial controls at insured institutions. An institution's
performance will be evaluated against these standards during the regulators'
periodic onsite examinations.
FIRREA also includes provisions affecting all federally insured financial
institutions in such areas as each institution's performance and record in
meeting community credit needs, as well as acquisitions of savings and loans
institutions.
CAPITAL ADEQUACY, REQUIREMENTS
The Federal Reserve Board monitors the capital adequacy of bank holding
companies. As discussed below, Sterling Bank and Houston National Bank are
subject to the capital adequacy requirements of the FDIC and the Banking
Department of Texas. The Federal Reserve Board uses a combination of risk-based
guidelines and leverage ratios to evaluate capital adequacy.
The Federal Reserve Board has adopted a system using risk-based capital
adequacy guidelines to evaluate the capital adequacy of bank holding companies.
Under the risk-based capital guidelines, different categories of assets are
assigned different risk weights, based generally on the perceived credit risk of
the asset. These risk weights are multiplied by corresponding asset balances to
determine a "risk-related" asset base. Certain off balance sheet items, which
previously were not expressly considered in capital adequacy computations, are
added to the risk-weighted asset base by converting them to a balance sheet
equivalent and assigning to them the appropriate risk weight. In addition, the
guidelines define the capital components. Total capital is defined as the sum of
"core capital elements" ("Tier 1") and "supplemental capital elements" ("Tier
2") capital elements, with "Tier 2" being limited to 100% of "Tier 1." For bank
holding companies, "Tier 1" capital includes, with certain restrictions, common
shareholders' equity, perpetual preferred stock, and minority interests in
consolidated subsidiaries. "Tier 2" capital includes, with certain limitations,
certain forms of perpetual preferred stock, as well as maturing capital
instruments and the reserve for credit losses. The guidelines require
achievement of a minimum ratio of total capital-to-risk-weighted assets of 8.0%
(of which at least 4.0% is required to be comprised of "Tier 1" capital
elements). At December 31, 1996, Sterling's ratios of "Tier 1" and "Total"
capital-to-risk-weighted assets were approximately 10.27%, and 11.44%,
respectively. At December 31, 1996, First Houston's ratios of "Tier 1" and
"Total" capital-to-risk-weighted assets were 12.12 and 12.88 respectively.
In addition to the risk-based capital guidelines, the Federal Reserve Board
and the FDIC have adopted the use of a minimum Tier 1 leverage ratio as an
additional tool to evaluate the capital adequacy of banks and bank holding
companies. The banking organization's Tier 1 leverage ratio is defined to be a
company's "Tier 1" capital divided by its average total consolidated assets. The
leverage ratio adopted by the federal banking agencies requires a 3.0% "Tier 1"
capital to total assets ratio for institutions with the highest regulatory
rating of 1. All other institutions will be expected to maintain a 100 to 200
basis point cushion; that is, these institutions will be expected to maintain a
leverage ratio of 4.0% to 5.0%, Sterling's leverage ratio at December 31, 1996,
was 8.03%, significantly exceeding the regulatory minimum. First Houston's ratio
at December 31, 1996 was 5.75.
IMPOSITION OF LIABILITY FOR UNDERCAPITALIZED SUBSIDIARIES
A bank holding company that fails to meet the applicable risk-based capital
standards will be at a disadvantage. For example, Federal Reserve Board Policy
discourages the payment of dividends by a bank holding company from borrowed
funds as well as payments that would adversely affect capital adequacy. Failure
to meet the capital guidelines may result in institution by the Federal Reserve
Board of appropriate supervisory or enforcement actions. FDICIA requires bank
regulators to take "prompt corrective action" to resolve problems associated
with insured depository institutions whose capital declines below certain
levels.
53
<PAGE> 56
AUDIT REPORTS
As of January 1, 1994, FDICIA amended the Federal Deposit Insurance Act to
include provisions to strengthen the ability of the banking regulatory system to
identify deficiencies in financial management of insured deposit institutions.
The regulations promulgated by the FDIC to implement this part of the act
require only depository institutions with assets of $500 million or more to
conform to the new procedures although the agency requirements that every
depository institution, regardless of size, should voluntarily have an
independent public accountant and establish an independent audit committee. The
FDICIA requires insured institutions to submit annual audit reports prepared by
independent auditors to federal and state regulators. The audit report of the
institution's holding company can be used to satisfy this requirement. Auditors
must apply procedures agreed to by the FDIC to determine compliance by the
institution or holding company with legal requirements designated by the FDIC.
The annual audit report must include financial statements prepared in accordance
with generally accepted accounting principles, statements concerning
management's responsibility for the financial statements and internal controls
designated by the FDIC, and an attestation by the auditor regarding the
statements of management. For certain large institutions, independent auditors
may be required to review quarterly financial statements. FDICIA requires that
independent audit committees be formed, consisting of outside directors only.
Sterling has an audit committee comprised solely of outside directors who are
either certified public accountants or who have extensive banking experience,
and, therefore, is in compliance with the requirements of a large institution.
Commencing in 1996, Sterling Bank qualified as an institution with assets of
$500 million or more and was subject to the audit and reporting requirements of
FDICIA and will qualify as such an institution after the Merger.
ACQUISITIONS BY BANK HOLDING COMPANIES
Federal Reserve Board Approval. The BHCA requires a bank holding company to
obtain the prior approval of the Federal Reserve Board before it may acquire all
or substantially all of the assets of any bank, or ownership or control of any
voting shares of any bank, if after such acquisition it would own or control,
directly or indirectly, more than 5% of the voting shares of such bank. In
approving bank acquisitions, the Federal Reserve Board considers the financial
and managerial resources and future prospects of the bank holding company and
the banks concerned, the convenience and needs of the communities to be served,
and various competitive factors. The Attorney General of the United States may,
within 30 days after approval of an acquisition by the Federal Reserve Board,
bring an action challenging such acquisition under the federal antitrust laws,
in which case the effectiveness of such approval is stayed pending a final
ruling by the courts.
In the State of Texas, no holding company may acquire a state bank in Texas
if the holding company would control in excess of 20% of the federally insured
deposits in Texas.
Mergers of Banks and Thrifts. FDICIA has eased restrictions on
cross-industry mergers. Members of the Bank Insurance Fund ("BIF") and the
Savings Association Insurance Fund ("SAIF") are generally allowed to merge,
assume each other's deposits, and transfer assets in exchange for an assumption
of deposit liabilities. A formula applies to treat insurance assessments
relating to acquired deposits as if they were still insured through the acquired
institutions' insurance fund. The transaction must be approved by the
appropriate federal banking regulator. In considering such approval, the
regulators take into account applicable capital requirements, certain interstate
banking restrictions, and other factors.
Interstate Acquisitions. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Branching Act"), discussed below, has
increased the ease and likelihood of interstate acquisitions throughout much of
the United States. The Federal Reserve Board, however, will only allow the
acquisition by a bank holding company of an interest in any bank located in
another state if the statutory laws of the state in which the target bank is
located expressly authorize such acquisition. Despite Texas' having opted out of
the Riegle-Neal Act, the Texas Banking Act permits, in certain circumstances,
out-of-state bank holding companies to acquire certain existing banks and bank
holding companies in Texas.
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<PAGE> 57
INTERSTATE BANKING
Congress passed legislation in 1994 to remove geographic restrictions on
bank expansion. The Interstate Branching Act removes state law barriers to
acquisitions in all states and allows multistate banking operations to merge
into a single bank with interstate branches. Interstate banking and branching
authority will be subject to certain conditions and restrictions, such as
capital adequacy, management and Community Reinvestment Act compliance. The
Interstate Branching Act preempts existing barriers that restrict entry into all
states -- such as regional compacts and reciprocity agreements -- thus creating
opportunities for expansion into markets that were previously closed. Under the
law, bank holding companies are now able to acquire banks in any state, subject
to certain conditions. Banks acquired pursuant to this authority may
subsequently be converted to branches. Interstate branching is permitted by
allowing banks to merge across state lines to form a single institution.
Interstate merger transactions can be used to consolidate existing multistate
operations or to acquire new branches. A bank may establish a new branch as its
initial entry into a state only if the state has authorized de novo branching.
In addition, out-of-state banks may merge with a single branch of a bank if the
state has authorized such a transaction. The interstate branching provisions
become effective on June 1, 1997, unless a state took action before that time.
States were allowed to enact legislation to opt in early or to opt out
completely, as long as they did so before June 1, 1997. Texas has elected to
"opt out" of the Interstate Branching Act.
STERLING BANK
Sterling Bank is a Texas-chartered banking association, the deposits of
which are insured by the FDIC, and is not a member of the Federal Reserve
System;. Therefore, Sterling Bank is subject to supervision and regulation by
the FDIC and the Texas Department of Banking. Pursuant to such regulation,
Sterling Bank is subject to special restrictions, supervisory requirements and
potential enforcement actions. The Federal Reserve Board also has supervisory
authority which directly affects Sterling Bank. Sterling Bank is a member of the
Federal Home Loan Bank System.
PERMISSIBLE ACTIVITIES FOR STATE-CHARTERED INSTITUTIONS
The Texas Constitution provides that a Texas-chartered bank has the same
rights and privileges that are or may be granted to national banks domiciled in
Texas. FDICIA provides that, effective December 19, 1992, no state bank or
subsidiary thereof may engage as principal in any activity not permitted for
national banks, unless the institution complies with applicable capital
requirements and the FDIC determines that the activity poses no significant risk
to the BIF.
Many of the statutory restrictions limit the participation of such
institutions in the securities and insurance product markets. Presently these
restrictions do not affect Sterling Bank, since it is not involved in the types
of transactions covered by the restrictions.
BRANCHING
Texas law provides that a Texas-chartered bank can establish a branch
anywhere in Texas provided that the branch is approved in advance by the
Commissioner. The branch must also be approved by the FDIC, which considers a
number of factors, including financial history, capital adequacy, earnings
prospects, character of management, needs of the community, and consistency with
corporate powers. There are no federal limitations on the ability of insured
non-member state banks to branch across state lines; however, such branching
would be subject to applicable state law restrictions.
RESTRICTIONS ON SUBSIDIARY BANKS
Dividends paid by Sterling Bank provided substantially all of Sterling's
cash flow during 1996. Assuming approval of the Merger by the First Houston
Shareholders and its consummation and the anticipated merger of Houston National
Bank with and into Sterling Bank, Sterling Bank would provide substantially all
of Sterling's cash flow in the foreseeable future. Under federal law, Sterling
Bank may not pay a dividend that results in an "undercapitalized" situation. At
June 30, 1997, there was an aggregate of approximately
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<PAGE> 58
$19.8 million available for the payment of dividends by Sterling Bank to
Sterling (on a pro forma basis assuming consummation of the Merger) without
prior regulatory approval.
As in the case with Sterling, substantially all of First Houston's cash
flow comes from dividends paid by First Houston's subsidiary bank, Houston
National. The National Bank Act provides that a national banking association may
not pay dividends (1) which cause the withdrawal or impairment of its capital,
(2) if losses have been sustained equal to or exceeding its undivided profits
then on hand, (3) in an amount greater than its net profits then on hand,
deducting therefrom its losses and bad debts, (4) unless the surplus fund is
equal to or greater than its common stock, or unless there has been added to
surplus funds not less than 1/10th of its net profits of the preceding half year
in the case of quarterly or semi-annual dividends or not less than 1/10th of its
net profits of the preceding two consecutive half year periods in the case of
annual dividends and (5) without the approval of the OCC, if dividends declared
in any calendar year exceed the total of the Bank's net profits for that year
combined with its retained earnings for the preceding two years, less any
required transfers to surplus. At June 30, 1997, an aggregate of approximately
$1.5 million was available for the payment of dividends by Houston National to
First Houston.
Other requirements in Texas law affecting the operation of subsidiary
banks, include requirements relating to maintenance of reserves against
deposits, restrictions on the nature and amount of loans that may be made and
the interest that may be charged thereon and restrictions relating to
investments and other activities. As Texas state chartered banks, subsidiary
banks are subject to regulation, supervision and periodic examination by the
Texas Department of Banking.
EXAMINATIONS
The FDIC periodically examines and evaluates insured banks. FDIC
examinations are conducted every 12 months. FDICIA authorizes the FDIC to assess
the institution for its costs of conducting the examinations.
The Commissioner also conducts examinations annually, unless additional
examinations are deemed necessary to safeguard the interests of shareholders,
depositors and creditors. The Commissioner may accept the results of a federal
examination in lieu of conducting an independent examination.
DEPOSIT INSURANCE ASSESSMENTS
The FDIC is required by the Federal Deposit Insurance Act to assess all
banks in order to adequately fund the BIF so as to resolve any insured
institution that is declared insolvent by its primary regulator. FDICIA required
the FDIC to establish a risk-based deposit insurance premium schedule. The
risk-based assessment system is used to calculate a depository institution's
semi-annual deposit insurance assessment based upon the designated reserve ratio
for the deposit insurance fund and the probability and extent to which the
deposit insurance fund will incur a loss with respect to the institution. In
addition, the FDIC can impose special assessments to cover the cost of
borrowings from the U.S. Treasury, the Federal Financing Bank, and BIF member
banks.
Under the current risk-based assessment system, each depository institution
is placed in one of nine assessment categories based on certain capital and
supervisory measures. Institutions assigned to higher-risk categories -- that
is, institutions that pose a greater risk of loss to their respective deposit
insurance funds -- pay assessments at higher rates than institutions that pose a
lower risk. Each of Sterling Bank and Houston National Bank was assessed a
weighted average premium of $0.16 per $100 of deposits for the year ended
December 31, 1995.
On August 8, 1995, the FDIC amended its regulations to change the range of
deposit insurance assessments charged to members of the BIF from the
then-prevailing range of .23% to .31% of deposits, to a range of .04% to .31% of
deposits. In connection with the new rate schedule, the FDIC established a
process for raising or lowering all rates for BIF-insured institutions
semi-annually if conditions warrant a change. Under this new system, the FDIC
will have the flexibility to adjust the entire BIF assessment rate schedule
twice a year without seeking public comment first, but only within a range of
five basis points or five cents per $100 above or below the premium schedule
adopted. Changes in the rate schedule outside the five basis points
56
<PAGE> 59
or five cent range above or below the current schedule can be made by the FDIC
only after a full rulemaking with opportunity for public comment.
Utilizing its authority to adjust the assessment rate schedule without
utilizing the notice and comment procedure, the FDIC adjusted the original
schedule by reducing the assessment rates four basis points so that effective
January 1, 1996 the range of deposit insurance assessment for the BIF-member
institutions is currently between 0% and .27% of deposits. BIF-member
institutions which qualify for the 0% assessment category will, however, still
have to pay the $1,000 minimum semi-annual assessment required by federal
statute. Sterling Bank was assessed the minimum amount of $2,000 for the year
ended December 31, 1996.
The EGRPRA contains a comprehensive approach to recapitalizing the SAIF in
order to bring it into parity with the BIF and to assure the payment of the
Financing Corporation's ("FICO") bond obligations. Under this new act, banks
insured under the BIF are required to pay a portion of the interest due on bonds
that were issued by FICO to help shore up the ailing Federal Savings and Loan
Insurance Corporations ("FSLIC") in 1987. The amount of FICO debt service to be
paid by all BIF-insured institutions is currently estimated to be approximately
$320,343,000 per year, or $0.128 per $100 of deposits from 1997 until the year
2000, when the obligations of BIF-insured institutions increases to
approximately $598,500,000, or $0.240 per $100 of deposits per year through the
year 2019.
EXPANDING ENFORCEMENT AUTHORITY
One of the major additional impacts imposed on the banking industry by
FDICIA is the increased ability of banking regulators to monitor the activities
of banks and their holding companies. In addition, the Federal Reserve Board and
FDIC have extensive authority to police unsafe or unsound practices and
violations of applicable laws and regulations by depository institutions and
their holding companies. For example, the FDIC may terminate the deposit
insurance of any institution which it determines has engaged in an unsafe or
unsound practice. The agencies can also assess civil money penalties, issue
cease and desist or removal orders, seek injunctions, and publicly disclose such
actions. FDICIA, FIRREA and other laws have expanded the agencies' authority in
recent years, and the agencies have not yet fully tested the limits of their
powers. Unlike the federal agencies, the Texas authorities generally do not
possess enforcement powers parallel to those enumerated above to address
violations of the Texas Banking Code.
EFFECT ON ECONOMIC ENVIRONMENT
The policies of regulatory authorities, including the monetary policy of
the Federal Reserve Board, have a significant effect on the operating results of
bank holding companies and their subsidiaries. Among the means available to the
Federal Reserve Board to affect the money supply are open market operations in
U.S. government securities, changes in the discount rate on member bank
borrowings, and changes in reserve requirements against member bank deposits.
These means are used in varying combinations to influence overall growth and
distribution of bank loans, investments and deposits, and their use may affect
interest rates charged on loans or paid for deposits.
Federal Reserve Board monetary policies have materially affected the
operating results of commercial banks in the past and are expected to continue
to do so in the future. The nature of future monetary policies and the effect of
such policies on the business and earnings of Sterling and its subsidiaries
cannot be predicted.
CONSUMER LAWS AND REGULATIONS
In addition to these laws and regulations, banks are also subject to
certain consumer laws and regulations that are designed to protect consumers in
transactions with banks. Among the more prominent of such laws and regulations
are the Truth in Lending Act, the Truth in Savings act, the Electronic Funds
Transfer Act, the Expedited Funds Availability Act, the Credit Reinvestment Act,
the Equal Credit Opportunity Act, and the Fair Housing Act. These laws and
regulations mandate certain disclosure requirements and regulate the manner in
which financial institutions must deal with customers when taking deposits or
making loans to such customers. Sterling Bank and Houston National Bank must
comply with the applicable provisions of these consumer protection laws and
regulations as part of their ongoing customer relations.
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<PAGE> 60
SELECTED CONSOLIDATED STATEMENTS OF EARNINGS OF FIRST HOUSTON
The selected consolidated statements of earnings set forth below with
respect to the results of the First Houston's operations for each of the years
in the three-year period ended December 31, 1996 and the six months ended June
30, 1996 and June 30, 1997 should be read in conjunction with, and are qualified
in their entirety by reference to, the First Houston consolidated financial
statements and the notes thereto included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30 YEAR ENDED DECEMBER 31
----------------------- ------------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Interest income.................. $ 4,879 $ 4,041 $ 8,758 $ 7,534 $ 4,740
Interest expense................. 1,672 1,437 3,080 2,714 1,304
---------- ---------- ---------- ---------- ----------
Net interest income.............. 3,207 2,604 5,678 4,820 3,436
Provision for credit losses...... 190 98 230 230 505
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for credit losses.... 3,017 2,506 5,448 4,590 2,931
---------- ---------- ---------- ---------- ----------
Noninterest income............... 298 298 634 532 605
Noninterest expenses............. 2,300 2,025 5,220 4,048 2,713
---------- ---------- ---------- ---------- ----------
Income before income taxes....... 1,015 779 862 1,074 823
Provision for income taxes....... 344 234 363 257 272
---------- ---------- ---------- ---------- ----------
Net income....................... $ 671 $ 545 $ 499 $ 817 $ 551
========== ========== ========== ========== ==========
Net income per common share...... $ 0.31 $ 0.26 $ 0.20 $ 0.43 $ 0.39
</TABLE>
58
<PAGE> 61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF FIRST HOUSTON
Management's Discussion and Analysis of Financial Condition and Results of
Operations of First Houston analyzes the major elements of First Houston's
consolidated financial results included herein. The following discussion should
be read in conjunction with First Houston's consolidated financial statements
and accompanying notes and other detailed information appearing elsewhere in
this Proxy Statement. All of First Houston's lending and banking activities are
conducted by Houston National Bank.
PERFORMANCE SUMMARY
First Houston's net earnings for the first six months of 1997 were
$671,002, up $125,743 from the first six months of 1996. This increase is due to
the increase in net interest income earned during the period, which is in turn
due to the increase in earning assets from 1996 to 1997. On a weighted average
per share basis, net earnings for the first six months of 1997 were $0.31 per
share, compared to $0.26 for the first six months of 1996.
Net earnings for 1996 were $499,069, a decrease of $317,738 from the
$816,807 recorded for 1995. Net earnings for 1995 increased by $266,030 over the
$550,777 recorded for 1994, which was primarily due to an approximately $1.4
million increase in net interest income after the provision for credit losses.
On a weighted average per share basis, net earnings for 1996 were $0.20 per
share of common stock as compared to $0.43 per share for 1995. For 1994, net
earnings (loss) per share of common stock were $0.39. First Houston has a
stock-based (stock option) compensation plan for which no compensation cost has
been recognized. Compensation costs under such plan, if recognized, would have
reduced net earnings by $5,086, $5,000 and $5,116, respectively, in years 1996,
1995 and 1994, and would not have affected earnings per share.
Two industry measures of the performance by a banking institution are its
return on average assets and return on average equity. Return on average assets
("ROA") measures net earnings in relation to average total assets and indicates
a bank's ability to employ its resources profitably. For 1996, First Houston's
ROA was 0.41%, compared to 0.79% for 1995 and 0.85% for 1994. The industry
averages for ROA were 1.23% for 1996 and 1.21% for 1995. Return on average
equity ("ROE") is determined by dividing annual net earnings by average
shareholders' equity and indicates how effectively a bank can generate net
income on the capital invested by its shareholders. For 1996, First Houston's
ROE was 6.28%, compared to 13.02% for 1995 and 11.79% for 1994. The industry
averages for ROE for 1996 and 1995 were 12.95% and 12.52%, respectively.
First Houston has typically under-performed the industry average in ROA
because of the high percentage of its total assets that are maintained in
investment securities in support of the bankruptcy trustee deposits maintained
by First Houston. This asset mix has, however, enabled First Houston to often
outperform the industry average in ROE because less capital is required to be
maintained for investment securities assets as opposed to other income-producing
assets such as loans.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income represents the amount by which interest income on
interest-earning assets, including investment securities and loans, exceeds
interest paid on interest-bearing liabilities, including deposits and other
borrowed funds. Net interest income is the principal source of First Houston's
earnings. Interest rate fluctuations, as well as changes in the amount and type
of earning assets and liabilities, combine to affect net interest income.
Net interest income for the first six months of 1997 was $3,207,000, an
increase of $603,000 over the $2,604,000 in net interest income earned the first
six months of 1996. This increase was due to a greater percentage increase in
interest income over the increase in interest expense, which in turn, was due to
a larger base of income-earning assets in the first six months of 1997 than in
the first six months of 1996 and to a higher yield on income-earnings assets in
the first six months of 1997 compared to the same period in 1996. In the first
six months of 1997, the average yield on interest-earning assets was 8%,
compared to 7.58% during the
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<PAGE> 62
comparable period in 1996 and the net interest margin increased to 5.26% in 1997
compared to 4.89% in the first six months of 1996.
Net interest income for 1996 was $5,678,180, up $628,371, or 13.04%, from
$4,819,809 for 1995. Such increase in net interest income was mainly due to
increased interest income of $1,224,342, partially offset by increased interest
expense of $365,971 in 1996 compared to 1995. Net interest income increased in a
greater amount than total interest expense because of a $4.97 million increase
in average interest earning assets over interest bearing liabilities, resulting
from an increase in low- and non-interest bearing liabilities such as corporate
demand deposit accounts. For 1996, the yield on interest-earning assets was
7.83%, a decrease of four basis points from 7.87% during 1995. Total funding
costs decreased five basis points from 2.81% to 2.76% between the two years. The
decrease in the yield on both interest-earning assets and total funding costs
resulted from both from interest rate fluctuations in the national economy as a
whole and from an increase in the proportion of First Houston's liabilities in
low- and non-interest bearing liabilities. The net interest margin (net interest
income divided by average total interest-earning assets) decreased from 4.97%
for 1995 to 4.86% for 1996. This decrease was due to an increase in average
earning assets and an increase in the proportion of earning assets held in lower
yielding assets such as investment securities.
To provide a more in-depth analysis of net interest income, the average
balance sheets and net interest income analysis presented below reflect the
contribution of interest-earning assets to overall net interest income and the
impact of the cost of funds.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------
1997 1996
-------------------------------- --------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
-------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold.................................... $ 6,236 $ 166 5.32% $ 10,350 $ 280 5.41%
Investment securities................................. 53,819 1,454 5.40% 47,128 1,224 5.19%
Loans, net of unearned discount(1).................... 61,831 3,259 10.54% 49,097 2,535 10.32%
Total interest-earning assets........................... 121,886 4,879 8.00% 106,575 4,041 7.58%
Total assets............................................ 130,063 4,879 7.50% 114,269 4,041 7.07%
Deposits:
Interest-bearing...................................... 97,006 1,667 3.43% 83,521 1,437 3.44%
Noninterest-bearing................................... 23,093 -- n/a 22,466 -- n/a
Total deposits.......................................... 120,099 1,667 2.77% 105,987 1,437 2.71%
Shareholders' equity.................................... 8,177 7,819
Interest rate spread(2)................................. 4.57% 4.14%
Net interest income and margin(3)....................... 3,212 5.26% 2,604 4.89%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------- -------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
-------- -------- ---------- -------- -------- ---------- ------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold...... $ 11,544 $ 621 5.38% $ 6,425 $ 318 4.95% $1,939 $ 130 6.70%
Investment securities... 49,348 2,672 5.41% 41,385 2,190 5.29% 18,558 893 4.81%
Loans, net of unearned
discount(1)........... 50,968 5,218 10.24% 47,906 4,921 10.27% 38,031 3,556 9.35%
Total interest-earning
assets.................. 111,860 8,511 7.61% 95,716 7,429 7.76% 58,528 4,579 7.82%
Total assets.............. 120,337 8,511 7.07% 103,570 7,429 7.17% 65,185 4,579 7.02%
Deposits:
Interest-bearing........ 88,052 3,077 3.49% 76,876 2,671 3.47% 45,423 1,302 2.87%
Noninterest-bearing..... 23,642 0 n/a 19,548 0 n/a 14,692 0 n/a
Total deposits............ 111,694 3,077 2.75% 96,424 2,671 2.77% 60,115 1,302 2.17%
Shareholders' equity...... 7,952 6,276 4,673
Interest rate spread(2)... 4.33% 4.34% 4.96%
Net interest income and
margin(3)............... 5,434 4.86% 4,758 4.97% 3,277 5.60%
</TABLE>
60
<PAGE> 63
- ---------------
(1) Loan origination and commitment fees are recognized as interest income at
the time of funding. These fees aggregated $246,000, $105,000 and $161,000
for the years ended December 31, 1996, 1995 and 1994, respectively, and
$125,000 for the six months ended June 30, 1997. Related direct costs are
not separately allocated to loans but are charged to noninterest expense in
the period incurred. The net effect of not recognizing such fees and related
costs over the life of the related loan is not considered to be material to
the financial statements. For the purpose of calculating loan yields,
average loan balances include nonaccrual loans with no related interest
income.
(2) The interest rate spread is the difference between the average yield on
interest-earning assets and the average rate paid on interest-bearing
liabilities.
(3) The net interest margin is equal to net interest income divided by average
interest-earning assets.
The following rate/volume analysis depicts the portions of net change in
interest income due to changes in volume or rate. The changes in interest due to
both rate and volume in the rate/volume analysis table have been allocated to
volume or rate change in proportion to the absolute amounts of the change in
each.
<TABLE>
<CAPTION>
JUNE 1997 VS.
JUNE 1996 1996 VS. 1995 1995 VS. 1994
---------------------- ------------------------ ------------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN: DUE TO CHANGE IN: DUE TO CHANGE IN:
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ----- ------ ------ ----- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold................ $(111) $(3) $(114) $ 253 $ 50 $ 303 $ 301 $(113) $ 188
Investment securities............. 174 55 229 421 61 482 1,098 199 1,297
Loans, net of unearned
discount(1)..................... 658 64 722 315 (18) 297 923 442 1,365
Total interest income............... 581 256 837 1,253 (171) 1,082 2,909 (59) 2,850
Total interest-bearing sources...... 232 (2) 230 388 18 406 902 467 1,369
Net interest income................. 374 233 607 803 (127) 676 2,082 (601) 1,481
</TABLE>
NONINTEREST INCOME
For 1996, aggregate noninterest income totaled approximately $634,000, an
increase of approximately $102,000, or 19.2%, over 1995. This increase was
largely the result of a significant increase in the number of deposit accounts,
which, in turn caused an increase in fee income from various customer service
fees. The Company recorded securities gains of approximately $86,600 in 1995
compared to securities losses of $645 in 1995.
For the years 1996, 1995 and 1994, First Houston's ratio of noninterest
income to total income was 6.75%, 6.60% and 11.32%, respectively. The trend in
this ratio over the last three years reflects the increase of bankruptcy trustee
deposits in 1995 that contribute to total income but not to noninterest income.
NONINTEREST EXPENSE
Noninterest expense totaled approximately $2,300,000 during the first six
months of 1997 as compared to $2,025,000 in the first six months of 1996. The
increase of $275,000 reflected increases in every component portion of
noninterest expense (except for a decrease in salaries and benefits of $24,000),
with the largest increase in total dollars coming in net occupancy expense,
which increased $90,000 in the first six months of 1997 as compared to 1996.
Noninterest expense totaled approximately $5.2 million for 1996, an
approximately $1.2 million or 29% increase from 1995. Such increase was due to
an increase in the amount spent by First Houston for employee compensation and
an increase in license fees payable with respect to the software used for the
bankruptcy trustee deposits. The license fees for the bankruptcy trustee
software are based on the amount of bankruptcy trustee deposits under
management, and an increase in the amount of bankruptcy trustee deposits results
in an increase in the license fees payable for the software. In 1996,
noninterest expense equaled 3.95% of average assets as compared to 3.36% for
1995. Salaries and employee benefits increased by approximately $761,000 as the
result of the accruals for bonuses and deferred compensation.
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<PAGE> 64
Net occupancy expense increased by approximately $76,500, or 20.96%, due to
expenditures for maintenance of equipment and capital improvements to the
banking facility. Data processing expense increased from approximately $294,000
to approximately $321,000, or approximately 9.0%, from 1995 due to the costs
associated with a conversion to the data processing system of another vendor
made necessary by the termination of operations by First Houston's previous data
processing vendor. Other noninterest expense increased approximately $286,000 or
approximately 44.39%, due to increase in professional and legal costs and to
license fees payable with respect to the software used for the bankruptcy
trustee deposits. Those license fees are the single largest component of other
noninterest expenses.
INCOME TAXES
For 1996, First Houston recorded federal income tax expense of $363,200
compared to approximately $257,000 for 1995. The effective tax rates were 42.1%
and 23.9% for 1996 and 1995, respectively. The increased rate is the result of
converting from cash basis reporting to accrual basis for federal income tax
purposes. The effective tax rates in 1994 and 1993 were approximately 33.0% and
4.0%, respectively.
IMPACT OF INFLATION
The effects of inflation on the local economy and on First Houston's
operating results have been relatively modest for the past several years. Since
substantially all of First Houston's assets and liabilities are monetary in
nature, such as cash, investments, loans and deposits, their values are less
sensitive to the effects of inflation than to changing interest rates, which do
not necessarily change in accordance with inflation rates. First Houston tries
to control the impact of interest rate fluctuations by managing the relationship
between its interest rate fluctuations by managing the relationship between its
interest rate sensitive assets and liabilities.
LOAN PORTFOLIO
During 1996, loans (net allowance for credit losses) increased
approximately $8.2 million, or approximately 17.2%, from $48 million at December
31, 1995 to approximately $56.2 million as the First Houston's loan demand
remained strong. During 1995, loans increased approximately $4.8 million, or
approximately 11%, from approximately $43.5 million at December 31, 1994 to
approximately $48.3 million. The growth in First Houston's loan portfolio has
resulted from increased loan demand in the Houston banking market generally and
focused marketing initiatives by First Houston. Over the last few years, First
Houston has been successful in marketing its lending and other banking services
to small to medium-sized, closely-held businesses, primarily due to First
Houston's ability to be more responsive to the needs of these customers than the
large financial institutions that increasingly dominated the Houston banking
market in recent years. A substantial portion of the growth in First Houston's
loan portfolio has come from such customers. At June 30, 1997 net loans totaled
approximately $64,857,000, up approximately $7,961,000 from December 31, 1996.
This increase reflects a continuation of the trends established in prior periods
of improving markets conditions and successful marketing efforts by First
Houston's loans officers.
At December 31, 1996, net loans represented approximately 46% of total
deposits and approximately 42% of total assets, whereas at December 31, 1995,
the percentages were approximately 43% and 40%, respectively.
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<PAGE> 65
The following table summarizes the loan portfolio of First Houston by type
of loan as of December 31, 1992 through 1996 and as of June 30, 1997.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
AS OF JUNE 30, --------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------------- -------------- -------------- -------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------- ---- ------- ---- ------- ---- ------- ---- ------- ---- ------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and industrial........ $20,744 32.0% $18,697 33.0% $18,123 37.3% $17,796 40.5% $15,817 47.2% $14,122 46.8%
Real estate:
Mortgage.............. 35,297 54.4 30,570 54.0% 22,498 46.4% 20,758 47.2% 12,490 37.3% 10,997 36.4%
Construction.......... 4,237 6.5 2,998 5.3% 1,657 3.4% 914 2.1% 1,443 4.3% 461 1.5%
Installment............. 4,368 6.7 4,150 7.3% 4,736 9.8% 4,510 10.2% 3,756 11.2% 4,629 15.3%
Purchased Receivables... 211 0.4 243 0.4% 1,502 3.1% 0 0 0
------- ---- ------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total........... $64,857 100% $56,658 100% $48,516 100% $43,978 100% $33,506 100% $30,209 100%
======= ==== ======= ==== ======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
The primary lending focus of First Houston is on commercial loans and real
estate loans to local businesses for owner-occupied property. First Houston
makes commercial loans primarily to small to medium-sized businesses and
professionals with revenues from $500,000 to $20 million. Houston National Bank
offers a variety of commercial lending products including revolving lines of
credit, letters of credit, working capital loans, and loans to finance accounts
receivable, inventory and equipment. Typically, Houston National Bank's
commercial loans have floating rates of interest, are for varying terms
(generally not exceeding three years), are personally guaranteed by the
principal shareholders of corporate borrowers and are secured by accounts
receivable, inventory or other business assets. In addition to the commercial
loans secured solely by non-real estate business assets, First Houston makes
commercial loans that are secured by owner-occupied real estate, as well as
other business assets.
Prior to making any commercial loan, First Houston analyzes the borrower's
financial statements and cash flows. First Houston also inspects the collateral
and visits the borrower's place of business and reviews other information. While
the loan is outstanding, First Houston monitors the financial condition of the
borrower through the periodic receipt and review of updated financial
information.
In addition to commercial loans secured by real estate, First Houston makes
residential and, to a lesser extent, commercial mortgage loans to finance the
purchase of real property, generally real estate on which structures have
already been completed. First Houston's residential mortgage loans are secured
by first liens on the underlying real property, have fixed interest rates, and
generally amortize over a 15-year period with balloon payments due at the end of
three years. Upon the expiration of each three-year period, First Houston may,
but is not obligated to, renew the loan at the then current market rate for an
additional three-year period. These loans are limited generally to 60 to 80% of
the property value.
First Houston's commercial mortgage loans are secured by first liens on the
underlying real estate, typically have floating interest rates, and amortize
over a 15- to 30-year period with balloon payments due at the end of three
years. In underwriting commercial mortgage loans, consideration is given to the
property's operating history, future operating projections, current and
projected occupancy, location and physical condition. The underwriting analysis
also includes credit checks, appraisals, environmental surveys, and a review of
the financial condition of the borrower.
First Houston also makes loans to finance the construction of residential
and, to a limited extent, nonresidential properties, such as churches.
Construction loans generally are secured by first liens on real estate and have
floating interest rates. First Houston conducts periodic inspections, either
directly or through an architect or other agent, prior to approval of periodic
draws on these loans. Underwriting guidelines similar to those described above
are also used in Houston National Bank's construction lending activities.
First Houston makes automobile, boat, home improvement and other loans to
customers. These loans are primarily made to customers with other relationships
with First Houston.
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The maturity ranges of the loan portfolio and the amount of loans with
predetermined interest rates and floating rates in each maturity range as of
December 31, 1996 are summarized in the following table.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------------
DUE AFTER
DUE IN ONE YEAR ONE THROUGH DUE AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
--------------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial, financial, and industrial...... $12,937,610 $ 5,549,389 $ 209,560 $18,896,559
Real estate -- mortgage.................... $ 8,325,559 $18,125,990 $4,118,796 $30,570,344
Real estate -- construction................ $ 1,352,792 $ 1,574,516 $ 71,009 $ 2,998,316
----------- ----------- ---------- -----------
Total............................ $22,615,961 $25,249,894 $4,399,364 $52,285,219
=========== =========== ========== ===========
Loans with a predetermined interest rate... $10,998,024 $1,700,165
Loans with a floating interest rate........ $14,251,870 $2,699,199
----------- ----------
Total............................ $25,249,894 $4,399,364
=========== ==========
</TABLE>
As of December 31, 1996, there was no concentration of loans to any one
type of industry exceeding 10% of total loans nor were there any loans
classified as highly-leveraged transactions.
NONPERFORMING LOANS AND ASSETS
First Houston has several procedures in place to assist in maintaining the
overall quality of its loan portfolio. First Houston has established
underwriting guidelines to be followed by its officers. First Houston also
monitors its delinquency levels for any negative or adverse trends and
particularly monitors credits which have total exposures of $50,000 or more.
However, there can be no assurance that First Houston's loan portfolio will not
become subject to increasing pressures from deteriorating borrower credit due to
general economic conditions.
First Houston's loan portfolio quality improved during 1996 reflecting the
general improvement in the U.S. economy as a whole. Nonperforming assets
(nonperforming loans and real estate acquired by foreclosure) were approximately
$79,000, or approximately .06% of total assets, at June 30, 1997, compared to
approximately $274,000, or approximately 0.21% of total assets, at December 31,
1996 and approximately $542,000, or approximately 0.45% of total assets, at
December 31, 1995.
First Houston generally places a loan on nonaccrual status and ceases
accruing interest when loan payment performance is deemed unsatisfactory and all
loans past due 90 days are placed on nonaccrual status, unless the loan is both
well secured and in the process of collection. Cash payments received while a
loan is classified as nonaccrual are recorded as a reduction of principal as
long as doubt exists as to collection. First Houston is sometimes required to
revise a loan's interest rate or repayment terms in a troubled debt
restructuring. At each of June 30, 1997, December 31, 1996, December 31, 1995
and December 31, 1994, First Houston had no restructured loans. Total
nonperforming loans (nonaccrual loans and restructured loans) at June 30, 1997
were approximately $2,000, compared to approximately $236,000, or approximately
0.18% of total assets, at December 31, 1996 and approximately $542,000, or
approximately 0.45% of total assets, at December 31, 1995. At June 30, 1997,
loans past due 90 days or more and still accruing interest were approximately
$2,000 compared to approximately $139,137 at December 31, 1996, $173,000 at
December 31, 1995 and approximately $84,000 at December 31, 1994.
As real estate market values change, First Houston updates appraisals on
loans secured by real estate on an ongoing basis, particularly those categorized
as nonperforming loans and potential problem loans. In instances where updated
appraisals reflect reduced collateral values, an evaluation of the borrower's
overall financial condition is made to determine the need, if any, for possible
write downs, appropriate additions to the allowance for credit losses or
treatment as an in-substance foreclosure.
64
<PAGE> 67
The following table presents information regarding nonperforming loans and
assets as of December 31, 1992 through 1996 and as of June 30, 1997.
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
JUNE 30, -------------------------------------
1997 1996 1995 1994 1993 1992
-------- ----- ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans(1).................... $ 0 $ 97 $ 369 $ 25 $ 325 $ 166
Restructured loans..................... 0 0 0 0 0 34
------ ----- ----- ----- ----- -----
Total nonperforming loans.... $ 0 $ 97 $ 369 $ 25 $ 325 $ 200
Real estate acquired by
foreclosure(2)....................... 77 37 0 0 0 0
------ ----- ----- ----- ----- -----
Total nonperforming assets... $ 77 $ 134 $ 369 $ 25 $ 325 $ 200
====== ===== ===== ===== ===== =====
Nonperforming loans to total loans..... 0.00% 0.24% 0.77% 0.06% 0.97% 0.66%
Nonperforming assets to total assets... 0.06% 0.10% 0.31% 0.57% 0.57% 0.39%
Accruing loans past due 90 days or
more................................. $ 2 $ 139 $ 173 $ 84 $ 0 $ 115
</TABLE>
- ---------------
(1) Interest income of approximately $41,375, $43,616, $3,172, $19,092 and
$23,026 would have been recorded in each of 1996 through 1992, respectively,
on nonperforming loans if the loans had been current in accordance with
their original terms. Interest income recorded on these non-performing loans
for any of these periods was immaterial.
(2) Includes assets accounted for as in-substance foreclosures.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is a reserve established through charges to
earnings in the form of a provision for credit losses. First Houston's
management has established an allowance for credit losses which it believes is
adequate for estimated losses in its loan portfolio. Based on an evaluation of
the loan portfolio, management presents a quarterly review of the allowance for
credit losses to the First Houston's Board of Directors, indicating any changes
in the allowance since the last review and any recommendations as to adjustments
in the allowance. In making its evaluation, First Houston's management considers
the results of recent regulatory examinations, the effects on the loan portfolio
of current economic indicators and their probable impact on borrowers, the
amount of charge-offs for the period, the amount of non-performing loans and
related collateral security, the evaluation of its loan portfolio by the
internal loan review department and the annual examination of First Houston's
financial statements by its independent auditors. Charge-offs occur when loans
are deemed to be uncollectible.
First Houston follows a loan review program to evaluate the credit risk in
its commercial loan portfolio for substantially all commercial loans and real
estate loans. Through the loan review process, First Houston maintains an
internally classified loan list which, along with the delinquency list of loans,
helps First Houston's management assess the overall quality of the loan
portfolio and the adequacy of the allowance for credit losses. Loans classified
as "substandard" are those loans with clear and defined weaknesses such as
highly leveraged positions, unfavorable financial ratios, uncertain repayment
sources or poor financial condition, which may jeopardize recoverability of the
debt. Loans classified as "doubtful" are those loans which have characteristics
similar to substandard accounts but with an increased risk that a loss may
occur, or at least a portion of the loan may require a charge-off if liquidated
at present. Although loans classified as substandard do not duplicate loans
classified as doubtful, both substandard and doubtful loans include some loans
that are delinquent at least 30 days or on nonaccrual status. As of June 30,
1997 substandard loans totaled approximately $1.46 million, of which
approximately $531,000 were loans designated as delinquent or nonaccrual, but
none of which were classified as doubtful. As of December 31, 1996, substandard
loans totaled approximately $1.48 million, of which approximately $236,000 were
loans designated as delinquent or nonaccrual, but none of which were classified
as doubtful.
In addition to its internally classified loan list and delinquency list of
loans, First Houston maintains a separate "watch list" which further aids First
Houston in monitoring its loan portfolio. Watch list loans show
65
<PAGE> 68
warning elements where the present status portrays one or more deficiencies that
require attention in the short run or where pertinent ratios of the loan account
have weakened to a point where more frequent monitoring is warranted. These
loans do not have all the characteristics of a classified loan (substandard or
doubtful) but do show weakened elements as compared with those of a satisfactory
credit. First Houston reviews these loans to assist in assessing the adequacy of
the allowance for credit losses. Substantially all of the loans on the watch
list as of June 30, 1996 are current and paying in accordance with loan terms,
and none of such loans are on nonaccrual status. As of June 30, 1996, watch list
loans totaled approximately $1.46 million, of which approximately $531,000 were
designated as delinquent.
In order to determine the adequacy of the allowance for credit losses,
management considers the risk classification or delinquency status of loans and
other factors. First Houston's management also establishes specific allowances
for credits which management believes require reserves greater than those
allocated according to their classification or delinquent status. An unallocated
allowance is also established based on First Houston's historical charge-off
experience over the last three years. First Houston then charges to operations a
provision for credit losses equal to the greater of .50% of total loans,
determined on an annualized basis, or the amount necessary to maintain the
allowance for credit losses at an adequate level determined according to the
foregoing methodology.
First Houston believes that the allowance for credit losses at June 30,
1997 is adequate to cover losses inherent in the portfolio as of such date.
However, there can be no assurance that First Houston will not sustain losses in
future periods, which could be substantial in relation to the size of the
allowance at June 30, 1997.
For the six months ended June 30, 1997, net loan charge-offs totaled
approximately $117,000, or approximately 0.19% of average loans outstanding for
the period, compared to approximately $314,000, or approximately 0.62% of
average loans outstanding during 1996. For the six months ended June 30, 1997,
First Houston recorded provisions of $190,000 to the allowance for credit losses
compared to $230,000 for 1996. At June 30, 1997, the allowance totaled
approximately $548,000, or approximately 0.84% of total loans.
During 1995, net loan charge-offs amounted to approximately $179,000, or
approximately 0.37% of average loans outstanding for the year, compared to
approximately $431,000, or approximately 1.13% of average loans outstanding of
1994. In 1995, First Houston recorded provisions for $230,000 to the allowance
for credit losses compared to $505,000 for 1994. At December 31, 1995, the
allowance aggregated approximately $558,000, or approximately 1.15% of total
loans.
66
<PAGE> 69
The following table presents, for the periods indicated, an analysis of the
allowance for credit losses and other related data.
<TABLE>
<CAPTION>
PERIOD ENDED YEARS ENDED DECEMBER 31,
JUNE 30, -----------------------------------------------
1997 1996 1995 1994 1993 1992
------------ ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Average loans outstanding.......... $61,831 $50,958 $47,906 $38,031 $32,203 $28,582
Loans outstanding at period-end.... 64,857 56,896 48,830 43,978 33,506 30,210
Allowance for credit losses at
beginning of period.............. 475 558 507 433 515 381
Charge-offs........................ (139) (341) (186) (434) (295) (494)
Recoveries......................... 22 28 7 3 18 1
------- ------- ------- ------- ------- -------
Net charge-offs.................... (117) (313) (179) (431) (277) (493)
Provision for credit losses........ 190 230 230 505 195 627
------- ------- ------- ------- ------- -------
Allowance for credit losses at end
of period........................ $ 548 $ 475 $ 558 $ 507 $ 433 $ 515
======= ======= ======= ======= ======= =======
Ratio of allowance to average
loans............................ 0.89% 0.93% 1.16% 1.33% 1.35% 1.80%
Ratio of allowance to period-end
loans............................ 0.84% 0.83% 1.14% 1.15% 1.29% 1.69%
Ratio of net charge-offs to average
loans............................ 0.19% 0.761% 0.37% 1.13% 0.86% 1.74%
</TABLE>
ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
The following tables describes the allocation of the allowance for credit
losses among various categories of First Houston loans and certain other
information as of the dates indicated. The allocation is made for analytical
purposes and is not necessarily indicative of the categories in which future
loan losses may occur. The total allowance is available to absorb losses from
any segment of loans.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
1996 1995
--------------------------------- ---------------------------------
PERCENT PERCENT OF PERCENT OF
OF LOANS TO PERCENT OF LOANS TO
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS
------ ---------- ----------- ------ ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance of allowance for credit
losses applicable to:
Commercial, financial and
industrial...................... $ 0 33.0% $ 0 37.3%
Real estate -- mortgage............ 0 54.0% 25 4.5% 46.4%
Real estate -- construction........ 0 5.3% 0 0.0% 3.4%
Installment........................ 0 7.3% 0 9.8%
Purchased receivables.............. 0 0.4% 0 3.1%
Unallocated........................ 475 100.0% N/A 533 95.5% N/A
---- ----- ----- ---- ----- -----
Total...................... $475 100.0% 100.0% $558 100.0% 100.0%
==== ===== ===== ==== ===== =====
</TABLE>
67
<PAGE> 70
INVESTMENTS
The following table summarizes the book value of investment securities held
by First Houston as of the dates shown. See Note 4 to First Houston's
consolidated financial statements included elsewhere in this Proxy Statement for
information relating to market values.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------------------
1997 1996 1995 1994
-------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury and obligations of U.S.
government agencies........................ $50,418 $52,920 $48,560 $22,155
Mortgage-backed subdivisions................. 296 292 304 382
------- ------- ------- -------
Total.............................. $50,714 $53,212 $48,864 $22,537
======= ======= ======= =======
</TABLE>
During the first six months of 1997, maturing investments and new deposit
funds generated were used to fund increased loan demand, thus investment
securities decreased by $2.50 million from $53.21 million at December 31, 1996.
At June 30, 1997, investment securities represented 40.23% of total deposits and
37.17% of total assets.
New deposit funds generated during 1996 were used by First Houston either
to satisfy loan demand or were invested in U.S. Treasury securities pledged
against the trustee deposits. Thus, investment securities increased by $4.35
million from $48.86 million at December 31, 1995 to $53.21 million. At December
31, 1996, investment securities held by First Houston represented 43.29% of
total deposits and 40.23% of total assets. For 1995, total investment securities
averaged $41.4 million, an increase of approximately $22.8 million, or
approximately 123%, from the 1994 average. The significant increase in
investment securities during 1995 reflects the growth of bankruptcy trustee
deposits following the implementation of Altair's software application by the
Company.
During 1991 First Houston began to invest deposits in excess of those
required to fund loans, as well as a portion of the proceeds of maturing U.S.
Treasury securities, in various fixed and floating rate agency issued
mortgage-backed securities. This shift of First Houston's investments into
mortgage-backed securities was undertaken after an analysis of First Houston's
asset/liability and interest rate sensitivity positions, and liquidity
requirements, and is intended to take advantage of higher-yielding investment
products without subjecting First Houston to undue exposure to future interest
rate increases. In making these investments, the maturity of the entire
investment portfolio has been kept within three years. Given the present
economic climate, First Houston's balance sheet seems to be properly structured
and consistent with achieving a reliable and steady stream of investment income.
The management of First Houston monitors the composition of the investment
portfolio continuously to ensure the asset mix is suitable for prevailing
economic conditions.
Another recent development that has affected the Company's investment
portfolio is First Houston's adoption of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" effective December 31, 1993. SFAS No.
115 requires that the unrealized gain or loss on securities available for sale,
net of tax be recorded as a separate component of stockholders' equity whereas
no gain or loss is recorded for securities that are designated as securities
that will be held to maturity. The purpose for the creation of SFAS 115 was to
better reflect the true asset values of financial institutions that maintain
significant portfolios of investment securities in the ordinary course of
business, especially in situations where liquidity considerations can
conceivably require sales of investment securities at unanticipated times.
Consistent with the view of asset values implicit in SFAS 115, the more
conservative approach to reporting the value of a portfolio of investment
securities is to treat a greater portion of the portfolio as being available for
sale rather than as being held to maturity. First Houston has adopted this
conservative approach by classifying 100% of its investment portfolio as being
available for sale. Unrealized losses on securities available for sale, net of
tax increased from approximately $85,000 at December 31, 1995 to approximately
$94,000 at December 31, 1996. This increase resulted principally from interest
rate fluctuations during the year.
68
<PAGE> 71
First Houston's investment portfolio at June 30, 1997 totaled $50.7 million
as compared to $53.2 million as of December 31, 1996. First Houston's entire
portfolio continues to be classified as available-for-sale.
The yield on the investment portfolio for 1996 was 5.4% and the weighted
average life of the investment portfolio was approximately 0.87 years at
December 31, 1996. The yield on the investment portfolio was 5.31% in 1995, and
5.2% in 1994. The weighted average life of the investment portfolio was
approximately 0.92 years at December 31, 1995 compared to approximately 2.25
years at December 31, 1994.
The maturity distribution and weighted average yield of First Houston's
investment portfolio as of December 31, 1996 are summarized in the following
table. Weighted average yield is calculated by dividing income within each
maturity range by the outstanding amount of the related investment.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------------------------------
DUE UNDER DUE OVER
1 YEAR DUE 1-5 YEARS DUE 5-10 YEARS 10 YEARS
--------------- --------------- --------------- ---------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL
------- ----- ------- ----- ------- ----- ------- ----- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and
obligations of U.S.
government agencies....... $31,057 5.35% $21,863 5.47% $ 0 -- $ 0 -- $52,920
Mortgage-backed
securities................ 0 -- 292 4.91% 0 -- 0 -- 292
------- ------- ------- ------- -------
Total.............. $31,057 5.35% $22,155 6.46% $ 0 -- $ 0 -- $53,212
======= ==== ======= ==== ======= ======= =======
</TABLE>
At December 31, 1996, $9.5 million of U.S. government agency securities are
callable during 1997. First Houston maintains a portfolio of investment
securities consisting of securities issued by the United States government and
of various U.S. government agencies. The executive officers and the board of
directors of Houston National Bank review all investment security transactions
on a monthly basis and such officers establish the investment policies and
procedure in conjunction with Houston National Bank's board of directors.
Investment securities are managed by First Houston's management in tandem with
the other short-term assets of First Houston to be flexible and, therefore,
responsive to structural changes in the composition of First Houston's deposits
as well as to cyclical and seasonal changes in loan demand. The portfolio must
be managed to provide adequate amounts of lendable funds during periods of
economic growth and to absorb excess funds during slack times. The portfolio is
also used to assist in the control of taxable income. Thus, investments are
selected to provide safety of principal and liquidity of balances, in addition
to producing the highest possible income. As of December 31, 1996, the market
value of First Houston's combined investment portfolio was approximately 99.7%
of its face value.
DEPOSITS
First Houston's lending and investing activities are funded almost entirely
by core deposits, approximately 86% of which are demand and savings deposits.
First Houston's average noninterest-bearing deposits have increased from
approximately $14.69 million, or approximately 24.4% of average total deposits
of 1994, to approximately $23.1 million, or approximately 19.2% of average total
deposits as of June 30, 1997. The increase in average non-interest bearing
deposits is primarily due to the increase of bankruptcy trustee deposits which
represent approximately 41.3% of average total deposits as of June 30, 1997.
First Houston does not accept brokered deposits.
First Houston's average total deposits during the first six months of 1997
were approximately $120.1 million, an increase of $8.4 million or approximately
7.5% from average total deposits of approximately $111.7 million for 1996. First
Houston's average total deposits during 1996 were approximately $111.7 million,
an approximate $15.3 million, or approximately 15.8%, increase from average
total deposits of approximately $96.4 million for 1995. Total deposits at
December 31, 1994 were approximately $69.7 million, up approximately $17.6
million, or approximately 33.9%, over total deposits at December 31, 1993.
Deposit growth was concentrated primarily in core deposits, consisting of all
deposits other than certificates of deposit, retail and public, in excess of
$100,000.
69
<PAGE> 72
The average balances and weighted average rates paid on deposits for each
of the years 1996, 1995, and 1994 and for the six months ended June 30, 1997 are
presented below.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------ ----------------------------------------------------------
1997 1996 1995 1994
------------------ ------------------ ----------------- -----------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
-------- ------- -------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand
deposits................. $ 23,093 0% $ 23,642 0% $19,548 0% $14,692 0%
Interest-bearing demand and
savings deposits......... 97,006 3.44% 88,052 3.49% 76,876 3.47% 45,423 2.87%
-------- -------- ------- -------
Total deposits... $120,099 $111,694 $96,424 $60,115
======== ======== ======= =======
</TABLE>
First Houston's time deposits of $100,000 or more have consistently shown a
pattern of renewal similar to that for deposits of less than $100,000. The
remaining maturity on certificates of deposit of $100,000 or more is presented
below.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------------
1997 1996 1995 1994
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Maturity
3 months or less............................... $5,172 $2,811 $ 4,025 $1,641
3 to 12 months................................. 2,964 3,490 3,628 3,052
Over 12 months................................. 1,172 1,603 2,585 587
------ ------ ------- ------
Total.................................. $9,308 $7,904 $10,238 $5,280
====== ====== ======= ======
</TABLE>
BORROWINGS
Deposits are the primary source of funds for First Houston's lending and
investment activities and for its general business purposes. Occasionally, First
Houston obtains additional funds from the Federal Home Loan Bank and
correspondent banks and from securities sold under repurchase agreements. At
December 31, 1996, First Houston had no borrowings from the Federal Home Loan
Bank or securities sold under repurchase agreements.
INTEREST RATE SENSITIVITY AND LIQUIDITY
First Houston's Funds Management Policy provides management with the
necessary guidelines for effective funds management, and First Houston has
established a measurement system for monitoring its net interest rate
sensitivity position. First Houston's objectives are generally to maintain a
relatively balanced position between interest rate sensitive assets and interest
rate sensitive liabilities with minor adjustments for a rising or declining
interest rate environment.
An interest rate sensitive asset or liability is one that, within a defined
time period, either matures or experiences an interest rate change in line with
general market interest rates. The management of interest rate risk is performed
by analyzing the maturity and repricing relationships between interest-earning
assets and interest-bearing liabilities at specific points in time ("GAP") and
by analyzing the effects of interest rate changes on net interest income over
specific periods of time by projecting the performance of the mix of assets and
liabilities in varied interest rate environments. Interest rate sensitivity
reflects the potential effect on net interest income of a movement in interest
rates. A company is considered to be asset sensitive, or having a positive GAP,
when the amount of its interest-earning assets maturing or repricing within a
given period exceeds the amount of its interest-bearing liabilities also
maturing or repricing within that time period. Conversely, a company is
considered to be liability sensitive, or having a negative GAP, when the amount
of its interest-bearing liabilities maturing or repricing within that time
period exceeds the amount of its interest-
70
<PAGE> 73
bearing liabilities also maturing or repricing within that time period. When
analyzing its GAP position, First Houston emphasizes the next 12-month period.
The following table shows the interest rate sensitivity GAPs for five
different time periods and the cumulative interest rate sensitivity GAPs for the
same periods as of December 31, 1996.
<TABLE>
<CAPTION>
0-90 91-180 181 DAYS OVER 1
DAYS DAYS TO 1 YEAR YEAR TOTAL
-------- ------- --------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Fed funds sold............................ $ 10,563 $ 0 $ 0 $ 0 $ 10,563
Investment securities..................... 12,798 19,299 21,115 0 53,212
Loans..................................... 37,579 4,726 12,906 1,729 58,940
-------- ------- ------- ------- --------
Total interest-earning assets..... $ 60,940 $24,025 $34,021 $ 1,729 $120,715
======== ======= ======= ======= ========
Interest bearing liabilities:
Demand and savings deposits............... $ 78,897 $ 0 $ 0 $ 0 $ 78,897
Certificates of deposit and other time
deposits............................... 5,907 7,026 4,089 0 17,022
-------- ------- ------- ------- --------
Total interest-bearing
liabilities..................... $ 84,804 $ 7,026 $ 4,089 $ 0 $ 95,919
======== ======= ======= ======= ========
Period GAP.................................. $(23,884) $16,999 $29,932 $ 1,729 $ 24,796
Cumulative GAP.............................. (23,864) (6,965) 23,067 24,796 24,796
Period GAP to total assets.................. (0.1804)% 0.1285% 0.2283% 0.0131% 0.1875%
Cumulative GAP to total assets.............. (0.1804) (0.0519) 0.1764 0.1895 0.3770
</TABLE>
Shortcomings are inherent in any GAP analysis since certain assets and
liabilities may not move proportionally as interest rates change. Consequently,
as the interest rate environment has become more volatile, First Houston's
management has increased its ability to forecast and monitor its net interest
rate sensitivity position and the object of various rate environments on
earnings. Monthly, First Houston analyzes its interest rate risk exposure by the
use of a simulation model provided by FTI (Financial Technology, Inc.). As of
June 30, 1997, the simulation model indicated that, in the event of a 200 basis
point increase in underlying market interest rates, First Houston's net interest
income would decrease 3.12%. In the event of a 200 basis point decrease in
underlying market interest rates, First Houston's net interest income would
decrease 2.11%. The results of this simulation analysis, which assume the effect
of 200 basis points adjusted quarterly over a 1 year time horizon and a floor on
interest bearing liabilities of 1.50%, indicates that the present mix of earning
assets and interest bearing liabilities should provide reasonable protection
from changes in interest rates. The simulation model also provides a detailed
GAP analysis, which First Houston uses as a secondary source in analyzing its
Asset/Liability mix. The GAP measurement of Rate Sensitive Assets (RSA) to Rate
Sensitive Liabilities (RSL) indicates a cumulative positive GAP of 1.04 through
the first year and a cumulative positive GAP of 1.18 through three years.
Liquidity involves First Houston's ability to raise funds to support asset
growth or reduce assets to meet deposit withdrawals and other payment
obligations, to maintain reserve requirements and otherwise to operate First
Houston on an ongoing basis. First Houston's liquidity needs are primarily met
by growth in core deposits. Although access to purchased funds from
correspondent banks is available and has been utilized on occasion to take
advantage of investment opportunities, First Houston does not generally rely on,
and there has not been a need to draw upon, these external funding sources. The
cash and federal funds sold position, supplemented by amortizing investment and
loan portfolios, have created an adequate liquidity position.
CAPITAL RESOURCES
At June 30, 1997, First Houston's shareholders' equity totaled
approximately $8,791,000, or approximately 6.44% of total assets, as compared
with $7.60 million or approximately 5.74% of total assets at December 31, 1996
and $7.59 million or approximately 6.29% of total assets at December 31, 1995.
71
<PAGE> 74
The federal bank regulatory authorities in the United States (i.e., the
Federal Reserve, OCC and the FDIC) have issued risk-based capital standards by
which all bank holding companies and banks are evaluated in terms of capital
adequacy. These guidelines relate a banking company's capital to the risk
profile of its assets. The risk-based capital standards require all banks to
have Tier 1 capital of at least 4% and total capital (Tier 1 and Tier 2) of at
least 8% of risk-adjusted assets. Tier 1 capital includes common stockholders'
equity and qualifying perpetual preferred stock together with related surpluses
and retained earnings. Tier 2 capital may be comprised of limited life preferred
stock, qualifying debt instruments, and the reserves for credit losses.
The federal banking regulators have also issued leverage ratio
requirements. The leverage ratio requirement is measured as the ratio of Tier 1
capital to adjusted average assets. The risk-based capital and leverage ratio
requirements replaced the primary capital and total capital guidelines used
previously. The table below provides a comparison of First Houston's risk-based
capital ratios and leverage ratio to the maximum regulatory requirements for the
periods indicated.
<TABLE>
<CAPTION>
DECEMBER 31, MINIMUM
JUNE 30, -------------- REGULATORY
1997 1996 1995 REQUIREMENTS
--------- ----- ----- ------------
<S> <C> <C> <C> <C>
The Bank:
Risk Based Capital Ratios:
Tier 1................................. 12.30% 12.12% 12.87% 4.00%
Total Capital.......................... 13.07% 12.88% 13.88% 8.00%
Leverage Ratio............................ 6.76% 5.75% 5.85% 3.00%
</TABLE>
The statutory basis for the capital and leverage requirements imposed by
the federal banking authorities is the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). The FDICIA requires that the capital
standards take adequate account of interest rate risk, concentration of credit
risk and the risks of non-traditional activities, as well as reflect the actual
performance and expected risk of loss on multi-family mortgages. The FDICIA also
requires each federal banking agency to specify by regulation the levels at
which an insured institution would be considered "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." Under the FDIC's regulations, Houston National
Bank is deemed to be "well capitalized."
BUSINESS OF FIRST HOUSTON
First Houston is a Texas corporation and registered bank holding company
under the BHCA and, as such, conducts its operations through its subsidiary
bank, Houston National, a national banking association. First Houston derives
most of its revenues and income from the activities of Houston National in
furnishing commercial banking and banking-related services. As a bank holding
company, First Houston holds all of the stock of Houston National Bank and
assists in the management of its banking subsidiary in business development,
loan policies and procedures, investment portfolio management, accounting,
external audit coordination, internal audit functions, human resources and
employee benefit administration, and insurance procurement.
BUSINESS OF THE BANK
Houston National Bank is a commercial bank chartered under the national
banking laws of the United States. Houston National Bank opened for business in
March 1985 and offers a diversified range of commercial banking services for
customers located principally in Houston, Texas. The services offered include
the traditional deposit functions of commercial banks, safe deposit facilities,
commercial and personal banking services, and the making of commercial, interim
construction, consumer, real estate and industrial loans. Houston National Bank
does not offer trust services. The personal banking services of Houston National
Bank include a variety of checking, money market, savings and NOW accounts; time
certificates; credit card operations; home mortgages; personal installment
loans; safe deposit facilities; and investment services.
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<PAGE> 75
Houston National Bank directs its commercial banking efforts toward the
"middle-market customer," which it defines as businesses with annual sales of $5
million to $25 million. The commercial banking services of Houston National Bank
consist primarily of various forms of commercial lending, including lines of
credit, revolving credit and term loans; accounts receivable, real estate and
other forms of secured financings; and letters of credit. The deposits of
Houston National Bank are insured by the FDIC to the fullest extent permitted by
law. The daily operation of Houston National Bank remains the responsibility of
its board of directors and executive officers.
At June 30, 1997, Houston National Bank had total deposits of $126.1
million. At June 30, 1997, Houston National Bank had total loans (net of
unearned income and allowance for possible credit losses) outstanding of $64.3
million, which represented approximately 51% of its total deposits.
The bulk of Houston National Bank's commercial loans have a floating rate
of interest based on the prime rate of Houston National Bank. Generally, the
commercial loans are secured with collateral having a minimum loan-to-value
ratio depending upon the nature of the collateral. Before approving any loan,
the credit worthiness of the borrower is established and is reviewed thereafter
on a regular basis.
Houston National Bank from time to time sells participation interests to
other financial institutions with respect to loans originated by Houston
National Bank when the loan exceeds Houston National Bank's legal lending limit
or when Houston National Bank otherwise deems it appropriate.
In addition to interest earned on loans, Houston National Bank receives
facility fees for the various types of commercial and industrial credits, and
commitment fees for real estate mortgage and construction and land development
loans and for letters of credit.
MARKET AREA
While Houston National Bank draws customers from throughout the Houston,
Texas area, it defines its primary market area as the 160 square-mile area
within the statistical metropolitan area of Houston bounded by the western edge
of downtown on the east, Highway 6 in the west, South Main Street from downtown
to the Fort Bend County line on the southeast, the Fort Bend County line to
Highway 6 on the southwest, Interstate 10 from downtown to Highway 290 on the
northeast, and Highway 290 to Highway 6 on the northwest. Houston National Bank
considers its principal competition in the commercial banking business to be the
other independent, full service commercial banks whose total asset size is
between $100 million and $200 million and which are located in Harris County,
Texas. Also included in Houston National Bank's primary market area are branch
offices of large statewide banks or regional holding companies, savings and loan
associations and credit unions. The products and services offered by Houston
National Bank in its target market are similar to those of area commercial banks
and, to some extent, savings and loan associations. However, many savings and
loan associations and credit unions do not provide commercial loan and similar
services to business customers. Houston National Bank does not operate any
branch facilities.
COMPETITION OF HOUSTON NATIONAL BANK
Houston National Bank experiences competition in both lending and
attracting deposits from other banks and non-bank financial institutions located
in its market area. Non-bank competitors with respect to deposits and
deposit-type accounts include savings and loan associations, credit unions,
securities firms, money market funds, life insurance companies and the mutual
funds industry. With respect to loans, Houston National Bank encounters
competition from other banks, savings and loan associations, finance companies,
insurance companies, small loan and credit card companies, credit unions,
pension trusts and securities firms.
In Houston and Texas, the nature of the competition in the banking business
has changed considerably in recent years as well with more large, out-of-state
banking organizations having entered the Houston market. While such fundamental
changes create opportunities for well-managed institutions regardless of size,
Houston National Bank's competition increasingly consists of regional, money
center institutions which have capital resources and legal loan limits
substantially in excess of those maintained by Houston National Bank. Houston
National Bank has a number of competitive advantages over such institutions in
the area of customer
73
<PAGE> 76
service and ability to respond quickly to customer needs; however, such
institutions can perform certain other functions for their customers, including
trust, securities brokerage and international banking services, which Houston
National Bank presently does not offer directly. Although Houston National Bank
could offer these services through a correspondent bank or through a joint
venture arrangement with other specialized companies, the inability to provide
such services directly can be a competitive disadvantage at times.
EMPLOYEES OF HOUSTON NATIONAL BANK
On June 30, 1997, Houston National Bank had 31 full-time employees, 12 of
whom were officers, and 3 part-time employee(s). Houston National Bank provides
medical insurance to its full-time employees. In 1990 Houston National Bank
established a 401(k) plan for all employees having tenure of one year or more
and the Bank matches contribution by the employee at a ratio of $1 contribution
by Houston National Bank for every $2 contribution by the employee up to a
maximum contribution by Houston National Bank of an amount equal to 3% of the
employee's annual salary. In 1996, Houston National Bank increased its matching
contribution to $1 for each $1 of employee contributions up to a maximum
contribution equal to 6% of the employee's annual salary.
PROPERTY
The office facilities of both First Houston and Houston National Bank are
located at 5757 Memorial Drive in a building owned by First Houston and built in
1985 on a 1.24 acre tract of land owned by First Houston. The banking facilities
include a traditional banking lobby, paying and receiving counters, a
bookkeeping department and three executive offices. Additionally, Houston
National Bank leases a five-lane drive-in facility adjacent to Houston National
Bank building.
CONTINUITY OF MANAGEMENT
The primary responsibility for day-to-day management of the First Houston
and Houston National Bank has been under the supervision of First Houston's
Chairman of the Board, John B. Carter, Jr., its President and Chief Executive
Officer, Charles M. Neff, and its Executive Vice President, James L. Hall, since
1988. Cumulatively, these three individuals have over 103 years of experience in
various aspects of the financial services industry. While the banking industry
has been undergoing extraordinary change both on a national and statewide basis
during the last 15 years, First Houston's management team has provided First
Houston with almost ten years of stable and consistent leadership.
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<PAGE> 77
MANAGEMENT OF FIRST HOUSTON
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding directors and
executive officers of First Houston.
<TABLE>
<CAPTION>
DIRECTOR/
EXECUTIVE OFFICER (AGE) POSITION(S) WITH BANK(S) AND BUSINESS EXPERIENCE
----------------- ----- ------------------------------------------------
<S> <C> <C>
John B. Carter, Jr.......... (72) Chairman of the Board of Directors of First Houston and
Houston National since February 1990 and January 1987,
respectively; Director of First Houston since January
1987; Senior Vice President and Chief Financial Officer
and Director of Pogo Producing Co., Inc. (oil and gas
drilling and exploration company) from 1977 to retirement
in 1986; a managing director of Lehman Bros., Inc.
(investment banking firm) from 1958 to 1977.
Robert L. Gerry, III........ (59) Director of First Houston and Houston National since 1992;
Vice Chairman/Director of Nuevo Energy Company since 1992.
James L. Hall............... (57) Director, Executive Vice President/Operations, Chief
Financial Officer of Houston National and First Houston
since February 1988; Executive Vice President of Union
National Bank of Laredo, Laredo, Texas from January 1984
to February 1988; Vice President and Chief Financial
Officer of Millikin National Bank, Decatur, Illinois, from
September 1976 to January 1984.
David L. Hatcher............ (55) Director of First Houston and Houston National; Chairman,
President and Chief Executive Officer of KMG-Bernuth, Inc.
(chemical manufacturing; formerly known as Harwin
Interests, Inc.), Houston, Texas, 1980 to present;
President/VP Market Properties Corp. (home building),
Houston, Texas, 1972-1980.
Jack M. Johnson, Jr......... (58) Director of First Houston and Houston National; Managing
Partner, Wintermann & Co. (agriculture and investments),
Eagle Lake, Texas 1985 to present; Chairman of the Board
of North Houston Bank, Houston, Texas 1963 to 1995.
Michael T. Judd............. (79) Advisory Director of First Houston and Houston National
since 1987; Various positions with E.F. Hutton, Ltd., Inc.
from 1959 to 1984 concluding with the position of
Executive Vice President and Managing Director; Employed
with Lehman Bros. (investment banking firm) since 1985.
Alfred W. Lasher III........ (51) Director of First Houston and Houston National from 1985
to 1987; Advisory Director of Houston National Bank and
First Houston since 1987; President of the Lasher Co.
(real estate development and investment company) since
1973.
John E. McFarlane........... (51) Director of First Houston and Houston National since March
1985; For the past five years, Mr. McFarlane has been an
independent investor.
Michael J. Moser............ (49) Advisory Director of First Houston and Advisory Director
and Executive Vice President -- Lending of Houston
National since 1993; Executive Vice President of Cullen
Center Bank from 1984 to 1993; Senior Vice President of
Republic Bank from 1980 to 1984; and OCC examiner from
1970 to 1979.
</TABLE>
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<PAGE> 78
<TABLE>
<CAPTION>
DIRECTOR/
EXECUTIVE OFFICER (AGE) POSITION(S) WITH BANK(S) AND BUSINESS EXPERIENCE
----------------- ----- ------------------------------------------------
<S> <C> <C>
Charles M. Neff, Jr......... (51) Director, President and Chief Executive Officer of Houston
National Bank and First Houston since February 1988;
President of Texas Capital Bank -- Westwood from January
1985 to February 1988; Director and President of American
Bank, Houston, Texas from January 1980 to January 1985.
Mr. Neff served as the Chairman of the Independent Bankers
Association of Texas in 1996.
James G. Niven.............. (51) Advisory Director of Houston National Bank and First
Houston since 1985; General partner of Pioneer Ventures
Co. (venture capital investment firm) since 1972; Senior
Vice President of Sotheby's (an auction company) since
1996.
H. Ray Roberts.............. (76) Director of First Houston and Houston National Bank since
1988; Financial Advisor and U.S. liaison for The Al-Zamil
Group of Companies (Saudi Arabian family-owned holding
company comprising a large number of individual companies
with business interests in manufacturing, services,
commercial endeavors and investments) since April 1968.
Williston B. Symonds........ (64) Director of Houston National Bank and First Houston since
March 1985; self-employed investor since 1985.
Lieven J. Van Riet, M.D..... (65) Advisory Director of Houston National Bank and First
Houston since May 1986; engaged in the private medical
practice of ophthalmology since 1965.
Diane W. Webb............... (57) Advisory Director of Houston National Bank and First
Houston since 1995; self-employed investor since 1992.
</TABLE>
Each member of the First Houston Board of Directors is elected annually and
the terms of the current board members will expire at the 1998 annual meeting of
shareholders.
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<PAGE> 79
PRINCIPAL SHAREHOLDERS OF FIRST HOUSTON
The following table sets forth at June 30, 1997, the number of shares and
percent of First Houston Common Stock issued and outstanding which are
beneficially owned by (i) each person known by First Houston to be the
beneficial owner of 5% or more of the outstanding shares of First Houston Common
Stock, (ii) each director and executive officer of First Houston and (iii) by
all such directors and officers as a group, as of June 30,1997. Unless otherwise
indicated the address of each such person is c/o First Houston Bancshares, Inc.,
5757 Memorial Drive, Houston, Texas 77007.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
BENEFICIALLY APPROXIMATE
OWNED AS OF PERCENTAGE OF
DECEMBER 31, TOTAL SHARES
NAME POSITION 1996(1) OUTSTANDING(1)
---- -------- ------------ --------------
<S> <C> <C> <C>
Gordon Cain(2)....................... Shareholder 167,000 6.8%
John B. Carter, Jr................... Chairman of the Board of Directors 194,000(3) 7.9%
Robert L. Gerry, III................. Director 9,000 0.4%
James L. Hall........................ Executive Vice President, Chief 76,450 3.1%
Financial Officer and Director
David L. Hatcher..................... Director 31,000(4) 1.3%
Jack Johnson......................... Director 14,500 0.6%
Michael T. Judd...................... Advisory Director 190,250 7.8%
Alfred W. Lasher III................. Advisory Director 13,000 0.5%
John E. McFarlane.................... Director 135,374(5) 5.5%
Michael J. Moser..................... Advisory Director and Executive Vice 92,500 3.8%
President of Houston National
Charles M. Neff, Jr.................. President, Chief Executive Officer 99,151 4.1%
and Director
James G. Niven....................... Advisory Director 26,500 1.1%
H. Ray Roberts....................... Director 10,350 0.4%
Williston B. Symonds................. Director 9,187 0.4%
Lieven J. Van Riet, M.D.............. Advisory Director 4,000 0.2%
Diane W. Webb........................ Advisory Director 16,500 0.7%
--------- -----
All directors and executive officers
as a group (15 persons)............ 921,762 %37.7
========= =====
</TABLE>
- ---------------
(1) Computed on a fully-diluted basis, assuming conversion of all 21,375
outstanding shares of First Houston Preferred Stock into 213,750 shares of
First Houston Common Stock resulting in an aggregate of 2,443,488 shares of
First Houston Common Stock.
(2) Mr. Cain's address is Eight Greenway Plaza, Suite 702, Houston, Texas 77046.
(3) 115,000 shares of First Houston Common Stock (on a fully-diluted basis) are
owned by Carter Interests, Ltd., a family limited partnership, and 79,000
are owned by John B. Carter, individually.
(4) 4,286 shares are owned by David L. Hatcher individually and 26,714 are owned
by KMG-Bernuth, Inc., of which Mr. Hatcher is the Chairman and Chief
Executive Officer.
(5) Includes 91,374 shares of First Houston Common Stock held by trusts of which
Mr. McFarlane is the trustee or a beneficiary.
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<PAGE> 80
EXECUTIVE COMPENSATION
The following table presents certain information concerning the
compensation (i) of the executive officers of First Houston whose total cash
compensation exceeded $60,000 during the year ended December 31, 1996 and (ii)
of all executive officers of First Houston as a group.
FIRST HOUSTON SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
NAME AND ------------------ STOCK
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS OTHER(1)
------------------ ---- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Charles M. Neff, Jr.......................... 1996 $115,000 $62,500 16,000 $656,984(2)
President and Chief Executive Officer 1995 115,000 54,300 0 4,025
1994 106,600 45,000 10,000 2,798
James L. Hall................................ 1996 $106,600 $24,500 9,500 $ 6,756
Executive Vice President and 1995 106,600 38,500 0 3,941
Chief Financial Officer 1994 106,600 45,000 7,000 2,956
Michael J. Moser............................. 1996 $ 92,500 $20,000 5,500 $ 5,910
Executive Vice President, Lending 1995 92,500 27,000 0 3,448
of Houston National 1994 82,500 0 6,500 1,881
</TABLE>
- ---------------
(1) The amounts in this column reflect First Houston's contribution to the
401(k) plan and does not include earnings on the undistributed balances.
(2) This amount includes $650,000 accrued in 1996 relating to a deferred
compensation agreement providing for benefits, payable over a 15-year period
commencing upon the later of Mr. Neff's attaining age 61 or the termination
of his employment. First Houston has placed $650,000 in a trust to fund this
obligation.
None of the executive officers or other employees of First Houston is a
party to an employment or noncompetition agreement with First Houston or Houston
National.
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<PAGE> 81
FIRST HOUSTON STOCK OPTION PLANS
In 1992 First Houston adopted The First Houston Bancshares, Inc. Incentive
Stock Option Plan (the "Plan") under which First Houston may issue to specified
employees incentive stock options to purchase shares of common stock up to a
total maximum of 75,000 shares of First Houston Common Stock. The Plan provides
that the issued options must be exercisable at or above the fair market value of
the stock at the time the option is granted. The Plan also provides that the
Board of Directors can determine in its discretion which employees will receive
options and the terms under which the options are issued subject, however, to
the following requirements: (i) the options must be exercisable within ten years
of the date of grant; (ii) the options must be nontransferable other than at
death and are exercisable only by the recipient employee during that employee's
lifetime; (iii) if the option is granted to an employee who owns more than ten
percent of the voting power of First Houston immediately before the grant of the
option, then the option exercise price must equal or be greater than 110% of the
fair market value of the First Houston Common Stock at the time of the grant of
the option and the option can not be exercisable more than five years after it
is granted; and (iv) the option must expire no later than the 90th day following
the date the employee's employment with First Houston terminates. For additional
information regarding the effect of the Merger on such options, see "Proposal
No. 1: Approval of the Merger Proposal -- Other Agreements -- Stock Plans;
Restricted Stock."
The following table sets forth certain information regarding the grant of
options under the Plan to certain executive officers of First Houston. As of the
date of this Proxy Statement, all outstanding options under the Plan have been
exercised.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE POTENTIAL REALIZABLE VALUE
SECURITIES OF TOTAL AT ASSUMED ANNUAL RATE
UNDERLYING OPTIONS OF STOCK PRICE APPRECIATION
OPTIONS GRANTED TO EXERCISE FOR OPTION TERM($)
GRANTED EMPLOYEES IN PRICE EXPIRATION ----------------------------
NAME (SHARES) 1996 ($/SHARE) DATE 5% 10%
---- ---------- ------------ --------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
James L. Hall................. 9,500 27.54% $3.23 1/16/06 $ 31,160 $ 67,878
Michael J. Moser.............. 5,500 15.94% $3.23 1/16/06 $ 18,040 $ 39,298
Charles M. Neff, Jr........... 16,000 46.38% $3.23 1/16/06 $ 52,480 $ 114,320
</TABLE>
INTERESTS OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
Certain of the directors and officers and principal shareholders of Houston
National Bank or First Houston and their associates are customers of Houston
National Bank. Such directors, officers and principal shareholders and their
associates have had transactions in the ordinary course of business with Houston
National Bank, including borrowings, all of which were effected on substantially
the same terms and conditions, including interest rates and collateral, as those
prevailing from time to time for comparable transactions with persons
unaffiliated with Houston National Bank and did not involve more than the normal
risk of collectibility or other unfavorable features. Houston National Bank
expects to continue to have such transactions on similar terms and conditions
with such directors, officers and principal shareholders of First Houston and
Houston National Bank and their associates in the future.
As of December 31, 1996, principal shareholders and the officers and
directors of First Houston and Houston National Bank or their affiliates were,
directly or indirectly, indebted to Houston National Bank in the aggregate
amount of $3,671,000, which amount constituted 6.45% of the total loans of
Houston National Bank as of such date and approximately 48.3% of equity capital
of Houston National Bank.
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<PAGE> 82
DESCRIPTION OF STERLING CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The authorized capital stock of Sterling consists of (i) 30,000,000 shares
of Sterling Common Stock, $1.00 per share par value, of which 12,004,400 were
issued and outstanding as of March 31, 1997 and (ii) 1,000,000 shares of
Sterling Preferred Stock, $1.00, issuable in series, of which 49,500 shares of
Series A and 38,880 shares of Series B Convertible Preferred Stock were issued
and outstanding as of March 31, 1997. As of March 31, 1997, an additional
766,258 shares of Sterling Common Stock were issuable upon exercise of
Sterling's outstanding employee stock options and pursuant to outstanding
subscriptions under Sterling's Employee Stock Purchase Plan.
The following discussion of the terms and provisions of Sterling's capital
stock is qualified in its entirety by reference to the Sterling Charter and the
Sterling Bylaws, copies of which are included as exhibits.
STERLING COMMON STOCK
The outstanding shares of Sterling Common Stock are, and the shares of
Sterling Common Stock to be issued to shareholders of First Houston assuming
consummation of the Merger will be, fully paid and non-assessable. There are no
preemptive, conversion, subscription, redemption or repurchase rights associated
with shares of Sterling Common Stock, except as exist under the 1994 Incentive
Stock Option Plan and the 1994 Employee Stock Purchase Plan. Each holder of
shares of Sterling Common Stock is entitled to one vote for each share held of
record as to all matters voted on. Holders of shares of Sterling Common Stock
are not entitled to cumulative voting rights in the election of directors. Upon
the dissolution of Sterling, the holders of Sterling Common Stock would be
entitled to participate ratably in the assets available for distribution after
satisfaction of the claims of creditors of Sterling and of holders of any series
of preferred stock having a liquidation preference, to the extent of such
preference.
The holders of shares of the Sterling Common Stock are entitled to such
dividends as the Sterling Board of Directors, in its discretion, may declare out
of funds legally available therefor. Under the TBCA, dividends may not be paid
if, after the payment, Sterling would be insolvent or if the payment would
exceed Sterling's surplus. There can be no assurances such dividends will
continue to be paid in the future. Payment of future dividends will be dependent
upon, among other things, Sterling's and Sterling Bank's, and assuming approval
of the Merger, Houston National's, earnings and financial condition, and the
general economic and regulatory climate.
Funds for the payment of dividends by Sterling are obtained from dividends
received from Sterling Bank. Certain restrictions exist regarding the ability of
Sterling Bank to pay dividends to Sterling. Under federal law, Sterling Bank
cannot pay a dividend if it will cause Sterling Bank to be "undercapitalized."
The regulators of Sterling Bank and Sterling may administratively impose
stricter limits on the ability of Sterling Bank to pay dividends to Sterling.
Sterling Bank is also subject to risk based capital rules which restrict
its ability to pay dividends. The risk based capital rules set an explicit
schedule for achieving minimum capital levels in relation to risk weighted
assets. Sterling Bank has been required to meet a minimum ratio of total capital
to risk weighted assets of 8.0%. As of December 31, 1996, Sterling Bank was in
compliance with all capital requirements.
Harris Trust and Savings Bank is the transfer agent and registrar for the
Sterling Common Stock.
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<PAGE> 83
PREFERRED STOCK
Sterling is authorized to issue 1,000,000 shares of Sterling Preferred
Stock. As of March 31, 1997, four series of 150,000 shares each have been
designated, of which Sterling has issued 49,500 shares of Series A and 38,880 of
Series B Convertible Preferred Stock. Sterling's Preferred Stock (or other
securities convertible in whole or in part into Sterling Preferred Stock) is
available for issuance from time to time for various purposes as determined by
Sterling's Board of Directors, including, without limitation, making future
acquisitions and raising additional equity capital. Subject to certain limits
set by the Sterling Charter, the Sterling Preferred Stock (or such convertible
securities) may be issued on such terms and conditions, at such times and in
such situations as the Sterling Board of Directors, in its discretion,
determines to be appropriate, without any further approval or action by the
shareholders (unless otherwise required by laws, rules, regulations or
agreements applicable to Sterling).
CLASSIFIED BOARD OF DIRECTORS
The Sterling Charter and Bylaws contain provisions for a staggered board of
directors with only one-third of the board standing for election each year. A
staggered board makes it more difficult for shareholders to change the majority
of the directors and instead promotes a continuity of existing management.
BLANK CHECK PREFERRED STOCK
The Sterling Charter authorizes blank check Preferred Stock. See
"-- Preferred Stock." Sterling's Board of Directors can set the voting rights,
redemption rights, conversion rights and other rights relating to such Preferred
Stock and could issue such stock in either a private or public transaction. In
some circumstances, the blank check Preferred Stock could be issued and have the
effect of preventing a merger, tender offer or other takeover attempt which
Sterling's Board of Directors opposes.
STATUTORY PROVISIONS
Part Thirteen, a recently enacted provision of the TBCA, restricts certain
transactions between a corporation organized under Texas law (or its
majority-owned subsidiaries) and any person holding 20% or more of the
corporation's outstanding voting stock, together with the affiliates or
associates of such person (an "Affiliated Shareholder"). Part Thirteen generally
prohibits a publicly held Texas corporation from engaging in the following
transactions with an Affiliated Shareholder, for a period of three years from
the date the shareholder becomes an Affiliated Shareholder unless certain
conditions described below are met: (a) any merger, share exchange or
conversion, (b) sales, leases, exchanges or other transfers of 10% or more of
the aggregate assets of the corporation, (c) issuances or transfers by the
corporation of any stock of the corporation which would have the effect of
increasing the Affiliated Shareholder's proportionate share of the stock of the
corporation, (d) the adoption of a plan or proposal for the liquidation or
dissolution of the corporation proposed by or pursuant to any arrangement with
the Affiliated Shareholder, (e) any other transaction which has the effect of
increasing the proportionate share of the stock of the corporation which is
owned by the Affiliated Shareholder, and (f) receipt by the Affiliated
Shareholder of the benefit (except proportionately as a shareholder) of loans,
advances, guarantees, pledges or other financial benefits provided by the
corporation. Part Thirteen is effective September 1, 1997.
The three-year ban does not apply if either the proposed transaction or the
transaction by which the Affiliated Shareholder became an Affiliated Shareholder
is approved by the board of directors of the corporation prior to the date such
shareholder becomes an Affiliated Shareholder. Business combinations are also
permitted within the three-year period if authorized at a meeting of
shareholders called for that purpose within six months after such shareholder
becomes an Affiliated Shareholder, by the holders of at least 66 2/3% of the
outstanding voting stock not owned by the Affiliated Shareholder.
Prior to December 31, 1997, a corporation has the option of electing to
exclude itself from the coverage of Part Thirteen by amending its articles of
incorporation or bylaws. After December 31, 1997, a corporation may, at its
option, exclude itself from the coverage of Part Thirteen by amending its
articles of incorporation or bylaws by action of its shareholders to exempt
itself from coverage, provided that such charter or bylaw
81
<PAGE> 84
amendment shall not become effective until 18 months after the date it is
adopted and will not apply to any business combination with an Affiliated
Shareholder who became such prior to the effective date of such amendment.
Sterling has not adopted such a charter or bylaw amendment.
PROPOSAL NO. 2: APPROVAL OF THE CHARTER PROPOSAL
GENERAL
Pursuant to the Merger Agreement, First Houston has agreed to amend the
First Houston Charter to delete paragraph (h)(4) of the Certificate of
Designation establishing the First Houston Preferred Stock. Approval and
implementation of the Charter Proposal is a condition to consummation of the
Merger (unless all shares of First Houston Preferred Stock have been converted
into First Houston Common Stock). This paragraph provides generally that if
First Houston engages in certain specified transactions (which includes a merger
such as the Merger), then as a condition to consummation of such transaction
provision must be made such that the holders of the First Houston Preferred
Stock would be entitled to receive in such transaction securities of the
surviving corporation of such transaction having the right to receive upon
conversion the same consideration as such holder would have received if the
First Houston Preferred Stock had been converted into First Houston Common Stock
immediately prior to consummation of the transaction.
The approval of the Charter Proposal is a condition to Sterling's
obligation to effect the Merger and is not waivable unless all of the First
Houston Preferred Stock has been converted into First Houston Common Stock.
Sterling believes that its capital structure following the Merger should not
include a series or class of preferred stock containing the terms of the First
Houston Preferred Stock.
REASONS FOR THE CHARTER PROPOSAL
As a condition to consummation of the Merger, Sterling has required that
the Charter Proposal be approved and implemented. In addition, as a condition to
entering into the Merger Agreement, Sterling required that First Houston agree
to solicit the affirmative vote of the Shareholders "FOR" the Charter Proposal
at the Meeting.
DESCRIPTION OF FIRST HOUSTON PREFERRED STOCK
The First Houston Preferred Stock was issued pursuant to a Certificate of
Designation dated as of July 31, 1991. A total of 50,000 shares of First Houston
Preferred Stock were authorized, of which 21,375 shares were outstanding as of
May 1, 1997. Holders of the First Houston Preferred Stock are entitled to
receive, when and as declared by the Board of Directors of First Houston,
cumulative preferential dividends in cash at an annual rate of $3.20 per share,
payable semi-annually on each July 1 and January 1. The shares of First Houston
Preferred Stock are redeemable, in whole or in part, at any time after July 1,
1998 for $40.00 per share, plus accrued and unpaid dividends thereon. The shares
of First Houston Preferred Stock have a liquidation preference of $40.00 per
share, plus accrued and unpaid dividends thereon to the date of payment. Subject
to certain limitations, the terms and provisions of the Certificate of
Designation may be amended by the affirmative vote or written consent of the
holders of two-thirds of the then issued and outstanding shares of the First
Houston Preferred Stock. Each share of First Houston Preferred Stock is
convertible at any time upon the election of the holder thereof into 10 shares
of First Houston Common Stock (subject to adjustment). So long as dividends are
not in arrears for three consecutive payments, the First Houston Preferred Stock
does not generally have any voting rights except with respect to "corporate
actions such as mergers, consolidations or the sale of all or substantially all
of the First Houston's assets . . .".
EFFECT OF THE CHARTER PROPOSAL
If the Charter Proposal is approved and implemented, paragraph (h)(4) of
the Certificate of Designation for the First Houston Preferred Stock will be
deleted in its entirety. As a consequence, upon consummation of the Merger, each
share of First Houston Preferred Stock will be converted into the right to
receive Sterling Common Stock as specified in the Merger Agreement, and holders
of First Houston Preferred Stock will not
82
<PAGE> 85
be entitled to receive Sterling Preferred Stock containing terms comparable to
the First Houston Preferred Stock, including, among other things, the right to
the payment of cumulative preferential dividends, the right to certain
preferences upon liquidation of Sterling and the right to vote as a class upon
certain corporate actions such as mergers, consolidations or the sale of all or
substantially all of Sterling's assets. See "Proposal No. 1: Approval of the
Merger Agreement -- Information About the Merger -- General -- Merger
Consideration."
TIMING OF IMPLEMENTATION OF THE AMENDMENT
If the Merger Proposal and the Charter Proposal are both approved, the
amendment to the First Houston Charter authorized in the Charter Proposal will
be filed with the Office of the Secretary of State of Texas, and will be
effective, immediately prior to the Effective Time of the Merger.
THE BOARD OF DIRECTORS OF FIRST HOUSTON UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS VOTE FOR APPROVAL OF THE CHARTER PROPOSAL.
VALIDITY OF SECURITIES
The legality of the shares of Sterling Common Stock offered hereby will be
passed upon for Sterling by Andrews & Kurth L.L.P., 600 Travis, Suite 4200,
Houston, Texas 77002.
EXPERTS
The consolidated financial statements as of December 31, 1996 and 1995 and
for each of the three years in the period ended December 31, 1996 of Sterling
Bancshares, Inc. and subsidiaries appearing in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996, and incorporated by reference in
this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report, which is incorporated by reference herein,
and have been so included and incorporated in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements of First Houston Bancshares, Inc. and
its subsidiary as of December 31, 1996 and 1995 and for each of the three years
in the period ended December 31, 1996 included in this Registration Statement
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein, and have been so included in reliance upon such
report given upon the authority of that firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
This Proxy Statement does not contain all the information set forth in the
Registration Statement and the exhibits relating thereto which Sterling has
filed with the SEC under the Securities Act. For further information pertaining
to Sterling and the securities offered hereby, reference is made to the
Registration Statement, including the exhibits thereto.
Sterling and First Houston are each responsible for their respective
expenses incurred in preparing, assembling and mailing this Proxy Statement and
the Notice of Meeting and Proxy, except that Sterling will pay all printing
expenses and filing fees in connection with this Proxy Statement and the
Registration Statement. All proxies delivered pursuant to this solicitation are
revocable at any time at the option of the persons executing them. Unless
revoked, properly executed proxies will be voted at the Meeting. Copies of
solicitation material will be furnished to brokerage houses, fiduciaries and
custodians as required for forwarding to the beneficial owners of First Houston
Capital Stock held in their names. It may be that further solicitation will be
undertaken by mail, telephone and personal contact by directors, officers or
regular employees of First Houston who will not be additionally compensated
therefor.
It is not intended that any business other than the proposals described
above will be presented at the Meeting. With respect to any other matters or
proposals that may legally come before the Meeting, however, it
83
<PAGE> 86
is the intention of the persons named as attorneys in the proxy to vote such
proxy in accordance with their best judgment.
INDEMNIFICATION
The Sterling Charter provide broad authority for indemnification of
directors and officers of Sterling. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers or
persons controlling Sterling, pursuant to the foregoing provisions or otherwise,
Sterling has been informed that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
84
<PAGE> 87
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
FIRST HOUSTON CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditor's Report................................ F-2
Consolidated Balance Sheets of First Houston as of December
31, 1996 and 1995 (audited) and June 30, 1997
(unaudited)............................................... F-3
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994 (audited) and the Six
Months Ended June 30, 1997 and 1996 (unaudited)........... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994 (audited) and
the Six Months Ended June 30, 1997 (unaudited)............ F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 (audited) and the Six
Months Ended June 30, 1997 and 1996 (unaudited)........... F-6
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 88
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 three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, 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 three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
January 27, 1997
(February 5, 1997 as to Note 21 and July 8, 1997
as to paragraphs 2, 3 and 4 of Note 14)
F-2
<PAGE> 89
FIRST HOUSTON BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
JUNE 30, 1997 1996 1995
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Cash and due from banks (Note 3)................... $ 4,377,119 $ 6,848,593 $ 4,991,384
Federal funds sold................................. 11,244,210 10,562,900 13,633,236
------------ ------------ ------------
Cash and cash equivalents........................ 15,621,329 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)........................... 50,713,617 53,212,387 48,863,899
Loans held for sale................................ 227,147 237,789 213,962
Loans (Notes 5 and 6).............................. 64,630,032 56,658,101 48,516,344
Less allowance for credit losses (Note 7).......... (547,660) (474,834) (558,464)
------------ ------------ ------------
Loans, net....................................... 64,082,372 56,183,267 47,957,880
Premises and equipment, net (Note 8)............... 2,824,530 2,773,446 2,631,899
Real estate acquired by foreclosure................ 77,246 37,246
Accrued interest receivable........................ 1,324,913 1,266,598 1,359,642
Other assets....................................... 1,580,478 1,134,885 876,588
------------ ------------ ------------
TOTAL.................................... $136,451,632 $132,257,111 $120,623,490
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing........................... $ 22,957,838 $ 27,012,016 $ 24,750,594
Interest-bearing (Note 9)..................... 103,106,540 95,919,404 87,650,004
------------ ------------ ------------
Total deposits........................... 126,064,378 122,931,420 112,400,598
Accrued interest payable........................... 111,045 119,527 164,719
Net deferred tax (asset) liability (Note 15)....... (4,258) (4,258) 276,480
Payable to Altair.................................. 77,586 77,586 106,049
Other liabilities.................................. 1,412,177 1,535,664 86,555
------------ ------------ ------------
Total liabilities........................ 127,660,928 124,659,939 113,034,401
------------ ------------ ------------
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........................ 2,229,738 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................................... 855,000 855,000 855,000
Capital surplus.................................. 6,560,331 6,183,614 6,178,994
Accumulated deficit (Note 2)..................... (808,453) (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.................................. (45,912) (94,426) (84,868)
------------ ------------ ------------
Total stockholders' equity............... 8,790,704 7,597,171 7,589,089
------------ ------------ ------------
TOTAL.................................... $136,451,632 $132,257,111 $120,623,490
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 90
FIRST HOUSTON BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
----------------------- ------------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees............ $3,258,593 $2,535,051 $5,464,927 $5,025,868 $3,716,787
Taxable investment securities.... 1,454,095 1,224,277 2,672,769 2,190,159 893,508
Deposits in financial
institutions.................. -- 1,707
Federal funds sold............... 166,057 279,573 620,666 317,993 129,858
---------- ---------- ---------- ---------- ----------
Total interest income.... 4,878,745 4,040,608 8,758,362 7,534,020 4,740,153
---------- ---------- ---------- ---------- ----------
INTEREST EXPENSE:
Deposits......................... 1,666,526 1,437,132 3,080,182 2,673,540 1,302,847
Federal funds purchased.......... 5,299 -- 40,671 857
---------- ---------- ---------- ---------- ----------
Total interest expense... 1,671,825 1,437,132 3,080,182 2,714,211 1,303,704
---------- ---------- ---------- ---------- ----------
NET INTEREST INCOME................ 3,206,920 2,603,476 5,678,180 4,819,809 3,436,449
PROVISION FOR CREDIT LOSSES (Note
7)............................... 190,000 97,500 230,000 230,000 505,000
---------- ---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES................ 3,016,920 2,505,976 5,448,180 4,589,809 2,931,449
---------- ---------- ---------- ---------- ----------
NONINTEREST INCOME:
Customer service fees............ 235,195 200,961 453,836 401,212 495,307
Other............................ 62,415 97,101 180,231 130,609 109,210
---------- ---------- ---------- ---------- ----------
Total noninterest
income................. 297,610 298,062 634,067 531,821 604,517
---------- ---------- ---------- ---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits... 925,308 948,827 2,839,612 2,078,395 1,313,448
Net occupancy expense............ 365,521 275,713 441,129 364,676 263,776
Licensing fees................... 229,057 195,630 409,834 337,500
Data processing.................. 73,451 69,915 320,690 294,189 256,760
Legal and professional........... 254,788 171,091 273,190 233,601 152,509
Federal Deposit Insurance
Corporation assessment........ 6,932 1,152 2,152 92,606 123,123
Other............................ 444,582 362,196 933,387 646,899 603,779
---------- ---------- ---------- ---------- ----------
Total noninterest
expense................ 2,299,639 2,024,524 5,219,994 4,047,866 2,713,395
---------- ---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES......... 1,014,891 779,514 862,253 1,073,764 822,571
PROVISION FOR INCOME TAXES (Note
15).............................. 343,889 234,255 363,184 256,957 271,794
---------- ---------- ---------- ---------- ----------
NET INCOME......................... $ 671,002 $ 545,259 $ 499,069 $ 816,807 $ 550,777
========== ========== ========== ========== ==========
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE (Note 18)....... $ 0.31 $ 0.26 $ 0.20 $ 0.43 $ 0.39
========== ========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 91
FIRST HOUSTON BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED LOSS ON
COMMON STOCK PREFERRED STOCK AVAILABLE-FOR-SALE
---------------------- ----------------- CAPITAL ACCUMULATED SECURITIES,
SHARES AMOUNT SHARES AMOUNT SURPLUS DEFICIT NET OF TAXES
--------- ---------- ------ -------- ---------- ----------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994........ 1,231,738 $1,231,738 21,375 $855,000 $3,754,861 $(1,201,956) $ (9,092)
Net income...................... 550,777
Cash dividends paid on common
stock, at $.15 per share...... (184,859)
Cash dividends paid on preferred
stock, at $3.20 per share..... (68,400)
Change in unrealized loss on
available-for-sale investment
securities, net of tax........ (642,563)
--------- ---------- ------ -------- ---------- ----------- ---------
BALANCE AT DECEMBER 31, 1994...... 1,231,738 1,231,738 21,375 855,000 3,754,861 (904,438) (651,655)
Net income...................... 816,807
Sale of common stock, at $4.00
per share..................... 864,500 864,500 2,424,133
Cash dividends paid on common
stock, at $.20 per share...... (405,874)
Cash dividends paid on preferred
stock, at $3.20 per share..... (68,400)
Dividend-in-kind................ (894,370)
Change in unrealized loss on
available-for-sale investment
securities, net of tax........ 566,787
--------- ---------- ------ -------- ---------- ----------- ---------
BALANCE AT DECEMBER 31, 1995...... 2,096,238 2,096,238 21,375 855,000 6,178,994 (1,456,275) (84,868)
Net income...................... 499,069
Stock options exercised, at
$3.31 per share............... 2,000 2,000 4,620
Cash dividends paid on common
stock, at $.20 per share...... (419,649)
Cash dividends paid on preferred
stock, at $3.20 per share..... (68,400)
Change in unrealized loss on
available-for-sale investment
securities, net of tax........ (9,558)
--------- ---------- ------ -------- ---------- ----------- ---------
BALANCE AT DECEMBER 31, 1996...... 2,098,238 2,098,238 21,375 855,000 6,183,614 (1,445,255) (94,426)
Net income...................... 671,002
Exercise of stock options....... 131,500 131,500 291,008
Recognition of tax benefit
resulting from exercise of
stock options................. 85,709
Cash dividends paid on preferred
stock......................... (34,200)
Change in unrealized loss on
available-for-sale investment
securities, net of tax........ 48,514
--------- ---------- ------ -------- ---------- ----------- ---------
BALANCE AT JUNE 30, 1997
(UNAUDITED)..................... 2,229,738 $2,229,738 21,375 $855,000 $6,560,331 $ (808,453) $ (45,912)
========= ========== ====== ======== ========== =========== =========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
BALANCE AT JANUARY 1, 1994........ $4,630,551
Net income...................... 550,777
Cash dividends paid on common
stock, at $.15 per share...... (184,859)
Cash dividends paid on preferred
stock, at $3.20 per share..... (68,400)
Change in unrealized loss on
available-for-sale investment
securities, net of tax........ (642,563)
----------
BALANCE AT DECEMBER 31, 1994...... 4,285,506
Net income...................... 816,807
Sale of common stock, at $4.00
per share..................... 3,288,633
Cash dividends paid on common
stock, at $.20 per share...... (405,874)
Cash dividends paid on preferred
stock, at $3.20 per share..... (68,400)
Dividend-in-kind................ (894,370)
Change in unrealized loss on
available-for-sale investment
securities, net of tax........ 566,787
----------
BALANCE AT DECEMBER 31, 1995...... 7,589,089
Net income...................... 499,069
Stock options exercised, at
$3.31 per share............... 6,620
Cash dividends paid on common
stock, at $.20 per share...... (419,649)
Cash dividends paid on preferred
stock, at $3.20 per share..... (68,400)
Change in unrealized loss on
available-for-sale investment
securities, net of tax........ (9,558)
----------
BALANCE AT DECEMBER 31, 1996...... 7,597,171
Net income...................... 671,002
Exercise of stock options....... 422,508
Recognition of tax benefit
resulting from exercise of
stock options................. 85,709
Cash dividends paid on preferred
stock......................... (34,200)
Change in unrealized loss on
available-for-sale investment
securities, net of tax........ 48,514
----------
BALANCE AT JUNE 30, 1997
(UNAUDITED)..................... $8,790,704
==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 92
FIRST HOUSTON BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
--------------------------- ------------------------------------------
1997 1996 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 671,002 $ 545,259 $ 499,069 $ 816,807 $ 550,777
Adjustments to reconcile net income
to net cash provided by operating
activities:
(Gain) loss on sale of
available-for-sale investment
securities..................... -- (42,674) (86,621) 645 177
Amortization and accretion of
premiums and discounts on
investment securities, net..... 109,113 162,717 268,398 123,249 4,379
Provision for credit losses...... 190,000 97,500 230,000 230,000 505,000
Deferred income tax expense...... 280,738 166,899 168,819
Depreciation and amortization.... 194,016 153,912 302,795 351,280 217,510
Decrease (increase) in accrued
interest receivable............ (58,315) 292,674 93,044 (662,175) (385,422)
Decrease (increase) in other
assets......................... (445,593) (368,130) (814,849) (418,129) (62,336)
(Decrease) increase in accrued
interest payable............... (8,483) (37,246) (45,192) 57,875 52,954
(Decrease) Increase in other
liabilities.................... (123,487) 407,288 1,449,109 91,579 (163,816)
(Decrease) Increase in payable to
Altair......................... (87,128) (28,463) 106,049
------------ ------------ ------------ ------------ ------------
Total adjustments........... (142,749) 578,913 1,648,959 47,272 337,265
------------ ------------ ------------ ------------ ------------
Net cash provided by
operating activities...... 528,252 1,124,172 2,148,028 864,079 888,042
------------ ------------ ------------ ------------ ------------
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....................... -- 13,303,452 19,433,913 5,401,110 1,606,360
Proceeds from maturities of
available-for-sale investment
securities....................... 19,000,000 16,800,000 30,521,429 35,100,000
Purchases of available-for-sale
investment securities............ (16,646,697) (27,261,113) (54,506,251) (66,190,212) (16,687,933)
Proceeds from paydowns on
investments secured by
mortgages........................ 12,453 4,288 6,160 96,667 102,522
Net increase in loans.............. (7,961,289) (1,124,413) (8,516,460) (4,930,855) (10,903,101)
Purchase of premises and
equipment........................ (245,349) (354,696) (471,054) (716,701) (155,749)
Disposal of premises and
equipment........................ 1,200 -- 26,714
Increase in deferred software
costs............................ -- -- (8,448) (190,034)
------------ ------------ ------------ ------------ ------------
Net cash (used) provided in
investing activities...... (5,839,682) 1,367,518 (13,410,549) (31,343,439) (26,227,935)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposit
accounts......................... 3,132,958 (1,638,105) 10,530,822 42,836,953 17,539,496
Proceeds from exercise of common
stock options.................... 422,508 -- 6,620 3,288,633
Dividend-in-kind................... -- -- (648,555)
Payment of cash dividends.......... (34,200) (244,024) (488,048) (474,274) (253,259)
------------ ------------ ------------ ------------ ------------
Net cash (used) provided by
financing activities...... 3,521,266 (1,882,129) 10,049,394 45,002,757 17,286,237
------------ ------------ ------------ ------------ ------------
</TABLE>
F-6
<PAGE> 93
FIRST HOUSTON BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
NET (DECREASE) INCREASE
IN CASH AND
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
--------------------------- ------------------------------------------
1997 1996 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH EQUIVALENTS..................... $ (1,790,164) $ 609,561 $ (1,213,127) $ 14,523,397 $ (8,053,656)
CASH AND CASH EQUIVALENTS:
Beginning of year.................. 17,411,493 18,624,620 18,624,620 4,101,223 12,154,879
------------ ------------ ------------ ------------ ------------
End of year........................ $ 15,621,329 $ 19,234,181 $ 17,411,493 $ 18,624,620 $ 4,101,223
============ ============ ============ ============ ============
SUPPLEMENTAL INFORMATION:
Income taxes paid.................. 712,000 41,820 $ 134,741 $ 78,702 $ 129,000
Interest paid...................... 1,560,780 1,309,659 3,125,374 2,708,636 1,250,649
NONCASH INVESTING AND FINANCING
ACTIVITIES:
</TABLE>
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 years ended December 31, 1995 or 1994.
During the years ended December 31, 1996, 1995 and 1994 the net change in
the unrealized loss on investment securities available for sale, net of tax was
$(9,558), $566,787 and $(642,563), 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.
See notes to consolidated financial statements.
F-7
<PAGE> 94
FIRST HOUSTON BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 winch 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.
The accompanying Consolidated Financial Statements and information as of
June 30, 1997 and for the six months ended June 30, 1997 and 1996 are unaudited,
and include all adjustments (consisting of only normal recurring adjustments),
that are necessary, in the opinion of management, for a fair presentation.
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. Tins
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.
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
F-8
<PAGE> 95
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.
Nonrefundable Fees and Costs Associated with Lending Activities -- Loan
origination and commitment fees are recognized as interest income at the time of
funding. Related direct costs are not separately allocated to loans but are
charged to noninterest expense in the period incurred. The net effect of not
recognizing such fees and related costs over the life of the related loan is not
considered to be material to the financial statements.
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 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.
F-9
<PAGE> 96
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 finds
sold. Generally, federal funds are purchased and sold for one-day periods.
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 and 1994 have
been reclassified to conform to the current year's presentation.
F-10
<PAGE> 97
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>
<S> <C>
Assets:
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>
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 1994
--------------------------------------- ---------------------------------------
YEARS ENDED DECEMBER 31, HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
- ------------------------ ---------- ----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest income......... $7,534,020 $7,534,020 $4,740,153 $4,740,153
Interest expense........ 2,714,211 2,714,211 1,303,704 1,303,704
---------- ---------- ---------- ----------
Net interest income..... 4,819,809 4,819,809 3,436,449 3,436,449
Provision for credit
losses................ 230,000 230,000 505,000 505,000
---------- ---------- ---------- ----------
Net interest income
after provision for
credit losses......... 4,589,809 4,589,809 2,931,449 2,931,449
Noninterest income...... 531,821 $ 360,188 171,633 604,517 604,517
Noninterest expense..... 4,047,866 615,902 3,431,964 2,713,395 $ 84,795 2,628,600
---------- --------- ---------- ---------- -------- ----------
Income (loss) before
income taxes.......... 1,073,764.. (255,714) 1,329,478 822,571 (84,795) 907,366
Provision (benefit) for
income taxes.......... 256,957 (106,049)(a) 363,006 271,794 (28,830)(b) 300,624
---------- --------- ---------- ---------- -------- ----------
Net income (loss)....... $ 816,807 $(149,665) $ 966,472 $ 550,777 $(55,965) $ 606,742
========== ========= ========== ========== ======== ==========
</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.
F-11
<PAGE> 98
Notes:
(a) To eliminate the historical income and expenses of Altair for the respective
periods presented, as if the distribution had occurred on January 1, 1994.
(b) To record the estimated income tax effect for the pro forma adjustments
described in Note (a) for the years ended December 31, 1995 and 1994,
respectively.
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.
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, 1995 and 1994 were $19,433,913, $5,401,110 and $1,606,360,
respectively. Gross gains of $87,332, $4,890 and $5,184 and gross losses of
$711, $5,535 and $5,361, respectively, were realized on those sales.
F-12
<PAGE> 99
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.
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..................................... 242,875 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 loses.
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 unpaired 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.
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.
F-13
<PAGE> 100
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,
1995 or 1994.
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 1994
------- ------- ------
<S> <C> <C> <C>
Nonaccrual loans:
Income earned.......................................... $12,253 $ 2,355 $8,720
Forgone income......................................... 41,375 43,616 3,172
</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 1994
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year...................... $ 558,464 $ 507,316 $ 433,583
Additions -- provision charged to operations...... 230,000 230,000 505,000
Deductions:
Loans charged off............................... (341,494) (186,069) (434,269)
Loan recoveries................................. 27,864 7,217 3,002
--------- --------- ---------
Net charge-offs................................... (313,630) (178,852) (431,267)
--------- --------- ---------
Balance at end of year............................ $ 474,834 $ 558,464 $ 507,316
========= ========= =========
</TABLE>
F-14
<PAGE> 101
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>
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, $389,136 and $163,410 for the years ended December 31, 1996, 1995 and
1994, 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, $29,000 and $21,000 for the years ended
December 31, 1996, 1995 and 1994, 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.
F-15
<PAGE> 102
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.
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.
F-16
<PAGE> 103
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 1994
------- ------ ------
<S> <C> <C> <C>
Shares under option, beginning of period................ 75,000 75,000 23,000
Changes during the period:
Granted............................................... 60,500 52,000
Cancelled/expired..................................... (2,000)
Exercised............................................. (2,000)
------- ------ ------
Shares under option, end of period...................... 131,500 75,000 75,000
======= ====== ======
Weighted average option price........................... $ 3.21 $ 3.20 $ 2.96
======= ====== ======
</TABLE>
At December 31, 1996, the Company has one stock-based compensation plan,
which is described above. The Company applies APB Opinion 25 and related
Interpretations in accounting for its plan. Accordingly, no compensation cost
has been recognized for the stock option plan. Had compensation cost for the
Company's stock-based compensation plan been determined based on the fair value
at the grant dates for awards under the plan consistent with the method of SFAS
No. 123, the Company's net income and earnings per share would have been reduced
to the pro forma amounts indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
1996 1995 1994
----------------------- ----------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income................ $499,069 $493,983 $816,807 $811,807 $550,777 $545,661
Primary earnings per
share................... $ 0.20 $ 0.20 $ 0.43 $ 0.43 $ 0.39 $ 0.39
Fully diluted earnings per
share................... 0.20 0.20 0.43 0.43 0.39 0.39
</TABLE>
The fair value of options at date of grant was estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions.
<TABLE>
<CAPTION>
1996 1994
----- -----
<S> <C> <C>
Expected live (years)....................................... 10.00 10.00
Interest rate............................................... 5.65% 7.84%
Volatility.................................................. 0.00% 0.00%
Dividend yield.............................................. 6.20% 4.50%
</TABLE>
No options were granted during the year ended December 31, 1995.
All outstanding options under the plan were exercised in April, 1997 with a
fair market value in excess of the option price. Each option holder recognized
ordinary income on the excess amount and First Houston received a corresponding
tax benefit resulting in a credit to stockholders' equity.
15. INCOME TAXES
The components of the provision for federal income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current............................................ $ 82,446 $ 90,058 $102,975
Deferred........................................... 280,738 166,899 168,819
-------- -------- --------
Total.................................... $363,184 $256,957 $271,794
======== ======== ========
</TABLE>
F-17
<PAGE> 104
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 1994
-------- --------- --------
<S> <C> <C> <C>
Taxes calculated at statutory rate................ $303,366 $ 365,080 $279,674
Increase (decrease) resulting from other, net..... 59,818 (108,123) (7,880)
-------- --------- --------
Total................................... $363,184 $ 256,957 $271,794
======== ========= ========
</TABLE>
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. Dividends paid by the
Bank to Bancshares for the years ended December 31, 1996, 1995 and 1994 were
$90,000, $420,000 and $745,719, respectively. Bancshares paid cash dividends to
its stockholders of $488,048, $474,274 and $253,259 for the years ended December
31, 1996, 1995 and 1994, respectively.
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,
F-18
<PAGE> 105
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.
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> <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
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>
F-19
<PAGE> 106
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, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net income....................................... $ 499,069 $ 816,807 $ 550,277
Less preferred stock dividends................... 68,400 68,400 68,400
---------- ---------- ----------
Net income available to common stockholders...... $ 430,669 $ 748,407 $ 481,877
========== ========== ==========
Weighted average number of common and common
equivalent shares outstanding.................. 2,153,281 1,745,821 1,231,738
========== ========== ==========
</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 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.
F-20
<PAGE> 107
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.
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 three years in the period ended December 31,
1996.
F-21
<PAGE> 108
FIRST HOUSTON BANCSHARES, INC.
CONDENSED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
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>
FIRST HOUSTON BANCSHARES, INC.
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
INCOME -- Dividends from subsidiary....................... $ 90,000 $420,000 $ 754,719
OPERATING EXPENSE -- Other expense........................ 59,703 50,110 50,665
-------- -------- ---------
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARY.................................. 30,297 369,890 704,054
INCOME TAX EXPENSE (BENEFIT).............................. 15,990 (233) 17,226
-------- -------- ---------
INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS (LOSS) OF
SUBSIDIARY.............................................. 14,307 370,123 721,280
EQUITY IN UNDISTRIBUTED EARNINGS (LOSS) OF SUBSIDIARY..... 484,762 446,684 (170,503)
-------- -------- ---------
NET INCOME................................................ $499,069 $816,807 $ 550,777
======== ======== =========
</TABLE>
F-22
<PAGE> 109
FIRST HOUSTON BANCSHARES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 499,069 $ 816,807 $ 550,777
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed (earnings) loss of
subsidiary...................................... (484,762) (446,684) 170,503
Increase in receivable from Bank.................. (387,777) (158,090) (35,745)
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
Decrease in accounts payable...................... (47,432)
--------- ----------- ---------
Total adjustments............................ (329,198) (675,749) 87,326
--------- ----------- ---------
Net cash provided by operating activities.... 169,871 141,058 638,103
--------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in prepaid offering expense................. 35,000 33,439
Dividends paid....................................... (488,048) (474,274) (253,259)
Capital contribution to subsidiary................... (2,750,000) (350,000)
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 (569,820)
--------- ----------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS... (311,557) 240,417 68,283
CASH AND CASH EQUIVALENTS:
Beginning of year.................................... 311,757 71,340 3,057
--------- ----------- ---------
End of year.......................................... $ 200 $ 311,757 $ 71,340
========= =========== =========
</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.
F-23
<PAGE> 110
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 111
APPENDIX A
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
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:
A-1
<PAGE> 112
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.
"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.
A-2
<PAGE> 113
"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.
"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.
"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.
A-3
<PAGE> 114
"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, 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.
"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.
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"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.
"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.
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(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 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.
(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").
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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.
(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.
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(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, 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.
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(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, 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.
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
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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 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
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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 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 governmental,
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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.
(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
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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.
(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.
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(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
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 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;
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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 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,
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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.
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.
(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
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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 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.
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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 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
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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 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,
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.
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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.
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
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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 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 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 Sec-
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tion 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;
(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;
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(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;
(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;
(l) 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 Compensa-
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tion 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 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 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 representa-
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tions 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 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).
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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 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 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
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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).
(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.
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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.
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
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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, 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 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
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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 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.
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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.
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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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:
(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
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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.
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
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(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 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.
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.
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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 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
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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
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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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> 148
ANNEX I
KNOWN ADJUSTMENTS
To the extent that any of the following items have not been accrued for or
recorded on the consolidated financial statements of First Houston as of the
Adjustment Date, the parties agree that the following amounts shall constitute
the Known Adjustments, and the sum of the following amounts shall be subtracted
from First Houston's total shareholders' equity at the Adjustment Date to
determine the Pro Forma First Houston shareholders' equity:
(1) The amount determined, on an after tax basis (assuming an
applicable tax rate of 34%) as follows: the sum of (i)(A) First Houston's
total loans as of December 31, 1996, multiplied by (B) Sterling's Allowance
Ratio (as defined below), minus (ii) First Houston's allowance for credit
losses as of December 13, 1996. The term Sterling's Allowance Ratio shall
mean the percentage amount equal to Sterling's allowance for credit losses
as of the Adjustment Date, divided by Sterling's total loans as of the
Adjustment Date.
(2) The cost incurred by First Houston, computed on an after tax
basis, in connection with terminating and/or discharging all of First
Houston's obligations and liabilities under the Deferred Compensation
Agreement and the Split Dollar Life Insurance Agreement; provided, however,
that if First Houston elects not to terminate such agreements, then for
purposes hereof the adjustment shall be equal to the net present value of
the maximum benefits that may be paid under the Deferred Compensation
Agreement discounted, from the Adjustment Date to the date at which such
benefits become due, at six percent (6%) per annum.
(3) The after tax cost of all bonuses and other compensation awards to
be paid to the employees of First Houston in connection with the
transactions contemplated by the Agreement, excluding severance benefits,
if any, to be paid by Sterling.
(4) By $225,000, adjusted on an after tax basis, if both of the
following matters have not been finally resolved in the manner specified as
of the Adjustment Date: (i) that certain lawsuit styled Diana Ramsey Hosek
v. Houston National Bank has not been settled; and (ii) a final
determination of the potential liability relating to the First Houston
401(k) Plan has not been established and fully paid and discharged in
accordance with the Code, applicable regulations and procedures of the
Internal Revenue Service, and ERISA.
(5) The book value as of the Adjustment Date of the following deferred
tax assets of First Houston: (i) net operating loss carryforwards and (ii)
investment tax credits.
Unless expressly required by GAAP or otherwise agreed to by Sterling, none
of the foregoing adjustments shall be recorded on First Houston's financial
statements.
This Annex I is hereby incorporated into and made a part of the Agreement.
All capitalized items used but not defined herein shall have the meanings set
forth in the Agreement.
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APPENDIX B
FORM OF AMENDMENT TO CERTIFICATE OF DESIGNATION FOR FIRST HOUSTON PREFERRED
STOCK
An amendment to the Certificate of Designation for the First Houston
Preferred Stock will be filed in the Office of the Secretary of State of Texas
if the Charter Proposal is approved by the Shareholders at the Meeting. The
operative portion of such amendment will provide in pertinent part as follows:
Paragraph (h)(4) of the Certificate of Designation is hereby amended
by deleting such paragraph (h)(4) in its entirety and inserting the
following in its place: "(h)(4). Intentionally Omitted."
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APPENDIX C
TEXAS BUSINESS CORPORATION ACT
DISSENTING SHAREHOLDER PROVISIONS
ART. 5.11. RIGHTS OF DISSENTING SHAREHOLDERS IN THE EVENT OF CERTAIN CORPORATE
ACTIONS
A. Any shareholder of a domestic corporation shall have the right to
dissent from any of the following corporate actions:
(1) Any plan of merger to which the corporation is a party if
shareholder approval is required by Article 5.03 or 5.16 of this Act and
the shareholder holds shares of a class or series that was entitled to vote
thereon as a class or otherwise;
(2) Any sale, lease, exchange or other disposition (not including any
pledge, mortgage, deed of trust or trust indenture unless otherwise
provided in the articles of incorporation) of all, or substantially all,
the property and assets, with or without good will, of a corporation
requiring the special authorization of the shareholders as provided by this
Act;
(3) Any plan of exchange pursuant to Article 5.02 of this Act in which
the shares of the corporation of the class or series held by the
shareholder are to be acquired.
B. Notwithstanding the provisions of Section A of this Article, a
shareholder shall not have the right to dissent from any plan of merger in which
there is a single surviving or new domestic or foreign corporation, or from any
plan of exchange, if (1) the shares held by the shareholder are part of a class
shares of which are listed on a national securities exchange, or are held of
record by not less than 2,000 holders, on the record date fixed to determine the
shareholders entitled to vote on the plan of merger or the plan of exchange, and
(2) the shareholder is not required by the terms of the plan of merger or the
plan of exchange to accept for his shares any consideration other than (a)
shares of a corporation that, immediately after the effective time of the merger
or exchange, will be part of a class or series of shares of which are (i)
listed, or authorized for listing upon official notice of issuance, on a
national securities exchange, or (ii) held of record by not less than 2,000
holders, and (b) cash in lieu of fractional shares otherwise entitled to be
received.
ART. 5.12. PROCEDURE FOR DISSENT BY SHAREHOLDERS AS TO SAID CORPORATE ACTIONS
A. Any shareholder of any domestic corporation who has the right to dissent
from any of the corporate actions referred to in Article 5.11 of this Act may
exercise that right to dissent only by complying with the following procedures:
(1)(a) With respect to proposed corporate action that is submitted to
a vote of shareholders at a meeting, the shareholder shall file with the
corporation, prior to the meeting, a written objection to the action,
setting out that the shareholder's right to dissent will be exercised if
the action is effective and giving the shareholder's address, to which
notice thereof shall be delivered or mailed in that event. If the action is
effected and the shareholder shall not have voted in favor of the action,
the corporation, in the case of action other than a merger, or the
surviving or new corporation (foreign or domestic) or other entity that is
liable to discharge the shareholder's right of dissent, in the case of a
merger, shall, within ten (10) days after the action is effected, deliver
or mail to the shareholder written notice that the action has been
effected, and the shareholder may, within ten (10) days from the delivery
or mailing of the notice, make written demand on the existing, surviving,
or new corporation (foreign or domestic) or other entity, as the case may
be, for payment of the fair value of the shareholder's shares. The fair
value of the shares shall be the value thereof as of the day immediately
preceding the meeting, excluding any appreciation or depreciation in
anticipation of the proposed action. The demand shall state the number and
class of the shares owned by the shareholder and the fair value of the
shares as estimated by the shareholder. Any shareholder failing to make
demand within the ten (10) day period shall be bound by the action.
(b) With respect to proposed corporate action that is approved
pursuant to Section A of Article 9.10 of this Act, the corporation, in the
case of action other than a merger, and the surviving or
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new corporation (foreign or domestic) or other entity that is liable to
discharge the shareholder's right of dissent, in the case of a merger,
shall, within ten (10) days after the date the action is effected, mail to
each shareholder of record as of the effective date of the action notice of
the fact and date of the action and that the shareholder may exercise the
shareholder's right to dissent from the action. The notice shall be
accompanied by a copy of this Article and any articles or documents filed
by the corporation with the Secretary of State to effect the action. If the
shareholder shall not have consented to the taking of the action, the
shareholder may, within twenty (20) days after the mailing of the notice,
make written demand on the existing, surviving, or new corporation (foreign
or domestic) or other entity, as the case may be, for payment of the fair
value of the shareholder's shares. The fair value of the shares shall be
the value thereof as of the date the written consent authorizing the action
was delivered to the corporation pursuant to Section A of Article 9.10 of
this Act, excluding any appreciation or depreciation in anticipation of the
action. The demand shall state the number and class of shares owned by the
dissenting shareholder and the fair value of the shares as estimated by the
shareholder. Any shareholder failing to make demand within the twenty (20)
day period shall be bound by the action.
(2) Within twenty (20) days after receipt by the existing, surviving,
or new corporation (foreign or domestic) or other entity, as the case may
be, of a demand for payment made by a dissenting shareholder in accordance
with Subsection (1) of this Section, the corporation (foreign or domestic)
or other entity shall deliver or mail to the shareholder a written notice
that shall either set out that the corporation (foreign or domestic) or
other entity accepts the amount claimed in the demand and agrees to pay
that amount within ninety (90) days after the date on which the action was
effected, and, in the case of shares represented by certificates, upon the
surrender of the certificates duly endorsed, or shall contain an estimate
by the corporation (foreign or domestic) or other entity of the fair value
of the shares, together with an offer to pay the amount of that estimate
within ninety (90) days after the date on which the action was effected,
upon receipt of notice within sixty (60) days after that date from the
shareholder that the shareholder agrees to accept that amount and, in the
case of shares represented by certificates, upon the surrender of the
certificates duly endorsed.
(3) If, within sixty (60) days after the date on which the corporate
action was effected, the value of the shares is agreed upon between the
shareholder and the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, payment for the shares shall
be made within ninety (90) days after the date on which the action was
effected and, in the case of shares represented by certificates, upon
surrender of the certificates duly endorsed. Upon payment of the agreed
value, the shareholder shall cease to have any interest in the shares or in
the corporation.
B. If, within the period of sixty (60) days after the date on which the
corporate action was effected, the shareholder and the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, do
not so agree, then the shareholder or the corporation (foreign or domestic) or
other entity may, within sixty (60) days after the expiration of the sixty (60)
day period, file a petition in any court of competent jurisdiction in the county
in which the principal office of the domestic corporation is located, asking for
a finding and determination of the fair value of the shareholder's shares. Upon
the filing of any such petition by the shareholder, service of a copy thereof
shall be made upon the corporation (foreign or domestic) or other entity, which
shall, within ten (10) days after service, file in the office of the clerk of
the court in which the petition was filed a list containing the names and
addresses of all shareholders of the domestic corporation who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the corporation (foreign or domestic) or other
entity. If the petition shall be filed by the corporation (foreign or domestic)
or other entity, the petition shall be accompanied by such a list. The clerk of
the court shall give notice of the time and place fixed for the hearing of the
petition by registered mail to the corporation (foreign or domestic) or other
entity and to the shareholders named on the list at the addresses therein
stated. The forms of the notices by mail shall be approved by the court. All
shareholders thus notified and the corporation (foreign or domestic) or other
entity shall thereafter be bound by the final judgment of the court.
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C. After the hearing of the petition, the court shall determine the
shareholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment for their shares, and shall
appoint one or more qualified appraisers to determine that value. The appraisers
shall have power to examine any of the books and records of the corporation the
shares of which they are charged with the duty of valuing, and they shall make a
determination of the fair value of the shares upon such investigation as to them
may seem proper. The appraisers shall also afford a reasonable opportunity to
the parties interested to submit to them pertinent evidence as to the value of
the shares. The appraisers shall also have such power and authority as may be
conferred on Masters in Chancery by the Rules of Civil Procedure or by the order
of their appointment.
D. The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to dissent was
effected to the date of such judgment, to the shareholders entitled to payment.
The judgment shall be payable to the holders of uncertificated shares
immediately but to the holders of shares represented by certificates only upon,
and simultaneously with, the surrender to the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of duly
endorsed certificates for those shares. Upon payment of the judgment, the
dissenting shareholders shall cease to have any interest in those shares or in
the corporation. The court shall allow the appraisers a reasonable fee as court
costs, and all court costs shall be allotted between the parties in the manner
that the court determines to be fair and equitable.
E. Shares acquired by the existing, surviving, or new corporation (foreign
or domestic) or other entity, as the case may be, pursuant to the payment of the
agreed value of the shares or pursuant to payment of the judgment entered for
the value of the shares, as in this Article provided, shall, in the case of a
merger, be treated as provided in the plan of merger and, in all other cases,
may be held and disposed of by the corporation as in the case of other treasury
shares.
F. The provisions of this Article shall not apply to a merger if, on the
date of the filing of the articles of merger, the surviving corporation is the
owner of all the outstanding shares of the other corporations, domestic or
foreign, that are parties to the merger.
G. In the absence of fraud in the transaction, the remedy provided by this
Article to a shareholder objecting to any corporate action referred to in
Article 5.11 of this Act is the exclusive remedy for the recovery of the value
of his shares or money damages to the shareholder with respect to the action. If
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this Article, any
shareholder who fails to comply with the requirements of this Article shall not
be entitled to bring suit for the recovery of the value of his shares or money
damages to the shareholder with respect to the action.
ART. 5.13. PROVISIONS AFFECTING REMEDIES OF DISSENTING SHAREHOLDERS
A. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act shall not thereafter be entitled to
vote or exercise any other rights of a shareholder except the right to receive
payment for his shares pursuant to the provisions of those articles and the
right to maintain an appropriate action to obtain relief on the ground that the
corporate action would be or was fraudulent, the respective shares for which
payment has been demanded shall not thereafter be considered outstanding for the
purposes of any subsequent vote of shareholders.
B. Upon receiving a demand for payment from any dissenting shareholder, the
corporation shall make an appropriate notation thereof in its shareholder
records. Within twenty (20) days after demanding payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act, each holder of
certificates representing
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shares so demanding payment shall submit such certificates to the corporation
for notation thereon that such demand has been made. The failure of holders of
certificated shares to do so shall, at the option of the corporation, terminate
such shareholder's rights under Articles 5.12 and 5.16 of this Act unless a
court of competent jurisdiction for good and sufficient cause shown shall
otherwise direct. If uncertificated shares for which payment has been demanded
or shares represented by a certificate on which notation has been so made shall
be transferred, any new certificate issued therefor shall bear similar notation
together with the name of the original dissenting holder of such shares and a
transferee of such shares shall acquire by such transfer no rights in the
corporation other than those which the original dissenting shareholder had after
making demand for payment of the fair value thereof.
C. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act may withdraw such demand at any
time before payment for his shares or before any petition has been filed
pursuant to Article 5.12 or 5.16 of this Act asking for a finding and
determination of the fair value of such shares, but no such demand may be
withdrawn after such payment has been made or, unless the corporation shall
consent thereto, after any such petition has been filed. If, however, such
demand shall be withdrawn as hereinbefore provided, or if pursuant to Section B
of this Article the corporation shall terminate the shareholder's rights under
Article 5.12 or 5.16 of this Act, as the case may be, or if no petition asking
for a finding and determination of fair value of such shares by a court shall
have been filed within the time provided in Article 5.12 or 5.16 of this Act, as
the case may be, or if after the hearing of a petition filed pursuant to Article
5.12 or 5.16, the court shall determine that such shareholder is not entitled to
the relief provided by those articles, then, in any such case, such shareholder
and all persons claiming under him shall be conclusively presumed to have
approved and ratified the corporate action from which he dissented and shall be
bound thereby, the right of such shareholder to be paid the fair value of his
shares shall cease, and his status as a shareholder shall be restored without
prejudice to any corporate proceedings which may have been taken during the
interim, and such shareholder shall be entitled to receive any dividends or
other distributions made to shareholders in the interim.
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PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation of Sterling provide that its directors and
officers may be indemnified against any costs and expenses, including counsel
fees, actually and necessarily incurred (or reasonably expected to be incurred)
in connection with the defense of any civil, criminal, administrative or other
claim, action, suit or proceedings (whether by or in the right of Sterling or
otherwise) in which he may become involved or with which he may be threatened,
by reason of his being or having been such a director or officer, and against
any payments in settlement of any such claim, action, suit or proceeding or in
satisfaction of any related judgment, fine or penalty, provided that the Board
of Directors of Sterling shall, in the exercise of its business judgment,
determine that such indemnification is in the best interest of Sterling.
Sterling's Bylaws provide for indemnification of directors and officers to
the full extent permitted by law. In the case of a derivative or other action by
or in the right of Sterling where a director is found liable, indemnity is
predicated on the determination that indemnification is nevertheless
appropriate, by majority vote of a committee of disinterested directors or by
independent legal counsel.
Under the Texas Business Corporation Act (the "TBCA"), directors, officers,
employees or agents are entitled to indemnification against expenses (including
attorneys' fees) whenever they successfully defend legal proceedings brought
against them by reason of the fact that they hold such a position with the
corporation. In addition, with respect to actions not brought by or in the right
of the corporation, indemnification is permitted under the TBCA for expenses
(including attorneys' fees), judgments, fines, penalties and reasonable
settlement if it is determined that the person seeking indemnification acted in
good faith and in a manner he or she reasonably believed to be in or not opposed
to the best interests of the corporation or its shareholders and, with respect
to criminal proceedings he or she had no reasonable cause to believe that his or
her conduct was unlawful. With respect to actions brought by or in the right of
the corporation, indemnification is permitted under the TBCA for expenses
(including attorneys' fees) and reasonable settlements, if it is determined that
the person seeking indemnification acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
corporation or its shareholders; provided, indemnification is not permitted if
the person is found liable to the corporation, unless the court in which the
action or suit was brought has determined that indemnification is fair and
reasonable in view of all the circumstances of the case.
Under an insurance policy maintained by Sterling, the directors and
officers of Sterling are insured within the limits and subject to the
limitations of the policy, against certain expenses in connection with the
defense of certain claims, actions, suits or proceedings, and certain
liabilities which might be imposed as a result of such claims, action, suits or
proceedings, which may be brought against them by reason of being or having been
such directors and officers.
ITEM 21. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER 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. (included as
Appendix A to the Proxy Statement included in this
Registration Statement).
3.1 -- Restated and Amended Articles of Incorporation of
Sterling (incorporated herein by reference to Exhibit 3.1
to the Company's Registration Statement of Form S-3 (File
No. 333-27185)).
3.2 -- Restated By-laws of Sterling (incorporated herein by
reference to Exhibit 4.2 to the Company's Registration
Statement of Form S-8 effective November 25, 1996 (File
No. 333-16719)).
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.1 -- Form of Indenture, to be dated as of , 1997
(incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-3 (File No.
333-27815)).
4.2 -- Form of Junior Subordinated Debenture (included as an
exhibit to Exhibit 4.1).
4.7 -- Form of Trust Preferred Securities Guarantee Agreement to
be issued by Sterling (incorporated herein by reference
to Exhibit 4.7 to the Company's Registration Statement on
Form S-3 (File No. 333-27185)).
5.1* -- Opinion of Andrews & Kurth L.L.P. as to the legality of
the securities being registered.
8+ -- Opinion of Chamberlain Hrdlicka White Williams & Martin
as to certain federal income tax matters.
21.1+ -- Subsidiaries of the Registrant (incorporated herein by
reference to Exhibit 21 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 (File No.
0-20750).
23.1* -- Consent of Deloitte & Touche LLP, Independent Auditors.
23.3* -- Consent of Andrews & Kurth L.L.P. (included in their
opinion filed herewith as Exhibit 5.1).
24* -- Powers of Attorney (included on the signature page).
</TABLE>
- ---------------
* Previously filed.
+ Filed herewith.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant of Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed pursuant
to the paragraph immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Securities Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of
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determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities under the Securities Act of
1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that, in the opinion of the Securities
and Exchange Commission, such indemnification is against the public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form S-4, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE> 157
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-4 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Houston, State of Texas, on August 29,
1997.
STERLING BANCSHARES, INC.
/s/ GEORGE MARTINEZ
------------------------------------
George Martinez, Chairman and Chief
Financial Officer
(Principal Executive Officer)
KNOW ALL MEN BE THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints George Martinez, and Mark T. Giles, and
each of them, his true and lawful attorneys-in-fact and agents with full power
of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement and any subsequent registration statement filed
by the Registrant pursuant to Rule 462(b) of the Securities Act of 1933, which
relates to this Registration Statement, and to file the same, with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agent, or his or their substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE POSITION DATE
--------- -------- ----
<C> <S> <C>
/s/ GEORGE MARTINEZ Chairman and Chief Financial August 29, 1997
- ----------------------------------------------------- Officer and Director (Principal
George Martinez Executive and Financial Officer)
/s/ GEORGE MARTINEZ Principal Accounting Officer August 29, 1997
- -----------------------------------------------------
George Martinez
/s/ MARK T. GILES* Director August 29, 1997
- -----------------------------------------------------
Mark T. Giles
/s/ C.P. BRYAN, JR.* Director August 29, 1997
- -----------------------------------------------------
C.P. Bryan, Jr.
/s/ JOHN H. BUCK* Director August 29, 1997
- -----------------------------------------------------
John H. Buck
/s/ JAMES M. CLEPPER* Director August 29, 1997
- -----------------------------------------------------
James M. Clepper
</TABLE>
II-4
<PAGE> 158
<TABLE>
<CAPTION>
SIGNATURE POSITION DATE
--------- -------- ----
<C> <S> <C>
/s/ WALTER P. GIBBS, JR.* Director August 29, 1997
- -----------------------------------------------------
Walter P. Gibbs, Jr.
/s/ BRUCE J. HARPER* Director August 29, 1997
- -----------------------------------------------------
Bruce J. Harper
/s/ GLENN H. JOHNSON* Director August 29, 1997
- -----------------------------------------------------
Glenn H. Johnson
/s/ JAMES J. KEARNEY* Director August 29, 1997
- -----------------------------------------------------
James J. Kearney
/s/ RUSSELL I. ORR* Director August 29, 1997
- -----------------------------------------------------
Russell I. Orr
/s/ CHRISTIAN A. RASCH* Director August 29, 1997
- -----------------------------------------------------
Christian A. Rasch
/s/ STEVEN F. RETZLOFF* Director August 29, 1997
- -----------------------------------------------------
Steven F. Retzloff
/s/ RAIMUNDO RIOJAS* Director August 29, 1997
- -----------------------------------------------------
Raimundo Riojas
/s/ CUBA WADLINGTON, JR.* Director August 29, 1997
- -----------------------------------------------------
Cuba Wadlington, Jr.
*By George Martinez, attorney-in-fact.
</TABLE>
II-5
<PAGE> 159
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER 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. (included as
Appendix A to the Proxy Statement included in this
Registration Statement).
3.1 -- Restated and Amended Articles of Incorporation of
Sterling (incorporated herein by reference to Exhibit 3.1
to the Company's Registration Statement of Form S-3 (File
No. 333-27185)).
3.2 -- Restated By-laws of Sterling (incorporated herein by
reference to Exhibit 4.2 to the Company's Registration
Statement of Form S-8 effective November 25, 1996 (File
No. 333-16719)).
4.1 -- Form of Indenture, to be dated as of , 1997
(incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-3 (File No.
333-27185)).
4.2 -- Form of Junior Subordinated Debenture (included as an
exhibit to Exhibit 4.1).
4.7 -- Form of Trust Preferred Securities Guarantee Agreement to
be issued by Sterling (incorporated herein by reference
to Exhibit 4.7 to the Company's Registration Statement on
Form S-3 (File No. 333-27815)).
5.1* -- Opinion of Andrews & Kurth L.L.P. as to the legality of
the securities being registered.
8+ -- Opinion of Chamberlain Hrdlicka White Williams & Martin
as to certain federal income tax matters.
21.1 -- Subsidiaries of the Registrant (incorporated herein by
reference to Exhibit 21 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 (File No.
0-20750).
23.1* -- Consent of Deloitte & Touche LLP, Independent Auditors.
23.3* -- Consent of Andrews & Kurth L.L.P. (included in their
opinion filed herewith as Exhibit 5.1).
24* -- Powers of Attorney (included on the signature page).
</TABLE>
- ---------------
* Previously filed.
+ Filed herewith.
<PAGE> 1
July ___, 1997
First Houston Bancshares, Inc.
5757 Memorial Drive
Houston, Texas 77007
Ladies and Gentlemen:
You have requested our opinion regarding the federal income tax
consequences of the proposed merger of SBI Acquisition Corp. ("SBI"), a wholly
owned subsidiary of Sterling Bancshares, Inc. ("Sterling"), with and into First
Houston Bancshares, Inc. ("First Houston") pursuant to that certain Agreement
and Plan of Merger dated as of March 18, 1997 ("Agreement"). Our conclusions
are based solely on the U.S. federal income tax laws and the laws of the State
of Texas. We are not hereby addressing any other legal consequences arising
under federal, state, local, foreign or other law. All capitalized terms used
but not defined herein have the same meanings given to them in the Agreement.
STATEMENT OF FACTS
The conclusions and recommendations stated in this letter are based
upon our understanding of the facts related to the proposed merger transaction,
which are as follows:
A. Organizational Matters
1. Sterling is a corporation duly organized and validly
existing under the laws of the State of Texas and a registered bank
holding company under the Bank Holding Company Act of 1956, as amended
(the "BHCA"). As of March 18, 1997, Sterling had approximately
11,999,643 issued and outstanding shares of common stock and 88,380
issued and outstanding shares of preferred stock.
2. SBI is a corporation duly organized and validly
existing under the laws of the State of Texas. As of March 18, 1997,
SBI had 1,000 issued and outstanding shares of common stock, $.01 par
value per share, all of which were owned by Sterling. At such time,
SBI had no issued and/or outstanding shares of preferred stock.
3. First Houston is a corporation duly organized and
validly existing under the laws of the State of Texas and a registered
bank holding company under the BHCA. As of March 18, 1997, First
Houston had approximately 2,098,238 issued and outstanding shares of
common stock and 21,375 issued and outstanding shares of preferred
stock.
<PAGE> 2
First Houston Bancshares, Inc.
July , 1997
Page 2
B. The Merger
1. First Houston's directors and shareholders have duly
and properly approved the Merger in compliance with all applicable
legal and corporate requirements.
2. At the Effective Time, Articles of Merger that comply
with Article 5.04 of the Texas Business Corporation Act will be filed
and thus, SBI will be merged with and into First Houston pursuant to
applicable state corporation laws, with First Houston surviving the
transaction and thereby becoming a wholly-owned subsidiary of
Sterling. Such transaction is structured and intended to satisfy the
requirements for tax-free treatment under sections 368(a)(1)(A) and
368(a)(2)(E) of the Internal Revenue Code of 1986, as amended (the
"Code"), and is referred to as the "Merger" for purposes of this
letter. As part of the Merger, each issued and outstanding share of
First Houston common stock will be converted into validly issued,
fully paid and nonassessable shares of Sterling Common Stock in an
amount equal to the Exchange Ratio, except for shares, if any, then
held by Sterling, Bancorporation or any wholly-owned subsidiary of
Sterling or First Houston, all of which will be canceled and shares
held by First Houston shareholders who exercise and do not
subsequently withdraw or lose statutory dissenters' rights. Sterling
will pay cash in lieu of issuing certificates or scrip for fractional
shares of Sterling common stock.
3. Immediately following the Merger, Sterling intends to
contribute the capital stock of the surviving corporation (First
Houston) to Sterling Bancorporation, a Delaware corporation and a
wholly-owned subsidiary of Sterling ("Bancorporation").
4. Sterling did not undertake any obligation to pay and
will not pay any expenses on behalf of either First Houston or First
Houston's former shareholders as part of the Merger that were not
related to or incurred in the course of accomplishing the Merger.
5. At all times following the Merger, Sterling will
cause First Houston to continue conducting its historic business
activities, and/or use a significant portion of First Houston's
historic business assets to conduct a business activity.
Additionally, First Houston will not distribute in kind, transfer, or
sell any of its assets to Sterling following the date of the Merger.
C. Business Purposes For the Merger
1. To provide improved services to serve the needs of
the community.
2. To create greater financial strength for the future
growth of the bank involved.
3. To allow Sterling and First Houston to compete more
effectively with other banking corporations.
<PAGE> 3
First Houston Bancshares, Inc.
July , 1997
Page 3
QUALIFICATIONS AND ASSUMPTIONS
The opinions stated in this letter are based upon our understanding of
the facts related to the Merger, as detailed above and elsewhere in this
letter. In the event that there is a difference between the actual facts
related to the Merger and our understanding of the facts as detailed in this
letter, the opinions stated in this letter could be modified. Our
understanding of the facts is derived in part from our review of copies of the
documents listed on Exhibit A attached hereto. We have assumed, without
independent investigation, that (i) such copies constitute true, accurate, and
complete copies of the originals of such documents, (ii) such documents reflect
the valid and binding obligations of the respective parties thereto and are
enforceable in accordance with their terms, (iii) such documents reflect the
entire agreement among the respective parties thereto with respect to the
subject matters thereof, and (iv) the transactions that are the subject of such
documents were carried out in accordance with the terms of such documents. As
to certain factual matters that are not reflected in such documents, our
understanding is derived from our reliance upon representations made to us by
authorized agents or representatives of Sterling, SBI, and First Houston. We
have assumed, without independent investigation, the accuracy and completeness
of all such representations. Additionally, as to certain other factual
matters, our understanding is based upon certain assumptions that you have
allowed us to make. The foregoing representations and assumptions are as
follows:
1. SBI has duly and properly complied with all
applicable legal and corporate requirements for the Merger.
2. After substantial due diligence by each of the
parties to the Merger concerning the legal and economic risks
associated with the Merger, the parties thereto entered into the
Merger with a view towards making an economic profit apart from tax
consequences.
3. The Merger will be treated by the parties thereto in
a manner that is consistent with its form.
4. At the time of the Merger, First Houston's former
shareholders were not under a binding obligation, nor had any plan or
intention, to dispose of any portion of the stock that they received
in the Merger following the Merger.
5. Immediately following the Merger, First Houston will
hold at least 90% of the fair market value of the net assets of both
SBI and First Houston, and at least 70% of the fair market value of
the gross assets of both SBI and First Houston. For purposes of this
representation, amounts paid by First Houston or SBI to dissenter's,
amounts paid by First Houston or SBI stockholders who receive cash or
other property, amounts used by First Houston or SBI to pay
reorganization expenses, and all redemptions and distributions (except
for regular, normal dividends) made by First Houston, if any, will be
included as assets of First Houston or SBI respectively, immediately
prior to the Merger.
<PAGE> 4
First Houston Bancshares, Inc.
July , 1997
Page 4
6. At all times relevant for purposes of this letter,
neither SBI nor First Houston constituted an investment company within
the meaning of Section 368(a)(2)(F) of the Code.
The opinions stated in this letter are based upon existing provisions
of the Code, the Treasury Department regulations promulgated thereunder (final,
temporary, and proposed), published revenue rulings and revenue procedures of
the Internal Revenue Service ("IRS"), reports and statements of congressional
committees and members, and judicial decisions. All such authorities are
subject to change at any time, either prospectively or retroactively, and any
such change could significantly modify the opinions stated in this letter. In
rendering our opinions, we undertake no responsibility to advise you of any
such change or of any new developments in the application or interpretation of
the federal income tax laws. The opinions stated in this letter may not be
relied upon to the extent that there is any such change or material new
development in the application or interpretation of the federal income tax laws
that relates to the transactions that are the subject of this letter.
A number of issues raised by the matters addressed in this letter,
including matters upon which we have stated our opinions, are complex and have
not been definitively resolved by the tax laws. The opinions that we state in
this letter are based upon our interpretation of existing law and our belief
regarding what a court would more likely than not conclude if presented with
the relevant issues properly framed. However, we can give no assurances that
our interpretations will prevail if the issues become the subject of judicial
or administrative proceedings. Realization of the tax consequences set forth
in this letter is subject to the significant risk that the IRS may challenge
the tax treatment and that a court could sustain such challenge. Because
taxpayers bear the burden of proof required to support items challenged by the
IRS, the opinions stated in this letter are based upon the representation and
assumption that the appropriate taxpayer will undertake the effort and expense
to present fully the case in support of any matter that the IRS challenges.
DISCUSSION
A transaction satisfies sections 368(a)(1)(A) and 368(a)(2)(E) of the
Code if: (1) the merger of the acquiring corporation's subsidiary (i.e., SBI in
the case of the Merger) with and into the target corporation (i.e., First
Houston in the case of the Merger) is valid under applicable state corporation
laws; (2) the acquiring corporation (i.e., Sterling in the case of the Merger)
issues stock to the target corporation's former shareholders in exchange for an
amount of the target corporation's then issued and outstanding shares of stock
constituting at least 80% of both the total combined voting power of all
classes of stock and the total number of shares of all nonvoting stock; and (3)
the target
<PAGE> 5
First Houston Bancshares, Inc.
July , 1997
Page 5
corporation ends up owning "substantially all" of the assets of both the
acquiring corporation's subsidiary and the target corporation.1
Additionally, in order to constitute a tax-free reorganization, the
transaction must satisfy certain judicially developed doctrines intended to
limit tax-free treatment to transactions that involve a substantial continuing
investment by the target corporation's former shareholders in the target
corporation's assets and affairs. First, the amount of acquiring corporation
stock that the target corporation's former shareholders receive as part of the
transaction must be large enough relative to any other consideration received
by them in connection with the transaction that such shareholders can be said
to have substantially maintained their equity interest in the target
corporation (the "continuity of shareholder interest" requirement).2 See
Treas. Reg. Section 1.368-2(a). Second, the acquiring corporation must
continue to conduct the target corporation's historic business activities,
and/or use a significant portion of the target corporation's historic business
assets to conduct a business activity (the "continuity of business enterprise"
requirement). See Treas. Reg. Section 1.368-1(b). Finally, the transaction
must be undertaken for valid non-tax business purposes (the "business purpose"
requirement). See Treas. Reg. Section 1.368-2(g).3
The Merger will be carried out pursuant to the requirements of Texas
law, and thus, assuming satisfaction of all such state law requirements, will
satisfy the statutory and regulatory requirement that it constitute a valid
merger under state law. Under the terms of the Merger, the First Houston
__________________________________
1 For purposes of obtaining an advance ruling from the IRS, substantially
all means at least 90% of the fair market value of the target
corporation s net assets and 70% of the fair market value of the target
corporation s gross assets. Rev. Proc. 77-37, 1977-2 C.B. 568, Section
3.01. However, the courts tend to support a lower threshold. See
Commissioner v. First Natl Bank, 104 F.2d 865 (3d Cir. 1939) (transfer
of 86% of target corporations assets acceptable); Smith v.
Commissioner, 34 B.T.A. 702 (1936) (transfer of 71% of target
corporation s assets acceptable). The key inquiry is whether the
target corporation s operating assets have been transferred, taking
into account (under the step transaction doctrine) any distributions or
transfers of the target corporation s assets within a relatively short
period of time before the transaction (or otherwise pursuant to the
same overall plan).
2 The continuity of shareholder interest requirement is commonly
understood to require, as a rule of thumb, that at least 50% of the
value of the consideration received by the target corporation's former
shareholders must consist of the acquiring corporation stock. See Rev.
Proc. 77-37, 1977-2 C.B. 568, Section 3.02. Additionally, it is
commonly understood to require that the target corporation's
shareholders must retain ownership of the acquiring corporation stock
that they receive in the transaction until such ownership becomes old
and cold. Recently proposed Treasury regulations would remove a
significant amount of uncertainty in this area regarding the length of
time that is necessary in order to achieve old and cold status. See
Prop. Treas. Reg. Section 1.368-1(e).
3 The law is unsettled regarding whether a business purpose must be
determined solely at the corporate level, or whether a business
purpose determined at the shareholder level also can satisfy this
requirement. However, the cases in this area indicate that the
business purpose requirement is satisfied when a business purpose is
real and substantial, regardless of whether it might be described as a
corporate or shareholder level purpose. See Lewis v. Commissioner,
176 F.2d 646 (1st Cir. 1949). See also Martin D. Ginsburg & Jack S.
Levin, Mergers, Acquisitions, and Buyouts, Section 609 (January 1997
edition).
<PAGE> 6
First Houston Bancshares, Inc.
July , 1997
Page 6
shareholders will be entitled to receive solely stock of Sterling except that
(i) fractional shares will not be issued but will be treated as if the First
Houston shareholders received Sterling shares and sold the fractional excess
for cash, and (ii) the First Houston shareholders who properly exercise their
dissenter's rights under Texas law will be entitled to receive payments solely
from First Houston (as the surviving corporation) of the appraised value of
their shares. Thus, we have assumed that as a result of the Merger
transaction, Sterling will issue stock to First Houston's former shareholders
in exchange for First Houston stock constituting at least 80% of both the total
combined voting power of all classes of stock and the total number of shares of
all non-voting stock. We note that stock of First Houston, which is redeemed
by First Houston, out of its own funds is not counted in the 20% limitation nor
is it counted for purposes of determining whether Sterling has acquired an
amount of stock in the transaction representing control of First Houston.
Treas. Reg. Section 1.368-2(j)(3)(i). However, use of First Houston funds to
redeem First Houston stock from dissenter's will be taken into account in
determining whether the "substantially all" requirement has been satisfied.
Finally, based upon representations made to us and/or assumptions that we have
been allowed to make for purposes of this letter, First Houston will hold at
least 90% of the fair market value of the net assets of both SBI and First
Houston, and at least 70% of the fair market value of the gross assets of both
SBI and First Houston, immediately following the Merger. As a result, it has
been assumed for purposes of this letter that the Merger satisfies the
statutory and regulatory requirement that First Houston as the surviving
corporation end up owning "substantially all" of the assets of both SBI and
First Houston following the Merger.
The Merger also satisfies each of the judicially developed doctrines.
First, the amount of the Sterling stock that the former First Houston
shareholders will receive as a result of the Merger is sufficient such that
they will meet the continuity of shareholder interest requirement. Second,
Sterling as the acquiring corporation will continue to conduct First Houston's
historic business activities and the transfer by Sterling of the First Houston
stock to Bancorporation subsequent to the Merger does not impact this
conclusion. Finally, the Merger has been undertaken for valid non-tax business
purposes as set forth above.
OPINIONS
Subject to the qualifications set forth herein, and based upon the
foregoing analysis, we are of the opinion:
1. When the Secretary of State of the State of Texas
issues a Certificate of Merger, then the Merger will be effective and
will constitute a statutory merger under the Texas Business
Corporation Act.
2. The Merger will satisfy the requirements of sections
368(a)(1)(A) and 368(a)(2)(E) of the Code and thus constitute a
reorganization; consequently, Sterling and First Houston will each be
a "party to a reorganization" within the meaning of Section 368(b) of
the Code.
<PAGE> 7
First Houston Bancshares, Inc.
July , 1997
Page 7
3. The shareholders of First Houston will recognize no
gain or loss upon the exchange of their First Houston Common Stock
solely for shares of Sterling Common Stock.
4. The tax basis of the Sterling Common Stock received
by the First Houston shareholders in the Merger will, in each
instance, be the same as the tax basis of the First Houston Common
Stock surrendered in exchange therefor, less the basis of any
fractional shares of Sterling Common Stock settled by the cash
payment.
5. The holding period of the Sterling Common Stock
received by the First Houston shareholders will, in each instance,
include the period during which the First Houston Common Stock
surrendered in exchange therefor was held, provided that the First
Houston Common Stock was held as a capital asset on the date of the
exchange.
6. The payment of cash to First Houston shareholders in
lieu of fractional share interests of Sterling Common Stock will be
treated for federal income tax purposes as if the fractional shares
were distributed as part of the exchange and then were redeemed by
Sterling. Under Section 302 of the Code, this assumed redemption
generally will result in a First Houston shareholder being treated as
if he or she sold his or her fractional shares of Sterling Common
Stock for the amount of cash received, thus, recognizing gain (or
loss) to the extent that the amount received exceeds (or is less than)
the tax basis allocable to the fractional share. The tax basis of the
fractional shares will equal a pro rata portion of the total basis of
all of the shareholder's Sterling Common Stock received in the
exchange. Generally, any gain or loss recognized upon such exchange
will be capital gain or loss, provided the fractional share would
constitute a capital asset in the hands of the exchanging shareholder.
7. Where solely cash is received by a First Houston
shareholder in exchange for First Houston Common Stock pursuant to the
exercise of dissenter's rights, such cash will be treated as having
been received in redemption of such holder's First Houston Common
Stock. Generally, subject to the provisions and limitations of
Section 302 of the Code, a shareholder receiving cash pursuant to the
exercise of dissenter's rights will be entitled to capital gain (or
loss) treatment measured by the difference between the cash received
and such shareholder's basis in the First Houston Common Stock
redeemed.
In addition, please note that we have reviewed the information
contained in the Registration Statement under the caption "Federal Income Tax
Consequences of the Merger''. It is our opinion that such information is
correct to the extent that it constitutes matters of law or legal conclusions.
Our opinions address only the matters expressly set forth in this
letter, and no opinion is to be implied or inferred except as expressly stated
in this letter. The opinions stated in this letter are stated and effective as
of the date first above written. This opinion is solely for your benefit and
may only be relied upon by you, your shareholders and your counsel and, for the
purposes of the Registration Statement and Merger, Sterling and SBI. We hereby
consent the filing of this opinion as an exhibit to the Registration Statement.
In giving such consent, we do not thereby admit that we are acting within the
category of persons whose consent is required under Section 7 of the Securities
Act and the rules and regulations of the Securities and Exchange Commission
thereunder.
Sincerely,
<PAGE> 8
First Houston Bancshares, Inc.
July , 1997
Page 8
CHAMBERLAIN, HRDLICKA, WHITE,
WILLIAMS & MARTIN
By: ___________________________________
Exhibit
<PAGE> 9
EXHIBIT A
1. Agreement and Plan of Merger.
2. The Registration Statement on Form S-4 prepared in connection with the
Merger and filed with the Securities and Exchange Commission on May
30, 1997, and all amendments thereto (the "Registration Statement")
pursuant to the Securities Act of 1933, as amended (the "Securities
Act").
