FORM S-1
PROSPERITY BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 6712 74-2331986
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
3040 POST OAK BLVD. TRACY T. RUDOLPH
HOUSTON, TEXAS 77056 CHAIRMAN OF THE BOARD
(713) 993-0002 3040 POST OAK BLVD.
(ADDRESS, INCLUDING ZIP CODE, AND HOUSTON, TEXAS 77056
TELEPHONE NUMBER, (713) 993-0002
INCLUDING AREA CODE, OF REGISTRANT'S (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
PRINCIPAL EXECUTIVE OFFICES) NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPIES TO:
WILLIAM T. LUEDKE IV, ESQ. WILLIAM S. RUBENSTEIN, ESQ.
BRACEWELL & PATTERSON, L.L.P. SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
2900 SOUTH TOWER PENNZOIL PLACE 919 THIRD AVENUE
HOUSTON, TEXAS 77002-2781 NEW YORK, NEW YORK 10022
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective.
If any of the Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
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Common Stock, $1.00 par value........ 1,930,000 $15.00 $28,950,000 $8,540
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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 SEPTEMBER 11, 1998
PROSPECTUS
1,677,783 SHARES
[LOGO]
PROSPERITY BANCSHARES, INC.
COMMON STOCK
Of the 1,677,783 shares of Common Stock (the "Common Stock") offered hereby (the "Offering"), 925,000 shares are being sold by Prosperity Bancshares, Inc. (the "Company") and 752,783 shares are being sold by certain shareholders of the Company (the "Selling Shareholders"). Prior to the Offering, there has been no established public market for the Common Stock. The initial public offering price will be determined by negotiations between the Company and representatives of the Underwriters (the "Representatives"). It is estimated that the initial public offering price will be in the range of $ to $ per share. See "Underwriting." Application has been made to have the shares of Common Stock approved for quotation on The Nasdaq Stock Market's National Market ("Nasdaq/National Market") under the symbol "PRSP."
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY.
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PROCEEDS PROCEEDS
PRICE TO UNDERWRITING TO TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
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Per Share........... $ $ $ $
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Total(3)............ $ $ $ $
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(1) The Company and the Selling Shareholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting offering expenses payable by the Company, estimated at $300,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to 251,667 additional shares of Common Stock, on the same terms and conditions as set forth above, solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discount, Proceeds to Company and Proceeds to Selling Shareholders will be approximately $ , $ , $ and $ , respectively. See "Underwriting."
The shares of Common Stock to be distributed to the public are offered by the Underwriters, subject to prior sale, when, as and if received and accepted by the Underwriters, subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the certificates for the shares of Common Stock will be made against payment therefor in Houston, Texas on or about , 1998.
KEEFE, BRUYETTE & WOODS, INC. HOEFER & ARNETT
INCORPORATED
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The date of this Prospectus is , 1998.
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[Map of Texas Locations]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING THE MARKET PRICE OF THE COMMON STOCK, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. IN ADDITION, IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS (AND SELLING GROUP MEMBERS) MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ/NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY DOES NOT PURPORT TO BE COMPLETE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL SHARE AND PER SHARE INFORMATION HAS BEEN ADJUSTED TO GIVE EFFECT TO A FOUR FOR ONE COMMON STOCK SPLIT EFFECTED IN THE FORM OF A STOCK DIVIDEND EFFECTIVE AS OF SEPTEMBER 10, 1998. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. REFERENCES TO THE COMPANY IN THIS PROSPECTUS INCLUDE REFERENCES TO FIRST PROSPERITY BANK WHERE THE CONTEXT REQUIRES.
THE COMPANY
Prosperity Bancshares, Inc. (the "Company") is a bank holding company headquartered in Houston, Texas. The Company derives substantially all of its income from the operation of its wholly-owned bank subsidiary, First Prosperity Bank (the "Bank"), which has 11 full-service banking locations ("Banking Centers") in the greater Houston metropolitan area and six contiguous counties situated south and southwest of Houston. As of June 30, 1998, the Company had total assets of $335.4 million, gross loans of $141.1 million, total deposits of $307.8 million and total shareholders' equity of $26.5 million. The Company's financial performance has been characterized by steady asset growth, consistent core earnings and strong asset quality. The Company has been profitable in every year of its existence.
The Company was formed in 1983 as a vehicle to acquire the former Allied Bank in Edna, and has grown through a combination of internal growth, the acquisition of community banks and the opening of new community banking offices. From 1988 to 1992, as a sound and profitable institution, the Company took advantage of the economic downturn in Texas and acquired the deposits and certain assets of failed banks in West Columbia, El Campo and Cuero and two failed banks in Houston. The Company opened a full-service Banking Center in Victoria in 1993 and the following year established a Banking Center in Bay City. The Company expanded its Bay City presence in 1996 with the acquisition of an additional branch location from Norwest Bank and in 1997 the Company acquired the Angleton branch of Wells Fargo Bank. In 1998, the Company enhanced its West Columbia Banking Center with the purchase of a commercial bank branch located in West Columbia. As a result of the addition of these branches and internal growth, the Company's assets have increased from $54.2 million at the end of 1987 to $335.4 million as of June 30, 1998 and its deposits have increased from $46.0 million to $307.8 million in that same period. In addition, the Company has executed a definitive agreement to acquire Union State Bank ("Union") in East Bernard, which had $76.9 million in assets and $63.7 million in deposits as of June 30, 1998. The acquisition of Union is expected to close on or before October 1, 1998 and to be immediately accretive to the Company's earnings.
The Company's primary market consists of the communities served by its three locations in the greater Houston metropolitan area and its eight locations in six contiguous counties (Brazoria, Wharton, Matagorda, Jackson, Victoria and DeWitt) neighboring Houston. The diverse nature of the economies in each local market served by the Company provides the Company with a varied customer base and allows the Company to spread its lending risk throughout a number of different industries. The Company's market areas outside of Houston are dominated by either small community banks or branches of large regional banks. Management believes that the Company, as one of the few mid-sized financial institutions that combines responsive community banking with the sophistication of a regional bank holding company, has a competitive advantage in its market areas and excellent growth opportunities through acquisitions, new branch locations and additional business development.
Operating under a community banking philosophy, the Company seeks to develop broad customer relationships based on service and convenience while maintaining its conservative approach to lending and strong asset quality. The Company's Board members and executive officers play an important role in the Company's business development efforts by actively participating in a number of civic and public service
activities in the local communities served by the Company. The Company has invested heavily in its officers and employees by recruiting talented bankers in its market areas and rewarding excellent performance with stock options and other economic incentives. Each of the Company's Banking Centers is administered by a local President and operated as a separate profit center, with each Banking Center President being held accountable for his Banking Center's performance and compensated accordingly.
The Company offers a variety of traditional loan and deposit products to its customers, which consist primarily of consumers and small and medium-sized businesses. The Company tailors its products to the specific needs of customers in a given market. The Company offers consumers home mortgage loans with adjustable rates, automobile loans, home equity loans, debit cards and cash management services. For businesses, the Company makes available term loans, lines of credit and loans for working capital, business expansion and the purchase of equipment and machinery, interim construction loans for builders and owner-occupied commercial real estate loans. The Company provides all of its customers with a full complement of traditional deposit products.
The Company's strategic plan includes the following goals:
o INCREASE LOAN VOLUME AND DIVERSIFY LOAN PORTFOLIO. The Company seeks to increase its ratio of loans to deposits from the June 30, 1998 level of 42.1% to approximately 65%. Given the Company's high level of low-cost core deposits, increased lending activity is expected to significantly enhance the Company's net income. Historically, the Company has elected to sacrifice some earnings for the relative security of home mortgage loans. While maintaining its conservative approach to lending, the Company plans to emphasize loan products such as home equity loans and loans to finance the construction of commercial owner-occupied real estate, and target professional service firms such as legal and medical practices and their principals in an effort to improve the mix of its loan portfolio.
o MAINTAIN EFFICIENCY RATIO. The Company has always emphasized cost control. The Company has invested significantly in the infrastructure required to centralize many of its critical operations, which management believes can accommodate substantial additional growth and minimize operational costs through certain economies of scale. Since 1993, the Company has acquired two branch locations and established two new offices while improving its efficiency ratio in each consecutive year.
o ENHANCE CROSS-SELLING. The Company trains and incents its employees to cross-sell various products. To assist in this effort, the Company has updated its technology to help its officers and employees identify cross-selling opportunities through a readily accessible Customer Information File. Recent cross-selling efforts have targeted the Company's existing mortgage and home equity loan customers and small and medium-sized businesses for the sale of additional loan and deposit products.
o AUGMENT MARKET SHARE. In recent years, the Company has increased its market share in each of the communities in which it maintains a Banking Center. The Company intends to continue seeking opportunities to expand either by acquiring existing banks or branches of banks or by establishing new branches. All of the Company's acquisitions have been accretive to earnings immediately and have supplied the Company with relatively low-cost deposits which have been used to fund the Company's lending activities.
THE OFFERING
Common Stock offered by the
Company.............................. 925,000 shares
Common Stock offered by the Selling
Shareholders....................... 752,783 shares
Common Stock to be outstanding after
the Offering....................... 4,915,308 shares
Use of Proceeds...................... The estimated net proceeds of the Offering (approxi-
mately $ million) will be used for general
corporate purposes, including support of balance sheet
growth, future acquisitions and to repay certain
indebtedness incurred in the acquisition of Union.
Risk Factors......................... See "Risk Factors" and "Dilution" for a discussion
of certain factors that should be considered by each
prospective investor.
Nasdaq/National Market Symbol........ "PRSP"
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data of the Company is derived from the Selected Consolidated Financial Data appearing elsewhere in this Prospectus, and should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto and the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations."
AS OF AND FOR THE
SIX MONTHS ENDED
JUNE 30, AS OF AND FOR THE YEARS ENDED DECEMBER 31,
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1998 1997 1997 1996 1995 1994 1993
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(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Interest income...................... $ 10,871 $ 9,632 $ 19,970 $ 16,841 $ 14,738 $ 12,644 $ 11,879
Interest expense..................... 4,714 4,453 9,060 7,923 6,904 5,363 4,902
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Net interest income................ 6,157 5,179 10,910 8,918 7,834 7,281 6,977
Provision for credit losses.......... 145 105 190 230 175 188 155
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Net interest income after provision
for credit losses................ 6,012 5,074 10,720 8,688 7,659 7,093 6,822
Noninterest income................... 1,239 1,010 2,264 1,897 1,489 1,500 1,366
Noninterest expense.................. 4,255 3,667 7,836 6,634 6,046 6,021 6,067
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Income before taxes................ 2,996 2,417 5,148 3,951 3,102 2,572 2,121
Provision for income taxes........... 939 756 1,586 1,240 781 609 492
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Net income........................... $ 2,057 $ 1,661 $ 3,562 $ 2,711 $ 2,321 $ 1,963 $ 1,629
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PER SHARE DATA(1):
Basic earnings per share............. $ 0.52 $ 0.47 $ 0.94 $ 0.77 $ 0.66 $ 0.56 $ 0.47
Diluted earnings per share........... 0.50 0.46 0.92 0.76 0.66 0.56 0.47
Book value........................... 6.64 5.83 6.22 5.36 4.68 3.81 3.66
Tangible book value(2)............... 5.22 4.35 4.81 4.21 3.95 3.02 2.81
Cash dividends....................... 0.10 0.05 0.14 0.10 0.10 0.07 --
Dividend payout ratio................ 19.39% 10.73% 15.27% 12.97% 15.14% 13.42% --%
Weighted average shares outstanding
(basic) (in thousands)............. 3,990 3,564 3,778 3,513 3,514 3,514 3,448
Weighted average shares outstanding
(diluted) (in thousands)........... 4,080 3,648 3,864 3,560 3,523 3,514 3,448
Shares outstanding at end of period
(in thousands)..................... 3,990 3,980 3,990 3,510 3,514 3,514 3,514
BALANCE SHEET DATA:
Total assets......................... $ 335,422 $ 315,079 $ 320,143 $ 293,988 $ 233,492 $ 224,022 $ 214,635
Securities........................... 158,685 157,954 167,868 147,564 117,505 121,912 138,764
Loans................................ 141,080 120,810 120,578 113,382 88,797 76,543 57,495
Allowance for credit losses.......... 1,114 956 1,016 923 753 588 734
Total deposits....................... 307,815 290,252 291,517 270,866 214,534 207,543 198,904
Borrowings and notes payable......... -- 865 2,800 3,267 1,517 2,275 2,275
Total shareholders' equity........... 26,478 23,213 24,818 18,833 16,458 13,374 12,844
AVERAGE BALANCE SHEET DATA:
Total assets......................... $ 330,099 $ 293,896 $ 304,086 $ 257,205 $ 224,701 $ 214,318 $ 202,071
Securities........................... 169,988 150,656 157,677 127,607 119,857 125,585 130,612
Loans................................ 129,228 115,424 117,586 104,534 81,631 69,200 53,422
Allowance for credit losses.......... 1,047 916 961 820 669 686 781
Total deposits....................... 300,938 268,696 278,377 236,334 207,321 197,711 186,673
Total shareholders' equity........... 25,722 20,066 21,821 17,646 14,916 13,109 11,912
PERFORMANCE RATIOS(3):
Return on average assets............. 1.25% 1.13% 1.17% 1.05% 1.03% 0.92% 0.81%
Return on average equity............. 15.99 16.56 16.32 15.36 15.56 14.97 13.68
Net interest margin
(tax-equivalent)(4)................ 4.15 3.95 4.02 3.91 3.96 3.91 3.97
Efficiency ratio(5).................. 57.53 58.83 59.48 61.34 64.85 68.56 72.71
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AS OF AND FOR THE
SIX MONTHS ENDED AS OF AND FOR THE
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
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(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSET QUALITY RATIOS(6):
Nonperforming assets to total loans
and other real estate.............. 0.00% 0.12% 0.00% 0.00% 0.00% 0.02% 0.19%
Net loan charge-offs to average
loans.............................. 0.04 0.06 0.08 0.06 0.01 0.48 0.31
Allowance for credit losses to total
loans.............................. 0.79 0.79 0.84 0.81 0.85 0.77 1.28
Allowance for credit losses to
nonperforming loans(7)............. -- -- -- -- -- -- --
CAPITAL RATIOS(6):
Leverage ratio....................... 6.25% 5.73% 6.30% 5.45% 6.05% 5.39% 4.66%
Average shareholders' equity to
average total assets............... 7.79 6.83 7.18 6.86 6.64 6.12 5.89
Tier 1 risk-based capital ratio...... 14.32 14.55 14.94 13.11 14.99 13.75 13.45
Total risk-based capital ratio....... 15.08 15.33 15.73 13.89 15.79 14.37 14.45
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(1) Adjusted for a four for one stock split effective September 10, 1998.
(2) Calculated by dividing total assets, less total liabilities and goodwill, by shares outstanding at end of period.
(3) All interim periods have been annualized.
(4) Calculated using a 34% federal income tax rate.
(5) Calculated by dividing total noninterest expense, excluding securities losses, by net interest income plus noninterest income.
(6) At period end, except net loan charge-offs to average loans and average shareholders' equity to average total assets.
(7) Nonperforming loans consist of nonaccrual loans and restructured loans.
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES CERTAIN RISKS. IN ADDITION TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY BEFORE PURCHASING THE COMMON STOCK OFFERED HEREBY. INFORMATION CONTAINED IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS" WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS," "WILL," "SHOULD," "PROJECTED," "CONTEMPLATED" OR "ANTICIPATES" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. NO ASSURANCE CAN BE GIVEN THAT THE FUTURE RESULTS COVERED BY THE FORWARD-LOOKING STATEMENTS WILL BE ACHIEVED. THE FOLLOWING FACTORS COULD CAUSE ACTUAL EXPERIENCE TO VARY MATERIALLY FROM THE FUTURE RESULTS COVERED IN SUCH FORWARD-LOOKING STATEMENTS. OTHER FACTORS, SUCH AS THE GENERAL STATE OF THE ECONOMY, COULD ALSO CAUSE ACTUAL EXPERIENCE TO VARY MATERIALLY FROM THE MATTERS COVERED IN SUCH FORWARD-LOOKING STATEMENTS.
RISKS INVOLVED IN ACQUISITIONS
The Company believes that a portion of its growth will come from acquisitions of banks and other financial institutions. Such acquisitions, including the acquisition of Union (the "Union Acquisition"), currently expected to be consummated prior to the consummation of the Offering, involve risks of changes in results of operations or cash flows, unforeseen liabilities relating to the acquired institution or arising out of the acquisition, asset quality problems of the acquired entity and other conditions not within the control of the Company, such as adverse personnel relations, loss of customers because of change of identity, deterioration in local economic conditions and other risks affecting the acquired institution. See "Pending Acquisition." There can be no assurance that any such acquisitions will enhance the Company's business, results of operations, cash flows or financial condition, and such acquisitions may have an adverse effect on the Company's results of operations, particularly during periods in which the acquisitions are being integrated into the Company's operations. Operational areas requiring significant integration include the consolidation of data processing operations, the combination of employee benefit plans, the creation of joint account and lending products, the development of unified marketing plans and other related areas. Successful integration of acquired entities could require significant expenditures by the Company that could negatively impact the Company's results of operations. Completion of the acquisition and integration could divert management's attention from other important issues and impact the Company's operating results. There can be no assurance that the Company will be able to identify other suitable acquisition candidates, that acquisitions will be consummated on acceptable terms or that the Company will be able to successfully integrate the operations of any acquired entity or business. The Company's ability to acquire banks and other financial institutions may depend on its ability to obtain additional debt and equity funding which may not be available on terms as favorable to the Company as currently available and, if equity funding is utilized, an acquisition may be dilutive to shareholders.
EXPOSURE TO LOCAL ECONOMIC CONDITIONS
The Company's success is dependent to a significant extent upon general economic conditions in Texas and to a certain extent, the metropolitan Houston area. The banking industry in Texas and Houston is affected by general economic conditions such as inflation, recession, unemployment and other factors beyond the Company's control. During the mid 1980s, severely depressed oil and gas and real estate prices materially and adversely affected the Texas and Houston economies, causing recession and unemployment in the region and resulting in excess vacancies in the Houston real estate market and elsewhere in the state. Since 1987, the Texas economy has improved in part due to its expansion into industries other than those related to energy. As the Texas and Houston economies have diversified away from the energy industry, however, they have become more susceptible to adverse effects resulting from recession in the national economy. Economic recession over a prolonged period or other economic dislocation in the Texas and Houston area could cause increases in nonperforming assets, thereby causing operating losses, impairing liquidity and eroding capital. There can be no assurance that future adverse changes in the Texas or Houston
economies would not have a material adverse effect on the Company's financial condition, results of operations or cash flows.
INTEREST RATE RISK
The Company's earnings depend to a great extent on "rate differentials," which are the differences between interest income that the Company earns on loans and investments and the interest expense paid on deposits and other borrowings. These rates are highly sensitive to many factors which are beyond the Company's control, including general economic conditions and the policies of various government and regulatory authorities. Increases in the discount rate by the Board of Governors of the Federal Reserve System ("Federal Reserve Board") usually lead to rising interest rates, which affect the Company's interest income, interest expense and investment portfolio. Also, certain governmental policies affect the cost of funds. From time to time, maturities of assets and liabilities are not balanced, and a rapid increase or decrease in interest rates could have an adverse effect on the net interest margin and results of operations of the Company. The nature, timing and effect of any future changes in federal monetary and fiscal policies on the Company and its results of operations are not predictable. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition -- Interest Rate Sensitivity and Liquidity."
COMPETITION
The banking business is highly competitive, and the profitability of the Company depends principally upon the Company's ability to compete in the market areas in which its banking operations are located. The Company competes with other commercial banks, savings banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, asset-based non-bank lenders and certain other nonfinancial entities, including retail stores which may maintain their own credit programs and certain governmental organizations which may offer more favorable financing than the Company. Many of such competitors may have greater financial and other resources than the Company. The Company has been able to compete effectively with other financial institutions by emphasizing customer service, technology and responsive 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. Although the Company has been able to compete effectively in the past, no assurances may be given that the Company will continue to be able to compete effectively in the future. Various legislative acts in recent years have led to increased competition among financial institutions. There can be no assurance that the United States Congress or the Texas legislature will not enact legislation that may further increase competitive pressures on the Company. Competition from both financial and non-financial institutions is expected to continue. See "The Company -- Competition."
REGULATION AND SUPERVISION
Bank holding companies and banks operate in a highly regulated environment and are subject to extensive supervision and examination by several federal and state regulatory agencies. The Company is subject to the Bank Holding Company Act of 1956, as amended (the "BHCA"), and to regulation and supervision by the Federal Reserve Board. The Bank, as a Texas state banking association, is subject to regulation and supervision by the Texas Banking Department and, as a result of the insurance of its deposits, by the Federal Deposit Insurance Corporation ("FDIC"). These regulations are intended primarily for the protection of depositors and customers, rather than for the benefit of investors. The Company and the Bank are subject to changes in federal and state laws, as well as changes in regulations and governmental policies, income tax laws and accounting principles. The effects of any potential changes cannot be predicted but could adversely affect the business, operations and cash flows of the Company and the Bank in the future. See "Supervision and Regulation."
The Federal Reserve Board has adopted a policy that requires a bank holding company such as the Company to serve as a source of financial strength to its banking subsidiaries. The Federal Reserve Board has required bank holding companies to contribute cash to their troubled bank subsidiaries based upon this
"source of strength" policy, which could have the effect of decreasing funds available for distributions to shareholders. In addition, a bank holding company in certain circumstances could be required to guarantee the capital plan of an undercapitalized banking subsidiary. See "Supervision and Regulation."
DIVIDEND HISTORY AND RESTRICTIONS ON ABILITY TO PAY DIVIDENDS
While the Company currently pays cash dividends on the Common Stock, there is no assurance that the Company will pay dividends on the Common Stock in the future. It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization's expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company's ability to serve as a source of strength to its banking subsidiaries.
The Company's principal source of funds to pay dividends on the shares of Common Stock will be cash dividends that the Company receives from the Bank. The payment of dividends by the Bank to the Company is subject to certain restrictions imposed by federal and state banking laws, regulations and authorities. The federal banking statutes prohibit federally insured banks from making any capital distributions (including a dividend payment) if, after making the distribution, the institution would be "undercapitalized" as defined by statute. In addition, the relevant federal regulatory agencies also have authority to prohibit an insured bank from engaging in an unsafe or unsound practice, as determined by the agency, in conducting an activity. The payment of dividends could be deemed to constitute such an unsafe or unsound practice, depending on the financial condition of the Bank. Regulatory authorities could impose administratively stricter limitations on the ability of the Bank to pay dividends to the Company if such limits were deemed appropriate to preserve certain capital adequacy requirements. As of June 30, 1998, an aggregate of approximately $6.2 million was available for payment of dividends by the Bank to the Company under applicable restrictions, without regulatory approval. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition -- Capital Resources" and "Supervision and Regulation -- The Bank."
DEPENDENCE ON KEY PERSONNEL
The Company and the Bank are dependent on certain key personnel including Tracy T. Rudolph and David Zalman, both of whom are considered to be important to the success of the Company and the Bank. The unexpected loss of Messrs. Rudolph or Zalman or other members of senior management could have an adverse effect on the Company and the Bank. The Company has entered into an employment agreement with each of Messrs. Rudolph and Zalman. See "Management -- Employment Agreements."
CERTAIN CHARTER AND BYLAW PROVISIONS
The Company's Articles of Incorporation and Bylaws contain certain provisions which may delay, discourage or prevent an attempted acquisition or change of control of the Company. These provisions include: (i) a Board of Directors classified into three classes of directors with the directors of each class having staggered, three-year terms, (ii) a provision that any special meeting of shareholders of the Company may be called only by a majority of the Board of Directors, the Chairman of the Board, the President or the holders of at least 50% of the shares entitled to vote on the matter, (iii) a provision establishing certain advance notice procedures for nomination of candidates for election as directors and for shareholder proposals to be considered at an annual or special meeting of shareholders and (iv) a provision that denies shareholders the right to amend the Bylaws of the Company. The Company's Articles of Incorporation provide for noncumulative voting for directors and authorize the Board of Directors of the Company to issue shares of preferred stock of the Company, $1.00 par value per share, without shareholder approval and upon such terms as the Board of Directors may determine. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions, 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 the Company. In addition, certain provisions of Texas law, including a
provision which restricts certain business combinations between a Texas corporation and certain affiliated shareholders, may delay, discourage or prevent an attempted acquisition or change in control of the Company. See "Supervision and Regulation," "Description of Securities of the Company -- Preferred Stock," and "-- Texas Law and Certain Provisions of the Articles of Incorporation and Bylaws."
MANAGEMENT'S OWNERSHIP INTEREST AND POSSIBLE EFFECTS
After the consummation of the Offering, the executive officers and directors of the Company and members of the Executive Committee of the Bank will beneficially own 21.38% of the outstanding shares of Common Stock, and approximately 20.34% of such shares of Common Stock if the Underwriters' over- allotment option is fully exercised. Accordingly, these executive officers and directors will be able to influence, to a significant extent, the outcome of all matters required to be submitted to the Company's shareholders for approval, including decisions relating to the election of directors of the Company, the determination of day-to-day corporate and management policies of the Company and other significant corporate transactions. See "Management," "Principal and Selling Shareholders" and "Description of Securities of the Company."
DILUTION OF COMMON STOCK
Investors purchasing shares of Common Stock in the Offering will incur immediate dilution of approximately % in their investment, in that the tangible book value of the Company after the Offering will be approximately $ compared with an assumed initial public offering price of $ per share (which is the mid-point of the Offering range). See "Dilution."
NO PRIOR TRADING MARKET
Prior to the Offering, there has been no public market for the shares of Common Stock. An application has been filed to have the Common Stock approved for quotation on the Nasdaq/National Market under the symbol "PRSP." The Representatives have advised the Company that they intend to make a market in the Common Stock as long as the volume of trading activity in the Common Stock and certain other market making conditions justify doing so. Nonetheless, there can be no assurance that an active public market will develop or be sustained after the Offering or that if such a market develops, investors in the Common Stock will be able to resell their shares at or above the initial public offering price. Making a market involves maintaining bid and asked quotations for the Common Stock and being available as principal to effect transactions in reasonable quantities at those quoted prices, subject to various securities laws and other regulatory requirements. A public trading market having the desired characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace of willing buyers and sellers of the Common Stock at any given time, which presence is dependent upon the individual decisions of investors over which neither the Company nor any market maker has any control.
DETERMINATION OF MARKET PRICE AND POSSIBLE VOLATILITY OF STOCK PRICE
The initial public offering price of the shares of Common Stock will be determined by negotiations between the Company and the Representatives and will not necessarily bear any relationship to the Company's book value, past operating results, financial condition or other established criteria of value and may not be indicative of the market price of the Common Stock after the Offering. See "Nature of the Trading Market and Market Prices" and "Underwriting" for information relating to the method of determining the initial public offering price. The stock market has from time to time experienced price and volume volatility. These market fluctuations may be unrelated to the operating performance of particular companies whose shares are traded and may adversely affect the market price of the Common Stock. There can be no assurance that the market price of the Common Stock will not decline below the initial public offering price.
SHARES ELIGIBLE FOR FUTURE SALE
The Company will have 4,915,308 shares of Common Stock outstanding after the Offering. The Company, its officers and directors and certain shareholders (who collectively will own 32.71% of the
outstanding shares after the consummation of the Offering) have agreed with the Representatives not to offer, sell, contract to sell or otherwise dispose of any of their shares of Common Stock for a period of 180 days after the date of this Prospectus without the permission of the Representatives. The currently outstanding shares of Common Stock which are not subject to such agreement are held by approximately 140 shareholders of record, and all of such shares are "restricted securities" as that term is defined by Rule 144 promulgated under the Securities Act of 1933, as amended (the "Securities Act") and will be eligible for sale in compliance with Rule 144 volume and other requirements. Shares held for at least two years by a person who has not been an "affiliate" of the Company at any time during the 90 days preceding the sale of such shares will be freely tradable in accordance with Rule 144(k) under the Securities Act, without regard to volume and other restrictions of Rule 144. In addition, all of the shares of Common Stock sold in the Offering, other than shares purchased by affiliates of the Company, will generally be freely tradable under the Securities Act. No prediction can be made as to the effect, if any, that future sales of Common Stock or the availability of Common Stock for future sale will have on the market price of the Common Stock prevailing from time to time. Sales of a substantial number of such shares in the future, or the perception that such sales could occur, could adversely affect the market price of the Common Stock. See "Management" and "Principal and Selling Shareholders."
REGULATION OF CONTROL
Individuals, alone or acting in concert with others, seeking to acquire 10% or more of any class of voting securities of the Company must comply with the Change in Bank Control Act, which requires the prior approval of the Federal Reserve Board for any such acquisition. Entities seeking to acquire 5% or more of any class of voting securities of, or otherwise to control, the Company may be required to obtain the prior approval of the Federal Reserve Board under the BHCA. Accordingly, prospective investors need to be aware of and to comply with these requirements, if applicable, in connection with any purchase of shares of the Common Stock offered hereby.
YEAR 2000 ISSUES
Significant uncertainty exists concerning the potential effects associated with "Year 2000" issues. The Company formally initiated a project in November 1997 to ensure that its operational and financial systems will not be adversely affected by Year 2000 software problems. The Company has formed a Year 2000 project team and the Board of Directors and management are supporting all compliance efforts and allocating the resources that management believes are necessary to ensure completion. An inventory of all systems and products that could be affected by the Year 2000 date change has been developed, verified and categorized as to its importance to the Company. The software for the Company's systems is primarily provided through service bureaus and software vendors. The Company is requiring its software providers to demonstrate and represent that the products provided are or will be Year 2000 compliant and has planned a program of testing compliance. In the event that its data processing system does not function properly, the Company is prepared to perform functions manually. The Company believes it is in compliance with regulatory guidelines regarding Year 2000 compliance, including the timetable for achieving compliance. Management does not expect the costs of bringing the Company's systems into Year 2000 compliance will have a material adverse effect on the Company's financial condition, results of operations or liquidity. Nonetheless, the Company's ability to predict the costs associated with Year 2000 compliance is subject to some uncertainties, and the Company may incur unexpected additional expenditures in connection with Year 2000 compliance, which expenditures could be material. In addition, there can be no assurance that the Company's operational and financial systems will not be affected by Year 2000 software problems.
THE COMPANY
GENERAL
The Company was formed in 1983 as a vehicle to acquire the former Allied
Bank in Edna, which was chartered in 1949. The Company's headquarters are
located at 3040 Post Oak Boulevard in Houston, Texas and its telephone number is
(713) 993-0002. As of June 30, 1998, the Company had approximately 155
shareholders of record.
The Company has grown through a combination of internal growth, the acquisition of community banks and the opening of new community banking offices. Utilizing a low cost of funds and employing stringent cost controls, the Company has been profitable in every year of its existence, including the period of adverse economic conditions in Texas in the late 1980s. From 1988 to 1992, as a sound and profitable institution, the Company took advantage of this economic downturn and acquired the deposits and certain assets of failed banks in West Columbia, El Campo and Cuero and two failed banks in Houston, which diversified the Company's franchise and increased its core deposits. The Company opened a full-service Banking Center in Victoria in 1993 and the following year established a Banking Center in Bay City. The Company expanded its Bay City presence in 1996 with the acquisition of an additional branch location from Norwest Bank and in 1997 the Company acquired the Angleton branch of Wells Fargo Bank. In 1998, the Company enhanced its West Columbia Banking Center with the purchase of a commercial bank branch located in West Columbia. As a result of the addition of these branches and internal growth, the Company's assets have increased from $54.2 million at the end of 1987 to $335.4 million as of June 30, 1998 and its deposits have increased from $46.0 million to $307.8 million in that same period. In addition, the Company has executed a definitive agreement to acquire Union State Bank ("Union") in East Bernard, which had $76.9 million in assets and $63.7 million in deposits as of June 30, 1998. The Union Acquisition will augment the Company's market share in Wharton County and is expected to be immediately accretive to the Company's earnings. See "Pending Acquisition."
The Company's primary market consists of the communities served by its three locations in the greater Houston metropolitan area and its eight locations in six contiguous counties (Brazoria, Wharton, Matagorda, Jackson, Victoria and DeWitt) located to the south and southwest of Houston. Texas Highway 59 (scheduled to become Interstate Highway 69), which serves as one of the primary trucking routes linking the interior United States and Mexico, runs directly through the center of the Company's market area. The increased traffic along this "NAFTA Highway" has enhanced economic activity in the Company's market area and created opportunities for growth. The diverse nature of the economies in each local market served by the Company provides the Company with a varied customer base and allows the Company to spread its lending risk throughout a number of different industries including farming, ranching, petrochemicals, manufacturing, tourism, recreation and professional service firms and their principals. The Company's market areas outside of Houston are dominated by either small community banks or branches of large regional banks. Management believes that the Company, as one of the few mid-sized financial institutions that combines responsive community banking with the sophistication of a regional bank holding company, has a competitive advantage in its market area and excellent growth opportunities through acquisitions, new branch locations and additional business development.
Operating under a community banking philosophy, the Company seeks to develop broad customer relationships based on service and convenience while maintaining its conservative approach to lending and strong asset quality. The Company's directors and officers are important to the Company's success and play a key role in the Company's business development efforts by actively participating in a number of civic and public service activities in the communities served by the Company, such as the Rotary Club, Lion's Club, United Way and Chamber of Commerce. In addition, the Company's Banking Centers in Bay City, Clear Lake, Cuero, Edna and Victoria maintain Community Development Boards, whose function is to solicit new business, develop customer relations and provide valuable community knowledge to their respective Banking Center Presidents.
The Company has invested heavily in its officers and employees by recruiting talented officers in its market areas and providing them with economic incentive in the form of stock options and bonuses based
on cross-selling performance. The senior management team has substantial experience in both the Houston markets and the surrounding communities in which the Company has a presence. Each Banking Center location is administered by a local President with knowledge of the community and banking skills which complement the local economy. The Company entrusts its Banking Center Presidents with authority and flexibility with respect to product pricing and decision making within general parameters established by the Company. The Company operates each Banking Center as a separate profit center, maintaining separate data with respect to each Banking Center's net interest income, efficiency ratio, deposit growth, loan growth and overall profitability. Banking Center Presidents are accountable for performance in these areas and compensated accordingly. Each Banking Center has its own local telephone number, which enables a customer to be served by a local banker.
BUSINESS
The Company offers a variety of traditional loan and deposit products to its customers, which consist primarily of consumers and small and medium-sized businesses. The Company tailors its products to the specific needs of customers in a given market. The Company maintains approximately 25,000 separate deposit accounts and over 5,000 separate loan accounts. At June 30, 1998, approximately 22.3% of the Company's total deposits were noninterest-bearing demand deposits and for the period ended June 30, 1998, the Company's average cost of funds was 3.11%.
The Company has been an active mortgage lender, with one-to-four family and commercial mortgage loans comprising 60.6% of the Company's total loans as of June 30, 1998. The Company also offers loans for automobiles and other consumer durables, home equity loans, debit cards, personal computer banking and other cash management services and telebanking. By offering certificates of deposit, NOW accounts, savings accounts and overdraft protection at competitive rates, the Company gives its depositors a full range of traditional deposit products. The Company has successfully introduced Banclub, which for a monthly fee provides consumers with a package of benefits including unlimited free checking, personalized checks, credit card protection, free travelers checks, cashier's checks and money orders and certain travel discounts.
The businesses targeted by the Company are primarily those that require loans in the $100,000 to $3.0 million range. The Company offers these businesses a broad array of loan products including term loans, lines of credit and loans for working capital, business expansion and the purchase of equipment and machinery, interim construction loans for builders and owner-occupied commercial real estate loans. For its business customers, the Company has developed a specialized checking product called Business 10 Checking which provides discounted fees for checking and normal account analysis.
STRATEGY
The Company's strategic plan includes the following goals:
INCREASE LOAN VOLUME AND DIVERSIFY LOAN PORTFOLIO. The Company seeks to increase its ratio of loans to deposits from the June 30, 1998 level of 42.1% to approximately 65%. Given the Company's high level of low-cost core deposits, increased lending activity is expected to significantly enhance the Company's net income. Historically, the Company has elected to sacrifice some earnings for the relative security of home mortgage loans. While maintaining its conservative approach to lending, the Company plans to emphasize both new and existing loan products. Among new loan products, the Company has successfully introduced home equity lending, which contributed $4.7 million in new loans during the first half of 1998. The Company has also increased its number of loans to finance the construction of commercial owner-occupied real estate and loans to commercial businesses for accounts receivable financing and other purposes. With the Union Acquisition, the Company's agricultural loans will increase from $8.4 million to $22.2 million on a pro forma basis as of June 30, 1998. The Company is also targeting professional service firms such as legal and medical practices for both loans secured by owner-occupied premises and personal loans to their principals. As an outgrowth of its traditional mortgage lending activity, the Company is making more jumbo mortgage loans, particularly in the Houston area.
MAINTAIN EFFICIENCY RATIO. The Company has always emphasized cost control. The Company has invested significantly in the infrastructure required to centralize many of its critical operations, such as data processing and loan application processing. For its Banking Centers, which the Company operates as independent profit centers, the Company supplies complete support in the areas of loan review, internal audit, compliance and training. The Company maintains a "products committee" which provides support in the areas of product development, marketing and pricing. Management believes that this centralized infrastructure can accommodate substantial additional growth while enabling the Company to minimize operational costs through certain economies of scale. Since 1993, the Company has acquired two branch locations and established two new offices while improving its efficiency ratio in each consecutive year.
ENHANCE CROSS-SELLING. The Company has increased its focus on cross-selling opportunities by training employees to identify and maximize cross-selling opportunities. The Company uses bonuses to encourage cross-selling efforts, and fosters friendly competition among the Banking Centers to achieve better cross-selling results. To assist with cross-selling efforts, the Company has updated its technology to help officers and employees identify cross-selling opportunities through a readily accessible Customer Information File which details personal information, existing account relationships and related account relationships. Recent cross-selling efforts by the Company have targeted the Company's existing mortgage and home equity loan customers and small and medium-sized businesses for the sale of additional loan and deposit products.
AUGMENT MARKET SHARE. In recent years, the Company has increased its market share in each of the communities in which it maintains a Banking Center. The Company intends to continue seeking opportunities, both inside and outside its existing markets, to expand either by acquiring existing banks or branches of banks or by establishing new branches. All of the Company's acquisitions have been accretive to earnings immediately and have supplied the Company with relatively low-cost deposits which have been used to fund the Company's lending activities. Factors used by the Company to evaluate expansion opportunities include the similarity in management and operating philosophies, whether the acquisition will be accretive to earnings and enhance shareholder value, the ability to achieve economies of scale to improve the efficiency ratio and the opportunity to enhance the Company's image and market presence.
FACILITIES
The Company conducts business at 11 full-service Banking Centers. The following table sets forth specific information on each such location. The Company's headquarters are located at 3040 Post Oak Boulevard, in Houston, Texas. The Company owns all of the buildings in which its Banking Centers are located other than the Post Oak, Meyerland and Victoria Banking Centers.
DEPOSITS AT
LOCATION JUNE 30, 1998
------------------------------------- -----------------------
(DOLLARS IN THOUSANDS)
Angleton............................. $30,751
Bay City (7th Street)................ 14,692
Bay City (Avenue F).................. 31,283
Clear Lake........................... 29,410
Cuero................................ 23,493
Edna................................. 35,540
El Campo............................. 40,795
Houston (Meyerland).................. 19,704
Houston (Post Oak)................... 29,977
Victoria............................. 11,489
West Columbia........................ 40,681
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COMPETITION
The banking business is highly competitive, and the profitability of the Company depends principally on the Company's ability to compete in its markets. The Company competes with other commercial banks, savings banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, asset-based non-bank lenders and certain other nonfinancial entities, including retail stores which may maintain their own credit programs and certain governmental organizations which may offer more favorable financing than the Company. The Company has been able to compete effectively with other financial institutions by emphasizing customer service, technology and responsive 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. See "Risk Factors -- Competition."
EMPLOYEES
As of June 30, 1998, the Company had 118 full-time equivalent employees, 50 of whom were officers of the Bank. The Company provides medical and hospitalization insurance to its full-time employees. The Company considers its relations with employees to be excellent. Neither the Company nor the Bank is a party to any collective bargaining agreement.
LEGAL PROCEEDINGS
The Company and the Bank from time to time are parties to or otherwise involved in legal proceedings arising in the normal course of business. Management does not believe that there is any pending or threatened proceeding against the Company or the Bank which, if determined adversely, would have a material effect on the business, results of operations or financial condition of the Company or the Bank.
USE OF PROCEEDS
The net proceeds to be received by the Company from the Offering (based upon an assumed initial public offering price of $ per share), after deducting the underwriting discount and estimated Offering expenses, are estimated to be approximately $ million, or $ million if the Underwriters' over- allotment option is fully exercised. The Company intends to use all of such proceeds for general corporate purposes, including support for anticipated balance sheet growth, future acquisitions and the repayment of $2.0 million of indebtedness (the "Indebtedness") to another commercial bank incurred in connection with the Union Acquisition. The principal amount of the Indebtedness is repayable over a seven year period and bears interest at the federal funds rate plus 2.75%. The Indebtedness is secured by all of the capital stock of the Bank.
Pending the application of the net proceeds, the Company intends to invest such proceeds in short-term, interest-bearing securities, certificates of deposit or guaranteed obligations of the United States of America.
DIVIDEND POLICY
Holders of Common Stock are entitled to receive dividends when, as and if declared by the Company's Board of Directors out of funds legally available therefor. While the Company has paid dividends on its Common Stock since 1994, there is no assurance that dividends will be paid in the future.
For a foreseeable period of time, the principal source of cash revenues to the Company will be dividends paid by the Bank with respect to the Bank's capital stock. There are certain restrictions on the payment of such dividends imposed by federal and state banking laws, regulations and authorities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition -- Capital Resources" and "Supervision and Regulation -- The Bank."
In the future, the declaration and payment of dividends on the Common Stock will depend upon the earnings and financial condition of the Company, liquidity and capital requirements, the general economic and regulatory climate, the Company's ability to service any equity or debt obligations senior to the
Common Stock and other factors deemed relevant by the Company's Board of Directors. See "Supervision and Regulation" and "Description of Securities of the Company." As of June 30, 1998, an aggregate of approximately $6.2 million was available for payment of dividends by the Bank to the Company under applicable restrictions, without regulatory approval. Regulatory authorities could impose administratively stricter limitations on the ability of the Bank to pay dividends to the Company if such limits were deemed appropriate to preserve certain capital adequacy requirements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition -- Capital Resources" and "Supervision and Regulation."
DILUTION
As of June 30, 1998, the tangible book value of the Common Stock was $5.22 per share. "Tangible book value per share" represents the amount of total tangible assets less total liabilities divided by the number of shares of Common Stock outstanding. After giving effect to the Union Acquisition, including $ million of goodwill and core deposit intangibles and the sale by the Company of 925,000 shares of Common Stock offered hereby (after deducting the underwriting discount and other estimated offering expenses to be paid by the Company), the pro forma tangible book value of the Company as of June 30, 1998 would have been $ per share. This represents an immediate increase in net tangible book value of $ per share to current shareholders and an immediate dilution of $ per share to new investors. The following table illustrates this per share dilution:
Assumed price to public.............. $ 14.00
---------
Tangible book value per share
before Offering................ $ 5.22
Increase per share attributable
to new investors............... $
---------
Pro forma tangible book value per
share after Offering............... $
---------
Dilution to new investors............ $
=========
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PENDING ACQUISITION
GENERAL. The Company's Board of Directors actively pursues an acquisition strategy designed to increase efficiency, market share and return to shareholders. As part of this strategy, the Company has entered into a definitive agreement to acquire Union, a Texas banking association organized in 1907, pursuant to a statutory merger. Union is a single location community bank whose business includes conventional consumer and commercial products and services, including interest and noninterest-bearing depository accounts and commercial, industrial, consumer, agricultural and real estate lending. At June 30, 1998, Union had total assets of approximately $76.9 million, total deposits of approximately $63.7 million (12.9% of which were noninterest-bearing) and total shareholders' equity of approximately $12.9 million. Union is the only full-service commercial bank in East Bernard and has a stable customer base.
The Union Acquisition will be accretive to the Company's earnings immediately and provide the Company a presence in East Bernard, a community of 1,500 located in northern Wharton County. The acquisition will allow the Company to acquire a larger market share in Wharton County, where the Company's El Campo Banking Center is located. The acquisition of Union will also help the Company improve its loan mix by increasing the Company's agriculture loans as of June 30, 1998 from $8.4 million to $22.2 million on a pro forma basis. Union has a lending philosophy which is similar to that employed by the Company. The Company's significantly higher lending limit is expected to create lending opportunities in the market that Union was unable to take advantage of prior to the acquisition. Similar to its previous acquisitions, the Company believes that the Union Acquisition will enable the Company to achieve certain economies of scale and resultant savings from the operation of Union as an additional Banking Center.
ACQUISITION BY THE COMPANY. On June 5, 1998, the Company entered into an Agreement and Plan of Reorganization (the "Acquisition Agreement") with Union pursuant to which the Company will acquire all of the issued and outstanding shares of Union's common stock (the "Union Common Stock"). The
Acquisition Agreement provides that upon consummation of the Union Acquisition, holders of Union Common Stock will receive $17.6 million in cash as consideration in exchange for their shares of Union Common Stock. The source of the Company's funds for the acquisition will be a combination of existing cash ($15.6 million) and borrowed funds ($2.0 million). The Union Acquisition will be accounted for as a purchase transaction.
The obligations of the parties to complete the acquisition of Union are subject to certain conditions, including the conditions that: (i) all approvals of any regulatory authority having jurisdiction have been received and all applicable statutory waiting periods have expired; (ii) the shareholders of Union shall have approved the transactions contemplated under the Acquisition Agreement; and (iii) the holders of not more than 10% of the Union Common Stock shall have exercised their dissenters' rights of appraisal. In addition, the Company is not obligated to complete the acquisition of Union unless certain conditions have been satisfied by Union or waived by the Company, including that: (i) each of the representations and warranties of Union in the Acquisition Agreement shall be true in all material respects and Union shall have performed or complied with all covenants and conditions contained in the Acquisition Agreement; (ii) Union shall not have suffered any material adverse change in its financial condition, business or operations; and (iii) Union shall have used its best efforts to have the directors and officers of Union execute releases generally releasing Union from virtually all claims by such individuals. At or prior to the closing of the Union Acquisition, two executive officers of Union are expected to execute employment agreements which contain two-year non-competition clauses.
The closing date of the Union Acquisition, which management of the Company expects to occur prior to the closing of the Offering, will be selected by mutual agreement of the parties to the Acquisition Agreement following satisfaction or waiver of all conditions to closing. The closing of the Offering is not contingent upon the prior or simultaneous closing of the Union Acquisition. There can be no assurance that the foregoing conditions will be satisfied or waived or that the Union Acquisition will be completed.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements set forth the consolidated balance sheet at June 30, 1998 and the consolidated income statements for the six month period ended June 30, 1998 and for the year ended December 31, 1997, for the Company and Union and the adjustments reflecting the proposed acquisition of Union and the pro forma combined information following such transaction. The Union Acquisition will be accounted for as a purchase and the assets and liabilities will be recorded at their estimated fair market values, with the excess of the respective purchase prices over the net fair market values recorded as goodwill. The information with respect to the Company and Union as of June 30, 1998, and the pro forma information is unaudited. The pro forma balance sheet assumes that the Union Acquisition was consummated on the balance sheet date. The pro forma income statements assume that the Union Acquisition was consummated at the beginning of the period indicated. The pro forma financial statements should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this Prospectus. The pro forma combined balance sheet and statements of income are not necessarily indicative of the combined financial position at consummation of the Union Acquisition or the results of operations following consummation of the Union Acquisition.
PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1998
(UNAUDITED)
PRO FORMA
ADJUSTMENTS
-------------------- PRO FORMA
COMPANY UNION DEBITS CREDITS COMBINED
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks.............. $ 13,054 $ 1,673 $ 2,000(b) $ 4,700(b) $ 12,027
Federal funds sold................... 7,875 5,100 -- 12,900(b) 75
--------- --------- --------- --------- ---------
Total cash and cash
equivalents............... 20,929 6,773 2,000 17,600 12,102
Interest-bearing deposits in
financial institutions............. 99 -- 99
SECURITIES
Available-for-sale............... 44,744 20,069 64,813
Held-to-maturity................. 113,941 24,077 192(a) 138,210
--------- --------- ---------
Total securities............ 158,685 44,146 192 203,023
LOANS
Total loans, net of unearned
discount....................... 141,080 25,227 166,307
Allowance for credit losses...... (1,114) (671) (1,785 )
--------- --------- ---------
Net loans................... 139,966 24,556 164,522
Goodwill............................. 5,659 -- $ 4,235(a) 9,894
Premises and equipment............... 5,452 165 566(a) 6,183
Other real estate owned.............. -- 139 139
Other assets......................... 4,632 1,162 5,794
--------- --------- --------- --------- ---------
Total assets................ $ 335,422 $ 76,941 $ 6,993 $ 17,600 $401,756
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits......................... $ 307,815 $ 63,723 $371,538
Funds borrowed/customer
repurchase..................... -- -- $ 2,000(b) 2,000
Other liabilities................ 1,129 354 257(a) 1,740
--------- --------- --------- ---------
Total liabilities........... 308,944 64,077 2,257 375,278
Shareholders' equity:
Common stock..................... 3,994 700 $ 700(c) 3,994
Capital surplus.................. 4,817 3,300 3,300(c) 4,817
Retained earnings................ 17,708 8,929 8,929(c) 17,708
Treasury stock................... (18) -- (18 )
Net unrealized gain (loss) on
available-for-sale
securities..................... (23) (65) 65(a) (23 )
--------- --------- --------- --------- ---------
Total shareholders'
equity.................... 26,478 12,864 12,929 65 26,478
--------- --------- --------- --------- ---------
Total liabilities and
shareholders' equity...... $ 335,422 $ 76,941 $ 12,929 $ 2,322 $401,756
========= ========= ========= ========= =========
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(a) This adjustment represents the purchase price adjustments to mark Union's assets and liabilities to fair value upon the consummation of the Union Acquisition and results in recording of $4.235 million in goodwill.
(b) This adjustment represents the purchase of 100% of the outstanding shares of stock of Union for $17.6 million consisting of $15.6 million of existing of cash and an additional $2.0 million of cash generated from borrowings under an existing line of credit.
(c) This adjustment represents the elimination of the capital of Union against the investment in subsidiary of the Company.
PRO FORMA COMBINED INCOME STATEMENT
SIX-MONTH PERIOD ENDED JUNE 30, 1998
(UNAUDITED)
PRO FORMA
ADJUSTMENTS
------------------ PRO FORMA
COMPANY UNION DEBITS CREDITS COMBINED
---------- ------- ------ ------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income:
Interest and fees on loans......... $ 5,568 $ 1,040 $ 6,608
Interest on securities............. 5,176 1,375 6,551
Interest on federal funds sold..... 127 196 323
---------- ------- ----------
Total interest income......... 10,871 2,611 13,482
Interest expense:
Interest on deposits............... 4,646 1,238 5,884
Interest on other borrowings....... 68 -- $ 83(a) 151
---------- ------- ------ ----------
Total interest expense........ 4,714 1,238 83 6,035
Net interest income..................... 6,157 1,373 (83) 7,447
Provision for credit losses........ 145 -- 145
---------- ------- ------ ----------
Net interest income after provision for
credit losses......................... 6,012 1,373 (83) 7,302
Noninterest income:
Service charges.................... 1,136 98 1,234
Other noninterest income........... 103 32 135
---------- ------- ----------
Total noninterest income...... 1,239 130 1,369
Noninterest expense:
Salaries and employee benefits..... 2,115 453 2,568
Net occupancy expense.............. 427 58 10(b) 495
Other noninterest expense.......... 1,713 214 141(c) 2,068
---------- ------- ------ ----------
Total noninterest expense..... 4,255 725 151 5,131
Income before federal income taxes...... 2,996 778 (234) 3,540
Federal income taxes............... 939 248 $ 32(d) 1,155
---------- ------- ------ ------- ----------
Net income.................... $ 2,057 $ 530 $ (234) $ 32 2,385
========== ======= ====== ======= ==========
Basic earnings per share:
Net income per share............... $ .52 $ 7.57 $ .60
Average shares outstanding......... 3,990,308 70,000 3,990,308
========== ======= ==========
Diluted earnings per share:
Net income per share............... $ .50 $ 7.57 $ .58
Average shares outstanding......... 4,080,516 70,000 4,080,516
========== ======= ==========
|
(a) This adjustment represents the interest expense on the additional debt.
(b) This adjustment represents additional depreciation expense on the acquired buildings.
(c) This adjustment represents the amortization of $4.235 million in goodwill over 15 years.
(d) This adjustment represents the federal income tax effect of the above adjustments.
PRO FORMA COMBINED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
PRO FORMA
ADJUSTMENTS
------------------- PRO FORMA
COMPANY UNION DEBITS CREDITS COMBINED
---------- --------- ------- ------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income:
Interest and fees on loans......... $ 10,205 $ 2,135 $ 12,340
Interest on securities............. 9,572 2,790 12,362
Interest on federal funds sold..... 193 267 460
---------- --------- ----------
Total interest income...... 19,970 5,192 25,162
Interest expense:
Interest on deposits............... 8,858 2,504 11,362
Interest on other borrowings....... 202 -- $ 164(a) 366
---------- --------- ------- ----------
Total interest expense..... 9,060 2,504 164 11,728
Net interest income.................. 10,910 2,688 (164) 13,434
Provision for credit losses........ 190 (75) 115
---------- --------- ------- ----------
Net interest income after provision
for credit losses............... 10,720 2,763 (164) 13,319
Noninterest income:
Service charges.................... 2,062 218 2,280
Other noninterest income........... 202 110 312
---------- --------- ----------
Total noninterest income... 2,264 328 2,592
Noninterest expense:
Salaries and employee benefits..... 3,968 945 4,913
Net occupancy expense.............. 811 122 19(b) 952
Other noninterest expense.......... 3,057 436 281(c) 3,774
---------- --------- ------- ----------
Total noninterest
expense................. 7,836 1,503 300 9,639
Income before federal income taxes... 5,148 1,588 (464) 6,272
Federal income taxes............... 1,586 422 $ 62(d) 1,946
---------- --------- ------- ------- ----------
Net income................. $ 3,562 $ 1,166 $ (464) $ 62 $ 4,326
========== ========= ======= ======= ==========
Basic earnings per share:
Net income per share............ $ .94 $ 16.66 $ 1.15
Average shares outstanding...... 3,777,880 70,000 3,777,880
========== ========= ==========
Diluted earnings per share:
Net income per share............ $ .92 $ 16.66 $ 1.12
Average shares outstanding...... 3,863,636 70,000 3,863,636
========== ========= ==========
|
(a) This adjustment represents the interest expense on the additional debt.
(b) This adjustment represents additional depreciation expense on the acquired buildings.
(c) This adjustment represents the amortization of $4.235 million in goodwill over 15 years.
(d) This adjustment represents the federal income tax effect of the above adjustments.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the Company as of June 30, 1998, and as adjusted to give effect to (i) the Union Acquisition and (ii) the sale by the Company of 925,000 shares of Common Stock offered hereby, at a per share price of $ , net of the underwriting discount and other estimated offering expenses. See "Use of Proceeds."
JUNE 30, 1998
---------------------------------------------
AS ADJUSTED
AS ADJUSTED FOR THE UNION
FOR THE UNION ACQUISITION AND
ACTUAL ACQUISITION THE OFFERING
------- -------------- ----------------
(DOLLARS IN THOUSANDS)
Shareholders' Equity:
Preferred Stock, $1 par value,
20,000,000 shares authorized;
none issued and outstanding..... $ -- -- $
Common Stock, $1 par value;
50,000,000 shares authorized;
3,993,884 shares issued and
3,990,308 shares outstanding;
4,918,884 shares issued and
4,915,308 shares outstanding, as
adjusted........................ $ 3,994 $
Capital surplus.................... 4,817
Retained earnings.................. 17,708
Net unrealized gain (loss) on
available-for-sale securities... (23)
Less common stock held in
treasury-at cost................ (18)
------- --------------
Total shareholders'
equity..................... $26,478 $
======= ==============
|
NATURE OF THE TRADING MARKET
Prior to the Offering, there has been no public market for the shares of Common Stock and there can be no assurance that an active public market will develop or be sustained after the Offering or that if such a market develops, investors in the Common Stock will be able to resell their shares at or above the initial public offering price. See "Risk Factors -- No Prior Trading Market." The initial public offering price of the shares of Common Stock will be determined by negotiations between the Company and the Representatives and will not necessarily bear any relationship to the Company's book value, past operating results, financial condition or other established criteria of value and may not be indicative of the market price of the Common Stock after the Offering. Among the factors considered in such negotiations are prevailing market and general economic conditions, the market capitalizations, trading histories and stages of development of other traded companies that the Company and the Representatives believe to be comparable to the Company, the results of operations of the Company in recent periods, the current financial position of the Company, estimates of the business potential of the Company and the present state of the Company's development and the availability for sale in the market of a significant number of shares of Common Stock. Additionally, consideration will be given to the general status of the securities market, the market conditions for new issues of securities and the demand for securities of comparable companies at the time the Offering is made. See "Underwriting" for information relating to the method of determining the initial public offering price. Application has been made for quotation of the shares of Common Stock on the Nasdaq/National Market under the symbol "PRSP."
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto, appearing elsewhere in this Prospectus, and the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected historical consolidated financial data as of December 31, 1997 and 1996 and for the three years in the period ended December 31, 1997 are derived from the Company's Consolidated Financial Statements which have been audited by Deloitte & Touche LLP. The selected historical financial data as of December 31, 1995, 1994 and 1993 and for the two years in the period ended December 31, 1994 are derived from the Consolidated Financial Statements which have been audited by independent public accountants. The selected historical consolidated financial data as of and for each of the six months ended June 30, 1998 and June 30, 1997, have not been audited but, in the opinion of management, contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position and results of operations of the Company as of such dates and for such periods. The results of operations for the six months ended June 30, 1998, are not necessarily indicative of the results of operations that may be expected for the year ended December 31, 1998, or for any future periods.
AS OF AND FOR THE
SIX MONTHS ENDED
JUNE 30, AS OF AND FOR THE YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Interest income......................... $ 10,871 $ 9,632 $ 19,970 $ 16,841 $ 14,738 $ 12,644 $ 11,879
Interest expense........................ 4,714 4,453 9,060 7,923 6,904 5,363 4,902
--------- --------- --------- --------- --------- --------- ---------
Net interest income................. 6,157 5,179 10,910 8,918 7,834 7,281 6,977
Provision for credit losses............. 145 105 190 230 175 188 155
--------- --------- --------- --------- --------- --------- ---------
Net interest income after provision
for credit losses................. 6,012 5,074 10,720 8,688 7,659 7,093 6,822
Noninterest income...................... 1,239 1,010 2,264 1,897 1,489 1,500 1,366
Noninterest expense..................... 4,255 3,667 7,836 6,634 6,046 6,021 6,067
--------- --------- --------- --------- --------- --------- ---------
Income before taxes................. 2,996 2,417 5,148 3,951 3,102 2,572 2,121
Provision for income taxes.............. 939 756 1,586 1,240 781 609 492
--------- --------- --------- --------- --------- --------- ---------
Net income.............................. $ 2,057 $ 1,661 $ 3,562 $ 2,711 $ 2,321 $ 1,963 $ 1,629
========= ========= ========= ========= ========= ========= =========
PER SHARE DATA(1):
Basic earnings per share................ $ 0.52 $ 0.47 $ 0.94 $ 0.77 $ 0.66 $ 0.56 $ 0.47
Diluted earnings per share.............. 0.50 0.46 0.92 0.76 0.66 0.56 0.47
Book value.............................. 6.64 5.83 6.22 5.36 4.68 3.81 3.66
Tangible book value(2).................. 5.22 4.35 4.81 4.21 3.95 3.02 2.81
Cash dividends.......................... 0.10 0.05 0.14 0.10 0.10 0.07 --
Dividend payout ratio................... 19.39% 10.73% 15.27% 12.97% 15.14% 13.42% --%
Weighted average shares outstanding
(basic) (in thousands)................ 3,990 3,564 3,778 3,513 3,514 3,514 3,448
Weighted average shares outstanding
(diluted) (in thousands).............. 4,080 3,648 3,864 3,560 3,523 3,514 3,448
Shares outstanding at end of period (in
thousands)............................ 3,990 3,980 3,990 3,510 3,514 3,514 3,514
BALANCE SHEET DATA:
Total assets............................ $ 335,422 $ 315,079 $ 320,143 $ 293,988 $ 233,492 $ 224,022 $ 214,635
Securities.............................. 158,685 157,954 167,868 147,564 117,505 121,912 138,764
Loans................................... 141,080 120,810 120,578 113,382 88,797 76,543 57,495
Allowance for credit losses............. 1,114 956 1,016 923 753 588 734
Total deposits.......................... 307,815 290,252 291,517 270,866 214,534 207,543 198,904
Borrowings and notes payable............ -- 865 2,800 3,267 1,517 2,275 2,275
Total shareholders' equity.............. 26,478 23,213 24,818 18,833 16,458 13,374 12,844
AVERAGE BALANCE SHEET DATA:
Total assets............................ $ 330,099 $ 293,896 $ 304,086 $ 257,205 $ 224,701 $ 214,318 $ 202,071
Securities.............................. 169,988 150,656 157,677 127,607 119,857 125,585 130,612
Loans................................... 129,228 115,424 117,586 104,534 81,631 69,200 53,422
Allowance for credit losses............. 1,047 916 961 820 669 686 781
Total deposits.......................... 300,938 268,696 278,377 236,334 207,321 197,711 186,673
Total shareholders' equity.............. 25,722 20,066 21,821 17,646 14,916 13,109 11,912
|
(TABLE CONTINUED ON FOLLOWING PAGE)
AS OF AND FOR THE
SIX MONTHS ENDED
JUNE 30, AS OF AND FOR THE YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PERFORMANCE RATIOS(3):
Return on average assets................ 1.25% 1.13% 1.17% 1.05% 1.03% 0.92% 0.81%
Return on average equity................ 15.99 16.56 16.32 15.36 15.56 14.97 13.68
Net interest margin
(tax-equivalent)(4)................... 4.15 3.95 4.02 3.91 3.96 3.91 3.97
Efficiency ratio(5)..................... 57.53 58.83 59.48 61.34 64.85 68.56 72.71
ASSET QUALITY RATIOS(6):
Nonperforming assets to total loans and
other real estate..................... 0.00% 0.12% 0.00% 0.00% 0.00% 0.02% 0.19%
Net loan charge-offs to average loans... 0.04 0.06 0.08 0.06 0.01 0.48 0.31
Allowance for credit losses to total
loans................................. 0.79 0.79 0.84 0.81 0.85 0.77 1.28
Allowance for credit losses to
nonperforming loans(7)................ -- -- -- -- -- -- --
CAPITAL RATIOS(6):
Leverage ratio.......................... 6.25% 5.73% 6.30% 5.45% 6.05% 5.39% 4.66%
Average shareholders' equity to average
total assets.......................... 7.79 6.83 7.18 6.86 6.64 6.12 5.89
Tier 1 risk-based capital ratio......... 14.32 14.55 14.94 13.11 14.99 13.75 13.45
Total risk-based capital ratio.......... 15.08 15.33 15.73 13.89 15.79 14.37 14.45
|
(1) Adjusted for a four for one stock split effective September 10, 1998.
(2) Calculated by dividing total assets, less total liabilities and goodwill, by shares outstanding at end of period.
(3) All interim periods have been annualized.
(4) Calculated using a 34% federal income tax rate.
(5) Calculated by dividing total noninterest expense, excluding securities losses, by net interest income plus noninterest income.
(6) At period end, except net loan charge-offs to average loans and average shareholders' equity to average total assets.
(7) Nonperforming loans consist of nonaccrual loans and restructured loans.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company analyzes the major elements of the Company's balance sheets and statements of income. This section should be read in conjunction with the Company's financial statements and accompanying notes and other detailed information appearing elsewhere in this Prospectus.
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
OVERVIEW
The twelve month period ended June 30, 1998 was marked by strong loan growth of $20.3 million or 16.8% which is attributable to one-to-four family residential loans and the Company's entrance into the home equity market. The Company showed positive earnings growth due to the increase in loan volume and the acquisition of deposits and certain assets of a branch of Wells Fargo Bank in Angleton, Texas in the second quarter of 1997 (the "Angleton Acquisition").
Net income for the six months ended June 30, 1998 was $2.1 million, which was $396,000 or 23.8% more than net income for the six months ended June 30, 1997. Diluted earnings per common share were $0.50 for the six months ended June 30, 1998 and $0.46 for the six months ended June 30, 1997. The increase in net income reflected higher net interest income and noninterest income. The increase in net interest income was driven by growth in interest-earning assets, including strong internal loan growth. Annualized return on average assets and return on average common equity were 1.25% and 15.99%, respectively, for the six months ended June 30, 1998 compared with 1.13% and 16.56%, respectively, for the same period in 1997. Return on average assets and return on average equity excluding amortization of goodwill were 1.39% and 17.82%, respectively, for the six months ended June 30, 1998 compared with 1.24% and 18.18%, respectively, for the same period in 1997. The Company's annualized efficiency ratio, calculated by dividing total noninterest expense (excluding securities losses) by net interest income plus noninterest income, was 57.53% for the six months ended June 30, 1998 and 58.83% for the six months ended June 30, 1997. The Company's efficiency ratio excluding amortization of goodwill was 54.36% for the six months ended June 30, 1998 and 56.62% for the six months ended June 30, 1997.
Total assets at June 30, 1998 increased to $335.4 million from $315.1 million at June 30, 1997, an increase of $20.3 million or 6.4%. Deposits rose to $307.8 million at June 30, 1998 from $290.3 million at June 30, 1997, an increase of $17.5 million or 6.0%. This increase was attributable to internal growth and a branch acquisition. Total shareholders' equity was $26.5 million at June 30, 1998, representing an increase of $3.3 million or 14.2% over total shareholders' equity of $23.2 million at June 30, 1997.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income represents the amount by which interest income on interest-earning assets, including securities and loans, exceeds interest expense incurred on interest-bearing liabilities, including deposits and other borrowed funds. Net interest income is the principal source of the Company'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 six months ended June 30, 1998 was $6.2 million compared with $5.2 million for the six months ended June 30, 1997, an increase of $1.0 million or 19.2%. The Company's net interest margin on a tax-equivalent basis was 4.15% and 3.95% and net interest spread was 3.19% and 3.06% for the periods ended June 30, 1998 and June 30, 1997, respectively. Net interest income increased as a result of an increase in interest-earning assets derived primarily from growth in loans and securities. Loans increased to $141.1 million for the six months ended June 30, 1998 from $120.8 million for the six months ended June 30, 1997, an increase of $20.3 million or 16.8%. Home equity loans accounted for a significant portion of this growth.
The increase in the net interest margin for the first half of 1998 compared with the first half of 1997 reflects a three basis point increase in the yield on average interest-earning assets and a 10 basis point decrease in the cost of interest-bearing liabilities. The yield on average interest-earning assets increased to 7.15% for the six months ended June 30, 1998 from 7.12% for the six months ended June 30, 1997, due primarily to higher-yielding loans and securities. The cost of interest-bearing liabilities decreased to 3.96% for the six months ended June 30, 1998 from 4.06% for the six months ended June 30, 1997, due mainly to the lower cost of the funds acquired in the Angleton Acquisition.
The following table presents for the periods indicated the total dollar amount of average balances, interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Except as indicated in the footnotes, no tax-equivalent adjustments were made and all average balances are daily average balances.
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------------------
1998 1997
--------------------------------- ---------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- ------- ------- ----------- ------- -------
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
Loans............................... $ 129,228 $ 5,568 8.62% $ 115,424 $4,953 8.58%
Securities(1)....................... 169,988 5,175 6.09 150,656 4,563 6.06
Federal funds sold and other
temporary investments............. 4,789 127 5.30 4,626 116 5.02
----------- ------- ------- ----------- ------- -------
Total interest-earning
assets....................... 304,005 10,870 7.15% 270,706 9,632 7.12%
------- ------- ------- -------
Less allowance for credit losses.... (1,047) (916)
----------- -----------
Total interest-earning assets,
net of allowance............. 302,958 269,790
Noninterest-earning assets.............. 27,141 24,106
----------- -----------
Total assets................... $ 330,099 $ 293,896
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits.... $ 41,064 $ 330 1.61% $ 43,706 $ 496 2.27%
Savings and money market accounts... 78,704 1,376 3.50 57,182 934 3.27
Certificates of deposit............. 115,919 2,940 5.07 114,698 2,882 5.03
Federal funds purchased and other
borrowings........................ 2,345 68 5.80 3,755 141 7.51
----------- ------- ------- ----------- ------- -------
Total interest-bearing
liabilities.................. 238,032 4,714 3.96% 219,341 4,453 4.06%
----------- ------- ------- ----------- ------- -------
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits.......................... 65,251 53,109
Other liabilities................... 1,094 1,380
----------- -----------
Total liabilities.............. 304,377 273,830
----------- -----------
Shareholders' equity.................... 25,722 20,066
----------- -----------
Total liabilities and
shareholders' equity......... $ 330,099 $ 293,896
=========== ===========
Net interest rate spread............ 3.19% 3.06%
======= =======
Net interest income and margin(2)... $ 6,156 4.05% $5,179 3.83%
======= ======= ======= =======
Net interest income and margin (tax-
equivalent basis)(3).............. $ 6,308 4.15% $5,347 3.95%
======= ======= ======= =======
|
(1) Yield is based on amortized cost and does not include any component of unrealized gains or losses.
(2) The net interest margin is equal to net interest income divided by average interest-earning assets.
(3) In order to make pre-tax income and resultant yields on tax-exempt investments and loans comparable to those on taxable investments and loans, a tax-equivalent adjustment has been computed using a federal income tax rate of 34%.
The following schedule presents the dollar amount of changes in interest income and interest expense for the major components of interest-earning assets and interest-bearing liabilities and distinguishes between the increase related to higher outstanding balances and the volatility of interest rates. For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated to rate.
SIX MONTHS ENDED JUNE 30,
-----------------------------
1998 VS. 1997
-----------------------------
INCREASE
(DECREASE) DUE TO
------------------
VOLUME RATE TOTAL
------ --------- ---------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans........................... $ 592 $ 23 $ 615
Securities...................... 586 26 612
Federal funds sold and other
temporary investments......... 4 7 11
------ --------- ---------
Total increase in interest
income.................. 1,182 56 1,238
------ --------- ---------
Interest-bearing liabilities:
Interest-bearing demand
deposits...................... (30) (136) (166)
Savings and money market
accounts...................... 352 90 442
Certificates of deposit......... 31 27 58
Federal funds purchased and
other borrowings.............. (53) (20) (73)
------ --------- ---------
Total increase (decrease)
in interest expense..... 300 (39) 261
------ --------- ---------
Increase in net interest income...... $ 882 $ 95 $ 977
====== ========= =========
|
PROVISION FOR CREDIT LOSSES
The provision for credit losses increased to $144,500 for the six months ended June 30, 1998 from $105,000 for the same time period in 1997, an increase of $39,500 or 37.6%. The Company had no nonperforming assets at June 30, 1998.
NONINTEREST INCOME
Noninterest income is an important source of revenue for financial institutions. The Company's primary source of noninterest income is service charges on deposit accounts. Noninterest income for the six months ended June 30, 1998 was $1.2 million, an increase of $229,000 or 22.7% from $1.0 million for the same period in 1997 resulting largely from increased fees from service charges.
The following table presents for the periods indicated the major categories of noninterest income:
1998 1997
--------- ---------
(DOLLARS IN
THOUSANDS)
Service charges on deposit
accounts........................... $ 1,074 $ 863
Other noninterest income............. 165 147
--------- ---------
Total noninterest income........ $ 1,239 $ 1,010
========= =========
|
Service charges on deposit accounts are the largest component of noninterest income and a significant source of revenue to the Company. The increase in service charges on deposit accounts and total noninterest income for the first six months of 1998 compared with the first six months of 1997 resulted mainly from the increase in the number and volume of accounts resulting from the Angleton Acquisition.
NONINTEREST EXPENSE
In the six month period ended June 30, 1998, noninterest expense increased $588,000 or 16.0% to $4.3 million from $3.7 million for the period ended June 30, 1997. The increase reflected additional expenses resulting from the Angleton Acquisition.
The following table presents for the periods indicated the major categories of noninterest expense:
1998 1997
--------- ---------
(DOLLARS IN
THOUSANDS)
Salaries and employee benefits....... $ 2,115 $ 1,901
Non-staff expenses:
Net bank premises expense....... 349 314
Equipment rentals, depreciation
and maintenance............... 201 185
Data processing................. 369 291
Professional fees............... 43 36
Regulatory assessments.......... 35 33
Ad valorem and franchise
taxes......................... 101 81
Goodwill amortization........... 235 163
Other........................... 806 663
--------- ---------
Total noninterest
expense................. $ 4,254 $ 3,667
========= =========
|
Salaries and employee benefits for the six months ended June 30, 1998 was $2.1 million, an increase of $214,000 or 11.3% from $1.9 million in the same period of 1997. The increase was principally due to additional staff associated with the Angleton Acquisition.
Non-staff expenses increased to $2.1 million for the six month period ended June 30, 1998 from $1.8 million for the same period in 1997, an increase of $374,000 or 21.1%. This increase also was largely due to additional expenses associated with the Angleton Acquisition.
INCOME TAXES
Income tax expense includes the regular federal income tax at the statutory rate plus the income tax component of the Texas franchise tax. The amount of federal income tax expense is influenced by the amount of taxable income, the amount of tax-exempt income, the amount of non-deductible interest expense and the amount of other non-deductible expenses. Taxable income for the income tax component of the Texas franchise tax is the federal pre-tax income, plus certain officers' salaries, less interest income on federal securities. The income tax component of the Texas franchise tax was zero in the first six months of 1998 and 1997. During the six months ended June 30, 1998, income tax expense was $939,000 compared with $756,000 for the six months ended June 30, 1997. The effective tax rate for both the six months ended June 30, 1998 and 1997 was 31.3%.
IMPACT OF INFLATION
The effects of inflation on the local economy and on the Company's operating results have been relatively modest for the past several years. Since substantially all of the Company's assets and liabilities are monetary in nature, such as cash, securities, 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. The Company tries to control the impact of interest rate fluctuations by managing the relationship between its interest rate sensitive assets and liabilities. See "-- Financial Condition -- Interest Rate Sensitivity and Liquidity."
FINANCIAL CONDITION
LOAN PORTFOLIO
Loans, net of unearned interest, were $141.1 million at June 30, 1998, an increase of $20.3 million or 16.8% from $120.8 million at June 30, 1997. The increase was principally due to loans generated under the Company's new home equity loan program and one-to-four family residential loans. The State of Texas passed legislation approving home equity lending effective January 1, 1998. The Company makes home equity loans in amounts up to 80% of the appraised value. At June 30, 1998, home equity loans totaled $4.7 million. In addition to offering competitive mortgage rates, the Company marketed a new 15-year loan product which resulted in an increase in one-to-four family residential loans during the period. Construction and land development loans were $9.4 million at June 30, 1998, an increase of $3.1 million or 49.7% from $6.3 million at June 30, 1997. Growth was primarily due to new home construction in the Houston market.
The following table summarizes as of the dates indicated the loan portfolio of the Company by type of loan:
JUNE 30,
-----------------------------------------------
1998 1997
--------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Commercial and industrial............ $ 12,297 8.7% $ 12,870 10.7%
Real estate:
Construction and land
development................... 9,439 6.7 6,307 5.2
1-4 family residential.......... 64,617 45.8 52,780 43.7
Home equity..................... 4,711 3.3 -- --
Commercial mortgages............ 16,201 11.5 14,797 12.2
Farmland........................ 5,502 3.9 5,259 4.4
Multi-family residential........ 1,192 0.8 989 0.8
Agriculture.......................... 8,444 6.0 7,416 6.1
Consumer............................. 18,677 13.3 20,392 16.9
-------- -------- -------- --------
Total loans..................... $141,080 100.0% $120,810 100.0%
======== ======== ======== ========
|
The lending focus of the Company is on one-to-four family residential, agricultural, small and medium-sized business and consumer loans. The Company offers a variety of commercial lending products including term loans and lines of credit. A broad range of short to medium-term commercial loans, primarily collateralized, are made available to businesses for working capital (including inventory and receivables), business expansion (including acquisitions of real estate and improvements) and the purchase of equipment and machinery. The purpose of a particular loan generally determines its structure. All loans in the one-to-four family residential category were originated by the Company.
Loans from $200,000 to $500,000 are evaluated and acted upon by an officers' loan committee, which meets weekly. Loans above that amount must be approved by the Directors Loan Committee, which meets monthly.
Generally, the Company's commercial loans are made in the Company's primary market area and are underwritten on the basis of the borrower's ability to service such debt from income. As a general practice, the Company takes as collateral a lien on any available real estate, equipment or other assets owned by the borrower and obtains a personal guaranty of the borrower. Working capital loans are primarily collateralized by short-term assets whereas term loans are primarily collateralized by long-term assets.
In addition to commercial loans secured by real estate, the Company makes commercial mortgage loans to finance the purchase of real property which generally consists of real estate with completed structures. Additionally, a portion of the Company's lending activity has consisted of the origination of one-to-four family residential mortgage loans collateralized by owner-occupied properties located in the
Company's market areas. The Company offers a variety of mortgage loan products which generally are amortized over five to 25 years. Loans collateralized by one-to-four family residential real estate generally have been originated in amounts of no more than 89% of appraised value or have mortgage insurance. The Company requires mortgage title insurance and hazard insurance. The Company's commercial mortgage loans are secured by first liens on real estate, typically have variable interest rates and amortize over a ten to 15 year period. 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 verification, appraisals and a review of the financial condition of the borrower.
The Company makes loans to finance the construction of residential and, to a limited extent, nonresidential properties. Construction loans generally are secured by first liens on real estate and have floating interest rates. The Company conducts periodic inspections, either directly or through an agent, prior to approval of periodic draws on these loans. Underwriting guidelines similar to those described above are also used in the Company's construction lending activities. In keeping with the community-oriented nature of its customer base, the Company provides construction and permanent financing for churches located within its market area.
Consumer loans made by the Company include direct "A"-credit automobile loans, recreational vehicle loans, boat loans, home improvement loans, home equity loans, personal loans (collateralized and uncollateralized) and deposit account collateralized loans. The terms of these loans typically range from 12 to 120 months and vary based upon the nature of collateral and size of loan.
The contractual maturity ranges of the commercial and industrial and construction and land development portfolios and the amount of such loans with predetermined interest rates and floating interest rates in each maturity range as of June 30, 1998 are summarized in the following table:
JUNE 30, 1998
---------------------------------------------------
AFTER ONE
ONE YEAR THROUGH AFTER FIVE
OR LESS FIVE YEARS YEARS TOTAL
--------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
Commercial and industrial............ $ 5,875 $ 5,626 $ 796 $ 12,297
Construction and land development.... 3,528 2,800 3,111 9,439
--------- ----------- ----------- ---------
Total........................... $ 9,403 $ 8,426 $ 3,907 $ 21,736
========= =========== =========== =========
Loans with a predetermined interest
rate............................... $ 3,060 $ 6,264 $ 703 $ 10,027
Loans with a floating interest
rate............................... 6,343 2,162 3,204 11,709
--------- ----------- ----------- ---------
Total........................... $ 9,403 $ 8,426 $ 3,907 $ 21,736
========= =========== =========== =========
|
NONPERFORMING ASSETS
The Company has several procedures in place to assist it in maintaining the overall quality of its loan portfolio. The Company has established underwriting guidelines to be followed by its officers. The Company also monitors its delinquency levels for any negative or adverse trends. There can be no assurance, however, that the Company's loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.
The Company has historically had strong asset quality. There were no nonperforming assets (nonaccrual loans, restructured loans and other real estate) at June 30, 1998 compared with $144,000 at June 30, 1997 which consisted of a single one-to-four family property which was sold later in the year at a loss of $8,500. The Company records real estate acquired by foreclosure at the lesser of the outstanding loan balance or the fair value at the time of foreclosure, less estimated costs to sell.
The Company requires appraisals on loans secured by real estate. With respect to potential problem loans, an evaluation of the borrower's overall financial condition is made to determine the need, if any, for possible writedowns or appropriate additions to the allowance for credit losses.
The Company generally places a loan on nonaccrual status and ceases accruing interest when the payment of principal or interest is delinquent for 90 days, or earlier in some cases, unless the loan is in the process of collection and the underlying collateral fully supports the carrying value of the loan. The Company generally charges off all loans before attaining nonacccrual status.
The following table presents information regarding nonperforming assets at June 30, 1998 and June 30, 1997:
1998 1997
--------- ---------
(DOLLARS IN
THOUSANDS)
Nonaccrual loans..................... $ -- $ --
Restructured loans................... -- --
Other real estate.................... -- 144
--------- ---------
Total nonperforming assets...... $ -- $ 144
========= =========
Nonperforming assets to total loans
and other real estate.............. 0.00% 0.12%
|
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. Management has established an allowance for credit losses which it believes is adequate for estimated losses in the Company's loan portfolio. Based on an evaluation of the loan portfolio, management presents a monthly review of the allowance for credit losses to the Bank's Board of Directors, indicating any change in the allowance since the last review and any recommendations as to adjustments in the allowance. In making its evaluation, management considers the diversification by industry of the Company's commercial loan portfolio, the effect of changes in the local real estate market on collateral values, 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 nonperforming loans and related collateral security, the evaluation of its loan portfolio by the loan review function and the annual examination of the Company's financial statements by its independent auditors. Charge-offs occur when loans are deemed to be uncollectible.
The Company follows a loan review program to evaluate the credit risk in the loan portfolio. Through the loan review process, the Company maintains an internally classified loan list which, along with the delinquency list of loans, helps 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 a highly-leveraged position, 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. Loans classified as "loss" are those loans which are in the process of being charged off.
In addition to the internally classified loan list and delinquency list of loans, the Company maintains a separate "watch list" which further aids the Company in monitoring loan portfolios. Watch list loans have one or more deficiencies that require attention in the short term or pertinent ratios of the loan account that have weakened to a point where more frequent monitoring is warranted. These loans do not have all of the characteristics of a classified loan (substandard or doubtful) but do show weakened elements compared with those of a satisfactory credit. The Company reviews these loans to assist in assessing the adequacy of the allowance for credit losses.
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, such as collateral value, portfolio composition, trends in economic conditions and the financial strength of borrowers. Management establishes specific allowances for loans which management believes require reserves greater than those allocated according to their classification or delinquent status. An unallocated allowance is also established based on
the Company's historical charge-off experience. The Company then charges to operations a provision for credit losses to maintain the allowance for credit losses at an adequate level determined by the foregoing methodology.
For the six months ended June 30, 1998, net charge-offs totaled $47,000 or 0.04% of average loans outstanding for the period, compared with $72,000 in net charge-offs or 0.06% of average loans outstanding for the six months ended June 30, 1997. The majority of the charge-offs were loans acquired in acquisitions. During the six months ended June 30, 1998, the Company recorded a provision for credit losses of $144,500 compared with $105,000 for the six months ended June 30, 1997. At June 30, 1998, the allowance totaled $1.1 million, or 0.79% of total loans.
The following table presents for the periods indicated an analysis of the allowance for credit losses and other related data:
SIX MONTHS ENDED JUNE
30,
----------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
Average loans outstanding............ $ 129,228 $ 115,424
========== ==========
Gross loans outstanding at end of
period............................. $ 141,080 $ 120,810
========== ==========
Allowance for credit losses at
beginning of period................ $ 1,016 $ 923
Provision for credit losses.......... 145 105
Charge-offs:
Commercial and industrial....... (1) (26)
Real estate and agriculture..... (12) (36)
Consumer........................ (42) (25)
Recoveries:
Commercial and industrial....... 2 13
Real estate and agriculture..... -- --
Consumer........................ 6 2
---------- ----------
Net (charge-offs) recoveries......... (47) (72)
---------- ----------
Allowance for credit losses at end of
period............................. $ 1,114 $ 956
========== ==========
Ratio of allowance to end of period
loans.............................. 0.79% 0.79%
Ratio of net charge-offs to average
loans.............................. 0.04 0.06
Ratio of allowance to end of period
nonperforming loans................ -- --
|
The following table describes the allocation of the allowance for credit losses among various categories of loans and certain other information for the dates indicated. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any segment of loans.
JUNE 30,
----------------------------------------------
1998 1997
--------------------- ---------------------
PERCENT OF PERCENT OF
LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
Balance of allowance for credit
losses applicable to:
Commercial and industrial....... $ 8 8.7% $ -- 10.7%
Real estate..................... 42 72.0 6 66.3
Agriculture..................... -- 6.0 -- 6.1
Consumer........................ 47 13.3 2 16.9
Unallocated..................... 1,017 948
------ ----------- ------ -----------
Total allowance for credit
losses.................. $1,114 100.0% $ 956 100.0%
====== =========== ====== ===========
|
The Company believes that the allowance for credit losses at June 30, 1998 is adequate to cover losses inherent in the portfolio as of such date. There can be no assurance, however, that the Company will not sustain losses in future periods, which could be substantial in relation to the size of the allowance at June 30, 1998.
SECURITIES
The Company uses its securities portfolio both as a source of income and as a source of liquidity. At June 30, 1998, investment securities totaled $158.7 million, an increase of $739,000 from $158.0 million at June 30, 1997. At June 30, 1998, investment securities represented 47.3% of total assets, compared with 50.1% of total assets at June 30, 1997. The yield on the investment portfolio for the six months ended June 30, 1998 was 6.09% compared with a yield of 6.06% for the six months ended June 30, 1997.
The following table presents the amortized cost and fair value of securities classified as available-for-sale at June 30, 1998:
JUNE 30, 1998
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities and obligations
of U.S. government agencies........... $27,584 $ 27 $ 20 $27,591
Mortgage-backed securities.............. 15,932 40 158 15,814
States and political subdivisions....... 1,263 76 -- 1,339
--------- ---------- ---------- -------
Total.............................. $44,779 $ 143 $ 178 $44,744
========= ========== ========== =======
|
The following table presents the amortized cost and fair value of securities classified as held-to-maturity at June 30, 1998:
JUNE 30, 1998
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities and obligations
of U.S. government agencies........... $ 59,467 $ 293 $ 22 $ 59,738
Mortgage-backed securities.............. 36,327 66 194 36,199
States and political subdivisions....... 12,515 72 39 12,548
Collateralized mortgage obligations..... 5,632 -- 12 5,620
--------- ---------- ---------- --------
Total.............................. $ 113,941 $ 431 $ 267 $114,105
========= ========== ========== ========
|
Mortgage-backed securities are securities which have been developed by pooling a number of real estate mortgages and are principally issued by federal agencies such as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. These securities are deemed to have high credit ratings, and minimum regular monthly cash flows of principal and interest are guaranteed by the issuing agencies.
At June 30, 1998, 30.0% of the mortgage-backed securities held by the Company had contractual final maturities of more than ten years with a weighted average life of 3.1 years. However, unlike U.S. Treasury and U.S. government agency securities, which have a lump sum payment at maturity, mortgage-backed securities provide cash flows from regular principal and interest payments and principal prepayments throughout the lives of the securities. Mortgage-backed securities which are purchased at a premium will generally suffer decreasing net yields as interest rates drop because home owners tend to refinance their mortgages. Thus, the premium paid must be amortized over a shorter period. Therefore, these securities purchased at a discount will obtain higher net yields in a decreasing interest rate environment. As interest rates rise, the opposite will generally be true. During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal and consequently, the average life of this security will not be unduly shortened. If interest rates begin to fall, prepayments will increase.
The following table summarizes the contractual maturity of investment securities (including federal funds sold) and their weighted average yields. Available-for-sale securities are not adjusted for unrealized gains or losses.
JUNE 30, 1998
----------------------------------------------------------------------------------------
AFTER FIVE YEARS
AFTER ONE YEAR
BUT BUT
WITHIN ONE YEAR WITHIN FIVE WITHIN TEN YEARS AFTER TEN YEARS
YEARS TOTAL
---------------- ---------------- ---------------- ---------------- --------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL
------- ----- ------- ----- ------- ----- ------- ----- --------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities and obligations
of U.S. government agencies........... $16,483 6.06 % $53,486 6.36 % $17,081 6.26 % $ -- -- % $ 87,050
Mortgage-backed securities.............. 3,515 5.74 15,127 6.15 17,928 6.10 15,689 6.18 52,259
States and political subdivisions....... 2,893 4.40 6,669 5.10 3,844 5.10 372 7.14 13,778
Collateralized mortgage obligations..... -- -- 3,286 6.60 2,347 6.69 -- -- 5,633
Federal funds sold...................... 7,875 5.60 -- -- -- -- -- -- 7,875
------- ----- ------- ----- ------- ----- ------- ----- --------
Total............................... $30,766 5.75 % $78,568 6.22 % $41,200 6.11 % $16,061 6.20 % $166,595
======= ===== ======= ===== ======= ===== ======= ===== ========
|
U.S. Treasury securities and obligations
of U.S. government agencies........... 6.28 %
Mortgage-backed securities.............. 6.11
States and political subdivisions....... 5.01
Collateralized mortgage obligations..... 6.64
Federal funds sold...................... 5.60
-----
Total............................... 6.10 %
=====
|
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES ("SFAS 115"). At the date of purchase, the Company is required to
classify debt and equity securities into one of three categories:
held-to-maturity, trading or available-for-sale. At each reporting date, the
appropriateness of the classification is reassessed. Investments in debt
securities are classified as held-to-maturity and measured at amortized cost in
the
financial statements only if management has the positive intent and ability to hold those securities to maturity. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading and measured at fair value in the financial statements with unrealized gains and losses included in earnings. Investments not classified as either held-to-maturity or trading are classified as available-for-sale and measured at fair value in the financial statements with unrealized gains and losses reported, net of tax, in a separate component of shareholders' equity until realized.
DEPOSITS
The Company offers a variety of deposit accounts having a wide range of interest rates and terms. The Company's deposits consist of demand, savings, money market and time accounts. The Company relies primarily on competitive pricing policies and customer service to attract and retain these deposits. The Company does not have any brokered deposits.
The Company's average total deposits for the six months ended June 30, 1998 were $300.9 million or 12.0% over average total deposits during the same period in 1997. The Company's total deposits at June 30, 1998, were $307.8 million, up $17.6 million or 6.1% over total deposits at June 30, 1997. The increase in deposits is attributable to internal growth.
The Company's lending and investing activities are funded principally by deposits, approximately 61.5% of which are demand and savings deposits. Average noninterest-bearing deposits at June 30, 1998 increased to $65.3 million compared with $53.1 million for the first six months of 1997, an increase of $12.2 million or 23.0% over 1997. Approximately 21.7% of the average deposits were noninterest-bearing for the six months ended June 30, 1998. As a result, the Company had a total cost of deposits of 3.11%.
The daily average balances and weighted average rates paid on interest-bearing deposits for the period ended June 30, 1998 are presented below:
SIX MONTHS ENDED
JUNE 30, 1998
---------------------
AMOUNT RATE
---------- ---------
(DOLLARS IN
THOUSANDS)
Interest-bearing checking............... $ 41,064 1.61%
Regular savings......................... 9,842 2.46
Money market savings.................... 68,862 3.68
Time deposits........................... 115,919 5.12
---------- ---------
Total interest-bearing deposits.... 235,687 3.98
Noninterest-bearing deposits............ 65,251 --
---------- ---------
Total deposits..................... $ 300,938 3.11%
========== =========
|
The following table sets forth the amount of the Company's certificates of deposit that are $100,000 or greater by time remaining until maturity:
(DOLLARS IN THOUSANDS)
Three months or less................. $ 11,888
Over three through six months........ 5,734
Over six through 12 months........... 11,130
Over 12 months....................... 3,199
----------------------
Total........................... $ 31,951
======================
|
The Company expects that the majority of the certificates of deposit maturing within one year will renew. Should this not occur, management believes that there will be sufficient cash to fund payments.
OTHER BORROWINGS
Deposits are the primary source of funds for the Company's lending and investment activities. Occasionally, the Company obtains additional funds from the Federal Home Loan Bank ("FHLB") and correspondent banks. During 1997, the Company entered into an agreement with another commercial bank to borrow up to $8.0 million under a reducing, revolving line of credit (the "Line.") At June 30, 1998, the Company had no borrowings under the Line compared with $865,000 under a previous line of credit at June 30, 1997.
INTEREST RATE SENSITIVITY AND LIQUIDITY
The Company's Asset Liability and Funds Management Policy provides management with the necessary guidelines for effective funds management, and the Company has established a measurement system for monitoring its net interest rate sensitivity position. The Company manages its sensitivity position within established guidelines.
Interest rate risk is managed by the Asset Liability Committee ("ALCO"), which is composed of senior officers of the Company, in accordance with policies approved by the Company's Board of Directors. The ALCO formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the ALCO considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The ALCO meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the ALCO reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management uses two methodologies to manage interest rate risk: (i) an analysis of relationships between interest-earning assets and interest-bearing liabilities; and (ii) an interest rate shock simulation model. The Company has traditionally managed its business to reduce its overall exposure to changes in interest rates.
The Company manages its exposure to interest rates by structuring its balance sheet in the ordinary course of business. The Company does not enter into instruments such as leveraged derivatives, interest rate swaps, financial options, financial future contracts or forward delivery contracts for the purpose of reducing interest rate risk.
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 a given period exceeds the amount of its interest-earning assets also maturing or repricing within that time period. During a period of rising interest rates, a negative GAP would tend to affect net interest income adversely, while a positive GAP would tend to result in an increase in net interest income. During a period of falling interest rates, a negative GAP would tend to result in an increase in net interest income, while a positive GAP would tend to affect net interest income adversely.
The following table sets forth an interest rate sensitivity analysis for the Company at June 30, 1998:
VOLUMES SUBJECT TO REPRICING WITHIN
------------------------------------------------------------------------
0-30 DAYS 31-180 DAYS 181-365 DAYS AFTER ONE YEAR TOTAL
--------- ----------- ------------ -------------- ---------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Securities............................ $ 15,941 $ 14,900 $ 28,950 $ 98,894 $ 158,685
Loans................................. 24,255 6,709 10,431 99,685 141,080
Federal funds sold and other temporary
investments......................... 7,974 -- -- -- 7,974
--------- ----------- ------------ -------------- ---------
Total interest-earning assets....... 48,170 21,609 39,381 198,579 307,739
--------- ----------- ------------ -------------- ---------
Interest-bearing liabilities:
Demand, money market and savings
deposits............................ 118,726 -- -- -- 118,726
Certificates of deposit and other time
deposits............................ 11,667 51,235 38,179 19,445 120,526
--------- ----------- ------------ -------------- ---------
Total interest-bearing
liabilities....................... 130,393 51,235 38,179 19,445 239,252
--------- ----------- ------------ -------------- ---------
Period GAP.............................. $ (82,223) $ (29,626) $ 1,202 $179,134 $ 68,487
Cumulative GAP.......................... $ (82,223) $(111,849) $ (110,647) $ 68,487
Period GAP to total assets.............. (24.51)% (8.83)% 0.36% 53.41%
Cumulative GAP to total assets.......... (24.51)% (33.35)% (32.99)% 20.42%
|
Shortcomings are inherent in any GAP analysis since certain assets and liabilities may not move proportionally as interest rates change. In addition to GAP analysis, the Company uses an interest rate risk simulation model and shock analysis to test the interest rate sensitivity of net interest income and the balance sheet, respectively. Contractual maturities and repricing opportunities of loans are incorporated in the model as are prepayment assumptions, maturity data and call options within the investment portfolio. Assumptions based on past experience are incorporated into the model for nonmaturity deposit accounts. Based on the Company's June 30, 1998 simulation analysis, the Company estimates that a 200 basis point rise or decline in rates over the next 12 month period would have an impact of less than 6% on its net interest income for the period. The change is relatively small, despite the Company's liability sensitive GAP position. The results are primarily from the behavior of demand, money market and savings deposits. The Company has found that historically interest rates on these deposits change more slowly in a rising rate environment than in a declining rate environment. This assumption is incorporated into the simulation model and is generally not fully reflected in a GAP analysis. The Company maintains an Investment Committee that reviews the Company's interest rate risk position, generally on a quarterly basis.
As a financial institution, the Company's primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of the Company's assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Based upon the nature of the Company's operations, the Company is not subject to foreign exchange or commodity price risk. The Company does not own any trading assets.
The Company's exposure to market risk is reviewed on a regular basis. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. Management realizes certain risks are inherent, and that the goal is to identify and accept the risks.
Liquidity involves the Company'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 the Company on an ongoing basis. During the past three years, the Company's liquidity needs have primarily been met by growth in core deposits, as previously discussed. Although access to purchased funds from correspondent banks is available and has been utilized on occasion to take advantage of investment
opportunities, the Company does not generally rely on these external funding sources. The cash and federal funds sold position, supplemented by amortizing investment and loan portfolios, have generally created an adequate liquidity position.
CAPITAL RESOURCES
Capital management consists of providing equity to support both current and future operations. The Company is subject to capital adequacy requirements imposed by the Federal Reserve Board and the Bank is subject to capital adequacy requirements imposed by the FDIC and the Texas Banking Department. Both the Federal Reserve Board and the FDIC have adopted risk-based capital requirements for assessing bank holding company and bank capital adequacy. These standards define capital and establish minimum capital requirements in relation to assets and off-balance sheet exposure, adjusted for credit risk. The risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profiles among bank holding companies and banks, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate relative risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.
The risk-based capital standards issued by the Federal Reserve Board require all bank holding companies to have "Tier 1 capital" of at least 4.0% and "total risk-based" capital (Tier 1 and Tier 2) of at least 8.0% of total risk-adjusted assets. "Tier 1 capital" generally includes common shareholders' equity and qualifying perpetual preferred stock together with related surpluses and retained earnings, less deductions for goodwill and various other intangibles. "Tier 2 capital" may consist of a limited amount of intermediate-term preferred stock, a limited amount of term subordinated debt, certain hybrid capital instruments and other debt securities, perpetual preferred stock not qualifying as Tier 1 capital, and a limited amount of the general valuation allowance for loan losses. The sum of Tier 1 capital and Tier 2 capital is "total risk-based capital."
The Federal Reserve Board has also adopted guidelines which supplement the risk-based capital guidelines with a minimum ratio of Tier 1 capital to average total consolidated assets ("leverage ratio") of 3.0% for institutions with well diversified risk, including no undue interest rate exposure; excellent asset quality; high liquidity; good earnings; and that are generally considered to be strong banking organizations, rated composite 1 under applicable federal guidelines, and that are not experiencing or anticipating significant growth. Other banking organizations are required to maintain a leverage ratio of at least 4.0% to 5.0%. These rules further provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory levels and comparable to peer group averages, without significant reliance on intangible assets.
Pursuant to Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), each federal banking agency revised its risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit risk and the risks of nontraditional activities, as well as reflect the actual performance and expected risk of loss on multifamily mortgages. The Bank is subject to capital adequacy guidelines of the FDIC that are substantially similar to the Federal Reserve Board's guidelines. Also pursuant to FDICIA, the FDIC has promulgated regulations setting the levels at which an insured institution such as the Bank would be considered "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." Under the FDIC's regulations, the Bank is classified "well capitalized" for purposes of prompt corrective action. See "Supervision and Regulation -- The Company" and "-- the Bank."
Shareholders' equity increased from $23.2 million at June 30, 1997 to $26.5 million at June 30, 1998, an increase of $3.3 million or 14.2%. This increase was primarily the result of net income of $4.0 million, less dividends paid on Common Stock of approximately $800,000.
The following table provides a comparison of the Company's and the Bank's leverage and risk-weighted capital ratios as of June 30, 1998 to the minimum and well capitalized regulatory standards:
TO BE WELL
MINIMUM CAPITALIZED UNDER
REQUIRED FOR CAPITAL PROMPT CORRECTIVE ACTUAL RATIO AT
ADEQUACY PURPOSES ACTION PROVISIONS JUNE 30, 1998
--------------------- ------------------- ----------------
THE COMPANY
Leverage ratio....................... 3.00%(1) N/A 6.25%
Tier 1 risk-based capital ratio...... 4.00% N/A 14.32%
Risk-based capital ratio............. 8.00% N/A 15.08%
THE BANK
Leverage ratio....................... 3.00%(2) 5.00% 6.21%
Tier 1 risk-based capital ratio...... 4.00% 6.00% 14.22%
Risk-based capital ratio............. 8.00% 10.00% 14.99%
|
(2) The FDIC may require the Bank to maintain a leverage ratio of up to 200 basis points above the required minimum.
YEAR 2000 COMPLIANCE
The Company formally initiated its Year 2000 project in November 1997 to insure that its operational and financial systems will not be adversely affected by Year 2000 problems. The Company has formed a Year 2000 project team and the Board of Directors and management are supporting all compliance efforts and allocating the necessary resources to ensure completion. An inventory of all systems and products (including both information technology and non-informational technology systems) that could be affected by the Year 2000 date change has been developed, verified and categorized as to its importance to the Company. The software for the Company's systems is provided through service bureaus and software vendors. The Company has contacted all of its third party vendors and software providers and is requiring them to demonstrate and represent that the products provided are or will be Year 2000 compliant and has planned a program of testing compliance. The service bureau has asserted that it is Year 2000 compliant and pursuant to applicable regulatory guidelines the Company is currently testing its system to verify this assertion. The Company has also surveyed its largest dollar deposit and loan customers to determine their readiness for Year 2000.
Management does not expect the costs of bringing the Company's systems into Year 2000 compliance will have a material adverse effect on the Company's financial conditions, results of operations or liquidity. The Company has budgeted $10,000 to address Year 2000 issues. As of June 30, 1998, the Company has not incurred any significant costs in relation to Year 2000. The largest potential risk to the Company concerning Year 2000 is the malfunction of its data processing system. In the event its data processing system does not function properly, the Company is prepared to perform functions manually. The Company believes it is in compliance with regulatory guidelines regarding Year 2000 compliance, including the timetable for achieving compliance.
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
OVERVIEW
Net income was $3.6 million, $2.7 million and $2.3 million for the years ended December 31, 1997, 1996 and 1995, respectively, and diluted earnings per share were $0.92, $0.76 and $0.66 for these same periods. Earnings growth from 1995 to 1996 and from 1996 to 1997 resulted principally from loan growth and branch acquisitions. The Company posted returns on average assets of 1.17%, 1.05% and 1.03% and returns on average equity of 16.32%, 15.36% and 15.56% for the years ended 1997, 1996 and 1995, respectively. The Company posted returns on average assets excluding amortization of goodwill of 1.30%, 1.15% and 1.13% and returns on average equity excluding amortization of goodwill of 18.17%, 16.82% and 16.96% for the years ended December 31, 1997, 1996 and 1995, respectively. The Company's efficiency ratio was 59.48% in 1997, 61.34% in 1996 and 64.85% in 1995. The Company's efficiency ratio excluding amortization of goodwill was 56.43% in 1997, 58.96% in 1996 and 62.61% in 1995.
Total assets at December 31, 1997, 1996 and 1995 were $320.1 million, $294.0 million and $233.5 million, respectively. Total deposits at December 31, 1997, 1996 and 1995 were $291.5 million, $270.9 million and $214.5 million, respectively, with deposit growth in each period resulting largely from the branch acquisitions in 1996 and 1997. Loans were $120.6 million at December 31, 1997, an increase of $7.2 million or 6.3% from $113.4 million at the end of 1996. Loans were $88.8 million at year end 1995. Shareholders' equity was $24.8 million, $18.8 million and $16.5 million at December 31, 1997, 1996 and 1995, respectively.
RESULTS OF OPERATIONS
NET INTEREST INCOME
1997 VERSUS 1996. Net interest income for 1997 was $10.9 million, compared with $8.9 million for 1996, an increase of $2.0 million or 22.5%. The improvement in net interest income for 1997 was mainly due to an increase in total interest-earning assets, primarily in the loan portfolio. During 1997, the yield on interest-earning assets increased eight basis points from 7.08% in 1996 to 7.16% in 1997 primarily due to an increase in the volume of higher-yielding loans. Total funding costs decreased seven basis points from 4.11% in 1996 to 4.04% in 1997 primarily due to an increase in noninterest-bearing deposits. For 1997, the net interest margin on a tax-equivalent basis increased 11 basis points to 4.02% from 3.91% in 1996.
1996 VERSUS 1995. Net interest income for the Company in 1996 was $8.9 million, an increase of 14.1% over the 1995 level of $7.8 million, due to an increase in the loan portfolio in 1996. For 1996 as a whole, the Company's net interest expense increased eight basis points from 4.03% to 4.11% while asset yields increased two basis points from 7.06% to 7.08%.
The following table presents for the periods indicated the total dollar amount of average balances, interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Except as indicated in the footnotes, no tax-equivalent adjustments were made and all average balances are daily average balances. Nonaccruing loans have been included in the tables as loans carrying a zero yield.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1997 1996 1995
---------------------------------- ---------------------------------- -----------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING
BALANCE PAID RATE BALANCE PAID RATE BALANCE
----------- -------- ------- ----------- -------- ------- -----------
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
Loans................................. $ 117,586 $10,205 8.68% $ 104,534 $ 9,136 8.74% $ 81,631
Securities(1)......................... 157,677 9,572 6.07 127,607 7,396 5.80 119,857
Federal funds sold and other temporary
investments.......................... 3,545 193 5.44 5,743 309 5.38 7,285
----------- -------- ------- ----------- -------- ------- -----------
Total interest-earning assets....... 278,808 19,970 7.16% 237,884 16,841 7.08% 208,773
-------- ------- -------- -------
Less allowance for credit losses...... (961) (820) (669)
----------- ----------- -----------
Total interest-earning assets, net of
allowance............................ 277,847 237,064 208,104
Noninterest-earning assets.............. 26,239 20,141 16,597
----------- ----------- -----------
Total assets........................ $ 304,086 $ 257,205 $ 224,701
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits...... $ 42,898 $ 915 2.13% $ 35,285 $ 741 2.10% $ 30,309
Savings and money market accounts..... 64,448 2,158 3.35 49,429 1,620 3.28 42,286
Certificates of deposit............... 113,669 5,785 5.09 105,538 5,359 5.08 96,649
Federal funds purchased and other
borrowings........................... 3,030 202 6.67 2,402 203 8.45 1,922
----------- -------- ------- ----------- -------- ------- -----------
Total interest-bearing
liabilities........................ 224,045 9,060 4.04% 192,654 7,923 4.11% 171,166
----------- -------- ------- ----------- -------- ------- -----------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits... 57,362 46,082 38,077
Other liabilities..................... 858 823 542
----------- ----------- -----------
Total liabilities................... 282,265 239,559 209,785
----------- ----------- -----------
Shareholders' equity.................... 21,821 17,646 14,916
----------- ----------- -----------
Total liabilities and shareholders'
equity............................. $ 304,086 $ 257,205 $ 224,701
=========== =========== ===========
Net interest rate spread................ 3.12% 2.97%
======= =======
Net interest income and margin(2)....... $10,910 3.91% $ 8,918 3.75%
======== ======= ======== =======
Net interest income and margin
(tax-equivalent basis)(3).............. $11,222 4.02% $ 9,290 3.91%
======== ======= ======== =======
|
INTEREST AVERAGE
EARNED/ YIELD/
PAID RATE
-------- -------
ASSETS
Interest-earning assets:
Loans................................. $ 7,203 8.82%
Securities(1)......................... 7,107 5.93
Federal funds sold and other temporary
investments.......................... 428 5.88
-------- -------
Total interest-earning assets....... 14,738 7.06%
-------- -------
Less allowance for credit losses......
Total interest-earning assets, net of
allowance............................
Noninterest-earning assets..............
Total assets........................
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits...... $ 545 1.80%
Savings and money market accounts..... 1,328 3.14
Certificates of deposit............... 4,876 5.05
Federal funds purchased and other
borrowings........................... 155 8.06
-------- -------
Total interest-bearing
liabilities........................ 6,904 4.03%
-------- -------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits...
Other liabilities.....................
Total liabilities...................
Shareholders' equity....................
Total liabilities and shareholders'
equity.............................
Net interest rate spread................ 3.03%
=======
Net interest income and margin(2)....... $ 7,384 3.75%
======== =======
Net interest income and margin
(tax-equivalent basis)(3).............. $ 8,272 3.96%
======== =======
------------
|
(1) Yield is based on amortized cost and does not include any component of unrealized gains or losses.
(2) The net interest margin is equal to net interest income divided by average interest-earning assets.
(3) In order to make pre-tax income and resultant yields on tax-exempt investments and loans comparable to those on taxable investments and loans, a tax-equivalent adjustment has been computed using a federal income tax rate of 34%.
The following schedule presents the dollar amount of changes in interest income and interest expense for the major components of interest-earning assets and interest-bearing liabilities and distinguishes between the increase related to higher outstanding balances and the volatility of interest rates. For purposes of this table, changes attributable to both rate and volume which can not be segregated have been allocated to rate.
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1997 VS. 1996 1996 VS. 1995
------------------------- --------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO DUE TO
--------------- ----------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ----- ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans................................. $1,141 $ (72) $1,069 $2,020 $ (87) $1,933
Securities............................ 1,744 432 2,176 460 (171) 289
Federal funds sold and other temporary
investments........................ (118) 2 (116) (91) (28) (119)
------ ----- ------ ------ ------ ------
Total increase (decrease) in
interest income.................. 2,767 362 3,129 2,389 (286) 2,103
------ ----- ------ ------ ------ ------
Interest-bearing liabilities:
Interest-bearing demand deposits...... 160 14 174 90 106 196
Savings and money market accounts..... 493 45 538 224 68 292
Certificates of deposit............... 413 13 426 449 34 483
Federal funds purchased and other
borrowings......................... 53 (54) (1) 38 10 48
------ ----- ------ ------ ------ ------
Total increase in interest
expense.......................... 1,119 18 1,137 801 218 1,019
------ ----- ------ ------ ------ ------
Increase (decrease) in net interest
income................................ $1,648 $ 344 $1,992 $1,588 $ (504) $1,084
====== ===== ====== ====== ====== ======
|
PROVISION FOR CREDIT LOSSES
The allowance for credit losses at December 31, 1997 was $1.0 million, representing 0.84% of outstanding loans. One year earlier, this ratio was 0.81% of outstanding loans. The provision for credit losses charged against earnings was $190,000 in 1997 compared with $230,000 in 1996. The Company recorded a lower provision in 1997 because it had specific reserves in the amount of $45,000 which were no longer necessary due to the repayment of the related loans. Net loans charged off in 1997 were $97,000 compared with $60,000 in 1996.
During 1996, the Company made provisions totaling $230,000 to the allowance for credit losses, an increase of $55,000 compared with 1995.
NONINTEREST INCOME
For 1997, noninterest income totaled $2.3 million, an increase of $367,000 or 19.3% versus $1.9 million in 1996. The increase was primarily due to the branch acquisitions in Bay City and Angleton and an increase in customer service fees. Noninterest income for 1996 was $1.9 million, a $408,000 or 27.4% increase from 1995 resulting largely from an increase in income from insufficient funds charges and customer service fees.
The following table presents for the periods indicated the major categories of noninterest income:
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Service charges on deposit accounts..... $ 1,948 $ 1,633 $ 1,280
Other noninterest income................ 316 264 209
--------- --------- ---------
Total noninterest income........... $ 2,264 $ 1,897 $ 1,489
========= ========= =========
|
NONINTEREST EXPENSE
For the years ended 1997, 1996 and 1995, noninterest expense totaled $7.8 million, $6.6 million and $6.0 million, respectively. The Company's efficiency ratio showed a positive trend over this period, reflecting the Company's continued success in controlling operating expenses and integrating its branch acquisitions.
The following table presents for the periods indicated the major categories of noninterest expense:
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Salaries and employee benefits.......... $ 3,968 $ 3,415 $ 3,041
Non-staff expenses
Net bank premises expense.......... 683 604 522
Equipment rentals, depreciation and
maintenance...................... 375 294 282
Data processing.................... 642 493 387
Professional fees.................. 97 114 103
Regulatory assessments and FDIC
insurance........................ 63 28 253
Ad valorem and franchise taxes..... 164 140 115
Goodwill amortization.............. 402 257 209
Other.............................. 1,442 1,289 1,134
--------- --------- ---------
Total noninterest expense..... $ 7,836 $ 6,634 $ 6,046
========= ========= =========
|
For 1997, noninterest expense totaled $7.8 million, an increase of $1.2 million or 18.2% over $6.6 million in 1996. Salaries and employee benefits for 1997 totaled $4.0 million, an increase of $553,000 or 16.2% over $3.4 million for 1996. Other operating expenses of $1.4 million represented an increase of $153,000 or 11.9% compared with $1.3 million in 1996. These increases were principally due to the Bay City and Angleton branch acquisitions. Total noninterest expenses in 1996 were $6.6 million, a 9.7% increase over the prior year's level of $6.0 million. Salaries and employee benefits in 1996 increased by 12.3% from $3.0 million to $3.4 million.
INCOME TAXES
Income tax expense includes the regular federal income tax at the statutory rate plus the income tax component of the Texas franchise tax. The income tax component of the Texas franchise tax was zero in 1997, 1996 and 1995. In 1997 income tax expense was $1.6 million compared with $1.2 million in 1996. The 1995 amount was $781,000. The effective tax rates in 1997, 1996 and 1995, respectively, were 30.8%, 31.4% and 25.2%.
FINANCIAL CONDITION
LOAN PORTFOLIO
At December 31, 1997, loans were $120.6 million, an increase of $7.2 million or 6.3% over loans at December 31, 1996 of $113.4 million. The growth in the loan portfolio was due to continued strong loan demand, especially in the real estate area. At December 31, 1997, total loans were 41.4% of deposits and 37.7% of total assets. At December 31, 1996, total loans were 41.9% of deposits and 38.6% of total assets.
Loans increased 27.7% during 1996 from $88.8 million at December 31, 1995 to $113.4 million at December 31, 1996. The loan growth during 1996 was spread between real estate and consumer loans. One-to-four family residential loans increased from $40.3 million at December 31, 1995 to $49.8 million at year end 1996. Consumer loans also had a substantial increase from $13.3 million at year end 1995 to $21.3 million at year end 1996.
The following table summarizes as of the dates indicated the loan portfolio of the Company by type of loan:
DECEMBER 31,
-----------------------------------------------------------------------------------------
1997 1996 1995 1994
-------------------- -------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- -------- --------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
Commercial and industrial............ $ 11,611 9.6% $ 10,633 9.4% $ 10,445 11.8% $ 9,479 12.4%
Real estate:
Construction and land
development....................... 6,453 5.3 5,021 4.4 2,507 2.8 2,139 2.8
1-4 family residential.............. 53,625 44.5 49,845 44.0 40,331 45.4 37,247 48.7
Commercial mortgages................ 16,277 13.5 14,376 12.7 12,835 14.5 9,520 12.5
Farmland............................ 5,804 4.8 5,468 4.8 3,989 4.5 3,529 4.6
Multi-family residential............ 937 0.8 1,068 0.9 716 0.8 64 0.0
Agriculture.......................... 6,359 5.3 5,686 5.0 4,666 5.2 4,605 6.0
Consumer............................. 19,512 16.2 21,285 18.8 13,308 15.0 9,960 13.0
--------- --- --------- --- --------- --- --------- ---
Total loans......................... $ 120,578 100.0% $ 113,382 100.0% $ 88,797 100.0% $ 76,543 100.0%
========= === ========= === ========= === ========= ===
|
1993
--------------------
AMOUNT PERCENT
--------- --------
Commercial and industrial............ $ 4,466 7.8%
Real estate:
Construction and land
development....................... 2,495 4.4
1-4 family residential.............. 26,815 46.7
Commercial mortgages................ 7,152 12.5
Farmland............................ 3,149 5.5
Multi-family residential............ 132 0.0
Agriculture.......................... 3,060 5.3
Consumer............................. 10,226 17.8
--------- ---
Total loans......................... $ 57,495 100.0%
========= ===
|
The contractual maturity ranges of the commercial and industrial and construction and land development portfolios and the amount of such loans with predetermined interest rates and floating rates in each maturity range as of December 31, 1997 are summarized in the following table:
DECEMBER 31, 1997
----------------------------------------------------
AFTER ONE
ONE YEAR THROUGH AFTER FIVE
OR LESS FIVE YEARS YEARS TOTAL
--------- ------------ ----------- ---------
(DOLLARS IN THOUSANDS)
Commercial and industrial............ $ 4,337 $6,815 $ 459 $ 11,611
Construction and land development.... 1,750 1,747 2,956 6,453
--------- ------------ ----------- ---------
Total...................... $ 6,087 $8,562 $ 3,415 $ 18,064
========= ============ =========== =========
Loans with a predetermined interest
rate............................... $ 2,944 $4,805 $ 447 $ 8,196
Loans with a floating interest
rate............................... 3,143 3,757 2,968 9,868
--------- ------------ ----------- ---------
Total...................... $ 6,087 $8,562 $ 3,415 $ 18,064
========= ============ =========== =========
|
The Company has adopted Statement of Accounting Standards No. 114,
ACCOUNTING FOR CREDITORS FOR IMPAIRMENT OF A LOAN ("SFAS 114"), as amended by
Statement of Accounting Standards No. 118, ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN-INCOME RECOGNITION AND DISCLOSURES. Under SFAS No. 114, as
amended, a loan is considered impaired based on current information and events,
if it is probable that the Company will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. The fair value of impaired loans is based on the present
value of expected future cash flows discounted at the loan's effective interest
rate or the loan's observable market price or based on the fair value of the
collateral if the loan is collateral-dependent. The implementation of SFAS Nos.
114 and 118 did not have a material adverse affect on the Company's financial
statements.
NONPERFORMING ASSETS
The Company's conservative lending approach, as well as a healthy local economy, has resulted in strong asset quality. The Company had no nonperforming assets as of December 31, 1997, 1996 or 1995.
The following table presents information regarding nonperforming assets at
the dates indicated:
DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Nonaccrual loans..................... $ -- $ -- $ -- $ -- $ --
Restructured loans................... -- -- -- -- --
Other real estate.................... -- -- -- 15 112
--------- --------- --------- --------- ---------
Total nonperforming assets...... $ -- $ -- $ -- $ 15 $ 112
========= ========= ========= ========= =========
Nonperforming assets to total loans
and other real estate.............. 0.00% 0.00% 0.00% 0.02% 0.19%
|
ALLOWANCE FOR CREDIT LOSSES
For the year ended 1997, net charge-offs totaled $97,000 or 0.08% of average loans outstanding for the period, compared with $60,000 or 0.06% in net charge-offs during 1996. The Company's net charge-offs totaled $10,000 or 0.01% of average loans outstanding in 1995. During 1997, the Company recorded a provision for credit losses of $190,000 compared with $230,000 for 1996. At December 31, 1997, the allowance totaled $1.0 million, or 0.84% of total loans. The Company made a provision for credit losses of $230,000 during 1996 compared with a provision of $175,000 for 1995. At December 31, 1996, the allowance aggregated $923,000, or 0.81% of total loans. At December 31, 1995, the allowance was $753,000, or 0.85% of total loans.
The following table presents for the periods indicated an analysis of the allowance for credit losses and other related data:
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Average loans outstanding............ $ 117,586 $ 104,534 $ 81,631 $ 69,200 $ 53,422
========== ========== ========= ========= =========
Gross loans outstanding at end of
period............................. $ 120,578 $ 113,382 $ 88,797 $ 76,543 $ 57,495
========== ========== ========= ========= =========
Allowance for credit losses at
beginning of period................ $ 923 $ 753 $ 588 $ 734 $ 745
Provision for credit losses.......... 190 230 175 188 155
Charge-offs:
Commercial and industrial.......... (26) (9) (6) (31) (119)
Real estate and agriculture........ (47) -- (2) (270) (120)
Consumer........................... (57) (64) (24) (129) (195)
Recoveries:
Commercial and industrial.......... 15 -- -- 17 31
Real estate and agriculture........ 7 -- 3 51 152
Consumer........................... 11 13 19 28 85
---------- ---------- --------- --------- ---------
Net (charge-offs) recoveries......... (97) (60) (10) (334) (166)
---------- ---------- --------- --------- ---------
Allowance for credit losses at end of
period............................. $ 1,016 $ 923 $ 753 $ 588 $ 734
========== ========== ========= ========= =========
Ratio of allowance to end of period
loans.............................. 0.84% 0.81% 0.85% 0.77% 1.28%
Ratio of net charge-offs to average
loans.............................. 0.08 0.06 0.01 0.48 0.31
Ratio of allowance to end of period
nonperforming loans................ -- -- -- -- --
|
The following tables describe the allocation of the allowance for credit losses among various categories of loans and certain other information for the dates indicated. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any segment of loans.
DECEMBER 31,
----------------------------------------------
1997 1996
--------------------- ---------------------
PERCENT OF PERCENT OF
LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
Balance of allowance for credit losses
applicable to:
Commercial and industrial.......... $ 41 9.6% $ 9 9.4%
Real estate........................ 59 68.9 34 66.8
Agriculture........................ -- 5.3 -- 5.0
Consumer........................... 51 16.2 6 18.8
Unallocated........................ 865 874
------ ----------- ------ -----------
Total allowance for credit
losses..................... $1,016 100.0% $ 923 100.0%
====== =========== ====== ===========
|
DECEMBER 31,
-----------------------------------------------------------------------
1995 1994 1993
--------------------- --------------------- ---------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
Balance of allowance for credit losses
applicable to:
Commercial and industrial.......... $ 7 11.8% $ 15 12.4% $ 3 7.8%
Real estate........................ 27 68.0 33 68.6 194 69.1
Agriculture........................ -- 5.2 -- 6.0 -- 5.3
Consumer........................... 6 15.0 4 13.0 9 17.8
Unallocated........................ 713 536 528
------ ----------- ------ ----------- ------ -----------
Total allowance for credit
losses..................... $ 753 100.0% $ 588 100.0% $ 734 100.0%
====== =========== ====== =========== ====== ===========
|
SECURITIES
The following table summarizes the amortized cost of investment securities
as of the dates shown (available-for-sale securities are not adjusted for
unrealized gains or losses):
DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities and obligations
of U.S. government agencies........... $ 83,160 $ 60,830 $ 42,147 $ 33,037 $ 31,892
Mortgage-backed securities.............. 64,168 59,382 41,278 34,956 47,282
States and political subdivisions....... 11,829 13,042 15,753 17,440 19,175
Collateralized mortgage obligations..... 8,749 14,341 18,411 36,676 40,415
---------- ---------- ---------- ---------- ----------
Total.............................. $ 167,906 $ 147,595 $ 117,589 $ 122,109 $ 138,764
========== ========== ========== ========== ==========
|
The following table summarizes the contractual maturity of investment securities and their weighted average yields. Available-for-sale securities are not adjusted for unrealized gains or losses.
DECEMBER 31, 1997
-----------------------------------------------------------------------------------------
AFTER ONE YEAR AFTER FIVE YEARS
BUT BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS
TOTAL
----------------- ----------------- ----------------- ----------------- ---------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL
--------- ----- --------- ----- --------- ----- --------- ----- ---------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities and obligations
of U.S. government agencies............ $ 28,392 5.97 % $ 54,768 6.27 % $ -- -- % $ -- -- % $ 83,160
Mortgage-backed securities.............. 2,223 4.85 26,679 6.43 18,249 6.11 17,017 6.24 64,168
States and political subdivisions....... 3,903 4.61 5,107 5.24 2,447 5.80 372 7.24 11,829
Collateralized mortgage obligations..... -- -- 4,258 6.45 4,491 6.13 -- -- 8,749
--------- ----- --------- ----- --------- ----- --------- ----- ---------
Total................................ $ 34,518 5.74 % $ 90,812 6.27 % $ 25,187 6.23 % $ 17,389 6.26 % $ 167,906
========= ===== ========= ===== ========= ===== ========= ===== =========
|
U.S. Treasury securities and obligations
of U.S. government agencies............ 6.24 %
Mortgage-backed securities.............. 6.23
States and political subdivisions....... 5.21
Collateralized mortgage obligations..... 6.18
-----
Total................................ 6.16 %
=====
|
The following table summarizes the carrying value by classification of securities as of the dates shown:
DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Available-for-sale...................... $ 38,612 $ 49,342 $ 35,452 $ 25,411 $ --
Held-to-maturity........................ 129,256 98,222 82,053 96,501 138,764
---------- ---------- ---------- ---------- ----------
Total.............................. $ 167,868 $ 147,564 $ 117,505 $ 121,912 $ 138,764
========== ========== ========== ========== ==========
|
At December 31, 1997, investment securities of $167.9 million increased $20.3 million from $147.6 million at December 31, 1996, as the Company invested excess deposits from the Angleton Acquisition. At December 31, 1997, investment securities represented 57.6% of total deposits and 52.4% of total assets. Approximately $66.4 million or 40.0% of the Company's investment securities reprice within one year.
Investment securities increased from $117.5 million at December 31, 1995 to $147.6 million at December 31, 1996, largely due to the Bay City branch acquisition.
The following tables present the amortized cost and fair value of securities classified as available-for-sale at December 31, 1997, 1996 and 1995:
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------------------------ -------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES VALUE COST GAINS LOSSES
--------- ---------- ---------- ------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities and obligations
of U.S. government agencies........... $19,988 $ 56 $ -- $20,044 $29,980 $127 $ --
Mortgage-backed securities.............. 17,299 62 258 17,103 17,952 43 306
States and political subdivisions....... 1,363 102 -- 1,465 1,441 105 --
--------- ---------- ---------- ------- --------- ---------- ----------
Total............................... $38,650 $220 $258 $38,612 $49,373 $275 $306
========= ========== ========== ======= ========= ========== ==========
|
U.S. Treasury securities and obligations
of U.S. government agencies........... $30,107
Mortgage-backed securities.............. 17,689
States and political subdivisions....... 1,546
-------
Total............................... $49,342
=======
|
DECEMBER 31, 1995
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities and obligations
of U.S. government agencies........... $20,247 $ 69 $ -- $20,316
Mortgage-backed securities.............. 13,860 -- 294 13,566
States and political subdivisions....... 1,429 141 -- 1,570
--------- ---------- ---------- -------
Total.............................. $35,536 $ 210 $ 294 $35,452
========= ========== ========== =======
|
The following tables present the amortized cost and fair value of securities classified as held-to-maturity at December 31, 1997, 1996 and 1995:
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------------------------- -------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES VALUE COST GAINS LOSSES
--------- ---------- ---------- -------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities and obligations
of U.S. government agencies........... $ 63,171 $244 $ 20 $ 63,395 $30,849 $121 $121
Mortgage-backed securities.............. 46,871 369 219 47,021 41,431 90 704
States and political
subdivisions.......................... 10,465 141 -- 10,606 11,601 173 18
Collateralized mortgage
obligations........................... 8,749 19 15 8,753 14,341 -- 103
--------- ---------- ---------- -------- --------- ---------- ----------
Total............................... $129,256 $773 $254 $129,775 $98,222 $384 $946
========= ========== ========== ======== ========= ========== ==========
|
U.S. Treasury securities and obligations
of U.S. government agencies........... $30,849
Mortgage-backed securities.............. 40,817
States and political
subdivisions.......................... 11,756
Collateralized mortgage
obligations........................... 14,238
-------
Total............................... $97,660
=======
|
DECEMBER 31, 1995
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities and obligations
of U.S. government agencies........... $21,900 $ 21 $ 169 $21,752
Mortgage-backed securities.............. 27,417 6 420 27,003
States and political subdivisions....... 14,324 248 40 14,532
Collateralized mortgage obligations..... 18,412 1 238 18,175
--------- ---------- ---------- -------
Total.............................. $82,053 $ 276 $ 867 $81,462
========= ========== ========== =======
|
DEPOSITS
Deposits at December 31, 1997 were $291.5 million, an increase of $20.6
million, or 7.6% from $270.9 million at December 31, 1996. The increase was
mainly due to the Angleton Acquisition in the second quarter of 1997.
Noninterest-bearing deposits of $61.4 million at December 31, 1997 increased
$6.2 million, or 11.2% from $55.2 million at December 31, 1996.
Noninterest-bearing deposits as of December 31, 1996 were $55.2 million compared
with $42.9 million at December 31, 1995. Interest-bearing deposits were $215.7
million, up $44.0 million or 25.6% from $171.7 million at December 31, 1995. The
Company does not accept brokered deposits. Total deposits at December 31, 1995
were $214.6 million.
The daily average balances and weighted average rates paid on deposits for each of the years ended December 31, 1997, 1996 and 1995 are presented below:
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ---- -------- ---- -------- ----
(DOLLARS IN THOUSANDS)
Interest-bearing checking............... $ 42,898 2.13% $ 35,285 2.10% $ 30,309 1.80%
Regular savings......................... 9,215 2.32 7,674 2.46 6,772 2.47
Money market savings.................... 55,233 3.50 41,755 3.43 35,514 3.27
Time deposits........................... 113,669 5.08 105,538 5.08 96,649 5.05
-------- ---- -------- ---- -------- ----
Total interest-bearing deposits.... 221,015 4.00 190,252 4.06 169,244 3.99
Noninterest-bearing deposits............ 57,362 -- 46,082 -- 38,077 --
-------- ---- -------- ---- -------- ----
Total deposits..................... $278,377 3.18% $236,334 3.27% $207,321 3.26%
======== ==== ======== ==== ======== ====
|
The following table sets forth the amount of the Company's certificates of deposit that are $100,000 or greater by time remaining until maturity:
(DOLLARS IN THOUSANDS)
Three months or less.................... $ 4,198
Over three through six months........... 4,349
Over six through 12 months.............. 8,300
Over 12 months.......................... 2,029
----------------------
Total.............................. $ 18,876
======================
|
OTHER BORROWINGS
Deposits are the primary source of funds for the Company's lending and investment activities. Occasionally, the Company obtains additional funds from the FHLB and correspondent banks. At December 31, 1997, the Company had borrowings of $2.8 million compared to zero at both December 31, 1996 and 1995.
At December 31, 1997, the Company had no outstanding borrowings under the Line extended by a commercial bank. During 1997, the Company paid off the outstanding balance under a similar agreement (the "Old Line") with another commercial bank. At December 31, 1996 and 1995, borrowings under the Old Line totaled $3.3 million and $1.5 million, respectively.
INTEREST RATE SENSITIVITY AND LIQUIDITY
The following table sets forth an interest rate sensitivity analysis for
the Company at December 31, 1997:
VOLUMES SUBJECT TO REPRICING WITHIN
-----------------------------------------------------------
0-30 31-180 181-365 AFTER
DAYS DAYS DAYS ONE YEAR TOTAL
---------- ---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Securities.......................... $ 9,644 $ 36,432 $ 20,379 $ 101,413 $ 167,868
Loans............................... 16,621 18,020 12,279 73,658 120,578
Other temporary investments......... 198 -- -- -- 198
---------- ---------- ---------- --------- ---------
Total interest-earning
assets....................... 26,463 54,452 32,658 175,071 288,644
---------- ---------- ---------- --------- ---------
Interest-bearing liabilities:
Demand, money market and savings
deposits.......................... 119,770 -- -- -- 119,770
Certificates of deposit and other
time deposits..................... 18,495 46,730 30,773 14,302 110,300
Federal funds purchased and FHLB
advances.......................... 2,800 -- -- -- 2,800
---------- ---------- ---------- --------- ---------
Total interest-bearing
liabilities.................. 141,065 46,730 30,773 14,302 232,870
---------- ---------- ---------- --------- ---------
Period GAP..................... $ (114,602) $ 7,722 $ 1,885 $ 160,769 $ 55,774
Cumulative GAP................. $ (114,602) $ (106,880) $ (104,995) $ 55,774
Period GAP to total assets..... (35.80)% 2.41% 0.59% 50.22%
Cumulative GAP to total
assets....................... (35.80)% (33.39)% (32.80)% 17.42%
|
See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Interest Rate Sensitivity and Liquidity" for the six months ended June 30, 1998 and June 30, 1997 for a discussion of the Company's policies regarding asset and liability risk management.
CAPITAL RESOURCES
Shareholders' equity increased to $24.8 million at December 31, 1997 from $18.8 million at December 31, 1996, an increase of $6.0 million or 31.9%. This increase was primarily the result of net income of $3.6 million plus a Common Stock issuance of $3.0 million, less dividends paid on Common Stock of $574,000. During 1996, shareholders' equity increased by $2.3 million or 13.9% from $16.5 million at December 31, 1995.
The following table provides a comparison of the Company's and the Bank's leverage and risk-weighted capital ratios as of December 31, 1997 to the minimum and well capitalized regulatory standards:
TO BE WELL CAPITALIZED
MINIMUM REQUIRED UNDER PROMPT
FOR CAPITAL CORRECTIVE ACTION ACTUAL RATIO AT
ADEQUACY PURPOSES PROVISIONS DECEMBER 31, 1997
----------------- ----------------------- ------------------
THE COMPANY
Leverage ratio....................... 3.00%(1) N/A 6.30%
Tier 1 risk-based capital ratio...... 4.00% N/A 14.94%
Risk-based capital ratio............. 8.00% N/A 15.73%
THE BANK
Leverage ratio....................... 3.00%(2) 5.00% 6.13%
Tier 1 risk-based capital ratio...... 4.00% 6.00% 14.80%
Risk-based capital ratio............. 8.00% 10.00% 15.59%
|
(1) The Federal Reserve Board may require the Company to maintain a leverage ratio of up to 200 basis points above the required minimum.
(2) The FDIC may require the Bank to maintain a leverage ratio of up to 200 basis points above the required minimum.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following is a list of all of the directors and executive officers of the Company and members of the Executive Committee of the Bank, their respective positions with the Company and the Bank and their ages.
NAME POSITION AGE
----------------------------------------------------------------------- ---
Harry Bayne....................... Director of the Company 58
Robert L. Benter.................. President of the Bank's Post Oak 46
Banking Center;
Member of the Executive Committee
of the Bank
Donald A. Bolton, Jr.............. President of the Bank's Victoria 49
Banking Center;
Member of the Executive Committee
of the Bank
James A. Bouligny................. Director of the Company 62
J.T. Herin........................ Director of the Company 82
Randy D. Hester................... President of the Bank's West Columbia 39
Banking
Center; Member of the Executive
Committee of
the Bank
David Hollaway.................... Treasurer and Chief Financial Officer 42
of the Company and Senior Vice
President and Chief Financial
Officer of the Bank
Tracy T. Rudolph.................. Chairman of the Board and President 59
of the
Company and Chairman of the Board
of the Bank
Charles M. Slavik................. Director of the Company 82
Harrison Stafford................. Director of the Company 86
Robert Steelhammer................ Director of the Company 57
David Zalman...................... Director and Vice President/Secretary 42
of the
Company; Director and President of
the Bank
|
HARRY BAYNE. Mr. Bayne has been a director of the Company since 1989. He is President and Chief Executive Officer of Varitec Industries, Inc. in Houston. Since 1967, Mr. Bayne has served as President of Bayne TV & Appliance Co., a subsidiary of Varitec Industries, Inc. Mr. Bayne is active in the Houston and Bay Area Chambers of Commerce.
ROBERT L. BENTER. Mr. Benter, President of the Bank's Post Oak Banking Center in Houston, joined the Bank in 1992 as an Executive Vice President and senior lending officer. From 1988 to 1992, he served as an Executive Vice President of Compass Bank-Houston. From 1978 to 1988, Mr. Benter was employed by First Republic Bank-San Felipe and attained the position of Banking Center President. Mr. Benter began his banking career in 1974 at Community Bank in Austin.
DONALD A. BOLTON, JR. Mr. Bolton has been President of the Bank's Victoria Banking Center since 1993 and currently oversees all of the Bank's lending activity outside of Houston. Prior to joining the Bank, Mr. Bolton was employed by First Victoria National Bank for 20 years, progressing from Senior Vice President to Chief Lending Officer.
JAMES A. BOULIGNY. Mr. Bouligny has been a director of the Company since 1991. Mr. Bouligny is a name partner in the El Campo law firm of Duckett, Bouligny & Collins, LLP. Mr. Bouligny received a Bachelor of Business Administration degree and a Juris Doctor degree from the University of Texas. Mr. Bouligny's civic activities include a 24 year tenure as a member of the Board of Directors of Wharton County Junior College. He is currently a member of the MG and Lillie Johnson Foundation.
J.T. HERIN. Mr. Herin has been a director of the Company since 1989. His affiliation with the Bank started in 1953 with his election to the Board of Directors. He is the owner of the J-Bar Ranch in Ganado.
RANDY D. HESTER. Mr. Hester is President of the Bank's West Columbia Banking Center. He joined the Bank in 1991 as Manager of the Loan Function and Operations of the Cuero Banking Center. Prior to
joining the Bank, Mr. Hester was President of Texas Premier Bank in Victoria and held various lending and management positions at its affiliate, Bank of Kerrville. Mr. Hester began his banking career in 1978 at First City-Windsor Park Bank in San Antonio.
DAVID HOLLAWAY. Mr. Hollaway has been Senior Vice President and Chief Financial Officer of the Bank since 1992 and Treasurer of the Company since 1993. He became Chief Financial Officer of the Company in 1998. From 1990 to 1992, Mr. Hollaway worked for the Resolution Trust Corporation in its Gulf Coast Consolidated Office in Houston. From 1988 to 1990, he worked as the Cost Accounting Manager of San Jacinto Savings Association in Bellaire, Texas. From 1981 to 1988, Mr. Hollaway was Vice President-Auditor of South Main Bank in Houston. Mr. Hollaway is a Certified Public Accountant.
TRACY T. RUDOLPH. Mr. Rudolph founded the Company in 1983 and has served as Chairman of the Board since its inception. From 1980 to 1986, Mr. Rudolph was Chairman and Chief Executive Officer of South Main Bank in Houston. Prior to that, he worked at Town & Country Bank in Houston from 1972 to 1980, where he became Chairman and Chief Executive Officer prior to the bank's acquisition by Allied Bancshares, Inc. Mr. Rudolph has over 35 years of commercial banking experience.
CHARLES M. SLAVIK. Mr. Slavik has been a director of the Company since 1993 and was a founding director of the Bank in 1949. Mr. Slavik is currently Chairman of the Board of both Slavik's, Inc. and Slavik's Funeral Home. Mr. Slavik attended St. Edward's University and Landig College of Mortuary Science. He was commissioned as a Second Lieutenant in World War II and was released from active duty as a Captain in 1946. Mr. Slavik has served as a member of the Edna Rotary Club, Veterans of Foreign Wars, the Edna Hospital Board and the Chamber of Commerce. From 1959 to 1963, Mr. Slavik served as Mayor of Edna.
HARRISON STAFFORD. Mr. Stafford has been a director of the Company since 1987 and was involved in the founding of the Bank in 1949. Mr. Stafford engages in farming, ranching and investments. Mr. Stafford graduated from the University of Texas, where he was a three year All-Conference football player. Mr. Stafford has been inducted into the National Collegiate Football Hall of Fame, the University of Texas Hall of Fame and the Texas High School Hall of Fame. Mr. Stafford has participated actively in the Edna Rotary Club and the University of Texas Ex's Association, and has served as president of the Edna Independent School District Board and as a member of the Lavaca Navidad River Authority.
ROBERT STEELHAMMER. Mr. Steelhammer has been a director of the Company since its inception. Mr. Steelhammer is a partner with the law firm of Steelhammer & Miller, P.C. in Houston. He received a Bachelor of Science degree from the University of Texas and a Juris Doctor degree from South Texas College of Law. He is a member of the State Bar of Texas, a registered professional engineer for the State of Texas and a member of the American Institute of Chemical Engineers.
DAVID ZALMAN. Mr. Zalman joined the Bank as President in 1986 and became a director and Vice President/Secretary of the Company in 1987. From 1978 to 1986, Mr. Zalman was employed by Commercial Bancshares, Inc. in El Campo, beginning as cashier and rising to become Chief Executive Officer. Mr. Zalman received a Bachelor of Business Administration degree in Finance and Marketing from the University of Texas in 1978. He has served as a member of the El Campo City Council, the Edna Rotary Club and the El Campo Lion's Club and as president of the West Wharton County United Way.
Directors are elected for three year terms, classified into Classes I, II and III. Messrs. Herin, Slavik and Stafford are Class I directors with terms of office expiring on the date of the Company's annual meeting of shareholders in 1999; Messrs. Bayne, Bouligny and Steelhammer are Class II directors with terms of office expiring on the date of the Company's annual meeting of shareholders in 2000; and Messrs. Rudolph and Zalman are Class III directors with terms of office expiring on the date of the Company's annual meeting of shareholders in 2001. Each officer of the Company is elected by the Board of Directors of the Company and holds office until his successor is duly elected and qualified or until his or her earlier death, resignation or removal.
The Board of Directors has established Audit and Compensation Committees. The Audit Committee reviews the general scope of the audit conducted by the Company's independent auditors and matters
relating to the Company's internal control systems. In performing its function, the Audit Committee meets separately with representatives of the Company's independent auditors and with representatives of senior management. The Audit Committee is composed of Messrs. Bayne, Bouligny and Steelhammer, all of whom are outside directors.
The Compensation Committee is responsible for making recommendations to the Board of Directors with respect to the compensation of the Company's executive officers and is responsible for the establishment of policies dealing with various compensation and employee benefit matters. The Compensation Committee also administers the Company's stock option plans and makes recommendations to the Board of Directors as to option grants to Company employees under such plans. The Compensation Committee is comprised of Messrs. Bayne, Bouligny, Herin, Slavik, Stafford and Steelhammer, all of whom are outside directors.
EMPLOYMENT AGREEMENTS
Tracy T. Rudolph and David Zalman have entered into employment agreements with the Company. Each agreement is for a term of three years and automatically renews each year unless terminated in accordance with its terms. The employment agreements provide that if the employee is terminated without cause (including constructive termination) or if a change in control of the Company occurs, the employee shall be entitled to receive from the Company a lump sum payment equal to three years' base salary.
DIRECTOR COMPENSATION
Directors of the Company receive a $1,250 fee for each Board meeting attended and no fees for each committee meeting attended. Directors of the Bank receive a $350 fee for each Board meeting attended and $300 for each committee meeting attended.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table provides certain summary information concerning compensation paid or accrued by the Company to or on behalf of the Company's Chairman of the Board and President and each of the other two most highly compensated executive officers of the Company whose compensation exceeds $100,000 (determined as of the end of the last fiscal year) for the fiscal years ended December 31, 1997:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
---------------------------------------- --------- ---------- --------- ------------ ---------------
Tracy T. Rudolph........................ 1997 $ 225,000 $ -- $ -- $ 7,348(1)
Chairman of the Board and President of
the Company and Chairman of the Board
the Bank
David Zalman............................ 1997 185,000 -- -- 7,630(2)
Vice President/Secretary of the
Company and President of the Bank
Robert L. Benter........................ 1997 92,500 12,000 -- 1,020(3)
President of the Post Oak Banking
Center; Member of the Executive
Committee of the Bank
|
(1) Consists of contributions by the Company to the 401(k) Plan of $4,750 and premiums paid by the Company on a life insurance policy for Mr. Rudolph.
(2) Consists of contributions by the Company to the 401(k) Plan of $4,750 and premiums paid by the Company on two life insurance policies for Mr. Zalman.
(3) Consists of contributions by the Company to the 401(k) Plan.
STOCK OPTION PLANS
The Company has outstanding options to purchase 320,000 shares of Common Stock issued pursuant to a stock option plan approved by the shareholders in 1995 (the "1995 Plan") for executive officers and directors. Under the 1995 Plan, the options vest ratably over a ten year period beginning on the date of the grant; however, no options may be exercised until the optionee has completed five years of employment with the Company after the date of the grant. The options were granted at an average exercise price of $4.75. Compensation expense was not recognized for the options because the options had an exercise price approximating the fair value of the Common Stock at the time of the grant. No options granted under the 1995 Plan will be exercisable until May 31, 2000. Options to purchase an additional 20,000 shares are available for issuance under the 1995 Plan.
The Company's Board of Directors and shareholders approved a new stock option plan in 1998 (the "1998 Plan") which authorizes the issuance of up to 460,000 shares of Common Stock under both "non-qualified" and "incentive stock" options to employees and "non-qualified" stock options to directors who are not employees. Generally, under the 1998 Plan it is intended that the options will vest 60% at the end of the third year following the date of grant and an additional 20% at the end of each of the two following years; however, an individual option may vest as much as 20% at the end of the first or second year following the date of grant if necessary to maximize the "incentive" tax treatment to the optionee for the particular option being granted. Options under the 1998 Plan generally must be exercised within 10 years following the date of grant or no later than three months after optionee's termination with the Company, if earlier. No options have been granted under the 1998 Plan. The 1998 Plan provides that in the event of a change in control of the Company, all options granted immediately vest and become exercisable.
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS 123"). This statement established fair value based accounting and reporting standards for all transactions in which a company acquires goods or services by issuing its equity investments, which includes stock-based compensation plans. Under SFAS 123, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. Fair value of stock options is determined using an option-pricing model. This statement encourages companies to adopt as prescribed the fair value based method of accounting to recognize compensation expense for employee stock compensation plans. However, it does not require the fair value based method to be adopted but a company must comply with the disclosure requirements set forth in the statement. The Company has continued to apply Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, ("APB 25") and related Interpretations, and, accordingly, will provide the pro forma disclosures of net income and earnings per share.
OPTIONS GRANTED DURING 1997
The Company did not grant any options to its executive officers during 1997.
BENEFIT PLAN
The Company has established a contributory profit sharing plan (the "Plan") pursuant to Internal Revenue Code Section 401(k) covering substantially all employees. At least one year of service is required to be eligible for employer-matching contributions. Participants may contribute up to 15% of their compensation to the Plan. Each year the Company determines, at its discretion, the amount of matching contributions. Total Plan expense charged to the Company's operations for 1997 and 1996 was approximately $87,000 and $72,000, respectively. The Company has expensed $48,000 for 1998 contributions during the period ended June 30, 1998.
INTERESTS OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
Many of the directors, executive officers and principal shareholders of the Company (I.E., those who own 10% or more of the Common Stock) and their associates, which include corporations, partnerships and other organizations in which they are officers or partners or in which they and their immediate families have
at least a 5% interest, are customers of the Company. During 1997, the Company made loans in the ordinary course of business to many of the directors, executive officers and principal shareholders of the Company and their associates, all of which were on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons unaffiliated with the Company and did not involve more than the normal risk of collectibility or present other unfavorable features. Loans to directors, executive officers and principal shareholders of the Company are subject to limitations contained in the Federal Reserve Act, the principal effect of which is to require that extensions of credit by the Company to executive officers, directors and principal shareholders satisfy the foregoing standards. On June 30, 1998, all of such loans aggregated $3.0 million, which was approximately 0.01% of the Company's Tier 1 capital at such date.
The Company expects to have such transactions or transactions on a similar basis with its directors, executive officers and principal shareholders and their associates in the future.
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of June 30, 1998, by (i) each director and executive officer of the Company and members of the Executive Committee of the Bank, (ii) each person who is known by the Company to own beneficially 5% or more of the Common Stock, (iii) all directors and executive officers as a group and (iv) the Selling Shareholders, who will sell 641,905 shares of Common Stock in the Offering. Unless otherwise indicated, each person has sole voting and dispositive power over the shares indicated as owned by such person and the address of each shareholder is the same as the address of the Company. Messrs. Bayne, Bouligny, Herin, Rudolph, Stafford, Steelhammer and Zalman have each been a director of the Company for more than three years. See "Management -- Directors and Executive Officers of the Company.
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING(1)
----------------------- NUMBER OF SHARES ------------------------
BENEFICIAL OWNER NUMBER PERCENT TO BE SOLD NUMBER PERCENT
---------------------------------------- --------- ------- ---------------- --------- -------
PRINCIPAL AND OTHER SHAREHOLDERS
----------------------------------------
Dr. Perry Mueller....................... 200,000(2) 5.01% -0- 200,000 4.07%
Louis Tittizer.......................... 280,472(3) 7.03 -0- 280,472 5.71
LLPA General Partnership................ 228,160(4) 5.72 166,667 61,493 1.25
Joe Zalman, Jr.......................... 89,732 2.29 75,000 14,732 *
DIRECTORS AND EXECUTIVE OFFICERS
----------------------------------------
Harry Bayne............................. 168,324 4.22% 73,615 94,709 1.93
Robert L. Benter........................ 2,920(5) * -0- 2,920 *
Donald A. Bolton, Jr.................... 12,000(6) * -0- 12,000 *
James A. Bouligny....................... 201,756 5.06 43,750 158,006 3.21
J.T. Herin.............................. 100,400 2.52 66,667 33,733 *
Randy D. Hester......................... 14,272(7) * -0- 14,272
David Hollaway.......................... 2,000 * -0- 2,000
Tracy T. Rudolph........................ 320,000(8) 8.02 180,000 140,000 2.85
Charles M. Slavik....................... 43,740(9) 1.10 8,750 34,990 *
Harrison Stafford....................... 132,800(10) 3.33 42,500 90,300 1.84
Robert Steelhammer...................... 176,000 4.41 75,000 101,000 2.05
David Zalman............................ 387,868(11) 9.72 20,834 367,034 7.47
Directors and Executive Officers as a
Group................................. 1,562,080 39.15% 511,116 1,050,964 21.38%
|
* Denotes ownership of less than 1.0%
(1) Assumes (i) the issuance of 925,000 shares in the Offering and (ii) the sale of 752,783 shares by the Selling Shareholders.
(2) Includes 107,144 shares held of record by First National Bank of Lake Jackson as custodian for Dr. Mueller's self-directed IRA and 26,188 shares held of record by First Prosperity Bank as custodian for Dr. Mueller's self-directed IRA. Perry Mueller's address is 203 That Way, Lake Jackson, Texas 77566.
(3) Louis Tittizer's address is P. O. Box 519, Edna, Texas 77976.
(4) LLPA General Partnership's address is 1177 West Loop South, Suite 1450, Houston, Texas 77027.
(5) Includes 920 shares held of record by the Company's 401(k) Plan as custodian for Mr. Benter.
(6) Includes 8,000 shares held of record by Bolton Brothers Separate Property Investment Partnership, of which Mr. Bolton is a general partner and 4,000 shares held of record by the Company's 401(k) Plan as custodian for Mr. Bolton.
(7) Includes 8,000 shares held of record by the Company's 401(k) Plan as
custodian for Mr. Hester and 4,000 shares held of record by the Company's
401(k) Plan as custodian for Janet L. Hester, the wife of Mr. Hester.
(8) Includes 4,640 shares held of record by the Company's 401(k) Plan as custodian for Mr. Rudolph.
(9) Includes 38,740 shares held of record by the Charles and Emma Slavik Investment Partnership, of which Mr. Slavik is general partner.
(10) Includes 132,800 shares held of record by the Harrison Stafford Investment Partnership, of which Mr. Stafford is general partner.
(11) Includes 3,200 shares held of record by Mr. Zalman as custodian for Britain Zalman, the minor son of Mr. Zalman, and 3,200 shares held of record by Mr. Zalman as custodian for Cullen Zalman, the minor son of Mr. Zalman.
SUPERVISION AND REGULATION
The supervision and regulation of bank holding companies and their subsidiaries is intended primarily for the protection of depositors, the deposit insurance funds of the FDIC and the banking system as a whole, and not for the protection of the bank holding company shareholders or creditors. The banking agencies have broad enforcement power over bank holding companies and banks including the power to impose substantial fines and other penalties for violations of laws and regulations.
The following description summarizes some of the laws to which the Company and the Bank are subject. 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.
THE COMPANY
The Company is a bank holding company registered under the BHCA, and it is subject to supervision, regulation and examination by the Federal Reserve Board. The BHCA and other 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 regulations.
REGULATORY RESTRICTIONS ON DIVIDENDS; SOURCE OF STRENGTH. It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization's expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company's ability to serve as a source of strength to its banking subsidiaries.
Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to each of its banking subsidiaries and commit resources to their support. Such support may be required at times when, absent this Federal Reserve Board policy, a holding company may not be inclined to provide it. As discussed below, a bank holding company in certain circumstances could be required to guarantee the capital plan of an undercapitalized banking subsidiary.
In the event of a bank holding company's bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is required to cure immediately any deficit under any commitment by the debtor holding company to any of the federal banking agencies to maintain the capital of an insured depository institution, and any claim for breach of such obligation will generally have priority over most other unsecured claims.
ACTIVITIES "CLOSELY RELATED" TO BANKING. The BHCA prohibits a bank holding company, with certain limited exceptions, from acquiring direct or indirect ownership or control of any voting shares of any company which is not a bank or from engaging in any activities other than those of banking, managing or controlling banks and certain other subsidiaries, or furnishing services to or performing services for its subsidiaries. One principal exception to these prohibitions allows the acquisition of interests in companies whose activities are found by the Federal Reserve Board, by order or regulation, to be so closely related to banking or managing or controlling banks, as to be a proper incident thereto. Some of the activities that have been determined by regulation to be closely related to banking are making or servicing loans, performing certain data processing services, acting as an investment or financial advisor to certain investment trusts and investment companies, and providing securities brokerage services. Other activities approved by the Federal Reserve Board include consumer financial counseling, tax planning and tax preparation, futures and options advisory services, check guaranty services, collection agency and credit bureau services, and personal property appraisals. In approving acquisitions by bank holding companies of companies engaged in banking-related activities, the Federal Reserve Board considers a number of factors, and weighs the expected benefits to the public (such as greater convenience and increased competition or gains in efficiency) against the risks of possible adverse effects (such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices). The Federal Reserve
Board is also empowered to differentiate between activities commenced de novo and activities commenced through acquisition of a going concern.
SECURITIES ACTIVITIES. The Federal Reserve Board has approved applications by bank holding companies to engage, through nonbank subsidiaries, in certain securities-related activities (underwriting of municipal revenue bonds, commercial paper, consumer receivable-related securities and one-to-four family mortgage-backed securities), provided that the affiliates would not be "principally engaged" in such activities for purposes of Section 20 of the Glass-Steagall Act. In limited situations, holding companies may be able to use such subsidiaries to underwrite and deal in corporate debt and equity securities.
SAFE AND SOUND BANKING PRACTICES. Bank holding companies are not permitted to engage in unsafe and unsound banking practices. The Federal Reserve Board's Regulation Y, for example, generally requires a holding company to give the Federal Reserve Board prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding year, is equal to 10% or more of the company's consolidated net worth. The Federal Reserve Board may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. Depending upon the circumstances, the Federal Reserve Board could take the position that paying a dividend would constitute an unsafe or unsound banking practice.
The Federal Reserve Board has broad authority to prohibit activities of bank holding companies and their nonbanking subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws or regulations, and can assess civil money penalties for certain activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as $1,000,000 for each day the activity continues.
ANTI-TYING RESTRICTIONS. Bank holding companies and their affiliates are prohibited from tying the provision of certain services, such as extensions of credit, to other services offered by a holding company or its affiliates.
CAPITAL ADEQUACY REQUIREMENTS. The Federal Reserve Board has adopted a system using risk-based capital guidelines to evaluate the capital adequacy of bank holding companies. Under the guidelines, specific categories of assets are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a "risk-weighted" asset base. The guidelines require a minimum total risk-based capital ratio of 8.0% (of which at least 4.0% is required to consist of Tier 1 capital elements). Total capital is the sum of Tier 1 and Tier 2 capital. As of June 30, 1998, the Company's ratio of Tier 1 capital to total risk-weighted assets was 14.32% and its ratio of total capital to total risk-weighted assets was 15.08%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition -- Capital Resources."
In addition to the risk-based capital guidelines, the Federal Reserve Board uses a leverage ratio as an additional tool to evaluate the capital adequacy of bank holding companies. The leverage ratio is a company's Tier 1 capital divided by its average total consolidated assets. Certain highly-rated bank holding companies may maintain a minimum leverage ratio of 3.0%, but other bank holding companies may be required to maintain a leverage ratio of up to 200 basis points above the regulatory minimum. As of June 30, 1998, the Company's leverage ratio was 6.25%.
The federal banking agencies' risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria, assuming that they have the highest regulatory rating. Banking organizations not meeting these criteria are expected to operate with capital positions well above the minimum ratios. The federal bank regulatory agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve Board guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.
IMPOSITION OF LIABILITY FOR UNDERCAPITALIZED SUBSIDIARIES. Bank regulators are required to take "prompt corrective action" to resolve problems associated with insured depository institutions whose capital declines below certain levels. In the event an institution becomes "undercapitalized," it must submit a capital restoration plan. The capital restoration plan will not be accepted by the regulators unless each company having control of the undercapitalized institution guarantees the subsidiary's compliance with the capital restoration plan up to a certain specified amount. Any such guarantee from a depository institution's holding company is entitled to a priority of payment in bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5% of the institution's assets at the time it became undercapitalized or the amount necessary to cause the institution to be "adequately capitalized." The bank regulators have greater power in situations where an institution becomes "significantly" or "critically" undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain prior Federal Reserve Board approval of proposed dividends, or might be required to consent to a consolidation or to divest the troubled institution or other affiliates.
ACQUISITIONS BY BANK HOLDING COMPANIES. The BHCA requires every 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 by bank holding companies, the Federal Reserve Board is required to consider 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.
CONTROL ACQUISITIONS. The Change in Bank Control Act prohibits a person or group of persons from acquiring "control" of a bank holding company unless the Federal Reserve Board has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% of more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act, such as the Company, would, under the circumstances set forth in the presumption, constitute acquisition of control of the Company.
In addition, any entity is required to obtain the approval of the Federal Reserve Board under the BHCA before acquiring 25% (5% in the case of an acquiror that is a bank holding company) or more of the outstanding Common Stock of the Company, or otherwise obtaining control or a "controlling influence" over the Company.
THE BANK
The Bank is a Texas-chartered banking association, the deposits of which are insured by the Bank Insurance Fund ("BIF"). The Bank is not a member of the Federal Reserve System; therefore, the Bank is subject to supervision and regulation by the FDIC and the Texas Banking Department. Such supervision and regulation subjects the Bank to special restrictions, requirements, potential enforcement actions and periodic examination by the FDIC and the Texas Banking Department. Because the Federal Reserve Board regulates the bank holding company parent of the Bank, the Federal Reserve Board also has supervisory authority which directly affects the Bank.
EQUIVALENCE TO NATIONAL BANK POWERS. The Texas Constitution, as amended in 1986, provides that a Texas-chartered bank has the same rights and privileges that are or may be granted to national banks domiciled in Texas. To the extent that the Texas laws and regulations may have allowed state-chartered banks to engage in a broader range of activities than national banks, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") has operated to limit this authority. FDICIA provides that 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 insurance fund. In general, statutory restrictions on the activities of banks are aimed at protecting the safety and soundness of depository institutions.
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 Texas Banking Department. 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.
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES AND INSIDERS. Transactions between the Bank and its nonbanking subsidiaries, including the Company, are subject to Section 23A of the Federal Reserve Act. In general, Section 23A imposes limits on the amount of such transactions, and also requires certain levels of collateral for loans to affiliated parties. It also limits the amount of advances to third parties which are collateralized by the securities or obligations of the Company or its subsidiaries.
Affiliate transactions are also subject to Section 23B of the Federal Reserve Act which generally requires that certain transactions between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving other nonaffiliated persons.
The restrictions on loans to directors, executive officers, principal shareholders and their related interests (collectively referred to herein as "insiders") contained in the Federal Reserve Act and Regulation O apply to all insured institutions and their subsidiaries and holding companies. These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to insiders and their related interests. These loans cannot exceed the institution's total unimpaired capital and surplus, and the FDIC may determine that a lesser amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions.
RESTRICTIONS ON DISTRIBUTION OF SUBSIDIARY BANK DIVIDENDS AND ASSETS. Dividends paid by the Bank have provided a substantial part of the Company's operating funds and for the foreseeable future it is anticipated that dividends paid by the Bank to the Company will continue to be the Company's principal source of operating funds. Capital adequacy requirements serve to limit the amount of dividends that may be paid by the Bank. Under federal law, the Bank cannot pay a dividend if, after paying the dividend, the Bank will be "undercapitalized." The FDIC may declare a dividend payment to be unsafe and unsound even though the Bank would continue to meet its capital requirements after the dividend.
Because the Company is a legal entity separate and distinct from its subsidiaries, its right to participate in the distribution of assets of any subsidiary upon the subsidiary's liquidation or reorganization will be subject to the prior claims of the subsidiary's creditors. In the event of a liquidation or other resolution of an insured depository institution, the claims of depositors and other general or subordinated creditors are entitled to a priority of payment over the claims of holders of any obligation of the institution to its shareholders, including any depository institution holding company (such as the Company) or any shareholder or creditor thereof.
EXAMINATIONS. The FDIC periodically examines and evaluates insured banks. Based upon such an evaluation, the FDIC may revalue the assets of the institution and require that it establish specific reserves to compensate for the difference between the FDIC-determined value and the book value of such assets. The Texas Banking Department also conducts examinations of state banks but may accept the results of a federal examination in lieu of conducting an independent examination.
AUDIT REPORTS. Insured institutions with total assets of $500 million or more must submit annual audit reports prepared by independent auditors to federal and state regulators. In some instances, the audit report of the institution's holding company can be used to satisfy this requirement. Auditors must receive examination reports, supervisory agreements and reports of enforcement actions. In addition, financial statements prepared in accordance with generally accepted accounting principles, management's certifications concerning responsibility for the financial statements, internal controls and compliance with legal requirements designated by the FDIC, and an attestation by the auditor regarding the statements of management relating to the internal controls must be submitted. For institutions with total assets of more
than $3 billion, independent auditors may be required to review quarterly financial statements. FDICIA requires that independent audit committees be formed, consisting of outside directors only. The committees of such institutions must include members with experience in banking or financial management, must have access to outside counsel, and must not include representatives of large customers.
CAPITAL ADEQUACY REQUIREMENTS. The FDIC has adopted regulations establishing minimum requirements for the capital adequacy of insured institutions. The FDIC may establish higher minimum requirements if, for example, a bank has previously received special attention or has a high susceptibility to interest rate risk.
The FDIC's risk-based capital guidelines generally require state banks to have a minimum ratio of Tier 1 capital to total risk-weighted assets of 4.0% and a ratio of total capital to total risk-weighted assets of 8.0%. The capital categories have the same definitions for the Bank as for the Company. As of June 30, 1998, the Bank's ratio of Tier 1 capital to total risk-weighted assets was 14.22% and its ratio of total capital to total risk-weighted assets was 14.99%. See "Management's Discussion and Analysis of Financial Condition and Result of Operation of the Company -- Financial Condition -- Capital Resources."
The FDIC's leverage guidelines require state banks to maintain Tier 1 capital of no less than 5.0% of average total assets, except in the case of certain highly rated banks for which the requirement is 3.0% of average total assets. The Texas Banking Department has issued a policy which generally requires state chartered banks to maintain a leverage ratio (defined in accordance with federal capital guidelines) of 6%. As of June 30, 1998, the Bank's ratio of Tier 1 capital to average total assets (leverage ratio) was 6.21%. See "Management's Discussion and Analysis of Financial Condition and Result of Operation of the Company -- Financial Condition -- Capital Resources."
CORRECTIVE MEASURES FOR CAPITAL DEFICIENCIES. The federal banking regulators are required to take "prompt corrective action" with respect to capital-deficient institutions. Agency regulations define, for each capital category, the levels at which institutions are "well capitalized," "adequately capitalized," "under capitalized," "significantly under capitalized" and "critically under capitalized." A "well capitalized" bank has a total risk-based capital ratio of 10.0% or higher; a Tier 1 risk-based capital ratio of 6.0% or higher; a leverage ratio of 5.0% or higher; and is not subject to any written agreement, order or directive requiring it to maintain a specific capital level for any capital measure. An "adequately capitalized" bank has a total risk-based capital ratio of 8.0% or higher; a Tier 1 risk-based capital ratio of 4.0% or higher; a leverage ratio of 4.0% or higher (3.0% or higher if the bank was rated a composite 1 in its most recent examination report and is not experiencing significant growth); and does not meet the criteria for a well capitalized bank. A bank is "under capitalized" if it fails to meet any one of the ratios required to be adequately capitalized.
In addition to requiring undercapitalized institutions to submit a capital restoration plan, agency regulations contain broad restrictions on certain activities of undercapitalized institutions including asset growth, acquisitions, branch establishment and expansion into new lines of business. With certain exceptions, an insured depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be undercapitalized after any such distribution or payment.
As an institution's capital decreases, the FDIC's enforcement powers become more severe. A significantly undercapitalized institution is subject to mandated capital raising activities, restrictions on interest rates paid and transactions with affiliates, removal of management and other restrictions. The FDIC has only very limited discretion in dealing with a critically undercapitalized institution and is virtually required to appoint a receiver or conservator.
Banks with risk-based capital and leverage ratios below the required minimums may also be subject to certain administrative actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing in the event the institution has no tangible capital.
DEPOSIT INSURANCE ASSESSMENTS. The Bank must pay assessments to the FDIC for federal deposit insurance protection. The FDIC has adopted a risk-based assessment system as required by FDICIA. Under
this system, FDIC-insured depository institutions pay insurance premiums at rates based on their risk classification. Institutions assigned to higher risk classifications (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. An institution's risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to the regulators. In addition, the FDIC can impose special assessments in certain instances.
The FDIC established a process for raising or lowering all rates for insured institutions semi-annually if conditions warrant a change. Under this new system, the FDIC has the flexibility to adjust the assessment rate schedule twice a year without seeking prior public comment, but only within a range of five cents per $100 above or below the premium schedule adopted. Changes in the rate schedule outside the 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.
On September 30, 1996, President Clinton signed into law an act that contained a comprehensive approach to recapitalizing the SAIF 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 Corporation in 1987. The BIF rate must equal one-fifth of the SAIF rate through year-end 1999, or until the insurance funds are merged, whichever occurs first. Thereafter BIF and SAIF payers will be assessed pro rata for the FICO bond obligations. With regard to the assessment for the FICO obligation, the current BIF rate is .0126% of deposits and the SAIF rate is .0630% of deposits.
ENFORCEMENT POWERS. The FDIC and the other federal banking agencies have broad enforcement powers, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties and appoint a conservator or receiver. Failure to comply with applicable laws, regulations and supervisory agreements could subject the Company or its banking subsidiaries, as well as officers, directors and other institution-affiliated parties of these organizations, to administrative sanctions and potentially substantial civil money penalties. The appropriate federal banking agency may appoint the FDIC as conservator or receiver for a banking institution (or the FDIC may appoint itself, under certain circumstances) if any one or more of a number of circumstances exist, including, without limitation, the fact that the banking institution is undercapitalized and has no reasonable prospect of becoming adequately capitalized; fails to become adequately capitalized when required to do so; fails to submit a timely and acceptable capital restoration plan; or materially fails to implement an accepted capital restoration plan.
BROKERED DEPOSIT RESTRICTIONS. Adequately capitalized institutions cannot accept, renew or roll over brokered deposits except with a waiver from the FDIC, and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew, or roll over brokered deposits.
CROSS-GUARANTEE PROVISIONS. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee" provision which generally makes commonly controlled insured depository institutions liable to the FDIC for any losses incurred in connection with the failure of a commonly controlled depository institution.
COMMUNITY REINVESTMENT ACT. The Community Reinvestment Act of 1977 ("CRA") and the regulations issued thereunder are intended to encourage banks to help meet the credit needs of their service area, including low and moderate income neighborhoods, consistent with the safe and sound operations of the banks. These regulations also provide for regulatory assessment of a bank's record in meeting the needs of its service area when considering applications to establish branches, merger applications and applications to acquire the assets and assume the liabilities of another bank. FIRREA requires federal banking agencies to make public a rating of a bank's performance under the CRA. In the case of a bank holding company, the CRA performance record of the banks involved in the transaction are reviewed in connection with the filing of an application to acquire ownership or control of shares or assets of a bank or to merge with any other bank holding company. An unsatisfactory record can substantially delay or block the transaction.
CONSUMER LAWS AND REGULATIONS. In addition to the laws and regulations discussed herein, the Bank is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, and the Fair Housing Act, among others. 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. The Bank must comply with the applicable provisions of these consumer protection laws and regulations as part of their ongoing customer relations.
INSTABILITY OF REGULATORY STRUCTURE
Various legislation, including proposals to overhaul the bank regulatory system, expand the powers of banking institutions and bank holding companies and limit the investments that a depository institution may make with insured funds, is from time to time introduced in Congress. Such legislation may change banking statutes and the operating environment of the Company and its banking subsidiaries in substantial and unpredictable ways. The Company cannot determine the ultimate effect that potential legislation, if enacted, or implementing regulations with respect thereto, would have upon the financial condition or results of operations of the Company or its subsidiaries.
EXPANDING ENFORCEMENT AUTHORITY
One of the major additional burdens 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 are possessed of 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.
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 the Company and its subsidiaries cannot be predicted.
DESCRIPTION OF SECURITIES OF THE COMPANY
AUTHORIZED CAPITAL STOCK
The authorized capital stock of the Company consists of (i) 20,000,000 shares of preferred stock, $1.00 per share par value ("Preferred Stock"), issuable in series, none of which are issued and outstanding and (ii) 50,000,000 shares of Common Stock, $1.00 per share par value, of which 3,993,884 shares were issued and 3,990,308 shares were outstanding as of June 30, 1998. The terms of any new series of preferred stock may be fixed by the Board of Directors of the Company within certain limits set by the Company's Articles of Incorporation.
The following discussion of the terms and provisions of the Company's capital stock is qualified in its entirety by reference to the Company's Articles of Incorporation and Bylaws, copies of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part.
PREFERRED STOCK
The Company is authorized to issue 20,000,000 shares of Preferred Stock. The Preferred Stock (or other securities convertible in whole or in part into Preferred Stock) is available for issuance from time to time for various purposes as determined by the Company's Board of Directors, including, without limitation, making future acquisitions, raising additional equity capital and financing. Subject to certain limits set by the Company's Articles of Incorporation, the Preferred Stock (or such convertible securities) may be issued on such terms and conditions, and at such times and in such situations, as the Board of Directors in its sole 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 the Company).
Moreover, except as otherwise limited by the Articles of Incorporation or applicable laws, rules or regulations, the Board of Directors has the sole authority to determine the relative rights and preferences of the Preferred Stock and any series thereof without shareholder approval. The Company's Articles of Incorporation require all shares of Preferred Stock to be identical, except as to the following characteristics, which may vary between different series of Preferred Stock:
(i) dividend rate, preference of dividend with respect to any other class or series of stock, and cumulativity, non-cumulativity or partial cumulativity of dividends;
(ii) redemption price and terms, including, to the extent permitted by law, the manner in which shares are to be chosen for redemption if less than all the shares of a series are to be redeemed;
(iii) sinking fund provisions for the redemption or purchase of shares;
(iv) the amount payable upon shares in the event of voluntary or involuntary liquidation;
(v) the terms and conditions on which shares may be converted, if the shares of any series are issued with the privilege of conversion;
(vi) voting rights; and
(vii) such other powers, preferences and rights as the Board of Directors shall determine.
The Board of Directors does not intend to seek shareholder approval prior to any issuance of Preferred Stock or any series thereof, unless otherwise required by law. Under the Texas Business Corporation Act ("TBCA"), shareholder approval prior to the issuance of shares of Common Stock or Preferred Stock is required in connection with certain mergers. Frequently, opportunities arise that require prompt action, such as the possible acquisition of a property or business or the private sale of securities, and it is the belief of the Board of Directors that the delay necessary for shareholder approval of a specific issuance could be to the detriment of the Company and its shareholders. The Board of Directors does not intend to issue any shares of Common Stock or Preferred Stock except on terms which the Board of Directors deems to be in the best interests of the Company and its then existing shareholders.
Although the Preferred Stock could be deemed to have an anti-takeover effect, the Board of Directors is not aware of any takeover efforts. If a hostile takeover situation should arise, shares of Preferred Stock could be issued to purchasers sympathetic with the Company's management or others in such a way as to render more difficult or to discourage a merger, tender offer, proxy contest, the assumption of control by a holder of a large block of the Company's securities or the removal of incumbent management.
The effects of the issuance of the Preferred Stock on the holders of Common Stock could include, among other things, (i) reduction of the amount otherwise available for payments of dividends on Common Stock if dividends are payable on the series of Preferred Stock; (ii) restrictions on dividends on Common Stock if dividends on the series of Preferred Stock are in arrears; (iii) dilution of the voting power of Common Stock if the series of Preferred Stock has voting rights, including a possible "veto" power if the series of Preferred Stock has class voting rights; (iv) dilution of the equity interest of holders of Common Stock if the series of Preferred Stock is convertible, and is converted, into Common Stock; and (v) restrictions on the rights of holders of Common Stock to share in the Company's assets upon liquidation until satisfaction of any liquidation preference granted to the holders of the series of Preferred Stock. Holders of Common Stock have no preemptive rights to purchase or otherwise acquire any Preferred Stock that may be issued.
COMMON STOCK
The holders of the Common Stock are entitled to one vote for each share of Common Stock owned. Except as expressly provided by law and except for any voting rights which may be conferred by the Board of Directors on any shares of Preferred Stock issued, all voting power is in the Common Stock. Holders of Common Stock may not cumulate their votes for the election of directors. Holders of Common Stock do not have preemptive rights to acquire any additional, unissued or treasury shares of the Company, or securities of the Company convertible into or carrying a right to subscribe for or acquire shares of the Company.
Holders of Common Stock will be entitled to receive dividends out of funds legally available therefor, if and when properly declared by the Board of Directors. See "Risk Factors -- Dividend History and Restrictions on Ability to Pay Dividends" and "Supervision and Regulation."
On the liquidation of the Company, the holders of Common Stock are entitled to share pro rata in any distribution of the assets of the Company, after the holders of shares of Preferred Stock have received the liquidation preference of their shares plus any cumulated but unpaid dividends (whether or not earned or declared), if any, and after all other indebtedness of the Company has been retired.
TEXAS LAW AND CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS
Certain provisions of Texas law, the Company's Articles of Incorporation and the Company's Bylaws could make more difficult the acquisition of the Company by means of a tender offer, a proxy contest or otherwise and the removal of incumbent officers and directors. These provisions are intended to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of the Company to negotiate first with the Company.
The Company is subject to the provisions of the Texas Business Combination
Law (Articles 13.01 through 13.08 of the TBCA), which provides that a Texas
corporation such as the Company may not engage in certain business combinations,
including mergers, consolidations and asset sales, with a person, or an
affiliate or associate of such person, who is an "Affiliated Shareholder"
(generally defined as the holder of 20% or more of the corporation's voting
shares) for a period of three years from the date such person became an
Affiliated Shareholder unless: (i) the business combination or purchase or
acquisition of shares made by the Affiliated Shareholder was approved by the
board of directors of the corporation before the Affiliated Shareholder became
an Affiliated Shareholder or (ii) the business combination was approved by the
affirmative vote of the holders of at least two-thirds of the outstanding voting
shares of the corporation not beneficially owned by the Affiliated Shareholder,
at a meeting of shareholders called for that purpose (and not by written
consent), not less than six months after the Affiliated Shareholder became an
Affiliated Shareholder. The Texas Business Combination Law is not applicable to:
(i) the business combination of a
corporation: (a) where the corporation's original charter or bylaws contain a provision expressly electing not to be governed by the Texas Business Combination Law, (b) that adopted an amendment to its charter or bylaws before December 31, 1997, expressly electing not to be governed by the Texas Business Combination Law, or (c) that adopts an amendment to its charter or bylaws after December 31, 1997, by the affirmative vote of the holders, other than Affiliated Shareholders, of at least two-thirds of the outstanding voting shares of the corporation, expressly electing not to be governed by the Texas Business Combination Law; (ii) a business combination of a corporation with an Affiliated Shareholder that became an Affiliated Shareholder inadvertently, if the Affiliated Shareholder: (a) as soon as practicable divests itself of enough shares to no longer be an Affiliated Shareholder and (b) would not at any time within the three year period preceding the announcement of the business combination have been an Affiliated Shareholder but for the inadvertent acquisition; (iii) a business combination with an Affiliated Shareholder that was the beneficial owner of 20% or more of the outstanding voting shares of the corporation on December 31, 1996, and continuously until the announcement date of the business combination; (iv) a business combination with an Affiliated Shareholder who became an Affiliated Shareholder through a transfer of shares of the corporation by will or intestate succession and continuously was such an Affiliated Shareholder until the announcement date of the business combination; and (v) a business combination of a corporation with a wholly owned subsidiary if the subsidiary is not an affiliate or associate of the Affiliated Shareholder other than by reason of the Affiliated Shareholder's beneficial ownership of the voting shares of the corporation. Neither the Articles of Incorporation nor the Bylaws of the Company contain any provision expressly providing that the Company will not be subject to the Texas Business Combination Law. The Texas Business Combination Law may have the effect of inhibiting a non-negotiated merger or other business combination involving the Company, even if such event would be beneficial to the Company's shareholders.
The following discussion is a summary of certain material provisions of the Company's Articles of Incorporation and the Company's Bylaws, copies of which are filed as exhibits to the Registration Statement of which this Prospectus is a part.
CLASSIFIED BOARD OF DIRECTORS. Under the Company's Bylaws, the Board of Directors is classified into three classes, with the directors being elected for staggered, three-year terms. The classification of the Company's Board of Directors will have the effect of making it more difficult to change the composition of the Board of Directors, because at least two annual meetings of the shareholders would be required to change the control of the Board of Directors rather than one. In addition, the Bylaws provide that directors may be removed by the shareholders only for cause and that vacancies on the Board of Directors may be filled by the remaining directors.
ADVANCE NOTICE OF SHAREHOLDER PROPOSALS AND NOMINATIONS. The Company's Bylaws establish an advance notice procedure for shareholders to make nominations of candidates for election as directors or bring other business before any meeting of shareholders of the Company (the "Shareholder Notice Procedure"). The Shareholder Notice Procedure provides that only persons who are nominated by, or at the direction of, the Board, or by a shareholder who has given timely written notice to the Secretary of the Company prior to the meeting at which directors are to be elected, will be eligible for election as directors of the Company and that, at a shareholders' meeting, only such business may be conducted as has been brought before the meeting by, or at the direction of, the Board of Directors or by a shareholder who has given timely written notice to the Secretary of the Company of such shareholder's intention to bring such business before such meeting.
Under the Shareholder Notice Procedure, for notice of shareholder nominations or other business to be made at a shareholders' meeting to be timely, such notice must be received by the Company not less than 60 days prior to the meeting.
A shareholder's notice to the Company proposing to nominate a person for election as a director or proposing other business must contain certain information specified in the Bylaws, including the identity and address of the nominating shareholder, a representation that the shareholder is a record holder of stock of the Company entitled to vote at the meeting and information regarding each proposed nominee or each
proposed matter of business that would be required under the federal securities laws to be included in a proxy statement soliciting proxies for the proposed nominee or the proposed matter of business.
The Shareholder Notice Procedure may have the effect of precluding a contest for the election of directors or the consideration of shareholder proposals if the proper procedures are not followed, and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal, without regard to whether consideration of such nominees or proposals might be harmful or beneficial to the Company and its shareholders.
SPECIAL MEETINGS OF SHAREHOLDERS. The Articles of Incorporation provide that special meetings of shareholders can be called by shareholders only at the request of the holders of not less than one-half of the outstanding shares of stock entitled to vote at the meeting.
REDUCED SHAREHOLDER VOTE REQUIRED FOR CERTAIN ACTIONS. The Company's Articles of Incorporation provide that, notwithstanding any provision of the TBCA that would require approval of more than a majority of the shares entitled to vote on such matter and present or represented by proxy at the meeting, the vote or approval of a majority of the shares of the Company's stock entitled to vote on such matter will be sufficient to approve such matter. This provision reduces the required shareholder approval level for certain actions such as a merger, a consolidation, a share exchange, certain sales of substantially all of the Company's assets, a dissolution or an amendment to the Company's Articles of Incorporation, each of which would otherwise require two-thirds shareholder approval under Texas law.
NO ACTION BY WRITTEN CONSENT WITHOUT UNANIMOUS WRITTEN CONSENT. Under the TBCA, no action required or permitted to be taken at an annual or special meeting of shareholders may be taken by written consent in lieu of a meeting of shareholders without the unanimous written consent of all shareholders unless the articles of incorporation specifically allow action by less than unanimous consent. The Company's Articles of Incorporation do not contain such a provision.
AMENDMENT OF BYLAWS. The Company's Bylaws provide that the Bylaws may be amended only by the Board of Directors. Shareholders do not have the power to amend the Company Bylaws.
UNDERWRITING
Subject to the terms and conditions of the Purchase Agreement among the Company, the Selling Shareholders and the Representatives on behalf of the Underwriters, the Underwriters have agreed severally to purchase from the Company and the Selling Shareholders the following respective number of shares of Common Stock at the initial public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus.
NAME NO. OF SHARES
------------------------------------- --------------
Keefe, Bruyette & Woods, Inc.........
Hoefer & Arnett, Incorporated........
--------------
Total...........................
==============
|
The Purchase Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will purchase all such shares of the Common Stock if any of such shares are purchased. The Underwriters are obligated to take and pay for all of the shares of Common Stock offered hereby (other than those covered by the over-allotment option described below) if any are taken.
The Company has been advised by the Representatives that the Underwriters propose to offer to such shares of Common Stock to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may re-allow, a concession not in excess of $ per share to certain other dealers. After the initial public offering, the offering price and other selling terms may be changed by the Underwriters.
Pursuant to the Purchase Agreement, the Company has granted to the Underwriters an option, exercisable not later than 30 days after the date of this Prospectus, to purchase up to 251,667 additional shares of Common Stock at the public offering price, less the underwriting discounts and commissions set forth on the cover page of this Prospectus, solely to cover over-allotments. To the extent that the Underwriters exercise such option, the Underwriters will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number set forth next to such Underwriter's name in the preceding table bears to the total number of shares in such table, and the Company will be obligated, pursuant to the option, to sell such shares to the Underwriters.
The Company, each of its directors and executive officers, each of the Selling Shareholders and certain other shareholders of the Company have agreed not to sell or otherwise dispose of any shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of the Representatives. See "Risk Factors -- Shares Eligible for Future Sale."
The Company and the Selling Shareholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act.
Until the distribution of the Common Stock is completed, rules of the Commission (as defined herein) may limit the ability of the Underwriters and certain selling group members to bid for and purchase the Common Stock. As an exception to these rules, the Underwriters are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in connection with the Offering, i.e., if they sell a greater aggregate number of shares of Common Stock than is set forth on the cover page of this Prospectus, the Underwriters may reduce the short position by purchasing shares of Common Stock in the
open market. The Underwriters may also elect to reduce any short position by exercising all or part of the over-allotment option described above.
The Underwriters may also impose a penalty bid on certain selling group members. This means that if the Underwriters purchase Common Stock in the open market to reduce the selling group members' short position or to stabilize the price of the Common Stock, they may reclaim the amount of the selling concession from the selling group members who sold those shares of Common Stock as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resales of the security.
Neither the Company nor the Representatives make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company nor the Representatives make any representation that the Underwriters will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice.
The Underwriters and dealers may engage in passive market making transactions in the shares of Common Stock in accordance with Rule 103 of Regulation M promulgated by the Commission. In general, a passive market maker may not bid for, or purchase, shares of Common Stock at a price that exceeds the highest independent bid. In addition, the net daily purchases made by any passive market maker generally may not exceed 30% of its average daily trading volume in the Common Stock during a specified two month prior period, or 200 shares, whichever is greater. A passive market maker must identify passive market making bids as such on the Nasdaq electronic inter-dealer reporting system. Passive market making may stabilize or maintain the market price of the Common Stock above independent market levels. Underwriters and dealers are not required to engage in passive market making and may end passive market making activities at any time.
Prior to the Offering, there has been no public market for the Common Stock. Consequently, the initial public offering price for the Common Stock has been determined by negotiations between the Company and the Representatives. Among the factors considered in such negotiations were prevailing market and general economic conditions, the market capitalizations, trading histories and stages of development of other traded companies that the Company and the Representatives believed to be comparable to the Company, the results of operations of the Company in recent periods, the current financial position of the Company, estimates of the business potential of the Company and the present state of the Company's development and the availability for sale in the market of a significant number of shares of Common Stock. Additionally, consideration has been given to the general status of the securities market, the market conditions for new issues of securities and the demand for securities of comparable companies at the time the Offering was made.
Application has been made for quotation of the Common Stock on the Nasdaq/National Market.
LEGAL MATTERS
The validity of the shares of Common Stock to be issued by the Company will be passed upon by Bracewell & Patterson, L.L.P., Houston, Texas. Certain legal matters with respect to the Common Stock offered hereby will be passed upon for the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1997 and 1996 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997, included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein, and are included in reliance upon the reports of such firm, given upon their authority as experts in accounting and auditing.
The statements of condition of Union as of December 31, 1997 and 1996 and the related statements of income, changes in shareholders' equity and cash flows for each of the two years in the period ended December 31, 1997 included in this Prospectus have been audited by Harper & Pearson Company, independent auditors, as stated in their reports appearing herein, and are included in reliance upon the reports of such firm, given upon their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has not previously been subject to the reporting requirements of the Securities Exchange Act of 1934, as amended. The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act, with respect to the offer and sale of Common Stock pursuant to this Prospectus. This Prospectus, filed as a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement or the exhibits and schedules thereto in accordance with the rules and regulations of the Commission and reference is hereby made to such omitted information. Statements made in this Prospectus concerning the contents of any contract, agreement or other document filed as an exhibit to the Registration Statement are summaries of the terms of such contracts, agreements or documents and are not necessarily complete. Reference is made to each such exhibit for a more complete description of the matters involved and such statements shall be deemed qualified in their entirety by such reference. The Registration Statement and the exhibits and schedules thereto filed with the Commission may be inspected, without charge, and copies may be obtained at prescribed rates, at the public reference facility maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048 and CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60621-2511. For further information pertaining to the Common Stock offered by this Prospectus and the Company, reference is made to the Registration Statement. The Registration Statement and other information filed by the Company with the Commission are also available at the Commission's World Wide Web site on the Internet at http://www.sec.gov.
The Company intends to furnish its shareholders with annual reports containing audited financial statements certified by independent auditors and quarterly reports containing unaudited financial statements for the first three quarters of each fiscal year.
TABLE OF CONTENTS TO FINANCIAL STATEMENTS
Report of Independent Auditors..... F-2
Consolidated Balance Sheet as of
June 30, 1998 (Unaudited) and
December 31, 1997 and 1996....... F-3
Consolidated Statement of Income
for the Six Months Ended June 30,
1998 (Unaudited) and June 30, 1997
(Unaudited) and for the Years
Ended December 31, 1997, 1996
and 1995......................... F-4
Consolidated Statement of Changes
in Shareholders' Equity for the
Years Ended December 31, 1997,
1996 and 1995 and for the Six
Months Ended
June 30, 1998 (Unaudited)........ F-5
Consolidated Statement of Cash
Flows for the Six Months Ended
June 30, 1998 (Unaudited) and June
30, 1997 (Unaudited) and for the
Years Ended
December 31, 1997, 1996 and
1995.............................. F-6
Notes to Consolidated Financial
Statements........................ F-8
UNION STATE BANK
Independent Auditor's Report....... F-27
Statements of Condition as of June
30, 1997 and 1996 (Unaudited)..... F-28
Statements of Condition as of
December 31, 1997 and 1996........ F-29
Statements of Income for the Six
Months Ended June 30, 1998 and
1997 (Unaudited).................. F-30
Statements of Income for the Years
Ended December 31, 1997 and
1996.............................. F-31
Statements of Changes in
Shareholders' Equity for the Six
Months Ended June 30, 1998 and
1997 (Unaudited).................. F-32
Statements of Changes in
Shareholders' Equity for the Years
Ended December 31, 1997 and
1996.............................. F-33
Statements of Cash Flows for the
Six Months Ended June 30, 1998 and
1997 (Unaudited).................. F-34
Statements of Cash Flows for the
Years Ended December 31, 1997 and
1996.............................. F-35
|
Notes to Financial Statements for
the Years Ended December 31, 1997
and 1996.......................... F-36
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Prosperity Bancshares, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Prosperity Bancshares, Inc. and subsidiaries (collectively, the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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 Prosperity Bancshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
January 23, 1998 (except
for Note 23 as to which the
date is September 10, 1998)
Houston, Texas
PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
JUNE 30, --------------------------------
1998 1997 1996
--------------- --------------- ---------------
(UNAUDITED)
ASSETS
Cash and due from banks (Note 3)........ $ 13,054,238 $ 17,372,158 $ 15,954,319
Federal funds sold...................... 7,875,000 5,790,000
--------------- --------------- ---------------
Total cash and cash
equivalents................ 20,929,238 17,372,158 21,744,319
Interest-bearing deposits in financial
institutions.......................... 99,000 198,000 396,000
Available for sale securities, at fair
value (amortized cost of $44,779,100
(unaudited), $38,650,389 and
$49,372,925, respectively) (Note 4)... 44,744,151 38,612,395 49,341,523
Held to maturity securities, at cost
(fair value of $114,105,268
(unaudited), $129,774,737 and
$97,659,201, respectively) (Note 4)... 113,941,104 129,256,453 98,222,352
Loans (Notes 5 and 6)................... 141,079,572 120,577,987 113,382,477
Less allowance for credit losses (Note
7).................................... (1,113,713) (1,015,576) (922,833)
--------------- --------------- ---------------
Loans, net.................... 139,965,859 119,562,411 112,459,644
Accrued interest receivable............. 3,003,004 2,500,976 2,204,402
Goodwill, net of accumulated
amortization of $2,811,310
(unaudited), $2,576,686 and
$2,175,167, respectively.............. 5,658,789 5,643,413 4,054,818
Bank premises and equipment, net (Note
8).................................... 5,451,855 5,529,664 4,500,146
Other assets............................ 1,629,212 1,467,612 1,065,249
--------------- --------------- ---------------
TOTAL................................... $ 335,422,212 $ 320,143,082 $ 293,988,453
=============== =============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits (Note 9):
Noninterest-bearing................ $ 68,563,414 $ 61,447,143 $ 55,180,183
Interest-bearing................... 239,251,963 230,069,769 215,686,187
--------------- --------------- ---------------
Total deposits................ 307,815,377 291,516,912 270,866,370
Note payable (Note 10)................ 3,266,666
Other borrowings (Note 10)............ 2,800,000
Accrued interest payable.............. 724,784 708,494 688,139
Other liabilities..................... 404,232 300,079 333,966
--------------- --------------- ---------------
Total liabilities............. 308,944,393 295,325,485 275,155,141
COMMITMENTS AND CONTINGENCIES
(Notes 12 and 16)
SHAREHOLDERS' EQUITY (Notes 14, 17, 18
and 22):
Common stock, $1 par value; 50,000,000
shares authorized; 3,993,884
(unaudited), 3,993,884 and
3,513,884 shares issued at June 30,
1998, December 31, 1997 and 1996,
respectively; 3,990,308
(unaudited), 3,990,308 and
3,510,148 shares outstanding at
June 30, 1998, December 31, 1997
and 1996, respectively............. 3,993,884 3,993,884 3,513,884
Capital surplus....................... 4,817,782 4,817,782 2,297,602
Retained earnings..................... 17,707,546 16,049,334 13,061,698
Accumulated other comprehensive
income -- net unrealized losses on
available for sale investment
securities, net of tax of $11,883
(unaudited), $12,919 and $10,677,
respectively....................... (23,066) (25,076) (20,725)
Less treasury stock, at cost 3,576
(unaudited), 3,576 and 3,736
shares, respectively............... (18,327) (18,327) (19,147)
--------------- --------------- ---------------
Total shareholders' equity.... 26,477,819 24,817,597 18,833,312
--------------- --------------- ---------------
TOTAL................................... $ 335,422,212 $ 320,143,082 $ 293,988,453
=============== =============== ===============
|
See notes to consolidated financial statements.
PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED FOR THE YEARS ENDED
JUNE 30, DECEMBER 31,
-------------------------- ------------------------------------------
1998 1997 1997 1996 1995
------------ ------------ -------------- ------------ ------------
(UNAUDITED)
INTEREST INCOME:
Loans, including fees.............. $ 5,568,210 $ 4,953,742 $ 10,205,405 $ 9,136,451 $ 7,203,450
Investment securities:
Taxable......................... 4,876,213 4,228,118 8,950,157 6,647,877 6,241,258
Nontaxable...................... 295,080 325,640 604,968 723,285 850,410
Federal funds sold................. 126,531 115,523 193,300 309,396 428,161
Deposits in financial
institutions.................... 4,635 9,161 15,842 23,990 14,682
------------ ------------ -------------- ------------ ------------
Total interest income......... 10,870,669 9,632,184 19,969,672 16,840,999 14,737,961
------------ ------------ -------------- ------------ ------------
INTEREST EXPENSE:
Deposits........................... 4,646,711 4,312,058 8,858,172 7,719,880 6,749,468
Note payable and federal funds
purchased....................... 66,638 49,398 132,106 203,204 154,776
Other.............................. 1,414 91,809 69,566
------------ ------------ -------------- ------------ ------------
Total interest expense........ 4,714,763 4,453,265 9,059,844 7,923,084 6,904,244
------------ ------------ -------------- ------------ ------------
NET INTEREST INCOME.................. 6,155,906 5,178,919 10,909,828 8,917,915 7,833,717
PROVISION FOR CREDIT LOSSES (Note
7)................................. 144,500 104,970 189,970 230,000 175,000
------------ ------------ -------------- ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES.................. 6,011,406 5,073,949 10,719,858 8,687,915 7,658,717
------------ ------------ -------------- ------------ ------------
NONINTEREST INCOME:
Customer service fees.............. 1,135,887 918,678 2,061,799 1,742,200 1,391,196
Investment securities losses....... (28,424)
Other.............................. 103,485 91,013 202,239 155,298 126,193
------------ ------------ -------------- ------------ ------------
Total noninterest income...... 1,239,372 1,009,691 2,264,038 1,897,498 1,488,965
------------ ------------ -------------- ------------ ------------
NONINTEREST EXPENSE:
Salaries and employee benefits
(Note 15)....................... 2,144,627 1,900,744 3,967,508 3,414,553 3,040,540
Net occupancy expense.............. 426,514 377,394 810,717 710,400 608,26
Data processing.................... 369,246 290,532 641,813 493,257 387,499
Federal Deposit Insurance
Corporation assessment.......... 234,454
Goodwill amortization.............. 234,623 162,730 401,520 257,406 208,794
Depreciation expense............... 253,457 198,086 431,169 366,598 323,859
Other.............................. 856,235 737,533 1,582,807 1,392,024 1,241,855
------------ ------------ -------------- ------------ ------------
Total noninterest expense..... 4,254,702 3,667,019 7,835,534 6,634,238 6,045,526
------------ ------------ -------------- ------------ ------------
INCOME BEFORE INCOME TAXES........... 2,996,076 2,416,621 5,148,362 3,951,175 3,102,156
PROVISION FOR INCOME TAXES (Note
13)................................ 938,832 755,795 1,586,190 1,240,443 780,729
------------ ------------ -------------- ------------ ------------
NET INCOME........................... $ 2,057,244 $ 1,660,826 $ 3,562,172 $ 2,710,732 $ 2,321,427
============ ============ ============== ============ ============
EARNINGS PER SHARE
(Note 1):
Basic.............................. $ 0.52 $ 0.47 $ 0.94 $ 0.77 $ 0.66
============ ============ ============== ============ ============
Diluted............................ $ 0.50 $ 0.46 $ 0.92 $ 0.76 $ 0.66
============ ============ ============== ============ ============
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See notes to consolidated financial statements.
PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED OTHER
COMPREHENSIVE
INCOME --
NET UNREALIZED
LOSS ON
COMMON STOCK AVAILABLE FOR
--------------------- CAPITAL RETAINED SALE INVESTMENT
SHARES AMOUNT SURPLUS EARNINGS SECURITIES
-------- --------- --------- ---------- ------------------
BALANCE AT JANUARY 1, 1995........... 3,513,884 $3,513,884 $2,297,602 $8,732,315 $ (648,417)
Net income....................... 2,321,427
Accretion of unrealized loss.....
Unrealized loss on held to
maturity investment securities
transferred to available for
sale investments securities in
accordance with the FASB
one-time reassessment (Note
3)............................. (502,175)
Net change in unrealized loss on
available for sale investment
securities..................... 1,095,062
Total comprehensive income.......
Cash dividends declared, $0.10
per share...................... (351,388)
-------- --------- --------- ---------- ------------------
BALANCE AT DECEMBER 31, 1995......... 3,513,884 3,513,884 2,297,602 10,702,354 (55,530)
Net income....................... 2,710,732
Net change in unrealized loss on
available for sale investment
securities..................... 34,805
Total comprehensive income.......
Purchase of treasury stock.......
Cash dividends declared, $0.10
per share...................... (351,388)
-------- --------- --------- ---------- ------------------
BALANCE AT DECEMBER 31, 1996......... 3,513,884 3,513,884 2,297,602 13,061,698 (20,725)
Net income....................... 3,562,172
Net change in unrealized loss on
available for sale.............
Net change in unrealized loss on
available for sale investment
securities..................... (4,351)
Total comprehensive income.......
Sale of treasury stock........... 180
Issuance of common stock......... 480,000 480,000 2,520,000
Cash dividends declared, $0.15
per share...................... (574,536)
-------- --------- --------- ---------- ------------------
BALANCE AT DECEMBER 31, 1997......... 3,993,884 3,993,884 4,817,782 16,049,334 (25,076)
Net income (unaudited)........... 2,057,244
Net change in unrealized loss on
available for sale investment
securities (unaudited)......... 2,010
Total comprehensive income
(unaudited)....................
Cash dividends declared, $0.10
per share (unaudited).......... (399,032)
-------- --------- --------- ---------- ------------------
BALANCE AT JUNE 30, 1998
(UNAUDITED)........................ 3,993,884 $3,993,884 $4,817,782 $17,707,546 $ (23,066)
======== ========= ========= ========== ==================
|
NET UNREALIZED
LOSS ON HELD TO
MATURITY INVESTMENT
SECURITIES TOTAL
TRANSFERRED FROM TREASURY SHAREHOLDERS'
AVAILABLE FOR SALE STOCK EQUITY
-------------------- -------- -------------
BALANCE AT JANUARY 1, 1995........... $ (512,407) $13,373,977
Net income....................... 2,321,427
Accretion of unrealized loss..... 19,232 19,232
Unrealized loss on held to
maturity investment securities
transferred to available for
sale investments securities in
accordance with the FASB
one-time reassessment (Note
3)............................. 502,175
Net change in unrealized loss on
available for sale investment
securities..................... 1,095,062
-------------
Total comprehensive income....... 3,435,721
Cash dividends declared, $0.10
per share...................... (351,388)
-------------------- -------- -------------
BALANCE AT DECEMBER 31, 1995......... 16,458,310
Net income....................... 2,710,732
Net change in unrealized loss on
available for sale investment
securities..................... 34,805
-------------
Total comprehensive income....... 2,745,537
Purchase of treasury stock....... $(19,147) (19,147)
Cash dividends declared, $0.10
per share...................... (351,388)
-------------------- -------- -------------
BALANCE AT DECEMBER 31, 1996......... (19,147 ) 18,833,312
Net income....................... 3,562,172
Net change in unrealized loss on
available for sale.............
Net change in unrealized loss on
available for sale investment
securities..................... (4,351)
-------------
Total comprehensive income....... 3,557,821
Sale of treasury stock........... 820 1,000
Issuance of common stock......... 3,000,000
Cash dividends declared, $0.15
per share...................... (574,536)
-------------------- -------- -------------
BALANCE AT DECEMBER 31, 1997......... (18,327 ) 24,817,597
Net income (unaudited)........... 2,057,244
Net change in unrealized loss on
available for sale investment
securities (unaudited)......... 2,010
-------------
Total comprehensive income
(unaudited).................... 2,059,244
Cash dividends declared, $0.10
per share (unaudited).......... (399,032)
-------------------- -------- -------------
BALANCE AT JUNE 30, 1998
(UNAUDITED)........................ $ $(18,327) $26,477,819
==================== ======== =============
|
See notes to consolidated financial statements.
PROSPERITY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED FOR THE YEARS ENDED
JUNE 30, DECEMBER 31,
---------------------------- -------------------------------------------
1998 1997 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 2,057,244 $ 1,660,826 $ 3,562,172 $ 2,710,732 $ 2,321,427
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization.... 488,080 380,816 832,689 624,004 532,652
Provision for credit losses...... 144,500 104,970 189,970 230,000 175,000
Gain on disposal of bank premises
and equipment.................. (362) (2,032)
Net amortization (accretion) of
premium/discount on
investments.................... 78,717 135,264 340,156 284,992 (135,615)
Loss on sale of investment
securities..................... 28,424
Loss on sale of real estate
acquired by foreclosure........ 1,888 2,383 2,332
Increase in accrued interest
receivable..................... (502,028) (319,486) (296,574) (124,910) (441,971)
(Increase) decrease in other
assets......................... (161,600) (284,499) (396,589) (222,481) 662,993
(Decrease) increase in accrued
interest payable and other
liabilities.................... 92,968 164,843 (80,190) (137,708) 369,338
------------- ------------- ------------- ------------- -------------
Total adjustments.............. 142,525 161,908 591,845 653,535 1,191,121
------------- ------------- ------------- ------------- -------------
Net cash provided by operating
activities.................. 2,199,769 1,822,734 4,154,017 3,364,267 3,512,548
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and
principal paydowns of held to
maturity in investment
securities....................... 26,923,917 9,582,598 35,405,320 23,334,343 9,999,261
Purchase of held to maturity
investment securities............ (11,813,919) (26,965,495) (66,765,304) (39,744,846) (10,693,295)
Proceeds from sales of available
for sale investment securities... 21,892,501
Proceeds from maturities and
principal paydowns of available
for sale investment securities... 17,584,015 8,789,159 14,205,712 12,061,185 9,324,042
Purchase of available for sale
investment securities............ (23,586,091) (1,995,313) (3,497,451) (25,941,913) (25,894,641)
Net increase in loans.............. (20,485,851) (7,643,171) (7,481,819) (14,189,016) (12,357,605)
Net proceeds from sale of real
estate acquired by foreclosure... 186,699 106,882
Purchase of bank premises and
equipment........................ (175,647) (100,025) (742,949) (363,769) (741,934)
Proceeds from sale of bank premises
and equipment.................... 40,000 3,642 2,430
Net decrease (increase) in
interest-bearing deposits in
financial institutions........... 99,000 198,000 198,000 (198,000)
Premium paid for Angleton branch... (1,990,114) (1,990,114)
Net liabilities acquired in
purchase of Angleton branch (net
of acquired cash of $565,247).... 28,646,876 28,646,876
Premium paid for Bay City branch... (1,750,000)
Net liabilities acquired in
purchase of Bay City branch (net
of acquired cash of $492,210).... 27,541,971
Premium paid for West Columbia
branch........................... (250,000)
------------- ------------- ------------- ------------- -------------
Net liabilities acquired in
purchase of West Columbia branch
(net of acquired cash of
$5,548,318)...................... 5,798,318
Net cash (used in) provided by
investing activities........ (5,866,258) 8,522,516 (1,835,030) (19,246,403) (8,362,359)
------------- ------------- ------------- ------------- -------------
|
(TABLE CONTINUED ON FOLLOWING PAGE)
FOR THE SIX MONTHS ENDED FOR THE YEARS ENDED
JUNE 30, DECEMBER 31,
---------------------------- -------------------------------------------
1998 1997 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing
deposits......................... $ 6,892,880 $ (2,000,318) $ 1,209,964 $ 5,211,914 $ 1,785,696
Net (decrease) increase in
interest-bearing deposits........ 3,529,721 (8,403,089) (9,860,910) 12,455,035 5,205,012
Proceeds from line of credit....... 3,266,666
Repayments of note payable......... (2,402,017) (3,266,666) (1,156,666) (758,334)
Proceeds from other borrowings..... 283,860,000 144,525,000 296,585,000
Repayments of other borrowings..... (286,660,000) (144,525,000) (293,785,000)
Proceeds from the issuance of
common stock..................... 2,938,175 3,000,000
Purchase of treasury stock......... (19,147)
Sale of treasury stock............. 1,000
Payments of cash dividends......... (399,032) (175,505) (574,536) (351,388) (351,388)
------------- ------------- ------------- ------------- -------------
Net cash (used) provided by
financing activities........ 7,223,569 (10,042,754) (6,691,148) 19,046,414 5,880,986
------------- ------------- ------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS................... $ 3,557,080 $ 302,496 $ (4,372,161) $ 3,164,278 $ 1,031,175
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD.......................... 17,372,158 21,744,319 21,744,319 18,580,041 17,548,866
------------- ------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD............................. $ 20,929,238 $ 22,046,815 $ 17,372,158 $ 21,744,319 $ 18,580,041
============= ============= ============= ============= =============
INCOME TAXES PAID.................... $ 834,011 $ 725,000 $ 1,681,354 $ 1,111,805 $ 742,787
============= ============= ============= ============= =============
INTEREST PAID........................ $ 4,698,473 $ 4,335,396 $ 9,039,489 $ 7,849,375 $ 6,757,099
============= ============= ============= ============= =============
|
NONCASH INVESTING ACTIVITIES:
The Company acquired certain real
estate through foreclosure of
collateral on loans totaling
approximately $189,082, $0, and
$94,000 during the year ended
December 31, 1997, 1996, and 1995,
respectively.
The Company transferred securities
classified as held to maturity with
a cost basis of $14,970,881 and a
carrying value of $14,210,010 to
available for sale during November
1995 in connection with the one
time reassessment permitted by the
FASB.
The Company transferred securities
classified as held to maturity with
a cost basis of $51,999,852 to
available for sale on January 1,
1995 in connection with the
adoption of SFAS No. 115.
See notes to consolidated financial statements.
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
NATURE OF OPERATIONS -- Prosperity Bancshares, Inc. ("Bancshares") and its subsidiaries, Prosperity Holdings, Inc. ("Holdings") and First Prosperity Bank (the "Bank") (collectively referred to as the "Company") provide retail and commercial banking services.
The Bank operates eleven branch banking offices in South Central Texas, with three locations in Houston and eight locations south, southeast and southwest of Houston in Angleton, Bay City, Cuero, Edna, El Campo, West Columbia and Victoria.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the accounts of Bancshares and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform to generally accepted accounting principles ("GAAP") and the prevailing practices within the banking industry. A summary of significant accounting and reporting policies is as follows:
INTERIM FINANCIAL INFORMATION -- Financial information as of June 30, 1998 and for the six months ended June 30, 1998 and 1997 is unaudited. Such information includes all adjustments (consisting of only normal recurring adjustments), that are necessary in the opinion of management, for a fair statement of the financial information in the interim periods. The results from operations for the periods ended June 30, 1998 is not necessarily indicative of the results for the full fiscal year.
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.
SECURITIES -- Investment securities held to maturity are carried at cost, adjusted for the amortization of premiums and the accretion of discounts. Management has the positive intent and the Company has the ability to hold these assets as long-term investments until their estimated maturities. Under certain circumstances (including the deterioration of the issuer's creditworthiness or a change in tax law or statutory or regulatory requirements), securities may be sold or transferred to another portfolio.
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 shareholders' equity until realized. Securities within the available for sale portfolio may be used as part of the Company's asset/liability strategy and may be sold in response to changes in interest risk, prepayment risk or other similar economic factors.
Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary would result in write-downs of the individual securities to their fair value. The related write-downs would be included in earnings as realized losses.
Premiums and discounts are amortized and accreted to operations using the level-yield method of accounting, adjusted for prepayments as applicable. The specific identification method of accounting is used to compute gains or losses on the sales of these assets. Interest earned on these assets is included in interest income.
LOANS -- Loans are stated at the principal amount outstanding, net of unearned discount and fees. Unearned discount relates principally to consumer installment loans. The related interest income for multipayment loans is recognized principally by the "sum of the digits" method which records interest in proportion to the declining outstanding balances of the loans; for single payment loans, such income is recognized using the straight-line method.
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards ("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 to all impaired loans, with the exception of groups of smaller-balance homogeneous loans that are collectively evaluated for impairment. A loan is defined as impaired by SFAS No. 114 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 difference of carrying value of loans and 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 Company'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. Adoption of these pronouncements, SFAS Nos. 114 and 118, had no impact on the Company's consolidated financial statements including the level of the allowance for credit losses.
OTHER REAL ESTATE -- Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at the lesser of the outstanding loan balance or the fair value at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in the net gain/loss and carrying costs of other real estate.
NONREFUNDABLE FEES AND COSTS ASSOCIATED WITH LENDING ACTIVITIES -- Loan origination fees are recognized over the life of the related loan as an adjustment to yield using the interest method.
Generally, loan commitment fees are deferred, except for certain retrospectively determined fees, and recognized as an adjustment of yield by the interest method over the related loan life or, if the commitment expires unexercised, recognized in income upon expiration of the commitment.
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 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.
Restructured loans are those loans on which concessions in terms have been granted because of a borrower's financial difficulty. Interest is generally accrued on such loans in accordance with the new terms.
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 when the loss actually occurs or when a
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
determination is made that such a loss is probable. Recoveries are credited to the allowance at the time of recovery.
Throughout the year, management estimates the probable level of 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, probable 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 value of these assets because of economic, operating or other conditions beyond the Company's control.
Estimates of credit losses involve an exercise of judgment. While it is possible that in the short term the Company 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 probable losses that exist in the current loan portfolio.
PREMISES AND EQUIPMENT -- Premises and equipment are carried at cost less accumulated depreciation. Depreciation expense is computed principally using the straight-line method over the estimated useful lives of the assets which range from three to thirty years.
AMORTIZATION OF GOODWILL -- Goodwill is amortized using the straight-line method over a period of 15 to 25 years. Goodwill is periodically assessed for impairment.
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 tax assets and liabilities are recognized for the estimated tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
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.
STOCK-BASED COMPENSATION -- The Company accounts for its employee stock options using the intrinsic value-based method and makes pro forma disclosures of net income and earnings per share using the fair value-based method (see Note 14).
STATEMENTS OF CASH FLOWS -- For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks as well as federal funds sold that mature in three days or less.
RECLASSIFICATIONS -- Certain reclassifications have been made to 1997, 1996 and 1995 balances to conform to the current year presentation. All reclassifications have been applied consistently for the periods presented.
EARNINGS PER SHARE -- SFAS No. 128, "Earnings per share," requires presentation of basic and diluted earnings per share. Basic earnings per share has been computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Net income per common
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
share for all periods presented has been calculated in accordance with SFAS 128. Outstanding stock options issued by the Company represent the only dilutive effect reflected in diluted weighted average shares.
The following table illustrates the computation of basic and diluted earnings per share after effect of stock split (Note 22):
JUNE 30, DECEMBER 31,
------------------------------------- -------------------------------------------------
1998 1997 1997 1996 1995
----------------- ----------------- ----------------- ----------------- ---------
PER PER PER PER
SHARE SHARE SHARE SHARE
AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
--------- ------ --------- ------ --------- ------ --------- ------ ---------
Net income........................... $2,057,244 $1,660,826 $3,562,172 $2,710,732 $2,321,427
Basic --
Weighted average shares
outstanding.................... 3,990,308 $0.52 3,564,216 $0.47 3,770,880 $0.94 3,513,260 $0.77 3,513,884
====== ====== ====== ======
Diluted:
Weighted average shares
outstanding.................... 3,990,308 3,564,216 3,777,880 3,513,260 3,513,884
Effect of dilutive securities --
options........................ 90,208 84,248 85,756 46,472 9,156
--------- --------- --------- --------- ---------
Total............................ $4,080,516 $0.50 $3,648,464 $0.46 $3,863,636 $0.92 $3,559,732 $0.76 $3,523,040
========= ====== ========= ====== ========= ====== ========= ====== =========
|
Net income...........................
Basic --
Weighted average shares
outstanding.................... $0.66
======
Diluted:
Weighted average shares
outstanding....................
Effect of dilutive securities --
options........................
Total............................ $0.66
======
|
RECENTLY ISSUED ACCOUNTING STANDARDS -- Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" establishes accounting and reporting standards for derivative instruments and requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. This statement is effective for periods beginning after June 15, 1999. Management believes the implementation of this pronouncement will not have a material effect on the Company's financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" establishes new standards for public companies to report information about their operating segments, products and services, geographic areas and major customers. The statement is effective for financial statements issued for periods beginning after December 15, 1997. Management has not yet determined what its reporting segments will be under SFAS No. 131.
2. ACQUISITION OF BRANCHES
ANGLETON BRANCH -- During March 1997, the Company entered into a purchase and assumption agreement with another bank to purchase certain assets and to assume certain deposit accounts and related accrued interest payable of a branch located in Angleton, Texas. Effective June 20, 1997, the Company purchased approximately $723,000 in real property and fixed assets and assumed deposits, including unpaid accrued interest, totaling approximately $29,370,000.
In connection with the purchase, the Company paid a cash premium of approximately $1,990,000. This premium was recorded as goodwill and will be amortized on a straight-line basis over 15 years. The acquisition was partially financed with proceeds from the common stock issuance (see Note 17).
The acquisition was accounted for using the purchase method of accounting. Accordingly, the assets and liabilities of the acquired branch were recorded at their fair values at the acquisition date.
BAY CITY BRANCH -- During March 1996, the Company entered into a purchase and assumption agreement with another bank to purchase certain assets and to assume certain deposit accounts and related accrued interest payable of a branch located in Bay City, Texas. Effective June 21, 1996, the Company purchased approximately $10,600,000 in loans and $680,000 in real property and fixed assets and assumed deposits, including unpaid accrued interest, totaling approximately $38,824,000.
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the purchase, the Company paid a cash premium of $1,750,000. This premium was recorded as goodwill and will be amortized on a straight-line basis over 15 years. The acquisition was financed with proceeds from a note payable to an unaffiliated bank (see Note 10).
The acquisition was accounted for using the purchase method of accounting. Accordingly, the assets and liabilities of the acquired branch were recorded at their fair values at the acquisition date.
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 includes amounts so restricted of approximately $2,980,000, $5,849,000 and $5,300,000 at June 30, 1998 (unaudited) and December 31, 1997 and 1996, respectively.
4. INVESTMENT SECURITIES
The amortized cost and fair value of investments in debt securities are as
follows:
JUNE 30, 1998 (UNAUDITED)
-----------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
--------------- ---------- ---------- --------------- ---------------
AVAILABLE FOR SALE
U.S. Treasury securities and
obligations of U.S. government
agencies........................... $ 27,583,488 $ 27,053 $ 19,700 $ 27,590,823 $ 27,590,823
States and political subdivisions.... 1,263,712 75,612 1,339,324 1,339,324
Mortgage-backed securities........... 15,931,900 40,558 158,454 15,815,004 15,814,004
--------------- ---------- ---------- --------------- ---------------
Total................................ $ 44,779,100 $ 143,205 $ 178,154 $ 44,744,151 $ 44,744,151
=============== ========== ========== =============== ===============
HELD TO MATURITY
U.S. Treasury securities and
obligations of U.S. government
agencies........................... $ 59,467,478 $ 292,615 $ 21,904 $ 59,738,189 $ 59,467,478
States and political subdivisions.... 12,514,684 72,228 39,260 12,547,652 12,514,684
Collateralized mortgage
obligations........................ 5,632,377 12,079 5,620,298 5,632,377
Mortgage-backed securities........... 36,326,565 66,440 193,876 36,199,129 36,326,565
--------------- ---------- ---------- --------------- ---------------
Total................................ $ 113,941,104 $ 431,283 $ 267,119 $ 114,105,268 $ 113,941,104
=============== ========== ========== =============== ===============
|
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
-----------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
--------------- ---------- ---------- --------------- ---------------
AVAILABLE FOR SALE
U.S. Treasury securities and
obligations of U.S. government
agencies........................... $ 19,988,186 $ 56,500 $ 20,044,686 $ 20,044,686
States and political subdivisions.... 1,363,584 101,972 1,465,556 1,465,556
Mortgage-backed securities........... 17,298,619 61,928 $ 258,394 17,102,153 17,102,153
--------------- ---------- ---------- --------------- ---------------
Total................................ $ 38,650,389 $ 220,400 $ 258,394 $ 38,612,395 $ 38,612,395
=============== ========== ========== =============== ===============
HELD TO MATURITY
U.S. Treasury securities and
obligations of U.S. government
agencies........................... $ 63,171,223 $ 224,781 $ 20,836 $ 63,395,168 $ 63,171,223
States and political subdivisions.... 10,464,979 141,304 754 10,605,529 10,464,979
Collateralized mortgage
obligations........................ 8,748,951 18,729 14,852 8,752,828 8,748,951
Mortgage-backed securities........... 46,871,300 372,485 222,573 47,021,212 46,871,300
--------------- ---------- ---------- --------------- ---------------
Total................................ $ 129,256,453 $ 777,299 $ 259,015 $ 129,774,737 $ 129,256,453
=============== ========== ========== =============== ===============
DECEMBER 31, 1996
---------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
----------- ---------- ---------- ----------- -----------
AVAILABLE FOR SALE
U.S. Treasury securities and
obligations of U.S. government
agencies........................... $29,979,702 $ 127,534 $30,107,236 $30,107,236
States and political subdivisions.... 1,441,325 105,576 $ 345 1,546,556 1,546,556
Mortgage-backed securities........... 17,951,898 42,808 306,975 17,687,731 17,687,731
----------- ---------- ---------- ----------- -----------
Total................................ $49,372,925 $ 275,918 $ 307,320 $49,341,523 $49,341,523
=========== ========== ========== =========== ===========
HELD TO MATURITY
U.S. Treasury securities and
obligations of U.S. government
agencies........................... $30,849,828 $ 120,934 $ 121,381 $30,849,381 $30,849,828
States and political subdivisions.... 11,601,438 172,603 17,934 11,756,107 11,601,438
Collateral mortgage obligations...... 14,340,845 397 103,724 14,237,518 14,340,845
Mortgage-backed securities........... 41,430,241 90,859 704,905 40,816,195 41,430,241
----------- ---------- ---------- ----------- -----------
Total................................ $98,222,352 $ 384,793 $ 947,944 $97,659,201 $98,222,352
=========== ========== ========== =========== ===========
|
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and fair value of debt securities at December 31, 1997, 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.
HELD TO MATURITY AVAILABLE FOR SALE
---------------------------- --------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------ ------------ ----------- -----------
Due in one year or less.............. $ 14,205,605 $ 14,222,315 $18,090,971 $18,138,915
Due after one year through five
years.............................. 55,875,860 58,187,772 1,997,215 2,005,924
Due after five years through ten
years.............................. 3,554,737 1,590,610 891,197 957,512
Due after ten years.................. 372,387 407,891
------------ ------------ ----------- -----------
Subtotal............................. 73,636,202 74,000,697 21,351,770 21,510,242
Mortgage-backed securities and
collateralized mortgage
obligations........................ 55,620,251 55,774,040 17,298,619 17,102,153
------------ ------------ ----------- -----------
Total................................ $129,256,453 $129,774,737 $38,650,389 $38,612,395
============ ============ =========== ===========
|
There were no sales of held to maturity or available for sale investments in debt securities during 1998 (unaudited), 1997 and 1996. In 1995, there were no sales of held to maturity investments in debt securities. During 1995, proceeds from sales of available for sale investments in debt securities were $21,892,501. Gross gains of $140,330 and gross losses of $168,754 for 1995, were realized on those sales.
The Company does not own securities of any one issuer (other than the U.S. government and its agencies) for which aggregate adjusted cost exceeds 10% of the consolidated shareholders' equity at June 30, 1998 (unaudited) and December 31, 1997. Securities with amortized costs of approximately $58,104,387, $61,303,319 and $66,267,494 and a fair value of approximately $58,032,496, $61,146,428 and $65,456,055 at June 30, 1998 (unaudited) and December 31, 1997 and 1996, respectively, were pledged to secure public 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 Southeast Texas and is classified by major type as follows
(rounded):
DECEMBER 31,
JUNE 30, --------------------------------
1998 1997 1996
------------ --------------- ---------------
(UNAUDITED)
Commercial and industrial............ $ 12,297,000 $ 11,611,000 $ 10,633,000
Real estate:
Construction and land
development..................... 9,439,000 6,453,000 5,021,000
I-4 family residential............. 69,328,000 53,625,000 49,845,000
Commercial mortgages............... 16,201,000 16,277,000 14,376,000
Farmland........................... 5,502,000 5,804,000 5,468,000
Multi-family residential........... 1,192,000 937,000 1,068,000
Agriculture.......................... 8,444,000 6,359,000 5,686,000
Consumer............................. 19,502,000 20,498,000 22,561,000
------------ --------------- ---------------
Total................................ 141,905,000 121,564,000 114,658,000
Less unearned discount............... 825,000 986,000 1,276,000
------------ --------------- ---------------
Total................................ $141,080,000 $ 120,578,000 $ 113,382,000
============ =============== ===============
|
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As discussed in Note 1, the Bank adopted SFAS No. 114 and 118 effective January 1, 1995. Adoption of these statements had no impact on the Company's financial statements including the level of the allowance for credit losses. Instead, it resulted only in a reallocation of the existing allowance for credit losses.
At June 30, 1998 (unaudited) and December 31, 1997 and 1996, there was no recorded investment in impaired loans under SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." At December 31, 1995, the recorded investment in impaired loans under SFAS No. 114 was approximately $23,000 and required an allowance for credit losses of approximately $5,000. The average recorded investment in impaired loans for the year ended December 31, 1995 was approximately $19,000. The Company recognized interest revenue on these impaired loans of approximately $3,000 in 1995.
As of June 30, 1998 (unaudited) and December 31, 1997 and 1996, loans outstanding to directors, officers and their affiliates were approximately $3,036,000, $2,432,000 and $3,210,000, respectively. In the opinion of management, all transactions entered into between the Company and such related parties have been, and are, in the ordinary course of business, made on the same terms and conditions as similar transactions with unaffiliated persons.
An analysis of activity with respect to these related-party loans is as follows:
YEAR ENDED
DECEMBER 31,
SIX MONTHS ENDED ------------------------------
JUNE 30, 1998 1997 1996
---------------- -------------- --------------
(UNAUDITED)
Beginning balance.................... $2,432,000 $ 3,210,000 $ 3,046,000
New loans and reclassified related
loans.............................. 1,476,000 1,045,000 1,262,000
Repayments........................... (872,000) (1,823,000) (1,098,000)
---------------- -------------- --------------
Ending balance....................... $3,036,000 $ 2,432,000 $ 3,210,000
================ ============== ==============
|
6. NONPERFORMING LOANS AND PAST DUE LOANS
The Company had no nonaccrual, 90 days or more past due, or restructured loans at June 30, 1998 (unaudited), December 31, 1997 or 1996.
7. ALLOWANCE FOR CREDIT LOSSES
An analysis of activity in the allowance for credit losses is as follows:
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------------ ------------------------------------
1998 1997 1997 1996 1995
------------ ---------- ------------ ---------- ----------
(UNAUDITED)
Balance at beginning of year......... $ 1,015,576 $ 922,833 $ 922,833 $ 752,972 $ 588,321
Addition -- provision charged to
operations.................... 144,500 104,970 189,970 230,000 175,000
Net charge-offs:
Loans charged off.......... (54,777) (87,226) (130,086) (73,360) (32,206)
Loan recoveries............ 8,414 15,567 32,859 13,221 21,857
------------ ---------- ------------ ---------- ----------
Total net charge-offs................ (46,363) (71,659) (97,227) (60,139) (10,349)
------------ ---------- ------------ ---------- ----------
Balance at end of period............. $ 1,113,713 $ 956,144 $ 1,015,576 $ 922,833 $ 752,972
============ ========== ============ ========== ==========
|
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
YEAR ENDED
DECEMBER 31,
JUNE 30, --------------------------
1998 1997 1996
----------- ------------ ------------
(UNAUDITED)
Land................................. $ 934,559 $ 934,559 $ 624,858
Buildings............................ 5,180,418 4,766,007 4,322,046
Furniture, fixtures and equipment.... 2,258,240 2,164,222 1,868,563
Construction in progress............. 16,439 388,269 12,719
----------- ------------ ------------
Total................................ 8,389,656 8,253,057 6,828,186
Less accumulated depreciation........ 2,937,801 2,723,393 2,328,040
----------- ------------ ------------
Premises and equipment, net.......... $ 5,451,855 $ 5,529,664 $ 4,500,146
=========== ============ ============
|
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 June 30, 1998 and December 31, 1997 and 1996 were as follows:
DECEMBER 31,
JUNE 30, ------------------------------
1998 1997 1996
------------ -------------- --------------
(UNAUDITED)
Three months or less................. $ 11,888,000 $ 1,567,000 $ 12,570,000
Greater than three through six
months............................. 5,734,000 3,370,000 8,320,000
Greater than six through twelve
months............................. 11,130,000 11,992,000 5,669,000
Thereafter........................... 3,199,000 6,226,000 3,504,000
------------ -------------- --------------
Total................................ $ 31,951,000 $ 23,155,000 $ 30,063,000
============ ============== ==============
|
Interest expense for certificates of deposit in excess of $100,000 was approximately $593,000, $1,264,000, $1,291,000, and $1,247,000 for the periods ended June 30, 1998 (unaudited), December 31, 1997, 1996, and 1995, respectively.
The Company has no brokered deposits and there are no major concentrations of deposits.
10. NOTE PAYABLE AND OTHER BORROWINGS
NOTE PAYABLE -- During December 1997, Bancshares entered into an agreement with a bank to borrow up to $8,000,000 under a reducing, revolving line of credit (the "Line"). The purpose of the Line is to provide funding for potential acquisitions in the future. The maximum amount available under the Line is reduced by $1,142,857 each year beginning December 1998 with all amounts due and payable on December 31, 2004. The Line bears interest, payable quarterly, at the Federal Funds Rate plus 2.75%. The Line is collateralized by 100% of the issued and outstanding common shares of Holdings and the Bank. At June 30, 1998 (unaudited) and December 31, 1997, Bancshares had no outstanding borrowings under the Line. During 1997, Bancshares paid off the outstanding balance under a similar agreement (the "Old Line") with a bank. At December 31, 1996, borrowings under the Old Line totaled $3,266,666.
OTHER BORROWINGS -- At December 31, 1997, Federal Home Loan Bank ("FHLB") advances totaled $2,800,000 with a floating interest rate of 6.9%. There were no advances at June 30, 1998 (unaudited) or
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1996. The FHLB line of credit agreement matures May 14, 1999. The advances under the FHLB line of credit are secured by a blanket pledge of the Bank's one-to-four family mortgages.
11. INTEREST RATE RISK
The Company is principally engaged in providing real estate, consumer and commercial loans, with interest rates that are both fixed and variable. These loans are primarily funded through short-term demand deposits and longer-term certificates of deposit with variable and fixed rates. The fixed real estate loans are more sensitive to interest rate risk because of their fixed rates and longer maturities.
12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, the Company is a party to various financial instruments with off-balance-sheet risk 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. These 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 these instruments reflect the extent of the Company's involvement in particular classes of financial instruments.
The Company'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 Company 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 Company:
DECEMBER 31,
JUNE 30, ------------------------------
1998 1997 1996
------------ -------------- --------------
(UNAUDITED)
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit.... $ 10,348,000 $ 11,856,158 $ 11,660,000
Standby letters of credit....... 279,000 315,200 45,000
|
At June 30, 1998 (unaudited), approximately $3,900,000 of commitments to extend credit have fixed rates ranging from 6.60% to 11.50%. 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.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
The Company evaluates customer creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by the Company upon extension of credit, is based on management's credit evaluation of the customer.
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. INCOME TAXES
The components of the provision for federal income taxes are as follows:
1997 1996 1995
------------ ------------ ----------
Current.............................. $ 1,634,000 $ 1,340,000 $ 686,000
Deferred............................. (48,000) (100,000) 95,000
------------ ------------ ----------
Total................................ $ 1,586,000 $ 1,240,000 $ 781,000
============ ============ ==========
|
The provision for federal income taxes differs from the amount computed by applying the federal income tax statutory rate on income as follows:
1997 1996 1995
------------ ------------ ------------
Taxes calculated at statutory rate... $ 1,750,000 $ 1,343,000 $ 1,055,000
Increase (decrease) resulting from:
Tax-exempt interest............. (251,000) (258,000) (295,000)
Amortization of goodwill........ 57,000 57,000 50,000
Other, net...................... 30,000 98,000 (29,000)
------------ ------------ ------------
Total................................ $ 1,586,000 $ 1,240,000 $ 781,000
============ ============ ============
|
Deferred tax assets and liabilities are as follows:
1997 1996
---------- ----------
Deferred tax assets --
Allowance for credit losses..... $ 225,000 $ 194,000
---------- ----------
Total deferred tax assets............ 225,000 194,000
---------- ----------
Deferred tax liabilities:
Accretion on investments........ $ 189,000 $ 162,000
Bank premises and equipment..... 24,000 71,000
Unrealized loss on available for
sale investment securities.... 13,000 11,000
Other........................... 7,000 4,000
---------- ----------
Total deferred tax liabilities....... 233,000 248,000
---------- ----------
Net deferred tax liabilities......... $ (8,000) $ (54,000)
========== ==========
|
14. STOCK INCENTIVE PROGRAM
During 1995 the Company's Board of Directors approved a stock option plan (the "Plan") for executive officers and key employees to purchase common stock of Bancshares. On May 31, 1995, the Company granted 260,000 options, after stock split, (see Note 22) which vest over a ten-year period beginning on the date of grant. Fifty percent of the options vest after the five year period and ten percent vest in each year thereafter. The options may not be exercised until the optionee has completed five years of employment after the date of grant. The options were granted at an average exercise price of $4.40 (after stock split). Compensation expense was not recognized for the stock options because the options had an
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exercise price approximating the fair value of Bancshares' common stock at the
date of grant. The maximum number of options available for grant under the Plan
is 340,000 (after stock split).
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
JUNE 30, 1998 1997 1996 1995
---------------------- ---------------------- ---------------------- ---------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE NUMBER
OF EXERCISE OF EXERCISE OF EXERCISE OF
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS
--------- ---------- --------- ---------- --------- ---------- ---------
(UNAUDITED)
Options outstanding, beginning of
period............................. 260,000 $ 4.40 260,000 $ 4.40 260,000 $ 4.40
Options granted...................... 60,000 6.25 260,000
--------- ---------- --------- ---------- --------- ---------- ---------
Options outstanding, end of period... 320,000 $ 4.75 260,000 $ 4.40 260,000 $ 4.40 260,000
========= ========== ========= ========== ========= ========== =========
|
Options outstanding, beginning of
period.............................
Options granted...................... $ 4.40
----------
Options outstanding, end of period... $ 4.40
==========
|
There were no options granted, exercised, forfeited, or expired during 1997 and 1996. At June 30, 1998 (unaudited) and December 31, 1997 and 1996, there were no options that were exercisable under the Plan. On February 10, 1998, the Company granted 60,000 options under the Plan. The options were granted at an exercise price of $6.25. Compensation expense was not recorded for the stock options because the exercise price approximated the fair value of common stock at the date of grant.
The weighted-average grant date fair value of the stock options granted in 1995 was $.39. The weighted-average remaining contractual life of options outstanding at December 31, 1997 was 7.42 years. The fair value of each stock option was estimated using an option-pricing model with the following assumptions used: risk-free interest rate of 6.49%; dividend yield of 4.54%; and an expected life of 6.5 years.
If compensation expense had been recorded based on the fair value at the grant date for awards consistent with SFAS No. 123, the Company's net income would have been $2,052,660, $3,555,480, $2,704,040 and $2,317,522 and earnings per share would have been $.53, $.94, $.77 and $.66 for the six months ended June 30, 1998 (unaudited) and the years ended December 31, 1997, 1996 and 1995, respectively.
15. PROFIT SHARING PLAN
The Company has adopted a profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code whereby participants may contribute up to 15% of their compensation. Matching contributions are made at the discretion of the Company. Such matching contributions were approximately $48,000, $38,000, $87,000, $72,000 and $56,000 for the six months ended June 30, 1998 (unaudited) and 1997 (unaudited) and the years ended December 31, 1997, 1996, and 1995, respectively.
16. COMMITMENTS AND CONTINGENCIES
LEASES -- A summary of noncancelable future operating lease commitments as of December 31, 1997 follows:
1998................................. $ 189,606
1999................................. 102,214
2000................................. 50,821
2001................................. 50,821
2002................................. 50,821
----------
Total................................ $ 444,283
==========
|
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
It is expected that in the normal course of business, expiring leases will be renewed or replaced by leases on other property or equipment.
Rent expense under all noncancelable operating lease obligations aggregated approximately $191,000 for the year ended December 31, 1997 and $180,000 for the years ended December 31, 1996 and 1995.
LITIGATION -- Various lawsuits are pending against the Company. Management, after reviewing these lawsuits with outside counsel, considers that the aggregate liabilities, if any, will not be material to the consolidated financial statements.
17. SHAREHOLDERS' EQUITY
During 1997, the Company sold 480,000 shares of common stock at $6.25 per share, after stock split, (see Note 22), which approximated the book value of the Company at the time of the sale. Proceeds to the Company totaling $3,000,000 were used to fund the acquisition of a branch (see Note 2) and to repay borrowings under a line of credit arrangement with a bank (Note 10).
Dividends paid by Bancshares and the Bank are subject to restrictions by certain regulatory agencies. There was an aggregate of approximately $7,300,000 and $4,835,000 available for payment of dividends by Bancshares and by the Bank to Bancshares, respectively, at December 31, 1997 under these restrictions. Dividends paid by Bancshares during the years ended December 31, 1997 and 1996 were $574,536 and $351,388, respectively. Dividends paid by the Bank to Bancshares during the years ended December 31, 1997 and 1996 were $2,922,150 and $661,000, respectively.
18. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Any institution that fails to meet its minimum capital requirements is subject to actions by regulators that could have a direct material effect on the Company's and the Bank's financial statements. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines based on the Bank's assets, liabilities and certain off- balance-sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and the Bank's classification under the regulatory framework for prompt corrective action are also subject to qualitative judgments by the regulators about the components, risk weightings and other factors.
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 June 30, 1998 and December 31, 1997, that the Company and the Bank met all capital adequacy requirements to which they are subject.
At December 31, 1997, the most recent notification from the State of Texas Department of Banking 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 have been no conditions or events since that notification which management believes have changed the Bank's category.
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the Company's and the Bank's capital ratios at June 30, 1998 (unaudited), December 31, 1997 and 1996:
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------------- ---------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------- ----- -------------- ----- ----------- -----
CONSOLIDATED:
AS OF JUNE 30, 1998 (UNAUDITED):
Total Capital (to Risk Weighted
Assets)........................ $ 21,974,135 15.08% $ 11,656,560 8.0% N/A N/A
Tier I Capital (to Risk Weighted
Assets)........................ 20,860,423 14.32% 5,828,280 4.0% N/A N/A
Tier I Capital (to Average
Assets)........................ 20,860,423 6.25% 10,017,360 3.0% N/A N/A
AS OF DECEMBER 31, 1997:
Total Capital (to Risk Weighted
Assets)........................ $ 20,233,587 15.73% $ 10,292,800 8.0% N/A N/A
Tier I Capital (to Risk Weighted
Assets)........................ 19,217,587 14.94% 5,146,400 4.0% N/A N/A
Tier I Capital (to Average
Assets)........................ 19,217,587 6.30% 9,150,600 3.0% N/A N/A
AS OF DECEMBER 31, 1996:
Total Capital (to Risk Weighted
Assets)........................ $ 15,756,054 13.89% $ 9,076,240 8.0% N/A N/A
Tier I Capital (to Risk Weighted
Assets)........................ 14,878,054 13.11% 4,538,120 4.0% N/A N/A
Tier I Capital (to Average
Assets)........................ 14,878,054 5.45% 8,186,910 3.0% N/A N/A
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------------- ---------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------ ------ -------------- ----- ----------- -----
BANK ONLY:
AS OF JUNE 30, 1998 (UNAUDITED):
Total Capital (to Risk Weighted
Assets)........................ $ 21,837,916 14.99% $ 11,656,080 8.0% $14,570,100 10.0%
Tier I Capital (to Risk Weighted
Assets)........................ 20,724,204 14.22% 5,828,040 4.0% 8,742,060 6.0%
Tier I Capital (to Average
Assets)........................ 20,724,204 6.21% 10,016,160 3.0% 16,693,600 5.0%
AS OF DECEMBER 31, 1997:
Total Capital (to Risk Weighted
Assets)........................ $ 20,056,438 15.59% $ 10,291,920 8.0% $12,864,900 10.0%
Tier I Capital (to Risk Weighted
Assets)........................ 19,040,438 14.80% 5,145,960 4.0% 7,718,940 6.0%
Tier I Capital (to Average
Assets)........................ 19,040,438 6.13% 9,319,920 3.0% 15,533,200 5.0%
AS OF DECEMBER 31, 1996:
Total Capital (to Risk Weighted
Assets)........................ $ 18,827,802 16.60% $ 9,075,840 8.0% $11,344,800 10.0%
Tier I Capital (to Risk Weighted
Assets)........................ 17,949,802 15.82% 4,537,920 4.0% 6,806,880 6.0%
Tier I Capital (to Average
Assets)........................ 17,949,802 6.48% 8,306,760 3.0% 13,844,600 5.0%
|
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INFORMATION
Disclosures of the estimated fair value amounts of financial instruments 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 the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair value amounts.
The following methods and assumptions were used to estimate the fair value 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.
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 -- For certain homogeneous categories of loans (such as some residential mortgages and other consumer loans), fair value is estimated by discounting the future cash flows using the risk-free Treasury rate for the applicable maturity, adjusted for servicing and credit risk. The carrying value of variable rate loans approximates fair value because the loans reprice frequently to current market rates.
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.
LONG-TERM DEBT AND OTHER BORROWINGS -- Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS -- The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and the present creditworthiness of the counterparties.
The estimated fair values of the Company's financial instruments are as follows (in thousands):
DECEMBER 31,
----------------------------------------------
1997 1996
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
Financial assets:
Cash and cash equivalents....... $ 17,372 $ 17,372 $ 21,744 $ 21,744
Interest-bearing deposits in
financial institutions........ 198 198 396 396
Held to maturity securities..... 129,256 129,775 98,222 97,659
Available for sale securities... 38,612 38,612 49,342 49,342
Loans........................... 120,578 129,601 113,382 117,976
Less allowance for loan
losses........................ (1,016) (1,016) (923) (923)
---------- ---------- ---------- ----------
Total................................ $ 305,000 $ 314,542 $ 282,163 $ 286,194
========== ========== ========== ==========
Financial liabilities:
Deposits........................ $ 291,517 $ 291,779 $ 270,866 $ 271,274
Note payable.................... 3,267 3,267
Other borrowing................. 2,800 2,800
---------- ---------- ---------- ----------
Total................................ $ 294,317 $ 294,579 $ 274,133 $ 274,541
========== ========== ========== ==========
|
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The differences in fair value and carrying value of commitments to extend credit and standby letters of credit were not material at December 31, 1997 and 1996.
The fair value estimates presented herein are based on pertinent information available to management as of the dates indicated. 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 those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
20. COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income" requires that all components of comprehensive income and total comprehensive income be reported on one of the following: (1) the statement of income, (2) the statement of stockholders' equity, or (3) a separate statement of comprehensive income. Comprehensive income is comprised of net income and all changes to stockholders' equity, except those due to investments by owners (changes in paid-in capital) and distributions to owners (dividends). The Company adopted this statement effective January 1, 1998 and has elected to report comprehensive income in the consolidated statements of stockholders' equity.
Other comprehensive income consists of unrealized gains and losses on available for sale securities. For the six months ended June 30, 1998, the change in net unrealized loss on available for sale securities is reported in the consolidated statement of stockholders' equity.
21. PARENT COMPANY ONLY FINANCIAL STATEMENTS
PROSPERITY BANCSHARES, INC.
(PARENT COMPANY ONLY)
BALANCE SHEETS
JUNE 30, 1998 1997 1996
------------- -------------- --------------
(UNAUDITED)
ASSETS
Cash................................. $ 111,410 $ 153,610 $ 111,848
Investment in subsidiaries........... 20,747,224 19,065,984 17,988,765
Goodwill, net........................ 5,612,701 5,592,791 3,995,130
Other assets......................... 12,163 11,008 5,455
------------- -------------- --------------
TOTAL................................ $ 26,483,498 $ 24,823,393 $ 22,101,198
============= ============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Note payable.................... $ 3,266,666
Accrued interest payable and
other liabilities............. $ 5,679 $ 5,796 1,220
------------- -------------- --------------
Total liabilities.......... 5,679 5,796 3,267,886
------------- -------------- --------------
SHAREHOLDERS' EQUITY:
Common Stock.................... 3,993,884 3,993,884 3,513,884
Capital surplus................. 4,817,782 4,817,782 2,797,607
Retained earnings............... 17,707,546 16,049,334 13,061,698
Unrealized losses on available
for sale investment
securities, net of tax........ (23,066) (25,076) (20,725)
Less treasury stock, at cost
3,576 (unaudited), 3,576 and
3,736 shares at June 30, 1998,
December 31, 1997 and 1996,
respectively)................. (18,327) (18,327) (19,147)
------------- -------------- --------------
Total shareholders'
equity.................. 26,477,819 24,817,597 18,833,312
------------- -------------- --------------
TOTAL................................ $ 26,483,498 $ 24,823,393 $ 22,101,198
============= ============== ==============
|
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROSPERITY BANCSHARES, INC.
(PARENT COMPANY ONLY)
STATEMENTS OF INCOME
FOR THE SIX MONTHS
ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
-------------------------- ----------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
OPERATING INCOME --
Dividends from subsidiaries..... $ 595,000 $ 2,039,000 $ 2,922,150 $ 661,000 $ 1,352,777
OPERATING EXPENSE:
Interest expense................ 1,414 91,809 119,682 202,649 153,152
Amortization of goodwill........ 230,090 158,197 392,453 248,339 199,728
Other expenses.................. 56,947 28,688 66,416 48,987 31,135
------------ ------------ ------------ ------------ ------------
Total operating expense.... 288,451 278,694 578,551 499,975 384,015
------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAX BENEFIT AND
EQUITY IN UNDISTRIBUTED EARNINGS OF
SUBSIDIARIES....................... 306,549 1,760,306 2,343,599 161,025 968,762
FEDERAL INCOME TAX BENEFIT........... 71,465 41,323 137,003 85,555 62,658
------------ ------------ ------------ ------------ ------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES........... 378,014 1,801,629 2,480,602 246,580 1,031,420
EQUITY IN UNDISTRIBUTED EARNINGS OF
SUBSIDIARIES 1,679,230 (140,803) 1,081,570 2,464,152 1,290,007
------------ ------------ ------------ ------------ ------------
NET INCOME........................... $ 2,057,244 $ 1,660,826 $ 3,562,172 $ 2,710,732 $ 2,321,427
============ ============ ============ ============ ============
|
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROSPERITY BANCSHARES, INC.
(PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
JUNE 20, FOR THE YEARS ENDED DECEMBER 31,
-------------------------- ----------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 2,057,244 $ 1,660,826 $ 3,562,172 $ 2,710,732 $ 2,321,427
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed earnings
of subsidiaries................ (1,679,230) 140,803 (1,081,570) (2,464,152) (1,290,007)
Decrease in due to subsidiary.... (157,777)
Amortization of goodwill......... 230,090 158,197 392,453 248,339 199,728
(Increase) decrease in other
assets......................... (1,155) 8,442 (5,553) (1,570) 1,601
Increase (decrease) in other
liabilities.................... (117) 36,694 4,576 (33,577) 34,791
------------ ------------ ------------ ------------ ------------
Total adjustments........... (1,450,412) 344,136 (690,094) (2,250,960) (1,211,664)
------------ ------------ ------------ ------------ ------------
Net cash flows provided by
operating activities...... 606,832 2,004,962 2,872,078 459,772 1,109,763
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Premium paid for branch
acquisition...................... (250,000) (1,990,114) (1,990,114) (1,750,000)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable......... (2,402,017) (3,266,666) (1,516,666) (758,334)
Proceeds from line of credit....... 3,266,666
Issuance of common stock........... 2,938,175 3,000,000
Payments of cash dividends......... (399,032) (175,505) (574,536) (351,388) (351,388)
Sale (purchase) of treasury
stock............................ 1,000 (19,147)
------------ ------------ ------------ ------------ ------------
Net cash flows (used in)
provided by financing
activities................ (399,032) 360,653 (840,202) 1,379,465 (1,109,722)
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (42,200) 375,501 41,762 89,237 41
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD.......................... 153,610 111,848 111,848 22,611 22,570
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD............................. $ 111,410 $ 487,349 $ 153,610 $ 111,848 $ 22,611
============ ============ ============ ============ ============
|
PROSPERITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
22. PENDING ACQUISITION
During November 1997, the Company entered into a purchase and assumption agreement with another bank to purchase certain assets and to assume certain deposit accounts and related accrued interest payable of a branch located in West Columbia, Texas. This transaction, which has met regulatory approval, is expected to be completed on or about February 27, 1998. At that time, the Company expects to purchase loans totaling approximately $120,000 and assume deposit liabilities of approximately $7,500,000. The Company expects to pay a cash premium totaling approximately $250,000 for the transaction.
23. SUBSEQUENT EVENTS
On September 10, 1998, the Company effected a four for one common stock split in the form of a common stock dividend (the "Stock Split"). All share and per share information for common stock has been restated to reflect the Stock Split. In September 1998, the Company increased the number of authorized shares of common stock from 1,000,000 to 50,000,000 and authorized 20,000,000 shares of preferred stock with a par value of $1.
In June 1998, the Company entered into a merger agreement with a bank located in East Bernard, Texas. This transaction, which has met regulatory approval, is expected to be completed on or about October 1, 1998.
On February 10, 1998, the Company granted 60,000 options under the 1995 stock option plan. The options were granted at an exercise price of $6.25. Compensation expense was not recorded for the stock options because the exercise price approximated the fair value of common stock at the date of the grant.
In 1998, the Company approved a new stock option plan which authorizes the issuance of up to 460,000 shares of common stock.
******
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Union State Bank
East Bernard, Texas
We have audited the accompanying statements of condition of Union State Bank as of December 31, 1997 and 1996, and the related statements of income, changes in shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Union State Bank at December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
/s/ Harper & Pearson Company Houston, Texas January 23, 1998 |
UNION STATE BANK
STATEMENTS OF CONDITION
JUNE 30, 1998 AND 1997
(UNAUDITED)
1998 1997
-------------- --------------
ASSETS
Cash and due from banks.............. $ 1,672,840 $ 1,681,819
Federal funds sold................... 5,100,000 3,100,000
-------------- --------------
Total cash and cash equivalents...... 6,772,840 4,781,819
Securities available for sale, less
unrealized losses.................. 20,069,030 15,847,429
Securities to be held to maturity.... 24,076,943 31,153,834
Loans................................ 25,227,167 23,626,280
Less allowance for possible loan
losses........................ 670,702 718,656
-------------- --------------
Loans, net...................... 24,556,465 22,907,624
Bank premises and equipment, net..... 165,029 209,013
Accrued interest receivable.......... 1,083,643 1,082,035
Deferred federal income taxes........ 33,255 110,225
Other assets, net.................... 183,385 211,428
-------------- --------------
$ 76,940,590 $ 76,303,407
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing............. $ 8,203,315 $ 7,715,830
Interest-bearing................ 55,519,663 56,442,834
-------------- --------------
Total Deposits.................. 63,722,978 64,158,664
Accrued interest payable........ 293,691 264,928
Other liabilities............... 59,680 79,347
-------------- --------------
Total Liabilities............... 64,076,349 64,502,939
-------------- --------------
Commitments
Shareholders' Equity
Common stock, $10 par value,
70,000 shares authorized,
issued and outstanding........ 700,000 700,000
Capital surplus................. 3,300,000 3,300,000
Retained earnings............... 8,928,797 7,998,818
Net unrealized losses on
securities available for sale,
net........................... (64,556) (198,350)
-------------- --------------
Total Shareholders' Equity...... 12,864,241 11,800,468
-------------- --------------
$ 76,940,590 $ 76,303,407
============== ==============
|
See accompanying notes.
UNION STATE BANK
STATEMENTS OF CONDITION
DECEMBER 31, 1997 AND 1996
1997 1996
-------------- --------------
ASSETS
Cash and due from banks................. $ 2,513,928 $ 2,502,038
Federal funds sold...................... 6,300,000 6,000,000
-------------- --------------
Total cash and cash equivalents.... 8,813,928 8,502,038
Securities available for sale, less
unrealized losses..................... 19,195,963 18,373,655
Securities to be held to maturity....... 29,620,984 31,181,829
Loans................................... 20,438,344 19,473,356
Less allowance for possible loan
losses........................... 649,669 702,274
-------------- --------------
Loans, net......................... 19,788,675 18,771,082
Bank premises and equipment, net........ 186,731 209,606
Accrued interest receivable............. 795,002 779,924
Deferred federal income taxes........... 82,206 108,162
Other assets, net....................... 215,349 435,554
-------------- --------------
$ 78,698,838 $ 78,361,850
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing................ $ 8,550,127 $ 9,020,075
Interest-bearing................... 57,593,728 57,624,409
-------------- --------------
Total Deposits..................... 66,143,855 66,644,484
Accrued interest payable........... 276,145 256,372
Other liabilities.................. 23,842 2,632
-------------- --------------
Total Liabilities.................. 66,443,842 66,903,488
-------------- --------------
Commitments
Shareholders' Equity
Common stock, $10 par value, 70,000
shares authorized, issued and
outstanding...................... 700,000 700,000
Capital surplus.................... 3,300,000 3,300,000
Retained earnings.................. 8,398,957 7,652,705
Net unrealized losses on securities
available for sale, net.......... (143,961) (194,343)
-------------- --------------
Total Shareholders' Equity......... 12,254,996 11,458,362
-------------- --------------
$ 78,698,838 $ 78,361,850
============== ==============
|
See accompanying notes.
UNION STATE BANK
STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
1998 1997
------------ ------------
INTEREST INCOME
Interest and fees on loans...... $ 1,040,303 $ 980,080
Securities available for sale... 599,768 514,952
Securities to be held to
maturity....................... 775,749 967,480
Federal funds sold.............. 195,565 77,371
------------ ------------
Total Interest Income........... 2,611,385 2,539,883
------------ ------------
INTEREST EXPENSE
Deposits........................ 1,238,241 1,229,806
------------ ------------
Total Interest Expense.......... 1,238,241 1,229,806
------------ ------------
NET INTEREST INCOME.................. 1,373,144 1,310,077
PROVISION FOR POSSIBLE CREDIT LOSSES -- --
------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR
POSSIBLE CREDIT LOSSES............. 1,373,144 1,310,077
------------ ------------
OTHER INCOME
Customer service charges........ 97,678 98,899
Other service charges and
fees........................... 23,453 25,186
Other........................... 9,156 59,473
------------ ------------
Total Other Income.............. 130,287 183,558
------------ ------------
OTHER EXPENSE
Salaries and employee
benefits....................... 453,222 438,171
Net occupancy and equipment
expense........................ 58,271 59,137
Data processing................. 52,417 49,227
Professional services fees...... 37,505 38,427
Taxes other than income taxes... 55,499 55,335
Other........................... 68,443 71,225
------------ ------------
Total Other Expense............. 725,357 711,522
------------ ------------
EARNINGS BEFORE INCOME TAXES......... 778,074 782,113
INCOME TAXES......................... 248,234 226,000
------------ ------------
NET EARNINGS......................... $ 529,840 $ 556,113
============ ============
|
See accompanying notes.
UNION STATE BANK
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
------------ ------------
INTEREST INCOME
Interest and fees on loans...... $ 2,135,057 $ 2,180,517
Securities available for sale... 964,771 965,685
Securities to be held to
maturity....................... 1,825,390 1,908,964
Federal funds sold.............. 266,891 149,549
------------ ------------
Total Interest Income........... 5,192,109 5,204,715
------------ ------------
INTEREST EXPENSE
Deposits........................ 2,504,186 2,505,963
------------ ------------
Total Interest Expense.......... 2,504,186 2,505,963
------------ ------------
NET INTEREST INCOME.................. 2,687,923 2,698,752
REDUCTION OF ALLOWANCE FOR POSSIBLE
CREDIT LOSSES...................... 75,000 55,000
------------ ------------
NET INTEREST INCOME AFTER REDUCTION
OF ALLOWANCE FOR POSSIBLE CREDIT
LOSSES............................. 2,762,923 2,753,752
------------ ------------
OTHER INCOME
Customer service charges........ 218,173 172,749
Other service charges and
fees............................ 37,561 46,815
Other........................... 72,984 59,908
------------ ------------
Total Other Income.............. 328,718 279,472
------------ ------------
OTHER EXPENSE
Salaries and employee
benefits....................... 945,129 931,227
Net occupancy and equipment
expense........................ 121,879 139,302
Data processing................. 101,001 115,103
Professional services fees...... 64,227 65,518
Taxes other than income taxes... 105,828 106,967
Other real estate losses and
expenses....................... 5,247 100,381
Other........................... 160,078 159,520
------------ ------------
Total Other Expense............. 1,503,389 1,618,018
------------ ------------
EARNINGS BEFORE INCOME TAXES......... 1,588,252 1,415,206
INCOME TAXES......................... 422,000 406,674
------------ ------------
NET EARNINGS......................... $ 1,166,252 $ 1,008,532
============ ============
|
See accompanying notes.
UNION STATE BANK
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
NET
UNREALIZED
LOSSES ON
SECURITIES
COMMON CAPITAL RETAINED AVAILABLE
STOCK SURPLUS EARNINGS FOR SALE TOTAL
---------- ------------ ------------ ------------ --------------
Balance -- December 31, 1997......... $ 700,000 $ 3,300,000 $ 8,398,957 $ (143,961) $ 12,254,996
Net Earnings......................... -- -- 529,840 -- 529,840
Dividends............................ -- -- -- -- --
Net Change in Unrealized Losses On
Securities Available for Sale...... -- -- -- 79,405 79,405
---------- ------------ ------------ ------------ --------------
Balance -- June 30, 1998............. $ 700,000 $ 3,300,000 $ 8,928,797 $ (64,556) $ 12,864,241
========== ============ ============ ============ ==============
UNION STATE BANK
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
NET
UNREALIZED
LOSSES ON
SECURITIES
COMMON CAPITAL RETAINED AVAILABLE
STOCK SURPLUS EARNINGS FOR SALE TOTAL
---------- ------------ ------------ ------------ --------------
Balance -- December 31, 1996......... $ 700,000 $ 3,300,000 $ 7,652,705 $ (194,343) $ 11,458,362
Net Earnings......................... -- -- 556,113 -- 556,113
Dividends............................ -- -- (210,000) -- (210,000)
Net Change in Unrealized Losses On
Securities Available for Sale...... -- -- -- (4,007) (4,007)
---------- ------------ ------------ ------------ --------------
Balance -- June 30, 1997............. $ 700,000 $ 3,300,000 $ 7,998,818 $ (198,350) $ 11,800,468
========== ============ ============ ============ ==============
|
See accompanying notes.
UNION STATE BANK
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
NET
UNREALIZED
LOSSES ON
SECURITIES
COMMON CAPITAL RETAINED AVAILABLE
STOCK SURPLUS EARNINGS FOR SALE TOTAL
---------- ------------ ------------ ------------ --------------
Balance -- December 31, 1995......... $ 700,000 $ 3,300,000 $ 7,064,173 $ (124,976) $ 10,939,197
Net Earnings......................... -- -- 1,008,532 -- 1,008,532
Dividends............................ -- -- (420,000) -- (420,000)
Net Change in Unrealized Losses On
Securities Available for Sale...... -- -- -- (69,367) (69,367)
---------- ------------ ------------ ------------ --------------
Balance -- December 31, 1996......... 700,000 3,300,000 7,652,705 (194,343) 11,458,362
Net Earnings......................... -- -- 1,166,252 -- 1,166,252
Dividends............................ -- -- (420,000) -- (420,000)
Net Change in Unrealized Losses On
Securities Available for Sale...... -- -- -- 50,382 50,382
---------- ------------ ------------ ------------ --------------
Balance -- December 31, 1997......... $ 700,000 $ 3,300,000 $ 8,398,957 $ (143,961) $ 12,254,996
========== ============ ============ ============ ==============
|
See accompanying notes.
UNION STATE BANK
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
1998 1997
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.................... $ 529,840 $ 556,113
-------------- --------------
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Provision for depreciation and
amortization............... 21,702 21,067
Deferred federal income
taxes...................... 48,951 (2,063)
Change in operating assets and
liabilities:
Accrued interest receivable... (288,641) (302,111)
Other assets.................. 31,964 224,126
Accrued interest payable...... 17,546 8,556
Other liabilities............. 35,838 76,715
-------------- --------------
Total adjustments............... (132,640) 26,290
-------------- --------------
Net cash provided by operating
activities.................... 397,200 582,403
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities
available for sale............ (4,115,000) --
Purchases of securities to be
held to maturity.............. -- (3,131,678)
Proceeds from paydowns and
maturities of securities...... 8,865,379 5,681,892
Loans originated/proceeds
received, net................. (4,767,790) (4,136,542)
Capital expenditures, net....... -- (20,474)
-------------- --------------
Net cash used by investing
activities.................... (17,411) (1,606,802)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits.......... (2,420,877) (2,485,820)
Dividends paid.................. -- (210,000)
-------------- --------------
Net cash used by financing
activities.................... (2,420,877) (2,695,820)
-------------- --------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS........................ (2,041,088) (3,720,219)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 8,813,928 8,502,038
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 6,772,840 $ 4,781,819
============== ==============
|
See accompanying notes.
UNION STATE BANK
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.................... $ 1,166,252 $ 1,008,532
-------------- --------------
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Reduction of allowance for
possible credit losses..... (75,000) (55,000)
Provision for depreciation and
amortization............... 43,349 56,889
Deferred federal income
taxes...................... -- 67,025
Change in operating assets and
liabilities:
Accrued interest receivable... (15,078) 112,773
Other assets.................. 220,205 394,445
Accrued interest payable...... 19,773 (29,250)
Other liabilities............. 21,210 (32,143)
-------------- --------------
Total adjustments............... 214,459 514,739
-------------- --------------
Net cash provided by operating
activities.................... 1,380,711 1,523,271
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities
available for sale............ (5,997,276) (5,024,297)
Purchases of securities to be
held to maturity.............. (5,329,972) (4,383,004)
Proceeds from maturities of
securities.................... 12,142,123 12,342,209
Loans originated/proceeds
received, net................. (942,593) 1,381,848
Capital expenditures, net....... (20,474) (68,107)
-------------- --------------
Net cash (used) provided by
investing activities.......... (148,192) 4,248,649
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits.......... (500,629) (256,505)
Dividends paid.................. (420,000) (420,000)
-------------- --------------
Net cash used by financing
activities.................... (920,629) (676,505)
-------------- --------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 311,890 5,095,415
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 8,502,038 3,406,623
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 8,813,928 $ 8,502,038
============== ==============
|
See accompanying notes.
UNION STATE BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
The accounting and reporting policies of Union State Bank are in accordance with generally accepted accounting principles and the prevailing practices within the banking industry. A summary of significant accounting policies is as follows:
ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles 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.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for possible credit losses on loans, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans and in the determination of investment security estimated market values. In connection with the determination of the allowances for possible losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties. The estimated market value of investment securities is determined by a third party investment company.
While management uses available information to recognize losses on loans and foreclosed real estate, further reductions in the carrying amounts of loans and foreclosed assets may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans and foreclosed real estate. Such agencies may require the Bank to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans and foreclosed real estates may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.
INTERIM FINANCIAL INFORMATION -- Financial information as of and for the six months ended June 30, 1998 and 1997 is unaudited. Such information includes all adjustments (consisting of only normal recurring adjustments), that are necessary in the opinion of management, for a fair statement of the financial information in the interim periods. The results from operations for the periods ended June 30, 1998 is not necessarily indicative of the results for the full fiscal year.
TRADING SECURITIES -- Securities that are held for short-term resale are classified as trading account securities and recorded at their fair values. Realized and unrealized gains and losses on trading account securities are included in other income. At December 31, 1997 and 1996, the Bank did not classify any of its securities as trading securities.
SECURITIES HELD TO MATURITY -- Government, Federal agency, and corporate debt securities that management has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and the accretion of discounts that are recognized in interest income using methods approximating the interest method over the period to maturity. Mortgage backed securities represent participating interests in pools of long-term first mortgage loans originated and serviced by issuers of the securities. Mortgage backed securities are carried at unpaid principal balances, adjusted for unamortized premiums and unearned discounts. Premiums and discounts are amortized using methods approximating the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments.
SECURITIES AVAILABLE FOR SALE -- Available for sale securities consist of investment securities not classified as trading securities nor as held to maturity securities. Unrealized holding gains and losses, net of tax, on available for sale securities are reported as a net amount in a separate component of shareholders'
UNION STATE BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
equity until realized. Gains and losses on the sale of available for sale securities are determined using the specific identification method. The amortization of premiums and the accretion of discounts are recognized in interest income using methods approximating the interest method over the period of maturity.
Declines in the fair value of individual held to maturity and available for sale securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses.
CONCENTRATIONS OF CREDIT -- Substantially all of the Bank's loans, commitments and letters of credit have been granted to customers in the Bank's market area. Generally, such customers are depositors of the Bank. The concentrations of credit by type of loan are set forth in Note C. It is the Bank's policy to not extend credit to any single borrower or group of related borrowers in excess of the Bank's legal lending limit.
INTEREST RATE RISK -- The Bank is principally engaged in providing short-term commercial loans with interest rates that fluctuate with various market indices and intermediate-term, fixed rate real estate loans. These loans are primarily funded through short-term demand deposits and longer-term certificates of deposit with fixed rates.
LOANS -- Loans are stated at the principal amount outstanding, net of unearned discount. Unearned discount relates principally to consumer installment loans. The related interest income for multi-payment loans is recognized as interest in proportion to the declining outstanding balances of the loans; for single payment loans such income is recognized under the straight-line method. Both methods approximate the interest method.
NON-PERFORMING LOANS AND PAST DUE LOANS -- Included in the non-performing 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 or identified as impaired, interest accrued and uncollected during the current year prior to the judgment of uncollectibility, is charged to operations. Interest accrued during prior periods is charged to allowance for possible 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.
Renegotiated loans are those loans on which concessions in terms have been granted because of a borrower's financial difficulty. Interest is generally accrued on such loans in accordance with the new terms.
ALLOWANCE FOR POSSIBLE CREDIT LOSSES -- The allowance for possible credit losses is a valuation allowance available for losses incurred on loans and other commitments to extend credit. All losses are charged to the allowance for possible 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 losses to determine whether the allowance for possible credit losses is adequate to absorb anticipated losses in the existing portfolio. Based on these estimates, an amount is charged to the provision for possible credit losses and credited to the
UNION STATE BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
allowance for possible 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 loan losses, and the present level of the allowance; results of examinations of the loan portfolio by regulatory agencies; results of examinations of the loan portfolio by an external consultant; 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 value of these assets because of economic, operating or other conditions beyond the Bank's control.
It should be understood that estimates of credit losses involve judgment. While it is possible that in particular periods the Bank may sustain losses which are substantial relative to the allowance for credit losses, it is the judgment of management that the allowances for credit losses reflected in the statements of condition are adequate to absorb losses which may exist in the current loan portfolio.
BANK PREMISES AND EQUIPMENT -- Bank Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation expense is computed principally on a tax method which approximates the straight-line method over the estimated useful lives of the assets.
REAL ESTATE ACQUIRED BY FORECLOSURE -- Real estate acquired by foreclosure is recorded at the fair value of the property less any selling costs, as applicable, at the time of foreclosure. Subsequent to foreclosure, real estate is carried at the lower of its new cost basis or fair value, less estimated costs to sell. Any adjustments to reflect declines in value below the recorded amounts are recognized and are charged to income in the period such determination is assessed. Required developmental costs associated with foreclosed property under construction are capitalized and considered in determining the fair value of the property.
Operating expenses of such properties, net of related income, and gains and losses on their disposition are included in other non-interest expense.
INCOME TAXES -- Under SFAS No. 109, the Bank uses the balance sheet approach for recording deferred taxes. The balance sheet approach accounts for deferred income taxes 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 tax law or rates.
STATEMENTS OF CASH FLOWS -- For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and federal funds sold. Generally, federal funds are sold for one-day periods.
UNION STATE BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B INVESTMENT SECURITIES
Investment securities have been classified according to management's intent. The amortized cost and estimated market values of investments in debt securities at December 31, 1997 and 1996 are summarized as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------- ---------- ---------- --------------
1997
Securities Available For Sale:
U.S. Gov't & Agency Securities..... $ 9,323,464 $ 9,409 $ (12,512) $ 9,320,361
Collateralized Mortgage
Obligations...................... 3,161,837 -- (150,038) 3,011,799
Mortgage-backed Securities......... 6,928,785 32,864 (97,846) 6,863,803
-------------- ---------- ---------- --------------
$ 19,414,086 $ 42,273 $ (260,396) $ 19,195,963
============== ========== ========== ==============
Securities to be Held to Maturity:
U.S. Gov't & Agency Securities..... $ 13,795,511 $ 47,936 $ (28,149) $ 13,815,298
Municipal -- Nontaxable............ 7,017,330 139,447 (1,069) 7,155,708
Municipal -- Taxable............... 300,000 -- (1,627) 298,373
Mortgage-backed Securities......... 8,508,143 68,157 (55,761) 8,520,539
-------------- ---------- ---------- --------------
$ 29,620,984 $ 255,540 $ (86,606) $ 29,789,918
============== ========== ========== ==============
1996
Securities Available For Sale:
U.S. Gov't Agency Securities....... $ 6,822,059 $ 14,780 $ (12,250) $ 6,824,589
Collateralized Mortgage
Obligations...................... 3,596,195 -- (189,508) 3,406,687
Mortgage-backed Securities......... 8,249,861 27,747 (135,229) 8,142,379
-------------- ---------- ---------- --------------
$ 18,668,115 $ 42,527 $ (336,987) $ 18,373,655
============== ========== ========== ==============
Securities to be Held to Maturity:
U.S. Gov't & Agency Securities..... $ 16,147,535 $ 74,505 $ (70,749) $ 16,151,291
Municipal -- Nontaxable............ 7,201,160 101,610 (26,054) 7,276,716
Mortgage-backed Securities......... 7,833,134 80,173 (115,698) 7,797,609
-------------- ---------- ---------- --------------
$ 31,181,829 $ 256,288 $ (212,501) $ 31,225,616
============== ========== ========== ==============
|
UNION STATE BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and estimated market value of debt securities at
December 31, 1997, by contractual maturities, 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.
SECURITIES HELD TO SECURITIES AVAILABLE FOR
MATURITY SALE
-------------------------- --------------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
----------- ----------- ----------- -----------
Due in 1 year or less................ $ 6,551,243 $ 6,540,982 $ 4,980,875 $ 4,975,879
Due from 1 year to 5 years........... 10,405,983 10,507,451 4,343,589 4,344,482
Due from 5 years to 10 years......... 4,155,615 4,220,946 -- --
Due after 10 years................... -- -- -- --
Collateralized Mortgage
Obligations........................ -- -- 3,161,837 3,011,799
Mortgage-Backed Securities........... 8,508,143 8,520,539 6,928,785 6,863,803
----------- ----------- ----------- -----------
$29,620,984 $29,789,918 $19,414,086 $19,195,963
=========== =========== =========== ===========
|
Investment securities with a carrying amount of $5,459,692 and $8,576,876 at December 31, 1997 and 1996, respectively, were pledged to secure public deposits and other borrowings.
There were no significant realized gains or losses in 1997 or 1996.
NOTE C LOANS
The loan portfolio consists of various types of loans made principally to borrowers located in Wharton and Ft. Bend Counties, Texas, and are classified by major type as follows:
1997 1996
-------------- --------------
Commercial........................... $ 2,335,648 $ 3,408,195
Real Estate.......................... 6,005,292 5,398,113
Consumer............................. 2,229,856 2,355,088
Farming.............................. 9,849,895 8,296,194
Other................................ 17,653 15,786
-------------- --------------
20,438,344 19,473,376
Less unearned discount............... -- (20)
-------------- --------------
$ 20,438,344 $ 19,473,356
============== ==============
|
Loan maturities of the loan portfolio at December 31, 1997 are as follows:
WITHIN 1 YEAR 1 - 5 YEARS AFTER 5 YEARS TOTAL
------------- ----------- ------------- --------------
Loans at fixed interest rates........... $ 3,267,161 $ 5,396,306 $ 2,167,650 $ 10,831,117
Loans at variable interest rates........ 9,607,227 -- -- 9,607,227
------------- ----------- ------------- --------------
$ 12,874,388 $ 5,396,306 $ 2,167,650 $ 20,438,344
============= =========== ============= ==============
|
UNION STATE BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In the ordinary course of business, the Bank has and expects to continue to have transactions, including borrowings, with its officers, directors, principal stockholders, and their affiliates. In the opinion of management, such transactions were on substantially the same terms, including interest rates and collateral, as those prevailing at the time of comparable transactions with other persons and did not involve more than a normal risk of collectibility or present any other unfavorable features to the Bank. Loans to such borrowers are summarized as follows:
1997 1996
------------ -------------
Balance, January 1...................... $ 551,554 $ 872,768
New loans during the year............... 482,225 991,170
Repayments during the year.............. (144,441) (1,312,384)
Other reductions........................ (203,818) --
------------ -------------
Balance, December 31.................... $ 685,520 $ 551,554
============ =============
|
NOTE D NONPERFORMING LOANS AND PAST DUE LOANS
The following table presents information relating to non-performing loans and past due loans:
1997 1996
--------- ---------
Nonaccrual loans........................ $ 17,902 $ 36,507
========= =========
90 days or more past due loans.......... $ 3,556 $ 12,630
========= =========
|
With respect to the above nonperforming loans, the following table presents interest income that would have been earned under the original terms of the loans.
1997 1996
--------- ---------
Foregone income......................... $ 6,534 $ 7,567
========= =========
|
NOTE E ALLOWANCE FOR POSSIBLE CREDIT LOSSES
An analysis of activity in the allowance for possible credit losses is as follows:
1997 1996
---------- ----------
Balance at beginning of year............ $ 702,274 $ 737,099
Reduction of allowance for possible
credit losses......................... (75,000) (55,000)
Loan recoveries......................... 24,455 20,175
Loans charged off....................... (2,060) --
---------- ----------
Balance at end of year.................. $ 649,669 $ 702,274
========== ==========
|
Impaired loans as defined by FASB Statement No. 114, "Accounting by Creditors for Impairment of a Loan" are not significant at December 31, 1997 and 1996.
UNION STATE BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized below:
1997 1996
------------ ------------
Land.................................... $ 10,675 $ 10,675
Buildings............................... 566,071 566,071
Furniture, fixtures and equipment....... 415,073 407,250
------------ ------------
991,819 983,996
Less accumulated depreciation........... (805,088) (774,390)
------------ ------------
$ 186,731 $ 209,606
============ ============
|
NOTE G ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 1997 and 1996 consists of the following:
1997 1996
---------- ----------
Loans................................... $ 312,922 $ 256,210
Mortgage-backed securities.............. 95,867 103,772
Investments and other................... 386,213 419,942
---------- ----------
$ 795,002 $ 779,924
========== ==========
|
NOTE H OTHER ASSETS
Other assets are summarized below:
1997 1996
------------ ------------
Other real estate.................... $ -- $ 84,530
Contracts for deed................... 35,525 57,478
Notes receivable..................... 105,929 220,881
Purchased interest and other......... 73,895 72,665
------------ ------------
$ 215,349 $ 435,554
============ ============
|
An analysis of activity in real estate acquired by foreclosure for the year ended December 31, 1997 and 1996 is as follows:
1997 1996
------------ ------------
Balance, beginning of year........... $ 84,530 525,313
Real estate foreclosures............. 45,735 25,276
Real estate sales and payments....... (130,265) (375,004)
------------ ------------
Balance, end of year................. -- 175,585
Allowance for loss on real estate.... -- (91,055)
------------ ------------
Real estate acquired by foreclosure,
net................................ $ -- $ 84,530
============ ============
|
UNION STATE BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I 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, 1997 and 1996 are as follows:
1997 1996
------------ ------------
Three months or less................. $ 3,233,424 $ 3,830,295
Four through twelve months........... 5,604,437 4,663,921
Thereafter........................... 955,409 915,750
------------ ------------
$ 9,793,270 $ 9,409,966
============ ============
|
Interest expense for certificates of deposit in excess of $100,000 amounted to approximately $476,281 and $477,270 for the years ended December 31, 1997 and 1996, respectively. The bank has no brokered deposits and there are no major concentrations of deposits.
NOTE J FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is party to various financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. 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 statements of condition. The contract or notional amounts of those instruments reflect the extent of the 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 whose contract amounts represent credit risk:
1997 1996
------------ ------------
Commitments to extend credit............ $ 7,792,741 $ 6,416,767
Standby letters of credit............... $ 16,800 $ 67,700
|
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 credit worthiness 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 its customers.
NOTE K EMPLOYEE BENEFITS
The Bank has a defined contribution savings plan in effect for substantially all full-time employees. An employee must contribute at least four percent of base pay to participate, which is then matched by the Bank. The Board of Directors may also make discretionary contributions each year. Benefit expenses amounted to $27,413 and $28,519 in 1997 and 1996, respectively.
UNION STATE BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE L INCOME TAXES
Income tax expense consists of the following:
1997 1996
---------- ----------
Current................................. $ 422,000 $ 339,649
Deferred................................ -- 67,025
---------- ----------
$ 422,000 $ 406,674
========== ==========
|
The provision for federal income taxes differs from the amount computed by applying the federal income tax statutory rate on earnings as follows:
1997 1996
------------ ----------
Taxes calculated at statutory rate...... $ 540,006 $ 481,170
Increase (decrease) resulting from:
Nontaxable interest income......... (103,249) (94,785)
Other, net......................... (14,757) 20,289
------------ ----------
$ 422,000 $ 406,674
============ ==========
|
Deferred income taxes result primarily from temporary differences relating to the loan loss reserve and the recognition of unrealized investment losses on securities available for sale.
NOTE M STATEMENTS OF CASH FLOWS
Interest payments of $2,484,413 and $2,531,832 were made during 1997 and 1996, respectively. Federal income tax payments of $406,708 and $358,769 were made during 1997 and 1996, respectively.
NOTE N REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements. Failure to meet the minimum regulatory capital requirements can initiate certain mandatory, and possible additional discretionary actions by regulators, that if undertaken, could have a direct material affect on the Bank's financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines involving quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total risk-based capital and Tier I capital to risk-weighted assets (as defined in the regulations), and Tier I capital to adjusted total assets (as defined). Management believes, as of December 31, 1997 and 1996, that the Bank meets all the capital adequacy requirements to which it is subject.
UNION STATE BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1997, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. To remain categorized as well capitalized, the Bank will have to maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as disclosed in the table below. There are no conditions or events since the most recent notification that management believes have changed the Bank's prompt corrective action category.
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------ ----- ----------- ----- ----------- -----
1997
Total Risk Based Capital
(to Risk Weighted Assets)............. $ 12,771,000 43.3 % $ 2,361,680 8.0% $ 2,952,100 10.0%
Tier I Capital
(to Risk Weighted Assets)............. $ 12,399,000 42.0 % $ 1,180,840 4.0% $ 1,771,260 6.0%
Tier I Capital
(to Adjusted Total Assets)............ $ 12,399,000 15.6 % $ 3,182,560 4.0% $ 3,978,200 5.0%
1996
Total Risk Based Capital
(to Risk Weighted Assets)............. $ 12,009,000 42.5 % $ 2,262,560 8.0% 2,828,200 10.0%
Tier I Capital
(to Risk Weighted Assets)............. $ 11,652,000 41.2 % $ 1,131,280 4.0% $ 1,696,920 6.0%
Tier I Capital
(to Adjusted Total Assets)............ $ 11,652,000 15.1 % $ 3,091,520 4.0% $ 3,864,400 5.0%
|
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES OF COMMON STOCK OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION OR OFFER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
Prospectus Summary................... 3 Summary Consolidated Financial Data............................... 6 Risk Factors......................... 8 The Company.......................... 13 Use of Proceeds...................... 16 Dividend Policy...................... 16 Dilution............................. 17 Pending Acquisition.................. 17 Unaudited Pro Forma Combined Condensed Financial Statements..... 19 Capitalization....................... 22 Nature of the Trading Market......... 22 Selected Consolidated Financial Data............................... 23 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 25 Management........................... 51 Principal and Selling Shareholders... 56 Supervision and Regulation........... 57 Description of Securities of the Company............................ 64 Underwriting......................... 68 Legal Matters........................ 69 Experts.............................. 70 Available Information................ 70 |
Table of Contents to Financial
Statements......................... F-1
UNTIL , (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
1,677,783 SHARES
[LOGO]
PROSPERITY BANCSHARES, INC.
COMMON STOCK
KEEFE, BRUYETTE & WOODS, INC.
HOEFER & ARNETT
INCORPORATED
, 1998
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated fees and expenses incurred by the Registrant in connection with this Offering are as follows:
Securities and Exchange Commission
registration fee................... $ 8,540
National Association of Securities
Dealers, Inc. filing fee........... $
Printing and engraving expenses...... $
Legal fees and expenses of counsel
for the Registrant................. $
Accounting fees and expenses......... $
Blue sky filing fees and expenses
(including legal fees and
expenses).......................... $
Transfer Agent fees.................. $
Miscellaneous........................ $
------------
Total................................ $
============
------------
|
* To be supplied by Amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Articles of Incorporation and Bylaws require the Registrant to indemnify officers and directors of the Registrant to the fullest extent permitted by Article 2.02-1 of the Business Corporation Act of the State of Texas (the "TBCA"). The Articles of Incorporation and Bylaws of the Registrant are filed as Exhibit 3.1 and 3.2 to the Registration Statement. Generally, Article 2.02-1 of the TBCA permits a corporation to indemnify a person who was, is, or is threatened to be made a named defendant or respondent in a proceeding because the person was or is a director or officer if it is determined that such person (i) conducted himself in good faith, (ii) reasonably believed (a) in the case of conduct in his official capacity as a director or officer of the corporation, that his conduct was in the corporation's best interests, and/or (b) in other cases, that his conduct was at least not opposed to the corporation's best interests, and (iii) in the case of any criminal proceeding, had no reasonable cause to believe that his conduct was unlawful. In addition, the TBCA requires a corporation to indemnify a director or officer for any action that such director or officer is wholly successfully in defending on the merits.
The Registrant's Articles of Incorporation provide that a director of the Registrant will not be liable to the corporation for monetary damages for an act or omission in the director's capacity as a director, except to the extent not permitted by law. Texas law does not permit exculpation of liability in the case of (i) a breach of the director's duty of loyalty to the corporation or its shareholders, (ii) an act or omission not in good faith that involves intentional misconduct or a knowing violation of the law, (iii) a transaction from which a director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the director's office, (iv) an act or omission for which the liability of the director is expressly provided by statute, or (v) an act related to an unlawful stock repurchase or dividend.
Pursuant to the Purchase Agreement, a form of which is filed as Exhibit 1.1 to this Registration Statement, the Underwriters have agreed to indemnify the directors, officers and controlling persons of the Registrant against certain civil liabilities that may be incurred in connection with this Offering, including certain liabilities under the Securities Act.
The Registrant may provide liability insurance for each director and officer for certain losses arising from claims or changes made against them while acting in their capabilities as directors or officers of Registrant, whether or not Registrant would have the power to indemnify such person against such liability, as permitted by law.
II-1
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On June 2, 1997, the Company issued 480,000 shares of Common Stock to certain individuals at $6.25 per share.
Each sale was for cash and was made pursuant to the registration exemption provided by Section 3(a)(11) of the Securities Act of 1933, as amended.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
The following documents are filed as exhibits to this Registration Statement:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
-------------------------------------------------------------
*1 -- Form of Purchase Agreement by and
among the Underwriters, the Selling
Stockholders and the Company
3.1 -- Amended and Restated Articles of
Incorporation of the Company
3.2 -- Amended and Restated Bylaws of the
Company
*4 -- Form of Certificate representing
shares of Common Stock
*5 -- Opinion of Bracewell & Patterson,
L.L.P. as to the legality of the
securities being registered
10.1 -- 1995 Stock Option Plan
10.2 -- 1998 Stock Incentive Plan
10.3 -- Employment Agreements
10.4 -- Agreement and Plan of Reorganization
dated June 5, 1998 between the
Company, First Prosperity Bank and
Union State Bank
21 -- Subsidiaries of the Registrant
23.1 -- Consent of Deloitte & Touche LLP
23.2 -- Consent of Harper & Pearson Company
*23.3 -- Consent of Bracewell & Patterson,
L.L.P. (included in the opinion to be
filed as Exhibit 5 to this
Registration Statement)
27 -- Financial Data Schedule
------------
|
* To be supplied by amendment.
(B) FINANCIAL STATEMENT SCHEDULES
None.
All other schedules for which provision is made in Regulation S-X of the Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide the Underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling
II-2
person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-3
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, PROSPERITY BANCSHARES, INC., HAS DULY CAUSED THIS REGISTRATION STATEMENT OR AMENDMENT THERETO TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON AND STATE OF TEXAS ON SEPTEMBER 11, 1998.
PROSPERITY BANCSHARES, INC.
By: /s/ TRACY T. RUDOLPH
TRACY T. RUDOLPH
CHAIRMAN OF THE BOARD
|
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS REGISTRATION STATEMENT OR AMENDMENT THERETO HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE INDICATED CAPACITIES ON SEPTEMBER 11, 1998.
SIGNATURE POSITIONS
--------- ---------
/s/ TRACY T. RUDOLPH Chairman of the Board (principal
Tracy T. Rudolph executive officer)
/s/ DAVID HOLLAWAY Chief Financial Officer (principal
David Hollaway financial officer and principal
accounting officer)
/s/ HARRY BAYNE Director
Harry Bayne
/s/ JAMES A. BOULIGNY Director
James A. Bouligny
/s/ J.T. HERIN Director
J.T. Herin
/s/ CHARLES M. SLAVIK Director
Charles M. Slavik
/s/ HARRISON STAFFORD Director
Harrison Stafford
/s/ ROBERT STEELHAMMER Director
Robert Steelhammer
/s/ DAVID ZALMAN Director
David Zalman
|
II-4
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGES
------------------------ ----------------------------------------------------------------------------------------- -------------
*1 -- Form of Purchase Agreement by and among the Underwriters, the Selling Stockholders and
the Company
3.1 -- Amended and Restated Articles of Incorporation of the Company
3.2 -- Amended and Restated Bylaws of the Company
*4 -- Form of Certificate representing shares of Common Stock
*5 -- Opinion of Bracewell & Patterson, L.L.P. as to the legality of the securities being
registered
10.1 -- 1995 Stock Option Plan
10.2 -- 1998 Stock Incentive Plan
10.3 -- Employment Agreements
10.4 -- Agreement and Plan of Reorganization dated June 5, 1998 between the Company, First
Prosperity Bank and Union State Bank
21 -- Subsidiaries of the Registrant
23.1 -- Consent of Deloitte & Touche LLP
23.2 -- Consent of Harper & Pearson Company
*23.3 -- Consent of Bracewell & Patterson, L.L.P. (included in the opinion to be filed as Exhibit
5 to this Registration Statement)
27 -- Financial Data Schedule
|
* To be supplied by amendment.
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
PROSPERITY BANCSHARES, INC.
ARTICLE 1.
The name of the Corporation is Prosperity Bancshares, Inc.
ARTICLE 2.
The period of duration of the Corporation is perpetual.
ARTICLE 3.
The purpose for which the Corporation is organized is to engage in any or all lawful acts, activities or businesses for which a corporation may be organized under the Texas Business Corporation Act.
ARTICLE 4.
Section 4.1 AUTHORIZED SHARES. The aggregate number of all classes of stock which the Corporation has authority to issue is 70,000,000 shares divided into (A) one class of 50,000,000 shares of Common Stock with a par value of $1.00 per share, and (B) one class of 20,000,000 shares of Preferred Stock with a par value of $1.00 per share, which may be divided into and issued in series as set forth in this Article Four.
Section 4.2 AUTHORIZATION OF DIRECTORS TO DETERMINE CERTAIN RIGHTS OF PREFERRED STOCK. The shares of Preferred Stock may be divided into and issued in series. The Board of Directors shall have the authority to establish series of unissued shares of Preferred Stock by fixing and determining the relative rights and preferences of the shares of any series so established, and to increase or decrease the number of shares within each such series; provided, however, that the Board of Directors may not decrease the number of shares within a series of Preferred Stock to less than the number of shares within such series that are then issued. The Preferred Stock of each such series shall have such designations, preferences, limitations, or relative rights, including voting rights, as shall be set forth in the resolution or resolutions establishing such series adopted by the Board of Directors, including, but without limiting the generality of the foregoing, the following:
(A) The distinctive designation of, and the number of shares of Preferred Stock that shall constitute, such series, which number (except where otherwise provided by the Board of Directors in the resolution establishing such series) may be increased or decreased
(but not below the number of shares of such series then outstanding) from time to time by like action of the Board of Directors;
(B) The rights in respect of dividends, if any, of such series of Preferred Stock, the extent of the preference or relation, if any, of such dividends to the dividends payable on any other class or classes or any other series of the same or other class or classes of capital stock of the Corporation and whether such dividends shall be cumulative or noncumulative;
(C) The right, if any, of the holders of such series of Preferred Stock to convert the same into, or exchange the same for, shares of any other class or classes or of any other series of the same or any other class or classes of capital stock, obligations, indebtedness, rights to purchase securities or other securities of the Corporation or other entities, domestic or foreign, or for other property or for any combination of the foregoing, and the terms and conditions of such conversion or exchange;
(D) Whether or not shares of such series of Preferred Stock shall be subject to redemption, and the redemption price or prices and the time or times at which, and the terms and conditions on which, shares of such series of Preferred Stock may be redeemed;
(E) The rights, if any, of the holders of such series of Preferred Stock upon the voluntary or involuntary liquidation, dissolution or winding-up of the Corporation or in the event of any merger or consolidation of or sale of assets by the Corporation;
(F) The terms of any sinking fund or redemption or repurchase or purchase account, if any, to be provided for shares of such series of Preferred Stock;
(G) The voting powers, if any, of the holders of any series of Preferred Stock generally or with respect to any particular matter, which may be less than, equal to or greater than one vote per share, and which may, without limiting the generality of the foregoing, include the right, voting as a series of Preferred Stock as a class, to elect one or more directors of the Corporation generally or under such specific circumstances and on such conditions, as shall be provided in the resolution or resolutions of the Board of Directors adopted pursuant hereto, including, without limitation, in the event there shall have been a default in the payment of dividends on or redemption of any one or more series of Preferred Stock; and
(H) Such other powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions thereof, as the Board of Directors shall determine.
Section 4.3. PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS OF ALL CLASSES OF CAPITAL STOCK.
(A) GENERAL. All shares of Common Stock shall have rights identical to those of all other such shares. Except as they may vary among series established pursuant to
Section 4.2 of this Article Four, all shares of Preferred Stock shall have preferences, limitations, and relative rights identical to those of all other such shares.
(B) LIQUIDATION PREFERENCE. In the event of dissolution, liquidation, or winding up of the Corporation (whether voluntary or involuntary), after payment or provision for payment of debts but before any distribution to the holders of Common Stock, the holders of each series of Preferred Stock then outstanding shall be entitled to receive the amount fixed by the Board of Directors pursuant to Section 4.2 of this Article Four and no more. All remaining assets shall be distributed pro rata among the holders of Common Stock. If the assets distributable among the holders of Preferred Stock are insufficient to permit full payment to them, the entire assets shall be distributed among the holders of the Preferred Stock in proportion to their respective liquidation preferences unless otherwise provided by the Board of Directors pursuant to Section 4.2 of this Article Four. Neither the consolida tion, merger, or reorganization of the Corporation with any other corporation or corporations, nor the sale of all or substantially all the assets of the Corporation, nor the purchase or redemption by the Corporation of any of its outstanding shares shall be deemed to be a dissolution, liquidation, or winding up within the meaning of this paragraph.
(C) REDEMPTION.
(1) RIGHT; METHOD. All or any part of any one or more series of Preferred Stock may be redeemed at any time or times at the option of the Corporation, by resolution of the Board of Directors, in accordance with the terms and conditions of this Article Four and those fixed by the Board of Directors pursuant to Section 4.2 of this Article Four. The Corporation may redeem shares of any one or more series without redeeming shares of any other series. If less than all the shares of any series are to be redeemed, the shares of the series to be redeemed shall be selected ratably or by lot or by any other equitable method determined by the Board of Directors.
(2) NOTICE. Notice shall be given to the holders of shares to be redeemed, either personally or by mail, not less than twenty nor more than fifty days before the date fixed for redemption.
(3) PAYMENT. Holders of redeemed shares shall be paid in cash the amount fixed by the Board of Directors pursuant to Section 4.2 of this Article Four.
(4) PROVISION FOR PAYMENT. On or before the date fixed for redemption, the Corporation may provide for payment of a sum sufficient to redeem the shares called for redemption either (a) by setting aside the sum, separate from its other funds, in trust for the benefit of the holders of the shares to be redeemed, or (b) by depositing such sum in a bank or trust company (either one in Texas having capital and surplus of at least $10,000,000 according to its latest statement of condition, or one anywhere in the United States duly appointed and acting as transfer agent of the Corporation) as a trust fund, with irrevocable instructions and authority to the bank or trust company to give or complete the notice of
redemption and to pay to the holders of the shares to be redeemed, on or after the date fixed for redemption, the redemption price on surrender of their respective share certificates. The holders of shares to be redeemed may be evidenced by a list certified by the Corporation (by its president or a vice president and by its secretary or an assistant secretary) or by its transfer agent. If the Corporation so provides for payment, then from and after the date fixed for redemption (a) the shares shall be deemed to be redeemed, (b) dividends thereon shall cease to accrue, (c) such setting aside or deposit shall be deemed to constitute full payment for the shares, (d) the shares shall no longer be deemed to be outstanding, (e) the holders thereof shall cease to be shareholders with respect to such shares, and (f) the holders shall have no rights with respect thereto except the right to receive (without interest) their proportionate shares of the funds so set aside or deposited upon surrender of their respective certificates, and any right to convert such shares which may exist. Any interest accrued on funds so set aside or deposited shall belong to the Corporation. If the holders of the shares do not, within six years after such deposit, claim any amount so deposited for redemption thereof, the bank or trust company shall upon demand pay over to the Corporation the balance of the funds so deposited, and the bank or trust company shall thereupon be relieved of all responsibility to such holders.
(5) STATUS OF REDEEMED SHARES. Shares of Preferred Stock which are redeemed shall be canceled and shall be restored to the status of authorized but unissued shares.
(D) PURCHASE. Except as fixed by the Board of Directors pursuant to
Section 4.2 of this Article Four or as otherwise expressly provided by
law, nothing herein shall limit the right of the Corporation to purchase
any of its outstanding shares in accordance with law, by public or private
transaction.
ARTICLE 5.
The Corporation will not commence business until it has received for the issuance of its shares consideration of the value of at least $1,000.00, consisting of money, labor done or property actually received.
ARTICLE 6.
Without necessity for action by its shareholders, the Corporation may purchase, directly or indirectly, its own shares to the extent of the aggregate of unrestricted capital surplus available therefor and unrestricted reduction surplus available therefor.
ARTICLE 7.
No contract or other transaction between the Corporation and one or more of its directors, officers or securityholders or between the Corporation and another corporation, partnership, joint venture, trust or other enterprise of which one or more of the Corporation's directors, officers or
securityholders are members, officers, securityholders, directors or employees or in which they are otherwise interested, directly or indirectly, shall be invalid solely because of such relationship, or solely because such director, officer or securityholder is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or other transaction, or solely because his or their votes are counted for such purpose, if: (a) the material facts as to his relationship or interest and as to the contract or other transaction are known or disclosed to the Board of Directors or committee thereof, and such board or committee in good faith authorizes the contract or other transaction by the affirmative votes of a majority of the disinterested directors even though the disinterested directors be less than a quorum; or (b) the material facts as to his relationship or interest and as to the contract or other transaction are known or disclosed to the shareholders entitled to vote thereon, and the contract or other transaction is specifically approved in good faith by vote of the shareholders; or (c) the contract or other transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board of Directors, a committee thereof, or the shareholders.
ARTICLE 8.
Section 8.1 INDEMNIFICATION. As permitted by Section G of Article 2.02-1 of the Texas Business Corporation Act or any successor statute (the "Indemnification Article"), the Corporation hereby:
(A) makes mandatory the indemnification permitted under Section B of the Indemnification Article as contemplated by Section G thereof;
(B) makes mandatory its payment or reimbursement of the reasonable expenses incurred by a former or present director who was, is, or is threatened to be made a named defendant or respondent in a proceeding upon such director's compliance with the requirements of Section K of the Indemnification Article; and
(C) extends the mandatory indemnification referred to in Section 8.1(a) above and the mandatory payment or reimbursement of expenses referred to in Section 8.1(b) above (i) to all former or present officers of the Corporation and (ii) to all persons who are or were serving at the request of the Corporation as a director, officer, partner or trustee of another foreign or domestic corporation, partnership, joint venture, trust or employee benefit plan, to the same extent that the Corporation is obligated to indemnify and pay or reimburse expenses to directors.
Section 8.2 NONEXCLUSIVITY. The indemnification provided by this Article shall not be deemed exclusive of any other rights to which the person indemnified may be entitled under any bylaw, agreement, authorization of shareholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall enure to the benefit of such person's heirs and legal representatives.
Section 8.3 INSURANCE. The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the Corporation or who is or was serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another business, foreign, domestic or non-profit corporation, partnership, joint venture, sole proprietorship, trust or other enterprise or employee benefit plan, against any liability asserted against such person and incurred by such person in such a capacity or arising out of such person's status as such a person, whether or not the Corporation would have the power to indemnify such person against that liability under the provisions of this Article or the Texas Business Corporation Act.
Section 8.4 WITNESSES. Notwithstanding any other provision of this Article, the Corporation shall pay or reimburse expenses incurred by any director, officer, employee or agent in connection with such person's appearance as a witness or other participation in a proceeding at a time when such person is not a named defendant or respondent in such proceeding.
ARTICLE 9.
In performing his duties, a director of the Corporation shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by: (a) one or more officers or employees of the Corporation whom the director reasonably believes to be reliable and competent in the matters presented, (b) counsel, public accountants or other persons as to matters which the director reasonably believes to be within such person's professional or expert competence, or (c) a committee of the Board of Directors upon which he does not serve, duly designed in accordance with a provision of the by-laws, as to matters within its designated authority, which committee the director deems to merit confidence, but he shall not be considered to be acting in good faith if he has knowledge concerning the matter in question that would cause such reliance to be unwarranted. A person who so performs his duties shall have no liability to the Corporation (whether asserted directly or derivatively) by reason of being or having been a director of the Corporation.
ARTICLE 10.
The address of the registered office of the Corporation is 3040 Post Oak Boulevard, Suite 150, Houston, Texas 77056, the name of the registered agent of the Corporation at such address is Tracy T. Rudolph.
ARTICLE 11.
The initial Board of Directors shall consist of three (3) members who shall serve as directors until the first annual meeting of shareholders or until their respective successors shall have been elected and qualified, and whose names and addresses are as follows:
NAME ADDRESS
---- -------
Gene A. Ratliff 102 North Wells
Edna, Texas 77957
Tracy T. Rudolph 3001 Main Street
Houston, Texas 77002
5922 Beaudry
Robert H. Steelhammer Houston, Texas 77035
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ARTICLE 12.
The name and address of the incorporator of the Corporation is as follows:
NAME ADDRESS
2900 South Tower
Pennzoil Place
William T. Luedke IV Houston, Texas 77002
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ARTICLE 13.
No holder of any shares of any class of stock of the Corporation shall, as such holder, have any preemptive or preferential right to receive, purchase, or subscribe to (1) any unissued or treasury shares of any class of stock (whether now or hereafter authorized) of the Corporation, (2) any obligations, evidences of indebtedness, or other securities of the Corporation convertible into or exchangeable for, or carrying or accompanied by any rights to receive, purchase, or subscribe to, any such unissued or treasury shares, (3) any right of subscription to or to receive, or any warrant or option for the purchase of, any of the foregoing securities, (4) any other securities that may be issued or sold by the Corporation, other than such (if any) as the Board of Directors of the Corporation, in its sole and absolute discretion, may determine from time to time.
ARTICLE 14.
Cumulative voting shall not be permitted.
ARTICLE 15.
Except to the extent otherwise required by law, the vote or concurrence of the holders of a majority of the shares of the Corporation entitled to vote and represented in person or by proxy at a meeting of the shareholders at which a quorum is present shall be the act of the shareholders. With
respect to any matter for which the affirmative vote of a portion of the shares of the Corporation entitled to vote greater than a majority of such shares is required by the Texas Business Corporation Act (or any successor or replacement statute), as the same now exists or may hereafter be amended, the affirmative vote of the holders of a majority of the shares of the Corporation entitled to vote on the matter shall be the act of the shareholders.
ARTICLE 16.
No director of the Corporation shall be liable to the Corporation or its shareholders for monetary damages for any act or omission in the director's capacity as a director, except to the extent that the foregoing exculpation from liability is not permitted under the applicable provisions of the Texas Miscellaneous Corporation Laws Act (or any successor or replacement statute) as the same now exists or may hereafter be amended. Any repeal or modification of the provisions of the foregoing sentence shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification.
ARTICLE 17.
Special meetings of the shareholders of the Corporation may be called only
(1) by the Chairman of the Board, by the President, by a majority of the Board
of Directors, or by such other person or persons as may be authorized in the
Bylaws or (2) by the holders of 50% of the outstanding shares of the Corporation
entitled to vote at the proposed special meeting.
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
PROSPERITY BANCSHARES, INC.
A Texas Corporation
Date of Adoption
July 30, 1998
TABLE OF CONTENTS
Page
Article 1
Offices
Section 1.1.Registered Office..........................................1
Section 1.2.Other Offices..............................................1
Article 2
Shareholders
Section 2.1.Place of Meetings..........................................1
Section 2.2.Quorum; Adjournment of Meetings...........................1
Section 2.3.Annual Meetings............................................2
Section 2.4.Special Meetings...........................................2
Section 2.5.Record Date................................................2
Section 2.6.Notice of Meetings.........................................3
Section 2.7.Shareholder List...........................................3
Section 2.8.Proxies....................................................3
Section 2.9.Voting; Election; Inspectors...............................4
Section 2.10.Conduct of Meetings.......................................5
Section 2.11.Notifications of Nominations and Proposed Business........5
Section 2.12.Treasury Stock............................................6
Article 3
Board of Directors
Section 3.1.Power; Number; Term of Office..............................6
Section 3.2.Classified Board...........................................7
Section 3.3.Quorum; Voting.............................................7
Section 3.4.Place of Meetings; Order of Business.......................7
Section 3.5.First Meeting..............................................7
Section 3.6.Regular Meetings...........................................8
Section 3.7.Special Meetings...........................................8
Section 3.8.Removal....................................................8
Section 3.9.Vacancies; Increases in the Number of Directors............8
Section 3.10.Compensation..............................................8
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Section 3.11.Action Without a Meeting; Telephone Conference Meeting....8
Section 3.12.Approval or Ratification of Acts or Contracts by
Shareholders..............................................9
Article 4
Committees
Section 4.1.Designation; Powers........................................9
Section 4.2.Procedure; Meetings; Quorum...............................10
Section 4.3.Substitution and Removal of Members; Vacancies............10
Article 5
Officers
Section 5.1.Number, Titles and Term of Office.........................10
Section 5.2.Powers and Duties of the Chairman of the Board............11
Section 5.3.Powers and Duties of the President........................11
Section 5.4.Vice Presidents...........................................11
Section 5.5.Secretary.................................................11
Section 5.6.Assistant Secretaries.....................................12
Section 5.7.Treasurer.................................................12
Section 5.8.Assistant Treasurers......................................12
Section 5.9.Action with Respect to Securities of Other Corporations...12
Section 5.10.Delegation...............................................12
Article 6
Capital Stock
Section 6.1.Certificates of Stock.....................................13
Section 6.2.Transfer of Shares........................................13
Section 6.3.Ownership of Shares.......................................13
Section 6.4.Regulations Regarding Certificates........................13
Section 6.5.Lost or Destroyed Certificates............................14
Article 7
Miscellaneous Provisions
Section 7.1.Fiscal Year...............................................14
Section 7.2.Corporate Seal............................................14
Section 7.3.Notice and Waiver of Notice...............................14
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Section 7.4.Facsimile Signatures......................................15
Section 7.5.Reliance upon Books, Reports and Records..................15
Section 7.6.Application of Bylaws.....................................15
Article 8
Indemnification of Officers and Directors
Section 8.1.Indemnification...........................................15
Section 8.2.Nonexclusivity............................................16
Section 8.3.Insurance.................................................16
Section 8.4.Witnesses.................................................16
Article 9
Amendments
Section 9.1.Amendments................................................16
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AMENDED AND RESTATED
BYLAWS
|
OF
PROSPERITY BANCSHARES, INC.
Article 1
OFFICES
SECTION 1.1. REGISTERED OFFICE. The registered office of the Corporation required by the State of Texas to be maintained in the State of Texas shall be the registered office named in the Articles of Incorporation of the Corporation, or such other office as may be designated from time to time by the Board of Directors in the manner provided by law.
SECTION 1.2. OTHER OFFICES. The Corporation may also have offices at such other places both within and without the State of Texas as the Board of Directors may from time to time determine or the business of the Corporation may require.
Article 2
SHAREHOLDERS
SECTION 2.1. PLACE OF MEETINGS. All meetings of the shareholders shall be held at the principal office of the Corporation, or at such other place within or without the State of Texas as shall be specified or fixed in the notices or waivers of notice thereof.
SECTION 2.2. QUORUM; ADJOURNMENT OF MEETINGS. Unless otherwise required by law or provided in the Articles of Incorporation of the Corporation or these Bylaws, the holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at any meeting of shareholders for the transaction of business. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum.
Notwithstanding the other provisions of the Articles of Incorporation of the Corporation or these Bylaws, the chairman of the meeting or the holders of a majority of the issued and outstanding stock, present in person or represented by proxy and entitled to vote thereat, at any meeting of shareholders, whether or not a quorum is present, shall have the power to adjourn such meeting from time to time, without any notice other than announcement at the meeting of the time and place of the
holding of the adjourned meeting. If the adjournment is for more than thirty
(30) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
shareholder of record entitled to vote at such meeting. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally called.
SECTION 2.3. ANNUAL MEETINGS. An annual meeting of the shareholders, for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting, shall be held at such place (within or without the State of Texas), on such date, and at such time as the Board of Directors shall fix and set forth in the notice of the meeting, which date shall be within thirteen (13) months subsequent to the last annual meeting of shareholders.
SECTION 2.4. SPECIAL MEETINGS. Unless otherwise provided in the Articles of Incorporation of the Corporation, special meetings of the shareholders for any purpose or purposes may be called at any time by the Chairman of the Board, by the President, by a majority of the Board of Directors, or by a majority of the executive committee (if any) or by the holders of 50% of the outstanding shares of the Company entitled to vote at the proposed special meeting, at such time and at such place as may be stated in the notice of the meeting. Business transacted at a special meeting shall be confined to the purpose(s) stated in the notice of such meeting.
SECTION 2.5. RECORD DATE. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders, or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors of the Corporation may fix a date as the record date for any such determination of shareholders, which record date shall not precede the date on which the resolutions fixing the record date are adopted and which record date shall not be more than sixty (60) days nor less than ten (10) days before the date of such meeting of shareholders, nor more than sixty (60) days prior to any other action to which such record date relates.
If the Board of Directors does not fix a record date for any meeting of the shareholders, the record date for determining shareholders entitled to notice of or to vote at such meeting shall be at the close of business on the day next preceding the day on which notice is given, or, if in accordance with Article 7, Section 7.3 of these Bylaws notice is waived, at the close of business on the day next preceding the day on which the meeting is held. The record date for determining shareholders for any other purpose (other than the consenting to corporate action in writing without a meeting) shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of shareholders of record entitled to notice of or to vote at a meeting of
shareholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.
For the purpose of determining the shareholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If the Board of Directors does not fix the record date, the record date for determining shareholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation at its registered office in the State of Texas or at its principal place of business. If the Board of Directors does not fix the record date, and prior action by the Board of Directors is necessary, the record date for determining shareholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action.
SECTION 2.6. NOTICE OF MEETINGS. Written notice of the place, date and
hour of all meetings, and, in case of a special meeting, the purpose or purposes
for which the meeting is called, shall be given by or at the direction of the
Board of Directors or the other person(s) calling the meeting to each
shareholder entitled to vote thereat not less than ten (10) nor more than sixty
(60) days before the date of the meeting. Such notice may be delivered either
personally or by mail. If mailed, notice is given when deposited in the United
States mail, postage prepaid, directed to the shareholder at such shareholder's
address as it appears on the records of the Corporation.
SECTION 2.7. SHAREHOLDER LIST. A complete list of shareholders entitled to vote at any meeting of shareholders, arranged in alphabetical order for each class of stock and showing the address of each such shareholder and the number of shares registered in the name of such shareholder, shall be open to the examination of any shareholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The shareholder list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any shareholder who is present.
SECTION 2.8. PROXIES. Each shareholder entitled to vote at a meeting of shareholders or to express consent or dissent to a corporate action in writing without a meeting may authorize another person or persons to act for him by proxy. Proxies for use at any meeting of shareholders shall be filed with the Secretary, or such other officer as the Board of Directors may from time to time
determine by resolution, before or at the time of the meeting. All proxies shall be received and taken charge of and all ballots shall be received and canvassed by the secretary of the meeting, who shall decide all questions touching upon the qualification of voters, the validity of the proxies, and the acceptance or rejection of votes, unless an inspector or inspectors shall have been appointed by the chairman of the meeting, in which event such inspector or inspectors shall decide all such questions.
No proxy shall be valid after eleven (11) months from its date, unless the proxy provides for a longer period. Each proxy shall be revocable unless expressly provided therein to be irrevocable and coupled with an interest sufficient in law to support an irrevocable power.
Should a proxy designate two or more persons to act as proxies, unless such instrument shall provide the contrary, a majority of such persons present at any meeting at which their powers thereunder are to be exercised shall have and may exercise all the powers of voting or giving consents thereby conferred, or if only one be present, then such powers may be exercised by that one; or, if an even number attend and a majority do not agree on any particular issue, each proxy so attending shall be entitled to exercise such powers in respect of such portion of the shares as is equal to the reciprocal of the fraction equal to the number of proxies representing such shares divided by the total number of shares represented by such proxies.
SECTION 2.9. VOTING; ELECTION; INSPECTORS. Unless otherwise required by law or provided in the Articles of Incorporation of the Corporation, each shareholder shall on each matter submitted to a vote at a meeting of shareholders have one vote for each share of the stock entitled to vote which is registered in his name on the record date for the meeting. For the purposes hereof, each election to fill a directorship shall constitute a separate matter. Shares registered in the name of another corporation, domestic or foreign, may be voted by such officer, agent or proxy as the bylaws (or comparable body) of such corporation may determine. Shares registered in the name of a deceased person may be voted by the executor or administrator of such person's estate, either in person or by proxy.
All voting, except as required by the Articles of Incorporation of the Corporation or where otherwise required by law, may be by a voice vote; provided, however, upon request of the chairman of the meeting or upon demand therefor by shareholders holding a majority of the issued and outstanding stock present in person or by proxy at any meeting a stock vote shall be taken. Every stock vote shall be taken by written ballots, each of which shall state the name of the shareholder or proxy voting and such other information as may be required under the procedure established for the meeting. All elections of directors shall be by written ballots, unless otherwise provided in the Articles of Incorporation of the Corporation.
At any meeting at which a vote is taken by written ballots, the chairman of the meeting may appoint one or more inspectors, each of whom shall subscribe an oath or affirmation to execute faithfully the duties of inspector at such meeting with strict impartiality and according to the best of such inspector's ability. Such inspector shall receive the written ballots, count the votes, and make and sign a certificate of the result thereof. The chairman of the meeting may appoint any person to serve as inspector, except no candidate for the office of director shall be appointed as an inspector.
Unless otherwise provided in the Articles of Incorporation of the Corporation, cumulative voting for the election of directors shall be prohibited.
SECTION 2.10. CONDUCT OF MEETINGS. The meetings of the shareholders shall be presided over by the Chairman of the Board, or, if the Chairman of the Board is not present, by the President, or, if the President is not present, by any Vice President, or if no Vice President is present, by a chairman elected at the meeting. The Secretary of the Corporation, if present, shall act as secretary of such meetings, or, if the Secretary is not present, an Assistant Secretary shall so act; if neither the Secretary or an Assistant Secretary is present, then a secretary shall be appointed by the chairman of the meeting.
The chairman of any meeting of shareholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to the chairman in order.
SECTION 2.11. NOTIFICATIONS OF NOMINATIONS AND PROPOSED BUSINESS. Subject
to the rights of holders of any class of capital stock of the Corporation (other
than the common stock), nominations for the election of directors and proposals
for business to be brought before any shareholder meeting may be made by the
Board of Directors or by any shareholder entitled to vote in the election of
directors generally. However, any such shareholder may nominate one or more
persons for election as directors at a meeting or propose business to be brought
before a meeting, or both, only if such shareholder has given timely notice in
proper written form of his intent to make such nomination or nominations or to
propose such business. To be timely, a shareholder's notice must be delivered to
or mailed and received by the Secretary of the Corporation not later than sixty
(60) days prior to such meeting. To be in proper written form, a shareholder's
notice to the Secretary shall set forth:
(i) the name and address of the shareholder who intends to make the nominations or propose the business and, in the case of nominations for the election of directors, of the person or persons to be nominated;
(ii) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote at such meeting and, if applicable, intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice or propose the business specified in the notice;
(iii) if applicable, a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder;
(iv) such other information regarding each nominee or each matter of business to be proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated or the matter been proposed by the Board of Directors; and
(v) if applicable, the consent of each nominee to serve as director of the Corporation if so elected.
A nomination of any person or proposal of any business not made in compliance with the foregoing procedures shall not be eligible to be voted upon by the shareholders at the meeting.
SECTION 2.12.TREASURY STOCK. The Corporation shall not vote, directly or indirectly, shares of its own stock owned by it and such shares shall not be counted for quorum purposes. Nothing in this Section 2.11 shall be construed as limiting the right of the Corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity.
Article 3
BOARD OF DIRECTORS
SECTION 3.1.POWER; NUMBER; TERM OF OFFICE. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, and, subject to the restrictions imposed by law or the Articles of Incorporation of the Corporation, the Board of Directors may exercise all the powers of the Corporation.
The number of directors which shall constitute the whole Board of Directors shall be determined from time to time by the Board of Directors (provided that no decrease in the number of directors which would have the effect of shortening the term of an incumbent director may be made by the Board of Directors). If the Board of Directors makes no such determination, the number of directors shall be three. Each director shall hold office for the term for which such director is
elected, and until such director's successor shall have been elected and qualified or until such director's earlier death, resignation or removal.
Unless otherwise provided in the Articles of Incorporation of the Corporation, directors need not be shareholders nor residents of the State of Texas.
SECTION 3.2.CLASSIFIED BOARD. The directors of the Corporation shall be divided into three classes, with respect to the time that they severally hold office, as nearly equal in number as possible, with the initial term of office of the first class of directors (the "Class I Directors") to expire at the 1999 annual meeting of holders of capital stock of the Corporation, the initial term of office of the second class of directors (the "Class II Directors") to expire at the 2000 annual meeting of holders of capital stock of the Corporation and the initial term of office of the third class of directors (the "Class III Directors") to expire at the 2001 annual meeting of holders of capital stock of the Corporation. Directors elected to succeed those directors whose terms have thereupon expired shall be elected for a term of office to expire at the third succeeding annual meeting of holders of capital stock of the Corporation after their election. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain or attain, if possible, the equality of the number of directors in each class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. If such equality is not possible, the increase or decrease shall be apportioned among the classes in such a way that the difference in the number of directors in any two classes shall not exceed one.
SECTION 3.3.QUORUM; VOTING. Unless otherwise provided in the Articles of Incorporation of the Corporation, a majority of the number of directors fixed in accordance with Section 3.1 shall constitute a quorum for the transaction of business of the Board of Directors and the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors.
SECTION 3.4.PLACE OF MEETINGS; ORDER OF BUSINESS. The directors may hold their meetings and may have an office and keep the books of the Corporation, except as otherwise provided by law, in such place or places, within or without the State of Texas, as the Board of Directors may from time to time determine. At all meetings of the Board of Directors business shall be transacted in such order as shall from time to time be determined by the Chairman of the Board, or in the Chairman of the Board's absence by the President, or in the President's absence by the Vice President, or by the Board of Directors.
SECTION 3.5.FIRST MEETING. Each newly elected Board of Directors may hold its first meeting for the purpose of organization and the transaction of business, if a quorum is present, immediately after and at the same place as the annual meeting of the shareholders. Notice of such
meeting shall not be required. At the first meeting of the Board of Directors in each year at which a quorum shall be present, held after the annual meeting of shareholders, the Board of Directors shall elect the officers of the Corporation.
SECTION 3.6.REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such times and places as shall be designated from time to time by the Chairman of the Board, or in the absence of the Chairman of the Board, by the President, or in the President's absence, by the Vice President, or in the absence of the Vice President, by another officer of the Corporation. Notice of such regular meetings shall not be required.
SECTION 3.7.SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by the Chairman of the Board, the President or, on the written
request of any director, by the Secretary, in each case on at least twenty-four
(24) hours personal, written, telegraphic, cable or wireless notice to each
director. Such notice, or any waiver thereof pursuant to Article 7, Section 7.3
hereof, need not state the purpose or purposes of such meeting, except as may
otherwise be required by law or provided for in the Articles of Incorporation of
the Corporation or these Bylaws. Meetings may be held at any time without notice
if all the directors are present or if those not present waive notice of the
meeting in writing.
SECTION 3.8.REMOVAL. Any director or the entire Board of Directors may be removed, but only for cause, by the holders of a majority of the shares then entitled to vote at an election of directors.
SECTION 3.9.VACANCIES; INCREASES IN THE NUMBER OF DIRECTORS. Unless otherwise provided in the Articles of Incorporation of the Corporation, vacancies existing on the Board of Directors for any reason may be filled by the affirmative vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director; and any director so chosen shall hold office until the next annual meeting held for the election of directors of the class of directors to which such director has been appointed and until such director's successor shall have been elected and qualified, or until such director's earlier death, resignation or removal.
SECTION 3.10.COMPENSATION. Directors and members of standing committees may receive such compensation as the Board of Directors from time to time shall determine to be appropriate, and shall be reimbursed for all reasonable expenses incurred in attending and returning from meetings of the Board of Directors.
SECTION 3.11.ACTION WITHOUT A MEETING; TELEPHONE CONFERENCE MEETING. Unless otherwise restricted by the Articles of Incorporation of the Corporation, any action required or permitted to be taken at any meeting of the Board of Directors or any committee designated by the Board of
Directors may be taken without a meeting if all members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. Such consent shall have the same force and effect as a unanimous vote at a meeting, and may be stated as such in any document or instrument filed with the Secretary of State of the State of Texas.
Unless otherwise restricted by the Articles of Incorporation of the Corporation, subject to the requirement for notice of meetings, members of the Board of Directors, or members of any committee designated by the Board of Directors, may participate in a meeting of such Board of Directors or committee, as the case may be, by means of a conference telephone connection or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such a meeting shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.
SECTION 3.12.APPROVAL OR RATIFICATION OF ACTS OR CONTRACTS BY SHAREHOLDERS. The Board of Directors in its discretion may submit any act or contract for approval or ratification at any annual meeting of the shareholders, or at any special meeting of the shareholders called for the purpose of considering any such act or contract, and any act or contract that shall be approved or be ratified by the vote of the shareholders holding a majority of the issued and outstanding shares of stock of the Corporation entitled to vote and present in person or by proxy at such meeting (provided that a quorum is present) shall be as valid and as binding upon the Corporation and upon all the shareholders as if it has been approved or ratified by every shareholder of the Corporation. In addition, any such act or contract may be approved or ratified by the written consent of shareholders holding a majority of the issued and outstanding shares of capital stock of the Corporation entitled to vote, and such consent shall be as valid and binding upon the Corporation and upon all the shareholders as if it had been approved or ratified by every shareholder of the Corporation.
Article 4
COMMITTEES
SECTION 4.1.DESIGNATION; POWERS. The Board of Directors may, by resolution passed by a majority of the whole board, designate one or more committees, including, if they shall so determine, an executive committee, with each such committee to consist of one or more of the directors of the Corporation. Any such designated committee shall have and may exercise such of the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation as may be provided in such resolution, except that no such committee shall have the power or authority of the Board of Directors in reference to amending the Articles of Incorporation of the Corporation, adopting an agreement of merger or consolidation, recommending to the
shareholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the shareholders a dissolution of the Corporation or a revocation of a dissolution of the Corporation, or amending, altering or repealing these Bylaws or adopting new bylaws for the Corporation. Any such designated committee may authorize the seal of the Corporation to be affixed to all papers which may require it. In addition to the above, such committee or committees shall have such other powers and limitations of authority as may be determined from time to time by the Board of Directors.
SECTION 4.2.PROCEDURE; MEETINGS; QUORUM. Any committee designated pursuant to this Article 4 shall keep regular minutes of its actions and proceedings in a book provided for that purpose and report the same to the Board of Directors at its meeting next succeeding such action, shall fix its own rules or procedures, and shall meet at such times and at such place or places as may be provided by such rules, or by such committee or the Board of Directors. Should a committee fail to fix its own rules, the provisions of these Bylaws, pertaining to the calling of meetings and conduct of business by the Board of Directors, shall apply as nearly as may be possible. At every meeting of any such committee, the presence of a majority of all the members thereof shall constitute a quorum, except as provided in Section 4.3 of this Article 4, and the affirmative vote of a majority of the members present shall be necessary for the adoption by it of any resolution.
SECTION 4.3.SUBSTITUTION AND REMOVAL OF MEMBERS; VACANCIES. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of such committee. In the absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. The Board of Directors shall have the power at any time to remove any member(s) of a committee and to appoint other directors in lieu of the person(s) so removed and shall also have the power to fill vacancies in a committee.
Article 5
OFFICERS
SECTION 5.1.NUMBER, TITLES AND TERM OF OFFICE. The officers of the
Corporation shall be a Chairman of the Board, a President, one or more Vice
Presidents (any one or more of whom may be designated Executive Vice President
or Senior Vice President), a Treasurer, a Secretary, and such other officers as
the Board of Directors may from time to time elect or appoint (including, but
not limited to, one or more Assistant Secretaries and one or more Assistant
Treasurers). Each officer shall hold office until such officer's successor shall
be duly elected and shall qualify or until such officer's death or until such
officer shall resign or shall have been removed. Any number of offices
may be held by the same person, unless the Articles of Incorporation of the Corporation provide otherwise. Except for the Chairman of the Board, no officer need be a director.
SECTION 5.2.POWERS AND DUTIES OF THE CHAIRMAN OF THE BOARD. The Chairman of the Board shall be the chief executive officer of the Corporation. Subject to the control of the Board of Directors and the Executive Committee (if any), the Chairman of the Board shall have general executive charge, management and control of the properties, business and operations of the Corporation with all such powers as may be reasonably incident to such responsibilities; may agree upon and execute all leases, contracts, evidences of indebtedness and other obligations in the name of the Corporation and may sign all certificates for shares of capital stock of the Corporation; and shall have such other powers and duties as designated in accordance with these Bylaws and as from time to time may be assigned to the Chairman of the Board by the Board of Directors. The Chairman of the Board shall preside at all meetings of the shareholders and of the Board of Directors.
SECTION 5.3.POWERS AND DUTIES OF THE PRESIDENT. Unless the Board of Directors otherwise determines, the President shall have the authority to agree upon and execute all leases, contracts, evidences of indebtedness and other obligations in the name of the Corporation; and, unless the Board of Directors otherwise determines, the President shall, in the absence of the Chairman of the Board or if there be no Chairman of the Board, preside at all meetings of the shareholders and of the Board of Directors; and the President shall have such other powers and duties as designated in accordance with these Bylaws and as from time to time may be assigned to the President by the Board of Directors or the Chairman of the Board.
SECTION 5.4.VICE PRESIDENTS. Each Vice President shall at all times possess power to sign all certificates, contracts and other instruments of the Corporation, except as otherwise limited in writing by the Chairman of the Board or the President of the Corporation. Each Vice President shall have such other powers and duties as from time to time may be assigned to such Vice President by the Board of Directors, the Chairman of the Board or the President.
SECTION 5.5.SECRETARY. The Secretary shall keep the minutes of all meetings of the Board of Directors, committees of the Board of Directors and the shareholders, in books provided for that purpose; shall attend to the giving and serving of all notices; may in the name of the Corporation affix the seal of the Corporation to all contracts and attest the affixation of the seal of the Corporation thereto; may sign with the other appointed officers all certificates for shares of capital stock of the Corporation; shall have charge of the certificate books, transfer books and stock ledgers, and such other books and papers as the Board of Directors may direct, all of which shall at all reasonable times be open to inspection of any director upon application at the office of the Corporation during business hours; shall have such other powers and duties as designated in these
Bylaws and as from time to time may be assigned to the Secretary by the Board of Directors, the Chairman of the Board or the President; and shall in general perform all acts incident to the office of Secretary, subject to the control of the Board of Directors, the Chairman of the Board or the President.
SECTION 5.6.ASSISTANT SECRETARIES. Each Assistant Secretary shall have the usual powers and duties pertaining to such offices, together with such other powers and duties as designated in these Bylaws and as from time to time may be assigned to an Assistant Secretary by the Board of Directors, the Chairman of the Board, the President or the Secretary. The Assistant Secretaries shall exercise the powers of the Secretary during that officer's absence or inability or refusal to act.
SECTION 5.7.TREASURER. The Treasurer shall have responsibility for the custody and control of all the funds and securities of the Corporation, and shall have such other powers and duties as designated in these Bylaws and as from time to time may be assigned to the Treasurer by the Board of Directors, the Chairman of the Board or the President. The Treasurer shall perform all acts incident to the position of Treasurer, subject to the control of the Board of Directors, the Chairman of the Board or the President; and the Treasurer shall, if required by the Board of Directors, give such bond for the faithful discharge of the Treasurer's duties in such form as the Board of Directors may require.
SECTION 5.8.ASSISTANT TREASURERS. Each Assistant Treasurer shall have the usual powers and duties pertaining to such office, together with such other powers and duties as designated in these Bylaws and as from time to time may be assigned to each Assistant Treasurer by the Board of Directors, the Chairman of the Board, the President, or the Treasurer. The Assistant Treasurers shall exercise the powers of the Treasurer during that officer's absence or inability or refusal to act.
SECTION 5.9.ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS. Unless otherwise directed by the Board of Directors, the Chairman of the Board or the President, together with the Secretary or any Assistant Secretary shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of security holders of or with respect to any action of security holders of any other corporation in which this Corporation may hold securities and otherwise to exercise any and all rights and powers which this Corporation may possess by reason of its ownership of securities in such other corporation.
SECTION 5.10.DELEGATION. For any reason that the Board of Directors may deem sufficient, the Board of Directors may, except where otherwise provided by statute, delegate the powers or duties of any officer to any other person, and may authorize any officer to delegate specified duties of such office to any other person. Any such delegation or authorization by the Board shall be effected from time to time by resolution of the Board of Directors.
Article 6
CAPITAL STOCK
SECTION 6.1.CERTIFICATES OF STOCK. The certificates for shares of the capital stock of the Corporation shall be in such form, not inconsistent with that required by law and the Articles of Incorporation of the Corporation, as shall be approved by the Board of Directors. Every holder of stock represented by certificates shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairman of the Board, the President or a Vice President and the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer of the Corporation representing the number of shares (and, if the stock of the Corporation shall be divided into classes or series, certifying the class and series of such shares) owned by such shareholder which are registered in certified form; provided, however, that any of or all the signatures on the certificate may be facsimile. The stock record books and the blank stock certificate books shall be kept by the Secretary or at the office of such transfer agent or transfer agents as the Board of Directors may from time to time determine. In case any officer, transfer agent or registrar who shall have signed or whose facsimile signature or signatures shall have been placed upon any such certificate or certificates shall have ceased to be such officer, transfer agent or registrar before such certificate is issued by the Corporation, such certificate may nevertheless be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. The stock certificates shall be consecutively numbered and shall be entered in the books of the Corporation as they are issued and shall exhibit the holder's name and number of shares.
SECTION 6.2.TRANSFER OF SHARES. The shares of stock of the Corporation shall be transferable only on the books of the Corporation by the holders thereof in person or by their duly authorized attorneys or legal representatives upon surrender and cancellation of certificates for a like number of shares. Upon surrender to the Corporation or a transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.
SECTION 6.3.OWNERSHIP OF SHARES. The Corporation shall be entitled to treat the holder of record of any share or shares of capital stock of the Corporation as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Texas.
SECTION 6.4.REGULATIONS REGARDING CERTIFICATES. The Board of Directors shall have the power and authority to make all such rules and regulations as they may deem expedient concerning
the issue, transfer and registration or the replacement of certificates for shares of capital stock of the Corporation.
SECTION 6.5.LOST OR DESTROYED CERTIFICATES. The Board of Directors may determine the conditions upon which the Corporation may issue a new certificate of stock in place of a certificate theretofore issued by it which is alleged to have been lost, stolen or destroyed and may require the owner of such certificate or such owner's legal representative to give bond, with surety sufficient to indemnify the Corporation and each transfer agent and registrar against any and all losses or claims which may arise by reason of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate in the place of the one so lost, stolen or destroyed.
Article 7
MISCELLANEOUS PROVISIONS
SECTION 7.1.FISCAL YEAR. The fiscal year of the Corporation shall begin on the first day of January of each year.
SECTION 7.2.CORPORATE SEAL. The corporate seal shall be circular in form and shall have inscribed thereon the name of the Corporation and the state of its incorporation, which seal shall be in the charge of the Secretary and shall be affixed to certificates of stock, debentures, bonds, and other documents, in accordance with the direction of the Board of Directors or a committee thereof, and as may be required by law; however, the Secretary may, if the Secretary deems it expedient, have a facsimile of the corporate seal inscribed on any such certificates of stock, debentures, bonds, contract or other documents. Duplicates of the seal may be kept for use by any Assistant Secretary.
SECTION 7.3.NOTICE AND WAIVER OF NOTICE. Whenever any notice is required to be given by law, the Articles of Incorporation of the Corporation or under the provisions of these Bylaws, said notice shall be deemed to be sufficient if given (i) by telegraphic, cable or wireless transmission (including by telecopy or facsimile transmission) or (ii) by deposit of the same in a post office box or by delivery to an overnight courier service company in a sealed prepaid wrapper addressed to the person entitled thereto at such person's post office address, as it appears on the records of the Corporation, and such notice shall be deemed to have been given on the day of such transmission or mailing or delivery to courier, as the case may be.
Whenever notice is required to be given by law, the Articles of Incorporation of the Corporation or under any of the provisions of these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person, including without limitation a director, at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the
express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the shareholders, directors, or members of a committee of directors need be specified in any written waiver of notice unless so required by the Articles of Incorporation of the Corporation or these Bylaws.
SECTION 7.4.FACSIMILE SIGNATURES. In addition to the provisions for the use of facsimile signatures elsewhere specifically authorized in these Bylaws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors.
SECTION 7.5.RELIANCE UPON BOOKS, REPORTS AND RECORDS. A member of the Board of Directors, or a member of any committee designated by the Board of Directors, shall, in the performance of such person's duties, be protected to the fullest extent permitted by law in relying upon the records of the Corporation and upon information, opinion, reports or statements presented to the Corporation.
SECTION 7.6.APPLICATION OF BYLAWS. In the event that any provisions of these Bylaws is or may be in conflict with any law of the United States, of the State of Texas or of any other governmental body or power having jurisdiction over this Corporation, or over the subject matter to which such provision of these Bylaws applies, or may apply, such provision of these Bylaws shall be inoperative to the extent only that the operation thereof unavoidably conflicts with such law, and shall in all other respects be in full force and effect.
Article 8
INDEMNIFICATION OF OFFICERS AND DIRECTORS
SECTION 8.1.INDEMNIFICATION. As permitted by Section G of Article 2.02-1 of the Texas Business Corporation Act or any successor statute (the "Indemnification Article"), the Corporation hereby:
(a) makes mandatory the indemnification permitted under Section B of the Indemnification Article as contemplated by Section G thereof;
(b) makes mandatory its payment or reimbursement of the reasonable expenses incurred by a former or present director who was, is, or is threatened to be made a named defendant or respondent in a proceeding upon such director's compliance with the requirements of Section K of the Indemnification Article; and
(c) extends the mandatory indemnification referred to in Section 8.1(a) above and the mandatory payment or reimbursement of expenses referred to in Section 8.1(b) above (i) to all former or present officers of the Corporation and (ii) to all persons who are or were serving at the request of the Corporation as a director, officer, partner or trustee of another foreign or domestic corporation, partnership, joint venture, trust or employee benefit plan, to the same extent that the Corporation is obligated to indemnify and pay or reimburse expenses to directors.
SECTION 8.2.NONEXCLUSIVITY. The indemnification provided by this Article shall not be deemed exclusive of any other rights to which the person indemnified may be entitled under any bylaw, agreement, authorization of shareholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall enure to the benefit of such person's heirs and legal representatives.
SECTION 8.3.INSURANCE. The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the Corporation or who is or was serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another business, foreign, domestic or non-profit corporation, partnership, joint venture, sole proprietorship, trust or other enterprise or employee benefit plan, against any liability asserted against such person and incurred by such person in such a capacity or arising out of such person's status as such a person, whether or not the Corporation would have the power to indemnify such person against that liability under the provisions of this Article or the Texas Business Corporation Act.
SECTION 8.4.WITNESSES. Notwithstanding any other provision of this Article, the Corporation shall pay or reimburse expenses incurred by any director, officer, employee or agent in connection with such person's appearance as a witness or other participation in a proceeding at a time when such person is not a named defendant or respondent in such proceeding.
Article 9
AMENDMENTS
SECTION 9.1.AMENDMENTS. The Board of Directors shall have the power to adopt, amend and repeal from time to time Bylaws of the Corporation. The shareholders of the Corporation shall not have the power to adopt, amend or repeal the Bylaws of the Corporation.
EXHIBIT 10.1
PROSPERITY BANCSHARES, INC.
STOCK OPTION PLAN
SECTION 1. PURPOSE OF THE PLAN. The purpose of the Prosperity Bancshares, Inc. Stock Option Plan, ("Plan") is to encourage ownership of common stock, $1.00 par value ("Common Stock"), of Prosperity Bancshares, Inc., a Texas corporation (the "Company"), by the executive officers and key employees of the Company and its Affiliates (as defined below) and to provide increased incentive for such officers and employees to render services and to exert maximum effort for the success of the Company's business. In addition, the Company expects that the Plan will further strengthen the identification of the executive officers and key employees with the stockholders. Certain options to be granted under this Plan are intended to qualify as Incentive Stock Options ("ISOs") pursuant to Section 422 of the Internal Revenue Code of 1986, as amended ("Code"), while other options granted under this Plan will be nonqualified options which are not intended to qualify as ISOs ("Nonqualified Options"), either or both as provided in the agreements evidencing the options as provided in Section 6 hereof. As used in this Plan, the term "Affiliates" means any "parent corporation" of the Company and any "subsidiary corporation" of the Company within the meaning of Code Sections 424(e) and (f), respectively.
SECTION 2. ADMINISTRATION OF THE PLAN.
(a) COMPOSITION OF THE ADMINISTRATION COMMITTEE. The Plan shall be administered by the Board of Directors of the Company (the "Board") or any committee appointed by the Board to administer the Plan. The Board in its capacity as the administrator of the Plan or any committee appointed by the Board to administer the Plan shall both be referred to herein as the "Committee".
(b) COMMITTEE ACTION. The Committee shall hold its meetings at such times and places as it may determine. A majority of its members shall constitute a quorum, and all determinations of the Committee shall be made by not less than a majority of its members. Any decision or determination reduced to writing and signed by a majority of the members shall be fully as effective as if it had been made by a majority vote of its members at a meeting duly called and held. The Committee may designate the Secretary of the Company or other Company employees to assist the Committee in the administration of the Plan, and may grant authority to such persons to execute award agreements or other documents on behalf of the Committee and the Company. Any duly constituted committee of the Board satisfying the qualifications of this Section 2 may be appointed as the Committee.
(c) COMMITTEE EXPENSES. All expenses and liabilities incurred by the Committee in the administration of the Plan shall be borne by the Company. The Committee may employ attorneys, consultants, accountants or other persons.
SECTION 3. STOCK RESERVED FOR THE PLAN. Subject to adjustment as provided in Section 6 hereof, the aggregate number of shares of Common Stock that may be optioned under the Plan is 85,000. The shares subject to the Plan shall consist of authorized but unissued shares of Common
Stock and such number of shares shall be and is hereby reserved for sale for such purpose. Any of such shares which may remain unsold and which are not subject to outstanding options at the termination of the Plan shall cease to be reserved for the purpose of the Plan, but until termination of the Plan or the termination of the last of the options granted under the Plan, whichever last occurs, the Company shall at all times reserve a sufficient number of shares to meet the requirements of the Plan. Should any option expire or be cancelled prior to its exercise in full, the shares theretofore subject to such option may again be made subject to an option under the Plan.
SECTION 4. ELIGIBILITY. The persons eligible to participate in the Plan as a recipient of options ("Optionee") shall include only executive officers and key employees of the Company or its Affiliates at the time the option is granted. An executive officer or key employee who has been granted an option hereunder may be granted an additional option or options, if the Committee shall so determine.
SECTION 5. GRANT OF OPTIONS.
(a) COMMITTEE DISCRETION. The Committee shall have sole and absolute
discretionary authority (i) to determine, authorize, and designate those
persons pursuant to this Plan who are to receive options under the Plan,
(ii) to determine the number of shares of Common Stock to be covered by
such options and the terms thereof, and (iii) to determine the type of
option granted: ISO, Nonqualified Option or a combination of ISO and
Nonqualified Options. The Committee shall thereupon grant options in
accordance with such determinations as evidenced by a written option
agreement. Subject to the express provisions of the Plan, the Committee
shall have discretionary authority to prescribe, amend and rescind rules
and regulations relating to the Plan, to interpret the Plan, to prescribe
the terms of the option agreements (which need not be identical), to
amend the terms of the option agreements (provided that no amendment
shall impair the rights of an Optionee, without the Optionee's consent)
and to make all other determinations deemed necessary or advisable for
the administration of the Plan.
(b) STOCKHOLDER APPROVAL. The Plan shall be approved by the holders of a majority of the outstanding shares of Common Stock.
(c) LIMITATION ON INCENTIVE STOCK OPTIONS. The aggregate fair market value (determined in accordance with Section 6(b) of this Plan at the time the option is granted) of the Common Stock with respect to which ISOs may be exercisable for the first time by any Optionee during any calendar year under all such plans of the Company and its Affiliates shall not exceed $100,000.
SECTION 6. TERMS AND CONDITIONS. Each option granted under the Plan shall be evidenced by an agreement, in a form approved by the Committee, which shall be subject to the following express terms and conditions and to such other terms and conditions as the Committee may deem appropriate.
(a) OPTION PERIOD. The Committee shall promptly notify the Optionee of the option grant and a written agreement shall promptly be executed and delivered by and on behalf of the Company and the Optionee, provided that the option grant shall expire if a written agreement is not signed by said Optionee (or his agent or attorney) and returned to the Company within 60 days from date of receipt by the Optionee of such agreement. The date of grant shall be the date the option is actually granted by the Committee, even though the written agreement may be executed and delivered by the Company and the Optionee after that date. Each option agreement shall specify the period for which the option thereunder is granted (which in no event shall exceed ten years from the date of grant) and shall provide that the option shall expire at the end of such period. If the original term of an option is less than ten years from the date of grant, the option may be amended prior to its expiration, with the approval of the Committee and the Optionee, to extend the term so that the term as amended is not more than ten years from the date of grant. However, in the case of an ISO granted to an individual who, at the time of grant, owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or its Affiliate ("Ten Percent Stockholder"), such period shall not exceed five years from the date of grant.
(b) OPTION PRICE. The purchase price of each share of Common Stock subject to a Nonqualified Option under this Plan shall be the "Book Value" of a share of Common Stock as of a date to be determined by the Committee. "Book Value" shall mean the total net worth of the Company (i.e., stockholders equity) divided by the number of shares outstanding. The purchase price of each share of Common Stock subject to an ISO shall be determined by the Committee at the time the option is granted and shall not be less than 100% of the fair market value of a share of Common Stock on the date the option is granted, as determined by the Committee. In the case of ISOs granted to a Ten Percent Stockholder, the exercise price shall not be less than 110% of the fair market value of a share of Common Stock on the date the option is granted.
For all purposes under this Plan, the determination of the fair market value of a share of Common Stock on a particular date shall be made by the Committee in such manner as it deems appropriate.
(c) EXERCISE PERIOD. The Committee may provide in the option agreement that an option may be exercised in whole, immediately, or is to be exercisable in increments. However, no portion of any option may be exercisable by an Optionee prior to the approval of this Plan by the shareholders of the Company.
(d) PROCEDURE FOR EXERCISE. Options shall be exercised by the delivery of written notice to the Secretary of the Company setting forth the number of shares with respect to which the option is being exercised. Such notice shall be accompanied by cash or cashier's check, bank draft, postal or express money order payable to the order of the Company, or Common Stock theretofore owned by such Optionee (or any combination of cash and Common Stock). Notice may also be delivered by fax or telecopy provided that the
purchase price of such shares is delivered to the Company via wire transfer on the same day the fax is received by the Company. The notice shall specify the address to which the certificates for such shares are to be mailed. An Optionee shall be deemed to be a stockholder with respect to shares covered by an option on the date the Company receives such written notice and such option payment. As promptly as practicable after receipt of such written notification and payment, the Company shall deliver to the Optionee certificates for the number of shares with respect to which such option has been so exercised, issued in the Optionee's name or such other name as Optionee directs; provided, however, that such delivery shall be deemed effected for all purposes when a stock transfer agent of the Company shall have deposited such certificates in the United States mail, addressed to the Optionee at the address specified pursuant to this Section 6(d).
(e) TERMINATION OF EMPLOYMENT. If an Optionee to whom an option is granted ceases to be employed by the Company for any reason other than death or disability, any option which is exercisable on the date of such termination of employment may be exercised during a period beginning on such date and ending at the time set forth in the option agreement; provided, however, that if an Optionee's employment is terminated because of the Optionee's theft or embezzlement from the Company, disclosure of trade secrets of the Company or the commission of a willful, felonious act while in the employment of the Company (such reasons shall hereinafter be collectively referred to as "for cause"), then any option or unexercised portion thereof granted to said Optionee shall expire upon such termination of employment. Notwithstanding the foregoing, no ISO may be exercised later than three months after an employee's termination of employment for any reason other than death or disability.
(f) DISABILITY OR DEATH OF OPTIONEE. In the event the Optionee dies or is determined under this Plan to be disabled while the Optionee is employed by the Company, the options previously granted to the Optionee may be exercised (whether or not exercisable on the date of death or the determination of disability) at any time and from time to time, within a period beginning on the date of such determination of disability or death and ending at the time set forth in the option agreement, by the Optionee, the guardian of the Optionee's estate, the executor or administrator of the Optionee's estate or by the person or persons to whom the Optionee's rights under the option shall pass by will or the laws of descent and distribution, but in no event may the option be exercised after its expiration under the terms of the option agreement. Notwithstanding the foregoing, no ISO may be exercised later than one year after the determination of disability or death. An Optionee shall be deemed to be disabled if, in the opinion of a physician selected by the Committee, the Optionee is incapable of performing services for the Company of the kind the Optionee was performing at the time the disability occurred by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long, continued and indefinite duration. The date of determination of disability for purposes hereof shall be the date of such determination by such physician.
(g) ASSIGNABILITY. An option shall not be assignable or otherwise transferable except by will or by the laws of descent and distribution or the rules thereunder. During the lifetime of an Optionee, an option shall be exercisable only by him.
(h) INCENTIVE STOCK OPTIONS. Each option agreement may contain such terms and provisions as the Committee may determine to be necessary or desirable in order to qualify under the Code an option designated as an incentive stock option.
(i) NO RIGHTS AS STOCKHOLDER. No Optionee shall have any rights as a stockholder with respect to shares covered by an option until the option is exercised by the written notice and accompanied by payment as provided in clause (d) above.
(j) EXTRAORDINARY CORPORATE TRANSACTIONS. The existence of
outstanding options shall not affect in any way the right or power of the
Company or its shareholders to make or authorize any or all adjustments,
recapitalizations, reorganizations, exchanges, or other changes in the
Company's capital structure or its business, or any merger or
consolidation of the Company, or any issuance of Common Stock or other
securities or subscription rights thereto, or any issuance of bonds,
debentures, preferred or prior preference stock ahead of or affecting the
Common Stock or the rights thereof, or the dissolution or liquidation of
the Company, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding, whether of a similar
character or otherwise. If the Company recapitalizes or otherwise changes
its capital structure, or merges, consolidates, sells all of its assets
or dissolves (each of the foregoing a "Fundamental Change"), then
thereafter upon any exercise of an option theretofore granted the
Optionee shall be entitled to purchase under such option, in lieu of the
number of shares of Common Stock as to which option shall then be
exercisable, the number and class of shares of stock and securities to
which the Optionee would have been entitled pursuant to the terms of the
Fundamental Change if, immediately prior to such Fundamental Change, the
Optionee had been the holder of record of the number of shares of Common
Stock as to which such option is then exercisable. If (i) the Company
shall not be the surviving entity in any merger or consolidation (or
survives only as a subsidiary of another entity), (ii) the Company sells
all or substantially all of its assets to any other person or entity
(other than a wholly-owned subsidiary), (iii) any person or entity
(including a "group" as contemplated by Section 13(d)(3) of the Exchange
Act) acquires or gains ownership or control of (including, without
limitation, power to vote) more than 50% of the outstanding shares of
Common Stock, (iv) the Company is to be dissolved and liquidated, or (v)
as a result of or in connection with a contested election of directors,
the persons who were directors of the Company before such election shall
cease to constitute a majority of the Board (each such event in clauses
(i) through (v) above is referred to herein as a "Corporate Change"), all
of an Optionee's options shall immediately become fully vested and
exercisable.
(k) CHANGES IN CAPITAL STRUCTURE. If the outstanding shares of Common Stock or other securities of the Company, or both, for which the option is then exercisable shall at any time be changed or exchanged by declaration of a stock dividend, stock split, combination
of shares or recapitalization, the number and kind of shares of Common Stock or other securities which are subject to this Plan or subject to any options theretofore granted, and the exercise prices, shall be appropriately and equitably adjusted so as to maintain the proportionate number of shares or other securities without changing the aggregate exercise price.
(l) ACCELERATION OF OPTIONS. Except as hereinbefore expressly provided, (i) the issuance by the Company of shares of stock of any class of securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, (ii) the payment of a dividend in property other than Common Stock, or (iii) the occurrence of any similar transaction, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Common Stock subject to options theretofore granted or the purchase price per share, unless the Committee shall determine in its sole discretion that an adjustment is necessary to provide equitable treatment to Optionee. Notwithstanding anything to the contrary contained in this Plan, the Committee may in its sole discretion accelerate the time at which any option may be exercised, including, but not limited to, upon the occurrence of the events specified in this Section 6.
SECTION 7. AMENDMENTS OR TERMINATION. The Board may amend, alter or
discontinue the Plan, but no amendment or alteration shall be made which would
impair the rights of any Optionee, without his consent, under any option
theretofore granted, or which, without the approval of the stockholders, would:
(i) except as is provided in Section 6(k) of the Plan, increase the total number
of shares reserved for the purposes of the Plan, (ii) change the class of
persons eligible to participate in the Plan as provided in Section 4 of the
Plan, (iii) extend the applicable maximum option period provided for in Section
6(a) of the Plan, (iv) extend the expiration date of this Plan set forth in
Section 13 of the Plan, (v) except as provided in Section 6(k) of the Plan,
decrease to any extent the option price of any option granted under the Plan or
(vi) withdraw the administration of the Plan from the Committee.
SECTION 8. COMPLIANCE WITH OTHER LAWS AND REGULATIONS. The Plan, the grant and exercise of options thereunder, and the obligation of the Company to sell and deliver shares under such options, shall be subject to all applicable federal and state laws, rules and regulations and to such approvals by any governmental or regulatory agency as may be required. The Company shall not be required to issue or deliver any certificates for shares of Common Stock prior to the completion of any registration or qualification of such shares under any federal or state law or issuance of any ruling or regulation of any government body which the Company shall, in its sole discretion, determine to be necessary or advisable. Any adjustments provided for in subparagraphs 6(j), (k) and (l) shall be subject to any shareholder action required by Texas corporate law.
SECTION 9. PURCHASE FOR INVESTMENT. Unless the options and shares of Common Stock covered by this Plan have been registered under the Securities Act of 1933, as amended, or the Company has determined that such registration is unnecessary, each person exercising an option
under this Plan may be required by the Company to give a representation in writing that he is acquiring such shares for his own account for investment and not with a view to, or for sale in connection with, the distribution of any part thereof.
SECTION 10. TAXES.
(a) The Company may make such provisions as it may deem appropriate for the withholding of any taxes which it determines is required in connection with any options granted under this Plan.
(b) Notwithstanding the terms of Paragraph 10(a), any Optionee may pay all or any portion of the taxes required to be withheld by the Company or paid by him or her in connection with the exercise of a Nonqualified Option by electing to have the Company withhold shares of Common Stock, or by delivering previously owned shares of Common Stock. An Optionee must make the foregoing election on or before the date that the amount of tax to be withheld is determined ("Tax Date"). All such elections are irrevocable and subject to disapproval by the Committee. Elections by Optionees who are subject to the short-swing profits recapture provisions of Section 16(b) of the Exchange Act ("Covered Optionee") are subject to the following additional restrictions: (i) such election may not be made within six months of the grant of an option, provided that this limitation shall not apply in the event of death or disability, and (ii) such election must be made either six months or more prior to the Tax Date or in a window period which shall commence on the third business day following the Company's release of a quarterly or annual summary statement of sales and earnings and ending on the twelfth business day following such release. Where the Tax Date in respect of an option is deferred until six months after exercise and the Covered Optionee elects share withholding, the full amount of shares of Common Stock will be issued or transferred to him upon exercise of the option, but he shall be unconditionally obligated to tender back to the Company the number of shares necessary to discharge the Company's withholding obligation or his estimated tax obligation on the Tax Date.
SECTION 11. REPLACEMENT OF OPTIONS. The Committee from time to time may permit an Optionee under this Plan to surrender for cancellation any unexercised outstanding option and receive from the Company in exchange an option for such number of shares of Common Stock as may be designated by the Committee. The Committee may, with the consent of the person entitled to exercise any outstanding option, amend such option, including reducing the exercise price of any option to not less than the fair market value of the Common Stock at the time of the amendment and extending the term thereof.
SECTION 12. NO RIGHT TO COMPANY EMPLOYMENT. Optionees shall be considered to be in the employment of the Company as long as they remain employees of the Company or an Affiliate. Any questions as to whether and when there has been a termination of such employment and the cause of such termination shall be determined by the Committee, and its determination shall be final. Nothing contained herein shall be construed as conferring upon the Optionee the right to
continue in the employ of the Company, nor shall anything contained herein be construed or interpreted to limit the "employment at will" relationship between the Optionee and the Company.
SECTION 13. LIABILITY OF COMPANY. The Company and any Affiliate which is in existence or hereafter comes into existence shall not be liable to an Optionee or other persons as to:
(a) THE NON-ISSUANCE OF SHARES. The non-issuance or sale of shares as to which the Company has been unable to obtain from any regulatory body having jurisdiction the authority deemed by the Company's counsel to be necessary to the lawful issuance and sale of any shares hereunder; and
(b) TAX CONSEQUENCES. Any tax consequence expected, but not realized, by any Optionee or other person due to the exercise of any option granted hereunder.
SECTION 14. EFFECTIVENESS AND EXPIRATION OF PLAN. The Plan shall be effective on the date the Board adopts the Plan. The Plan shall expire ten years after the date the Board approves the Plan and thereafter no option shall be granted pursuant to the Plan.
SECTION 15. NON-EXCLUSIVITY OF THE PLAN. Neither the adoption by the Board nor the submission for approval of this Plan to the shareholders of the Company shall be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including without limitation, the granting of restricted stock or stock options otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases.
SECTION 16. GOVERNING LAW. This Plan and any agreements hereunder shall be interpreted and construed in accordance with the laws of the State of Texas and applicable federal law.
IN WITNESS WHEREOF, and as conclusive evidence of the adoption of the foregoing by directors of the Company, Prosperity Bancshares, Inc., has caused these presents to be duly executed in its name and behalf by its proper officers thereunto duly authorized as of this ____ day of ______________. 199__.
PROSPERITY BANCSHARES, INC.
By:_________________________________
ATTEST:
EXHIBIT 10.2
PROSPERITY BANCSHARES, INC.
1998 STOCK INCENTIVE PLAN
I. PURPOSE
The purpose of the PROSPERITY BANCSHARES, INC. 1998 STOCK INCENTIVE PLAN (the "PLAN") is to provide a means through which PROSPERITY BANCSHARES, INC., a Texas corporation (the "COMPANY"), and its subsidiaries, may attract able persons to enter the employ of the Company and to provide a means whereby those employees upon whom the responsibilities of the successful administration and management of the Company rest, and whose present and potential contributions to the welfare of the Company are of importance, can acquire and maintain stock ownership, thereby strengthening their concern for the welfare of the Company and their desire to remain in its employ. A further purpose of the Plan is to provide employees, directors and other individuals with additional incentive and reward opportunities designed to enhance the profitable growth of the Company. Accordingly, the Plan provides for granting Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Performance Awards, Phantom Stock Awards, or any combination of the foregoing, as is best suited to the circumstances of the particular Holder as provided herein.
II. DEFINITIONS
The following definitions shall be applicable throughout the Plan unless specifically modified by any paragraph:
(a) "AFFILIATES" means any "parent corporation" of the Company and any "subsidiary" of the Company within the meaning of Code Sections 424(e) and (f), respectively.
(b) "AWARD" means, individually or collectively, any Option, Restricted Stock Award, Phantom Stock Award, Performance Award or Stock Appreciation Right.
(c) "BOARD" means the Board of Directors of the Company.
(d) "CHANGE OF CONTROL" means the occurrence of any of the following events: (i) the Company shall not be the surviving entity in any merger, consolidation or other reorganization (or survives only as a subsidiary of an entity other than a previously wholly-owned subsidiary of the Company), (ii) the Company's subsidiary bank is merged or consolidated into, or otherwise acquired by, an entity other than a wholly-owned subsidiary of the Company, (iii) the Company sells, leases or exchanges all or substantially all of its assets to any other person or entity (other than a
wholly-owned subsidiary of the Company), (iv) the Company is to be dissolved and
liquidated, (v) any person or entity, including a "group" as contemplated by
Section 13(d)(3) of the 1934 Act, acquires or gains ownership or control
(including, without limitation, power to vote or control the voting) of more
than 50% of the outstanding shares of the Company's voting stock (based upon
voting power), or (vi) as a result of or in connection with a contested election
of directors, the persons who were directors of the Company before such election
shall cease to constitute a majority of the Board.
(e) "CHANGE OF CONTROL VALUE" shall mean (i) the per share price offered to shareholders of the Company in any such merger, consolidation, reorganization, sale of assets or dissolution transaction, (ii) the price per share offered to shareholders of the Company in any tender offer or exchange offer whereby a Change of Control takes place, or (iii) if such Change of Control occurs other than pursuant to a tender or exchange offer, the Fair Market Value per share of the shares into which Awards are exercisable, as determined by the Committee, whichever is applicable. In the event that the consideration offered to shareholders of the Company consists of anything other than cash, the Committee shall determine the fair cash equivalent of the portion of the consideration offered which is other than cash.
(f) "CODE" means the Internal Revenue Code of 1986, as amended. Reference in the Plan to any section of the Code shall be deemed to include any amendments or successor provisions to any section and any regulations under such section.
(g) "COMMITTEE" means the Compensation Committee of the Board which shall be (i) constituted so as to permit the Plan to comply with Rule 16b-3 and (ii) constituted solely of "outside directors," within the meaning of section 162(m) of the Code and applicable interpretive authority thereunder.
(h) "COMPANY" means Prosperity Bancshares, Inc. and any of its Affiliates.
(i) "DIRECTOR" means an individual elected to the Board by the shareholders of the Company or by the Board under applicable corporate law who is serving on the Board on the date the Plan is adopted by the Board or is elected to the Board after such date.
(j) An "EMPLOYEE" means any person (including an officer or a Director) in an employment relationship with the Company or any parent or subsidiary corporation (as defined in section 424 of the Code).
(k) "1934 ACT" means the Securities Exchange Act of 1934, as amended.
(l) "FAIR MARKET VALUE" means, as of any specified date, the mean of the high and low sales prices of the Stock (i) reported by the any interdealer quotation system on which the Stock is quoted on that date or (ii) if the Stock is listed on a national stock exchange, reported on the stock exchange composite tape on that date; or, in either case, if no prices are reported on that date, on the last preceding date on which such prices of the Stock are so reported. If the Stock is traded over the counter at the time a determination of its fair market value is required to be made hereunder, its fair market value shall be deemed to be equal to the average between the reported high and low or closing bid and asked prices of Stock on the most recent date on which Stock was publicly traded. In the event Stock is not publicly traded at the time a determination of its value is required to be made hereunder, the determination of its fair market value shall be made by the Committee in such manner as it deems appropriate.
(m) "HOLDER" means an employee, director or other individual who has been granted an Award.
(n) "INCENTIVE STOCK OPTION" means an incentive stock option within the meaning of section 422(b) of the Code, commonly known as "qualified" stock options.
(o) "NONQUALIFIED STOCK OPTION" means an option granted under Paragraph VII of the Plan to purchase Stock which does not constitute an Incentive Stock Option.
(p) "OPTION" means an Award granted under Paragraph VII of the Plan and includes both Incentive Stock Options to purchase Stock and Nonqualified Stock Options to purchase Stock.
(q) "OPTION AGREEMENT" means a written agreement between the Company and a Holder with respect to an Option.
(r) "PERFORMANCE AWARD" means an Award granted under Paragraph X of the Plan.
(s) "PERFORMANCE AWARD AGREEMENT" means a written agreement between the Company and a Holder with respect to a Performance Award.
(t) "PHANTOM STOCK AWARD" means an Award granted under Paragraph XI of the Plan.
(u) "PHANTOM STOCK AWARD AGREEMENT" means a written agreement between the Company and a Holder with respect to a Phantom Stock Award.
(v) "PLAN" means the Prosperity Bancshares, Inc. 1998 Stock Incentive Plan, as amended from time to time.
(w) "RESTRICTED STOCK AGREEMENT" means a written agreement between the Company and a Holder with respect to a Restricted Stock Award.
(x) "RESTRICTED STOCK AWARD" means an Award granted under Paragraph IX of the Plan.
(y) "RULE 16B-3" means SEC Rule 16b-3 promulgated under the 1934 Act, as such may be amended from time to time, and any successor rule, regulation or statute fulfilling the same or a similar function.
(z) "SPREAD" means, in the case of a Stock Appreciation Right, an amount equal to the excess, if any, of the Fair Market Value of a share of Stock on the date such right is exercised over the exercise price of such Stock Appreciation Right.
(aa) "STOCK" means the common stock, $1.00 par value, of the Company.
(bb) "STOCK APPRECIATION RIGHT" means an Award granted under Paragraph VIII of the Plan.
(cc) "STOCK APPRECIATION RIGHTS AGREEMENT" means a written agreement between the Company and a Holder with respect to an Award of Stock Appreciation Rights.
III. EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan shall be effective upon the date of its adoption by the Board, provided that the Plan is approved by the shareholders of the Company within twelve months thereafter. No further Awards may be granted under the Plan after the expiration of ten years from the date of its adoption by the Board. The Plan shall remain in effect until all Awards granted under the Plan have been satisfied or expired.
IV. ADMINISTRATION
(a) COMMITTEE. The Plan shall be administered by the Committee.
(b) POWERS. Subject to the provisions of the Plan, the Committee shall have sole authority, in its discretion, to recommend to the Board of Directors of the Company which employees, directors or other individuals shall receive an Award, the time or times when such Award shall be made, whether an Incentive Stock Option, Nonqualified Option or Stock Appreciation Right shall be granted, the number of shares of Stock which may be issued under each Option, Stock Appreciation Right or Restricted Stock Award, and the value of each Performance Award and
Phantom Stock Award. In making such recommendations the Committee may take into account the nature of the services rendered by the respective employees, directors or other individuals, their present and potential contributions to the Company's success and such other factors as the Committee in its discretion shall deem relevant. All final decisions regarding the granting of Awards shall be made by the Board of Directors of the Company.
(c) ADDITIONAL POWERS. The Committee shall have such additional powers as are delegated to it by the other provisions of the Plan. Subject to the express provisions of the Plan, the Committee is authorized to construe the Plan and the respective agreements executed thereunder, to prescribe such rules and regulations relating to the Plan as it may deem advisable to carry out the Plan, and to determine the terms, restrictions and provisions of each Award, including such terms, restrictions and provisions as shall be requisite in the judgment of the Committee to cause designated Options to qualify as Incentive Stock Options, and to make all other determinations necessary or advisable for administering the Plan. The Committee may correct any defect or supply any omission or reconcile any inconsistency in any agreement relating to an Award in the manner and to the extent it shall deem expedient to carry it into effect. All final determinations on the matters referred to in this Article IV shall be made by the Board of Directors of the Company.
V. GRANT OF OPTIONS, STOCK APPRECIATION RIGHTS, RESTRICTED STOCK AWARDS, PERFORMANCE AWARDS AND PHANTOM STOCK AWARDS; SHARES SUBJECT TO THE PLAN
(a) STOCK GRANT AND AWARD LIMITS. The Committee may from time to time grant Awards to one or more employees, directors or other individuals determined by it to be eligible for participation in the Plan in accordance with the provisions of Paragraph VI. Subject to Paragraph XII, the aggregate number of shares of Stock that may be issued under the Plan shall not exceed 460,000 shares. Shares of Stock shall be deemed to have been issued under the Plan only to the extent actually issued and delivered pursuant to an Award. To the extent that an Award lapses or the rights of its Holder terminate or the Award is paid in cash, any shares of Stock subject to such Award shall again be available for the grant of an Award. To the extent that an Award lapses or the rights of its Holder terminate, any shares of Stock subject to such Award shall again be available for the grant of an Award. Separate stock certificates shall be issued by the Company for those shares acquired pursuant the exercise of an Incentive Stock Option and for those shares acquired pursuant to the exercise of a Nonqualified Stock Option.
(b) STOCK OFFERED. The stock to be offered pursuant to the grant of an Award may be authorized but unissued Stock or Stock previously issued and outstanding and reacquired by the Company.
VI. ELIGIBILITY
Awards may be granted to employees of the Company, directors of the Company or other individuals whose contributions to the welfare of the Company are of importance. An Award may be granted on more than one occasion to the same person, and, subject to the limitations set forth in the Plan, such Award may include an Incentive Stock Option or a Nonqualified Stock Option, a Stock Appreciation Right, a Restricted Stock Award, a Performance Award, a Phantom Stock Award or any combination thereof.
VII. STOCK OPTIONS
(a) OPTION PERIOD. The term of each Option shall be as specified by the Committee at the date of grant.
(b) LIMITATIONS ON EXERCISE OF OPTION. An Option shall be exercisable in whole or in such installments and at such times as determined by the Committee.
(c) SPECIAL LIMITATIONS ON INCENTIVE STOCK OPTIONS. To the extent that the aggregate Fair Market Value (determined at the time the respective Incentive Stock Option is granted) of Stock with respect to which Incentive Stock Options are exercisable for the first time by an individual during any calendar year under all incentive stock option plans of the Company and its parent and subsidiary corporations exceeds $100,000, such Incentive Stock Options shall be treated as Nonqualified Stock Options as determined by the Committee. The Committee shall determine, in accordance with applicable provisions of the Code, Treasury Regulations and other administrative pronouncements, which of an optionee's Incentive Stock Options will not constitute Incentive Stock Options because of such limitation and shall notify the optionee of such determination as soon as practicable after such determination. No Incentive Stock Option shall be granted to an individual if, at the time the Option is granted, such individual owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of its parent or subsidiary corporation, within the meaning of section 422(b)(6) of the Code, unless (i) at the time such Option is granted the option price is at least 110% of the Fair Market Value of the Stock subject to the Option and (ii) such Option by its terms is not exercisable after the expiration of five years from the date of grant.
(d) OPTION AGREEMENT. Each Option shall be evidenced by an Option Agreement in such form and containing such provisions not inconsistent with the provisions of the Plan as the Committee from time to time shall approve, including, without limitation, provisions to qualify an Incentive Stock Option under section 422 of the Code. An Option Agreement may provide for the payment of the option price, in whole or in part, by the delivery of a number of shares of Stock (plus
cash if necessary) having a Fair Market Value equal to such option price. Each Option Agreement shall provide that the Option may not be exercised earlier than six months from the date of grant and shall specify the effect of termination of employment on the exercisability of the Option. Moreover, an Option Agreement may provide for a "cashless exercise" of the Option by establishing procedures whereby the Holder, by a properly-executed written notice, directs (i) an immediate market sale or margin loan respecting all or a part of the shares of Stock to which he is entitled upon exercise pursuant to an extension of credit by the Company to the Holder of the option price, (ii) the delivery of the shares of Stock from the Company directly to a brokerage firm and (iii) the delivery of the option price from the sale or margin loan proceeds from the brokerage firm directly to the Company. Such Option Agreement may also include, without limitation, provisions relating to (i) vesting of Options, subject to the provisions hereof accelerating such vesting on a Change of Control, (ii) tax matters (including provisions (y) permitting the delivery of additional shares of Stock or the withholding of shares of Stock from those acquired upon exercise to satisfy federal or state income tax withholding requirements and (z) dealing with any other applicable employee wage withholding requirements), and (iii) any other matters not inconsistent with the terms and provisions of this Plan that the Committee shall in its sole discretion determine. The terms and conditions of the respective Option Agreements need not be identical.
(e) OPTION PRICE AND PAYMENT. The price at which a share of Stock may be
purchased upon exercise of an Option shall be determined by the Committee, but
(i) such purchase price shall not be less than the Fair Market Value of Stock
subject to an Incentive Stock Option on the date the Incentive Stock Option is
granted and (ii) such purchase price shall be subject to adjustment as provided
in Paragraph XII. The Option or portion thereof may be exercised by delivery of
an irrevocable notice of exercise to the Company. The purchase price of the
Option or portion thereof shall be paid in full in the manner prescribed by the
Committee.
(f) SHAREHOLDER RIGHTS AND PRIVILEGES. The Holder shall be entitled to all the privileges and rights of a shareholder only with respect to such shares of Stock as have been purchased under the Option and for which certificates of stock have been registered in the Holder's name.
(g) OPTIONS AND RIGHTS IN SUBSTITUTION FOR STOCK OPTIONS GRANTED BY OTHER CORPORATIONS. Options and Stock Appreciation Rights may be granted under the Plan from time to time in substitution for stock options held by individuals employed by corporations who become employees as a result of a merger or consolidation of the employing corporation with the Company or any subsidiary, or the acquisition by the Company or a subsidiary of the assets of the employing corporation, or the acquisition by the Company or a subsidiary of stock of the employing corporation with the result that such employing corporation becomes a subsidiary.
VIII. STOCK APPRECIATION RIGHTS
(a) STOCK APPRECIATION RIGHTS. A Stock Appreciation Right is the right to receive an amount equal to the Spread with respect to a share of Stock upon the exercise of such Stock Appreciation Right. Stock Appreciation Rights may be granted in connection with the grant of an Option, in which case the Option Agreement will provide that exercise of Stock Appreciation Rights will result in the surrender of the right to purchase the shares under the Option as to which the Stock Appreciation Rights were exercised. Alternatively, Stock Appreciation Rights may be granted independently of Options in which case each Award of Stock Appreciation Rights shall be evidenced by a Stock Appreciation Rights Agreement which shall contain such terms and conditions as may be approved by the Committee. The Spread with respect to a Stock Appreciation Right may be payable either in cash, shares of Stock with a Fair Market Value equal to the Spread or in a combination of cash and shares of Stock. With respect to Stock Appreciation Rights that are subject to Section 16 of the 1934 Act, however, the Committee shall, except as provided in Paragraph XII(c), retain sole discretion (i) to determine the form in which payment of the Stock Appreciation Right will be made (I.E., cash, securities or any combination thereof) or (ii) to approve an election by a Holder to receive cash in full or partial settlement of Stock Appreciation Rights. Each Stock Appreciation Rights Agreement shall provide that the Stock Appreciation Rights may not be exercised earlier than six months from the date of grant and shall specify the effect of termination of employment on the exercisability of the Stock Appreciation Rights.
(b) OTHER TERMS AND CONDITIONS. At the time of such Award, the Committee,
may in its sole discretion, prescribe additional terms, conditions or
restrictions relating to Stock Appreciation Rights, including, but not limited
to rules pertaining to termination of employment (by retirement, disability,
death or otherwise) of a Holder prior to the expiration of such Stock
Appreciation Rights. Such additional terms, conditions or restrictions shall be
set forth in the Stock Appreciation Rights Agreement made in conjunction with
the Award. Such Stock Appreciation Rights Agreements may also include, without
limitation, provisions relating to (i) vesting of Awards, subject to the
provisions hereof accelerating vesting on a Change of Control,(ii) tax matters
(including provisions covering applicable wage withholding requirements), and
(iii) any other matters not inconsistent with the terms and provisions of this
Plan, that the Committee shall in its sole discretion determine. The terms and
conditions of the respective Stock Appreciation Rights Agreements need not be
identical.
(c) EXERCISE PRICE. The exercise price of each Stock Appreciation Right shall be determined by the Committee, but such exercise price (i) shall not be less than the Fair Market Value of a share of Stock on the date the Stock Appreciation Right is granted (or such greater exercise price as may be required if such Stock Appreciation Right is granted in connection with an Incentive Stock Option that must have an exercise price equal to 110% of the Fair Market Value of the Stock on the
date of grant pursuant to Paragraph VII(c)), and (ii) shall be subject to adjustment as provided in Paragraph XII.
(d) EXERCISE PERIOD. The term of each Stock Appreciation Right shall be as specified by the Committee at the date of grant.
(e) LIMITATIONS ON EXERCISE OF STOCK APPRECIATION RIGHT. A Stock Appreciation Right shall be exercisable in whole or in such installments and at such times as determined by the Committee.
IX. RESTRICTED STOCK AWARDS
(a) FORFEITURE RESTRICTIONS TO BE ESTABLISHED BY THE COMMITTEE. Shares of Stock that are the subject of a Restricted Stock Award shall be subject to restrictions on disposition by the Holder and an obligation of the Holder to forfeit and surrender the shares to the Company under certain circumstances (the "FORFEITURE RESTRICTIONS"). The Forfeiture Restrictions shall be determined by the Committee in its sole discretion, and the Committee may provide that the Forfeiture Restrictions shall lapse upon (i) the attainment of targets established by the Committee that are based on (1) the price of a share of Stock, (2) the Company's earnings per share, (3) the Company's revenue, (4) the revenue of a business unit of the Company designated by the Committee, (5) the return on shareholders' equity achieved by the Company, or (6) the Company's pre-tax cash flow from operations, (ii) the Holder's continued employment with the Company for a specified period of time, or (iii) a combination of any two or more of the factors listed in clauses (i) and (ii) of this sentence. Each Restricted Stock Award may have different Forfeiture Restrictions, in the discretion of the Committee. The Forfeiture Restrictions applicable to a particular Restricted Stock Award shall not be changed except as permitted by Paragraph IX(b) or Paragraph XII.
(b) OTHER TERMS AND CONDITIONS. Stock awarded pursuant to a Restricted Stock Award shall be represented by a stock certificate registered in the name of the Holder of such Restricted Stock Award. The Holder shall have the right to receive dividends with respect to Stock subject to a Restricted Stock Award, to vote Stock subject thereto and to enjoy all other shareholder rights, except that (i) the Holder shall not be entitled to delivery of the stock certificate until the Forfeiture Restrictions shall have expired, (ii) the Company shall retain custody of the Stock until the Forfeiture Restrictions shall have expired, (iii) the Holder may not sell, transfer, pledge, exchange, hypothecate or otherwise dispose of the Stock until the Forfeiture Restrictions shall have expired, and (iv) a breach of the terms and conditions established by the Committee pursuant to the Restricted Stock Agreement, shall cause a forfeiture of the Restricted Stock Award. At the time of such Award, the Committee may, in its sole discretion, prescribe additional terms, conditions or restrictions relating to Restricted Stock Awards, including, but not limited to, rules pertaining to the termination of
employment (by retirement, disability, death or otherwise) of a Holder prior to expiration of the Forfeiture Restrictions. Such additional terms, conditions or restrictions shall be set forth in a Restricted Stock Agreement made in conjunction with the Award. Such Restricted Stock Agreement may also include, without limitation, provisions relating to (i) subject to the provisions hereof accelerating vesting on a Change of Control, vesting of Awards, (ii) tax matters (including provisions (y) covering any applicable employee wage withholding requirements and (z) prohibiting an election by the Holder under section 83(b) of the Code), and (iii) any other matters not inconsistent with the terms and provisions of this Plan that the Committee shall in its sole discretion determine. The terms and conditions of the respective Restricted Stock Agreements need not be identical.
(c) PAYMENT FOR RESTRICTED STOCK. The Committee shall determine the amount and form of any payment for Stock received pursuant to a Restricted Stock Award, provided that in the absence of such a determination, a Holder shall not be required to make any payment for Stock received pursuant to a Restricted Stock Award, except to the extent otherwise required by law.
(d) AGREEMENTS. At the time any Award is made under this Paragraph IX, the Company and the Holder shall enter into a Restricted Stock Agreement setting forth each of the matters as the Committee may determine to be appropriate. The terms and provisions of the respective Restricted Stock Agreements need not be identical.
X. PERFORMANCE AWARDS
(a) PERFORMANCE PERIOD. The Committee shall establish, with respect to and at the time of each Performance Award, a performance period over which the performance of the Holder shall be measured.
(b) PERFORMANCE AWARDS. Each Performance Award shall have a maximum value established by the Committee at the time of such Award.
(c) PERFORMANCE MEASURES. A Performance Award shall be awarded to an employee, director or other individual contingent upon future performance of the employee, director or other individual, the Company or any subsidiary, division or department thereof by or in which is he employed during the performance period. The Committee shall establish the performance measures applicable to such performance prior to the beginning of the performance period but subject to such later revisions as the Committee shall deem appropriate to reflect significant, unforeseen events or changes.
(d) AWARDS CRITERIA. In determining the value of Performance Awards, the Committee shall take into account a Holder's responsibility level, contributions, performance, potential, other Awards and such other considerations as it deems appropriate.
(e) PAYMENT. Following the end of the performance period, the Holder of a Performance Award shall be entitled to receive payment of an amount, not exceeding the maximum value of the Performance Award, based on the achievement of the performance measures for such performance period, as determined by the Committee. Payment of a Performance Award may be made in cash, Stock or a combination thereof, as determined by the Committee. Payment shall be made in a lump sum or in installments as prescribed by the Committee. Any payment to be made in Stock shall be based on the Fair Market Value of the Stock on the payment date. If a payment of cash is to be made on a deferred basis, the Committee shall establish whether interest shall be credited, the rate thereof and any other terms and conditions applicable thereto.
(f) TERMINATION OF EMPLOYMENT. A Performance Award shall terminate if the Holder does not remain continuously in the employ of the Company at all times during the applicable performance period, except as may be determined by the Committee or as may otherwise be provided in the Award at the time granted.
(g) AGREEMENTS. At the time any Award is made under this Paragraph X, the Company and the Holder shall enter into a Performance Award Agreement setting forth each of the matters contemplated hereby, and, in addition such matters as are set forth in Paragraph IX(b) as the Committee may determine to be appropriate. The terms and provisions of the respective agreements need not be identical.
XI. PHANTOM STOCK AWARDS
(a) PHANTOM STOCK AWARDS. Phantom Stock Awards are rights to receive shares of Stock (or cash in an amount equal to the Fair Market Value thereof), or rights to receive an amount equal to any appreciation in the Fair Market Value of Stock (or portion thereof) over a specified period of time, which vest over a period of time or upon the occurrence of an event (including without limitation a Change of Control) as established by the Committee, without payment of any amounts by the Holder thereof (except to the extent otherwise required by law) or satisfaction of any performance criteria or objectives. Each Phantom Stock Award shall have a maximum value established by the Committee at the time of such Award.
(b) AWARD PERIOD. The Committee shall establish, with respect to and at the time of each Phantom Stock Award, a period over which or the event upon which the Award shall vest with respect to the Holder.
(c) AWARDS CRITERIA. In determining the value of Phantom Stock Awards, the Committee shall take into account a Holder's responsibility level, contributions, performance, potential, other Awards and such other considerations as it deems appropriate.
(d) PAYMENT. Following the end of the vesting period for a Phantom Stock Award, the Holder of a Phantom Stock Award shall be entitled to receive payment of an amount, not exceeding the maximum value of the Phantom Stock Award, based on the then vested value of the Award. Payment of a Phantom Stock Award may be made in cash, Stock or a combination thereof as determine by the Committee. Payment shall be made in a lump sum or in installments as prescribed by the Committee in its sole discretion. Any payment to be made in Stock shall be based on the Fair Market Value of the Stock on the payment date. Cash dividend equivalents may be paid during or after the vesting period with respect to a Phantom Stock Award, as determined by the Committee. If a payment of cash is to be made on a deferred basis, the Committee shall establish whether interest shall be credited, the rate thereof and any other terms and conditions applicable thereto.
(e) TERMINATION OF EMPLOYMENT. A Phantom Stock Award shall terminate if the Holder does not remain continuously in the employ of the Company at all times during the applicable vesting period, except as may be otherwise determined by the Committee or as set forth in the Award at the time of grant.
(f) AGREEMENTS. At the time any Award is made under this Paragraph XI, the Company and the Holder shall enter into a Phantom Stock Award Agreement setting forth each of the matters contemplated hereby and, in addition such matters as are set forth in Paragraph IX(b) as the Committee may determine to be appropriate. The terms and provisions of the respective agreements need not be identical.
XII. RECAPITALIZATION OR REORGANIZATION
(a) The shares with respect to which Awards may be granted are shares of Stock as presently constituted, but if, and whenever, prior to the expiration of an Award theretofore granted, the Company shall effect a subdivision or consolidation by the Company, the number of shares of Stock with respect to which such Award may thereafter be exercised or satisfied, as applicable, (i) in the event of an increase in the number of outstanding shares shall be proportionately increased, and the purchase price per share shall be proportionately reduced, and (ii) in the event of a reduction in the number of outstanding shares shall be proportionately reduced, and the purchase price per share shall be proportionately increased.
(b) If the Company recapitalizes or otherwise changes its capital structure, thereafter upon any exercise or satisfaction, as applicable, of an Award theretofore granted the Holder shall be
entitled to (or entitled to purchase, if applicable) under such Award, in lieu of the number of shares of Stock then covered by such Award, the number and class of shares of stock and securities to which the Holder would have been entitled pursuant to the terms of the recapitalization if, immediately prior to such recapitalization, the Holder had been the holder of record of the number of shares of Stock then covered by such Award.
(c) In the event of a Change of Control, all outstanding Awards shall immediately vest and become exercisable or satisfiable, as applicable. The Committee, in its discretion, may determine that upon the occurrence of a Change of Control, each Award other than an Option outstanding hereunder shall terminate within a specified number of days after notice to the Holder, and such Holder shall receive, with respect to each share of Stock subject to such Award, cash in an amount equal to the excess, if any, of the Change of Control Value. Further, in the event of a Change of Control, the Committee, in its discretion shall act to effect one or more of the following alternatives with respect to outstanding Options, which may vary among individual Holders and which may vary among Options held by any individual Holder: (i) determine a limited period of time on or before a specified date (before or after such Change of Control) after which specified date all unexercised Options and all rights of Holders thereunder shall terminate, (2) require the mandatory surrender to the Company by selected Holders of some or all of the outstanding Options held by such Holders (irrespective of whether such Options are then exercisable under the provisions of the Plan) as of a date, before or after such Change of Control, specified by the Committee, in which event the Committee shall thereupon cancel such Options and the Company shall pay to each Holder an amount of cash per share equal to the excess, if any, of the Change of Control Value of the shares subject to such Option over the exercise price(s) under such Options for such shares, (3) make such adjustments to Options then outstanding as the Committee deems appropriate to reflect such Change of Control (provided, however, that the Committee may determine in its sole discretion that no adjustment is necessary to Options then outstanding) or (4) provide that thereafter upon any exercise of an Option theretofore granted the Holder shall be entitled to purchase under such Option, in lieu of the number of shares of Stock then covered by such Option the number and class of shares of stock or other securities or property (including, without limitation, cash) to which the Holder would have been entitled pursuant to the terms of the agreement of merger, consolidation or sale of assets and dissolution if, immediately prior to such merger, consolidation or sale of assets and dissolution the Holder has been the holder of record of the number of shares of Stock then covered by such Option. The provisions contained in this paragraph shall be inapplicable to an Award granted within six (6) months before the occurrence of a Change of Control if the Holder of such Award is subject to the reporting requirements of Section 16(a) of the 1934 Act. The provisions contained in this paragraph shall not terminate any rights of the Holder to further payments pursuant to any other agreement with the Company following a Change of Control.
(d) In the event of changes in the outstanding Stock by reason of recapitalization, reorganizations, mergers, consolidations, combinations, exchanges or other relevant changes in capitalization occurring after the date of the grant of any Award and not otherwise provided for by this Paragraph XII, any outstanding Awards and any agreements evidencing such Awards shall be subject to adjustment by the Committee at its discretion as to the number and price of shares of Stock or other consideration subject to such Awards. In the event of any such change in the outstanding Stock, the aggregate number of shares available under the Plan may be appropriately adjusted by the Committee, whose determination shall be conclusive.
(e) The existence of the Plan and the Awards granted hereunder shall not affect in any way the right or power of the Board or the shareholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of debt or equity securities ahead of or affecting Stock or the rights thereof, the dissolution or liquidation of the Company or any sale, lease, exchange or other disposition of all or any part of its assets or business or any other corporate act or proceeding.
(f) Any adjustment provided for in Subparagraphs (a), (b), (c) or (d) above shall be subject to any required shareholder action.
(g) Except as hereinbefore expressly provided, the issuance by the Company of shares of stock of any class or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares of obligations of the Company convertible into such shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Stock subject to Awards theretofore granted or the purchase price per share, if applicable.
XIII. AMENDMENT AND TERMINATION OF THE PLAN
The Board in its discretion may terminate the Plan at any time with respect to any shares for which Awards have not theretofore been granted. The Board shall have the right to alter or amend the Plan or any part thereof from time to time; provided that no change in any Award theretofore granted may be made which would impair the rights of the Holder without the consent of the Holder (unless such change is required in order to cause the benefits under the Plan to qualify as performance-based compensation within the meaning of section 162(m) of the Code and applicable interpretive authority thereunder), and provided, further, that the Board may not, without approval of the shareholders, amend the Plan:
(a) to increase the maximum number of shares which may be issued on exercise or surrender of an Award, except as provided in Paragraph XII;
(b) to change the Option price;
(c) to change the employees, directors or other individuals eligible to receive Awards or materially increase the benefits accruing to employees under the Plan;
(d) to extend the maximum period during which Awards may be granted under the Plan;
(e) to modify materially the requirements as to eligibility for participation in the Plan; or
(f) to decrease any authority granted to the Committee hereunder in contravention of Rule 16b-3.
XIV. MISCELLANEOUS
(a) NO RIGHT TO AN AWARD. Neither the adoption of the Plan by the Company nor any action of the Board or the Committee shall be deemed to give an employee, director or any other individual any right to be granted an Award to purchase Stock, a right to a Stock Appreciation Right, a Restricted Stock Award, a Performance Award or a Phantom Stock Award or any of the rights hereunder except as may be evidenced by an Award or by an Option Agreement, Stock Appreciation Rights Agreement, Restricted Stock Agreement, Performance Award Agreement or Phantom Stock Award Agreement on behalf of the Company, and then only to the extent and on the terms and conditions expressly set forth therein. The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of funds or assets to assure the payment of any Award.
(b) NO EMPLOYMENT RIGHTS CONFERRED. Nothing contained in the Plan shall
(i) confer upon any employee, director or any other individual any right with
respect to continuation of employment with the Company or any subsidiary or (ii)
interfere in any way with the right of the Company or any subsidiary to
terminate his or her employment at any time.
(c) OTHER LAWS; WITHHOLDING. The Company shall not be obligated to issue any Stock pursuant to any Award granted under the Plan at any time when the shares covered by such Award have not been registered under the Securities Act of 1933, as amended, and such other state and federal laws, rules or regulations as the Company or the Committee deems applicable and, in the opinion of legal counsel for the Company, there is no exemption from the registration requirements
of such laws, rules or regulations available for the issuance and sale of such shares. No fractional shares of Stock shall be delivered, nor shall any cash in lieu of fractional shares be paid. The Company shall have the right to deduct in connection with all Awards any taxes required by law to be withheld and to require any payments required to enable it to satisfy its withholding obligations.
(d) NO RESTRICTION ON CORPORATE ACTION. Nothing contained in the Plan shall be construed to prevent the Company or any subsidiary from taking any corporate action which is deemed by the Company or such subsidiary to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Plan or any Award made under the Plan. No employee, director, beneficiary or other person shall have any claim against the Company or any subsidiary as a result of any such action.
(e) RESTRICTIONS ON TRANSFER. An Award shall not be transferable otherwise than by will or the laws of descent and distribution or pursuant to a "qualified domestic relations order" as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder, and shall be exercisable during the Holder's lifetime only by such Holder or the Holder's guardian or legal representative.
(f) RULE 16B-3. It is intended that the Plan and any grant of an Award made to a person subject to Section 16 of the 1934 Act meet all of the requirements of Rule 16b-3. If any provision of the Plan or any such Award would disqualify the Plan or such Award under, or would otherwise not comply with, Rule 16b-3, such provision or Award shall be construed or deemed amended to conform to Rule 16b-3.
(g) SECTION 162(M). If the Plan is subject to 162(m) of the Code, it is
intended that the Plan comply fully with and meet all the requirements of
Section 162(m) of the Code so that Options and Stock Appreciation Rights granted
hereunder and, if determined by the Committee, Restricted Stock Awards, shall
constitute "performance-based" compensation within the meaning of such section.
If any provision of the Plan would disqualify the Plan or would not otherwise
permit the Plan to comply with Section 162(m) as so intended, such provision
shall be construed or deemed amended to conform to the requirements or
provisions of Section 162(m); provided that no such construction or amendment
shall have an adverse effect on the economic value to a Holder of any Award
previously granted hereunder.
(h) GOVERNING LAW. This Plan shall be construed in accordance with the laws of the State of Texas.
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is by and among FIRST PROSPERITY BANK, a Texas banking association (the "Bank"), and DAVID ZALMAN, an individual residing in El Campo, Wharton County, Texas (the "Employee"), effective as of January 1, 1998 (the "Effective Date").
WITNESSETH:
In consideration of the mutual covenants and agreements contained in this Agreement, the Parties agree as follows:
1 . EMPLOYMENT. On the terms and subject to the conditions set forth in this Agreement, the Bank hereby employs Employee, and engages the services of the Employee to serve as President of the Bank, and Employee hereby accepts employment with the Bank according to the terms set forth in this Agreement.
2. DUTIES. Employee is hereby employed and shall work at the location of the Bank or at such other place or places as may be directed by the Bank. The Employee shall have the position (including status, offices, titles and reporting requirements), authority, duties, and responsibilities usually associated with the president of a bank having assets similar in nature and value to the assets of the Bank.
3. TERM. The term of this Agreement shall be as follows:
3.1 TERM. The term ("Term") of this Agreement shall commence on the date hereof and continue for a period of three years.
3.2 EXTENSIONS. At the conclusion of each anniversary of the execution date of this Agreement or any extensions thereof, the Term of this Agreement shall automatically be extended for an additional year, unless this Agreement is terminated in accordance with Section 7 hereof.
4. COMPENSATION AND BENEFITS. The compensation and other benefits payable to Employee under this Agreement shall constitute the full consideration to be paid to Employee for all services to be rendered by Employee to the Bank.
4.1 BASE SALARY. During the first year the Term ofthis Agreement, the Bank shall pay Employee a base salary ("Base Salary") of $185,000 per annum, commencing on the date of execution of this Agreement. The Employee's Base Salary shall be payable in accordance with the Bank's customary policies, subject to payroll and withholding deductions as may be required by law and other deductions applied generally to employees of the Bank for insurance or other employee benefit plans.
4.2 ANNUAL REVIEW. The Employee's Base Salary shall be reviewed annually by the Board of Directors of Prosperity Bancshares, Inc., the parent of the Bank and recommendations shall be submitted to the board of Directors subject to approval by the Board of Prosperity and the Bank and the Base Salary may be increased from time to time upon the approval of both Boards.
4.3 REIMBURSEMENT OF EXPENSES. Employee shall be reimbursed for any and all reasonable costs and expenses incurred by Employee in performance of his services and duties as specified in this Agreement or incurred by Employee on behalf of, or in furtherance of the business of, the Bank, including, but not limited to business expenses incurred in connection with travel and entertaimnent; provided, however, that Employee shall submit to the Bank supporting receipts and information satisfactory to the Bank with respect to such reasonable costs and expenses. The Employee shall also be provided with the use of an automobile of Employee's selection with a purchase cost not exceeding $45,000, and the Bank will reimburse all operating expenses incurred by Employee for use of such automobile in carrying out Employee's duties for the Bank. Upon termination of this Agreement, Employee shall be entitled to Purchase the automobile from the Bank by payment of the NADA trade-in value of such automobile.
4.4 BENEFITS. During the term of employee's employment, he shall be entitled (i) to receive health insurance benefits with the same coverages and deductibles as are currently in effect with respect to Employee and his spouse (subject to the availability of such benefits at a reasonable cost), (ii) to participate in the Bank's other benefit plans to such extent as determined by the Board of Directors of the Bank, (iii) to participate in the Bank's other policies, including vacation and sick leave.
5. CONFLICTS OF INTERESTS; COVENANT NOT TO COMPETE.
5. 1 Employee shall, during the term of this Agreement, devote his time, attention, energies and business efforts to his duties as an employee of the Bank and to the business of the Bank. Employee shall not, during the term of this Agreement, directly or indirectly, for and on behalf of himself or any person, firm, partnership, corporation or other legal entity, own, manage, operate, control, invest in, make loans on advances to, guarantee the obligations of or participate in the ownership or management or operations of or be employed by or otherwise engage in the operation of any business that is in competition in any manner whatsoever with the business of the Bank.
6. CONFIDENTIAL INFORMATION.
6. 1 As used herein, "Confidential Information" means all technical and business information (including financial statements and related books and records, personnel records, customer lists, arrangements with customers and suppliers, manuals and reports) of the Bank and its affiliates which is of a confidential and/or proprietary character and which is either developed by Employee (alone or with others) or to which Employee has had access during his employment. Employee shall, both during and after his employment with the Bank, protect and maintain the con fidential and/or proprietary character of all Confidential Information. Employee shall not, during or after termination of his employment, directly or indirectly, use (for himself or another) or disclose any Confidential Information, for so long as it shall remain proprietary or protectible as confidential, except as may be necessary for the performance of his duties under this Agreement.
7. TERMINATION.
7. 1 TERMINATION OF AGREEMENT. Except as may otherwise be provided herein, this Agreement may terminate prior to the end of the Term upon the occurrence of:
(a) Thirty (30) days after written notice of termination is given by either party to the other; or
(b) Employees's death or, at the Bank's option, upon Employee's becoming Disabled (as defined in Section 8.3 hereof).
Any notice of termination given by Employee to the Bank under Section 7. 1 (a) above shall specify whether such termination is made with or without Good Reason-Change in Control (as defined in Section 8.5 hereof). Any notice of termination given by the Bank to Employee under Section 7.1(a) above shall specify whether such termination is with or without Cause (as defined in Section 8.4 hereof.
8. OBLIGATIONS OF THE BANK UPON TERMINATION.
8.1 CAUSE AND OTHER THAN FOR GOOD REASON-CHANGE IN CONTROL. If the Bank terminates this Agreement with Cause (as defined in Section 8.4) pursuant to Section 7. 1 (a) above, or if Employee terminates this Agreement without Good Reason-Change in Control pursuant to Section 7.1(a) hereof, this Agreement shall terminate without further obligations to Employee, other than those obligations owing or accrued to, vested in, or earned by Employee through the date of termination, including, but not limited to:
(a) to the extent not theretofore paid, Employee's Base Salary in effect at the time of such termination through the date of termination; and
(b) in the case of compensation previously deferred by Employee, all amounts previously deferred (together with any accrued interest thereon) and not yet paid by the Bank and any accrued vacation pay not yet paid by the Bank; and
(c) all other amounts or benefits owing or accrued to, vested in, earned by Employee through the date of termination under the then existing or applicable plans, programs, arrangements, and policies of Bank.
The aggregate amount of such obligations owing or accrued to, vested in, or earned by Employee through the date of termination shall be paid by the Bank to Employee in cash in one lump sum within thirty (30) days after the date of termination.
8.2 GOOD REASON-CHANGE IN CONTROL; OTHER THAN FOR CAUSE BEFORE OR AFTER A CHANGE IN CONTROL. If Employee terminates this Agreement with Good Reason-Change in Control Pursuant to Section 7.1(a) hereof, or if the Bank terminates this Agreement without Cause before or after the occurrence of a Change in Control pursuant to Section 7.1(a) hereof, the Bank shall Pay to Employee cash in one lump sum within thirty (30) days after the date of termination the aggregate of the following amounts (the "Change in Control-Lump Sum Payment"):
(i) to the extent not theretofore paid, Employee's Base Salary at the annual rate in effect at the time of such termination through the date of termination; and
(ii) to the extent not theretofore paid, any bonus through the date of termination; and
(iii) in the case of compensation previously deferred by Employee, all amounts previously deferred (together with any accrued interest thereon) and not yet paid by the Bank, and any accrued vacation pay not yet paid by the Bank; and
(iv) all other amounts or benefits owing or accrued to, vested in, or earned by Employee through the date of termination under the then existing or applicable plans, programs, arrangements, and policies of the Bank; and
(v) an amount equal to three (3) times the Employee's Base Salary in effect at the time of such termination. In no event shall Employee be entitled to invoke this provision more than once under the terms of this entire contract.
8.3 DEATH OR DISABILITIES. If Employee's employment is terminated under Section 7.l(b) hereof by reason of employee's death or Disability, the Bank shall pay to Employee's legal representatives cash in one lump sum within thirty (30) days after the date of employee's death or Disability the full amount of the obligations owing or accrued to, vested in, or earned by Employee through the date of Employee's death or disability, but not including the remaining unearned portion of the contract, without approval of both Boards. Anything in this Agreement to the contrary notwithstanding, the Employee's legal representatives or beneficialness shall be entitled to receive benefits provided under the then existing or applicable plans, programs, or arrangements and policies of the Bank relating to death or disability. As used herein, "Disabled" shall mean total disability as determined pursuant to the Bank's long term disability Plan or, if no such plan shall be in effect, by the Board of Directors of the Bank in accordance with their reasonable business judgment and the normal personnel practices of the Bank.
8.4 CAUSE. As used in this Agreement, the term "Cause" means (i) willful misconduct by Employee, (ii) the gross neglect by Employee of his duties as an employee, officer or director of the Bank which continues for more than thirty (30) days after written notice from the Bank to Employee specifically identifying the gross negligence of Employee and directing Employee to discontinue same, (iii) the commission by Employee of an act, other than an act taken in good faith within the course and scope of Employee's employment, which is directly detrimental to the Bank and which act exposes the Bank to material liability, (iv) the Employee having been indicted for or convicted of any felony or other crime involving moral turpitude, or (v) current illegal use of narcotics, illegal drugs or controlled substances by Employee, or the current use of alcohol by the Employee to an extent which materially impairs the performance of Employee's duties.
8.5 GOOD REASON-CHANGE IN CONTROL. As used in this Agreement, the term "Good Reason-Change in Control" means after the occurrence of a Change in Control (as defined in Section 8.6) and a determination by Employee that any one or more of the following events has occurred:
(a) the assignment by the Bank to Employee of duties that are inconsistent with the position of President at the time of such assigmnent, or the removal by the Bank from Employee of those duties usually appertaining to the position of President at the time of such removal; or
(b) a change by the Bank, without Employee's prior written consent, in Employee's responsibilities to the Bank as such responsibilities existed at the time of the occurrence of such Change in Control (or as such responsibilities may thereafter exist from time to time as a result of changes in such responsibilities made with Employee's prior written consent); or
(c) the failure of the Bank to continue to provide Employee with office space, related facilities and support personnel (including, but not limited to, administrative and secretarial assistance) that are both commensurate with the position of President and Employee's responsibilities to and position with the Bank at the time of the occurrence of such Change in Control and not materially dissimilar to the office space, related facilities and support personnel provided to other key executive officers of the Bank; or
(d) a reduction by the Bank in the amount of Employee's Base Salary specified in Section 4.1(a) (or as subsequently increased) and as in effect at the time of the occurrence of such Change in Conbol, or a failure of the Bank to pay such Base Salary to the Employee at the time and in the manner specified in Section 4.1 (a) of this Agreement; or
(e) the relocation, without Employee's prior written consent, of the Bank's principal executive offices to a location outside the county in which such offices are located at the time of the occurrence of such Change in Control; or
(f) the failure of the Bank to obtain the assumption by any successor to the Bank of the obligations imposed upon the Bank under this Agreement, as required by Section l5 of this Agreement; or
(g) the employment of Employee under this Agreement is terminated by the Bank without Cause; or
(h) the Bank notifies Employee of the Bank's intention not to observe or perform one or more of the obligations ofthe Bank under this Agreement; or
(i) the Bank breaches any provision of this Agreement.
8.6 CHANGE IN CONTROL. As used herein, the term "Change in Control" shall mean the occurrence with respect to First Prosperity Bancshares, Inc. ("Bancshares") or the Bank of any of the following events: (a) the acquisition of all or substantially all of the assets of Bancshares or the Bank, or (b) Bancshares or the Bank is acquired Pursuant to a merger, consolidation or other corporate reorganization.
9. NOTICES. Any notice under this Agreement must be in writing and may be given by certified or registered mail, postage prepaid, addressed to the party or parties to be notified with return receipt requested, or by delivering the notice in person. For purposes of notice, the address of Employee or any administrator, executor or legal representative of Employee or his estate, as the case may be, shall be the last address of the Employee on the records of the Bank. The address of the Bank shall be its Principal business address.
10. CONTROLLING LAW. This Agreement shall be governed by the laws of the State of Texas.
11 . ENTIRE AGREEMENT. This Agreement contains the entire agreement of the parties and may only be amended in writing signed by both parties; provided, that no amendment to this Agreement shall be effective unless authorized by resolution of the Board of Directors and signed on behalf of the Bank by a duly authorized officer of the Bank other than Employee.
12. REMEDIES, MODIFICATION AND SEPARABILITY. Employee and the Bank agree that Employee's breach of Sections 5 and 6 of this Agreement will result in irreparable harm to the Bank, that no adequate remedy at law is available, and that the Bank shall be entitled to injunctive relief; however, nothing herein shall prevent the Bank from pursuing any other remedies at law or at equity available to the Bank. Should a court of competent jurisdiction declare any of the covenants set forth in Sections 5 or 6 unenforceable, the court shall be empowered to modify or reform such covenants so as to provide relief reasonably necessary to protect the interests of the Bank and Employee and to award injunctive relief, or damages, or both, to which the Bank may be entitled. If any provision of this Agreement is declared by a court of last resort to be invalid, the Bank and Employee agree that such declaration shall not affect the validity of the other provisions ofthis Agreement. If any provision of this Agreement is capable to two constructions, one of which would render the provision void and the other of which would render the provision valid, then the provision shall have the construction which renders it valid.
13. PRESERVATION OF BUSINESS: FIDUCIARY RESPONSIBILITY. Employee shall use his best efforts to preserve the business and organization of the Bank, to keep available to the Bank the services of its present employees and to preserve the business relations of the Bank with suppliers, distributors, customers and others. Employee shall not commit any act which would injure the Bank. Employee shall observe and fulfill proper standards of fiduciary responsibility attendant upon his Office.
14. ASSIGNMENTS. This Agreement is personal to Employee and without the prior written consent of the Bank shall not be assignable by Employee other than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by Employee's legal representatives and heirs. This Agreement shall inure to the benefit of and be binding upon the Bank and its successors and assigns. The Bank shall require any corporation, entity, individual or other person who is the successor (whether direct or indirect, by purchase, merger, consolidation, reorganization, or otherwise) to all or substantially all of the business or assets of the Bank to expressly assume and agree to perform, by a written agreement in form and substance satisfactory to Employee, all of the obligations of the Bank under this Agreement. As used in this Agreement, the term "Bank" shall mean the Bank as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, written agreement, or otherwise.
15. WAIVER OF BREACH. The waiver by the Bank of a breach of any provision of this Agreement by Employee shall not operate or be construed as a waiver by the Bank of any subsequent breach of Employee.
16. REVOCATION OF PREVIOUS EMPLOYMENT AGREEMENT. Any and all previous employment agreements existing between the Bank and Employee are revoked and canceled.
17. HEADINGS. The section headings in this Agreement are for convenience of reference and shall not be used in the interpretation or construction of this Agreement.
18. ATTORNEY'S FEES. In the event Bank or Employee breaches any term or provision of this Agreement and the other party employs an attorney or attorneys to enforce the terms of this Agreement, then the breaching or defaulting party agrees to pay the other party the reasonable attorney's fees and costs incurred to enforce this Agreement.
19. EXECUTION. This Agreement may be executed in multiple counterparts each of which shall be deemed an original and all of which shall constitute one instrument.
Employee acknowledges that he has read this Agreement and understands that signing this Agreement is a condition of employment.
IN WITNESS WHEREOF, this Agreement is executed as of the _____ day of
-----------,
1998.
"EMPLOYEE" "BANK"
FIRST PROSPERITY BANCSHARES, INC.
____________________________________
DAVID ZALMAN BY:_________________________________
TRACY RUDOLPH, DIRECTOR
BY:_________________________________
DAVID ZALMAN, DIRECTOR
BY:_________________________________
HARRY BAYNE, DIRECTOR
BY:_________________________________
JIM BOULIGNY, DIRECTOR
|
BY:_________________________________
J. T. HERIN, DIRECTOR
BY:_________________________________
CHARLES SLAVIK, DIRECTOR
BY:_________________________________
HARRISON STAFFORD, DIRECTOR
BY:_________________________________
ROBERT STEELHAMMER, DIRECTOR
|
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is by and among FIRST PROSPERITY BANK, a Texas banking association (the "Bank"), and TRACY T. RUDOLPH, an individual residing in Houston, Harris County, Texas (the "Employee"), effective as of January 1, 1998 (the "Effective Date").
WITNESSETH:
In consideration of the mutual covenants and agreements contained in this Agreement, the Parties agree as follows:
1 . EMPLOYMENT. On the terms and subject to the conditions set forth in this Agreement, the Bank hereby employs Employee, and engages the services of the Employee to serve as Chairman of the Board of the Bank, and Employee hereby accepts employment with the Bank according to the terms set forth in this Agreement.
2. DUTIES. Employee is hereby employed and shall work at the location of the Bank or at such other place or places as may be directed by the Bank. The Employee shall have the position (including status, offices, titles and reporting requirements), authority, duties, and responsibilities usually associated with the chairman of the board of a bank having assets similar in nature and value to the assets of the Bank.
3. TERM. The term of this Agreement shall be as follows:
3.1 TERM. The term ("Term") of this Agreement shall commence on the date hereof and continue for a period of three years.
3.2 EXTENSIONS. At the conclusion of each anniversary of the execution date of this Agreement or any extensions thereof, the Term of this Agreement shall automatically be extended for an additional year, unless this Agreement is terminated in accordance with Section 7 hereof.
4. COMPENSATION AND BENEFITS. The compensation and other benefits payable to Employee under this Agreement shall constitute the full consideration to be paid to Employee for all services to be rendered by Employee to the Bank.
4.1 BASE SALARY. During the first year the Term of this Agreement, the Bank shall pay Employee a base salary ("Base Salary") of $225,000 per annum, commencing on the date of execution of this Agreement. The Employee's Base Salary shall be payable in accordance with the Bank's customary policies, subject to payroll and withholding deductions as may be required by law and other deductions applied generally to employees of the Bank for insurance or other employee benefit plans.
4.2 ANNUAL REVIEW. The Employee's Base Salary shall be reviewed annually by the Board of Directors of Prosperity Bancshares, Inc., the parent of the Bank and recommendations shall be submitted to the board of Directors subject to approval by the Board of Prosperity and the Bank and the Base Salary may be increased from time to time upon the approval of both Boards.
4.3 REIMBURSEMENT OF EXPENSES. Employee shall be reimbursed for any and all reasonable costs and expenses incurred by Employee in performance of his services and duties as specified in this Agreement or incurred by Employee on behalf of, or in furtherance of the business of, the Bank, including, but not limited to business expenses incurred in connection with travel and entertainment; provided, however, that Employee shall submit to the Bank supporting receipts and information satisfactory to the Bank with respect to such reasonable costs and expenses. The Employee shall also be provided with the use of an automobile of Employee's selection with a purchase cost not exceeding $45,000, and the Bank will reimburse all operating expenses incurred by Employee for use of such automobile in carrying out Employee's duties for the Bank. Upon termination of this Agreement, Employee shall be entitled to Purchase the automobile from the Bank by payment of the NADA trade-in value of such automobile.
4.4 BENEFITS. During the term of employee's employment, he shall be entitled (i) to receive health insurance benefits with the same coverages and deductibles as are currently in effect with respect to Employee and his spouse (subject to the availability of such benefits at a reasonable cost), (ii) to participate in the Bank's other benefit plans to such extent as determined by the Board of Directors of the Bank, (iii) to participate in the Bank's other policies, including vacation and sick leave.
5. CONFLICTS OF INTERESTS; COVENANT NOT TO COMPETE.
5. 1 Employee shall, during the term of this Agreement, devote his time, attention, energies and business efforts to his duties as an employee of the Bank and to the business of the Bank. Employee shall not, during the term of this Agreement, directly or indirectly, for and on behalf of himself or any person, firm, partnership, corporation or other legal entity, own, manage, operate, control, invest in, make loans on advances to, guarantee the obligations of or participate in the ownership or management or operations of or be employed by or otherwise engage in the operation of any business that is in competition in any manner whatsoever with the business of the Bank.
6. CONFIDENTIAL INFORMATION.
6. 1 As used herein, "Confidential Information" means all technical and business information (including financial statements and related books and records, personnel records, customer lists, arrangements with customers and suppliers, manuals and reports) of the Bank and its affiliates which is of a confidential and/or proprietary character and which is either developed by Employee (alone or with others) or to which Employee has had access during his employment. Employee shall, both during and after his employment with the Bank, protect and maintain the confidential and/or proprietary character of all Confidential Information. Employee shall not, during or after termination of his employment, directly or indirectly, use (for himself or another) or disclose any Confidential Information, for so long as it shall remain proprietary or protectible as confidential, except as may be necessary for the performance of his duties under this Agreement.
7. TERMINATION.
7. 1 TERMINATION OF AGREEMENT. Except as may otherwise be provided herein, this Agreement may terminate prior to the end of the Term upon the occurrence of:
(a) Thirty (30) days after written notice of termination is given by either party to the other; or
(b) Employees's death or, at the Bank's option, upon Employee's becoming Disabled (as defined in Section 8.3 hereof).
Any notice of termination given by Employee to the Bank under Section 7. 1 (a) above shall specify whether such termination is made with or without Good Reason-Change in Control (as defined in Section 8.5 hereof). Any notice of termination given by the Bank to Employee under Section 7.1(a) above shall specify whether such termination is with or without Cause (as defined in Section 8.4 hereof.
8. OBLIGATIONS OF THE BANK UPON TERMINATION.
8.1 CAUSE AND OTHER THAN FOR GOOD REASON-CHANGE IN CONTROL. If the Bank terminates this Agreement with Cause (as defined in Section 8.4) pursuant to Section 7. 1 (a) above, or if Employee terminates this Agreement without Good Reason-Change in Control pursuant to Section 7.1(a) hereof, this Agreement shall terminate without further obligations to Employee, other than those obligations owing or accrued to, vested in, or earned by Employee through the date of termination, including, but not limited to:
(a) to the extent not theretofore paid, Employee's Base Salary in effect at the time of such termination through the date of termination; and
(b) in the case of compensation previously deferred by Employee, all amounts previously deferred (together with any accrued interest thereon) and not yet paid by the Bank and any accrued vacation pay not yet paid by the Bank; and
(c) all other amounts or benefits owing or accrued to, vested in, earned by Employee through the date of termination under the then existing or applicable plans, programs, arrangements, and policies of Bank.
The aggregate amount of such obligations owing or accrued to, vested in, or earned by Employee through the date of termination shall be paid by the Bank to Employee in cash in one lump sum within thirty (30) days after the date of termination.
8.2 GOOD REASON-CHANGE IN CONTROL; OTHER THAN FOR CAUSE BEFORE OR AFTER A CHANGE IN CONTROL. If Employee terminates this Agreement with Good Reason-Change in Control Pursuant to Section 7.1(a) hereof, or if the Bank terminates this Agreement without Cause before or after the occurrence of a Change in Control pursuant to Section 7.1(a) hereof, the Bank shall Pay to Employee cash in one lump sum within thirty (30) days after the date of termination the aggregate of the following amounts (the "Change in Control-Lump Sum Payment"):
(i) to the extent not theretofore paid, Employee's Base Salary at the annual rate in effect at the time of such termination through the date of termination; and
(ii) to the extent not theretofore paid, any bonus through the date of termination; and
(iii) in the case of compensation previously deferred by Employee, all amounts previously deferred (together with any accrued interest thereon) and not yet paid by the Bank, and any accrued vacation pay not yet paid by the Bank; and
(iv) all other amounts or benefits owing or accrued to, vested in, or earned by Employee through the date of termination under the then existing or applicable plans, programs, arrangements, and policies of the Bank; and
(v) an amount equal to three (3) times the Employee's Base Salary in effect at the time of such termination. In no event shall Employee be entitled to invoke this provision more than once under the terms of this entire contract.
8.3 DEATH OR DISABILITIES. If Employee's employment is terminated under Section 7.1(b) hereof by reason of employee's death or Disability, the Bank shall pay to Employee's legal representatives cash in one lump sum within thirty (30) days after the date of employee's death or Disability the full amount of the obligations owing or accrued to, vested in, or earned by Employee through the date of Employee's death or disability, but not including the remaining unearned portion of the contract, without approval of both Boards. Anything in this Agreement to the contrary notwithstanding, the Employee's legal representatives or beneficialness shall be entitled to receive benefits provided under the then existing or applicable plans, programs, or arrangements and policies of the Bank relating to death or disability. As used herein, "Disabled" shall mean total disability as determined pursuant to the Bank's long term disability Plan or, if no such plan shall be in effect, by the Board of Directors of the Bank in accordance with their reasonable business judgment and the normal personnel practices of the Bank.
8.4 CAUSE. As used in this Agreement, the term "Cause" means (i) willful misconduct by Employee, (ii) the gross neglect by Employee of his duties as an employee, officer or director of the Bank which continues for more than thirty (30) days after written notice from the Bank to Employee specifically identifying the gross negligence of Employee and directing Employee to discontinue same, (iii) the commission by Employee of an act, other than an act taken in good faith within the course and scope of Employee's employment, which is directly detrimental to the Bank and which act exposes the Bank to material liability, (iv) the Employee having been indicted for or convicted of any felony or other crime involving moral turpitude, or (v) current illegal use of narcotics, illegal drugs or controlled substances by Employee, or the current use of alcohol by the Employee to an extent which materially impairs the performance of Employee's duties.
8.5 GOOD REASON-CHANGE IN CONTROL. As used in this Agreement, the term "Good Reason-Change in Control" means after the occurrence of a Change in Control (as defined in Section 8.6) and a determination by Employee that any one or more of the following events has occurred:
(a) the assignment by the Bank to Employee of duties that are inconsistent with the position of Chairman of the Board at the time of such assigmnent, or the removal by the Bank from Employee of those duties usually appertaining to the position of Chairman of the Board at the time of such removal; or
(b) a change by the Bank, without Employee's prior written consent, in Employee's responsibilities to the Bank as such responsibilities existed at the time of the occurrence of such Change in Control (or as such responsibilities may thereafter exist from time to time as a result of changes in such responsibilities made with Employee's prior written consent); or
(c) the failure of the Bank to continue to provide Employee with office space, related facilities and support personnel (including, but not limited to, administrative and secretarial assistance) that are both commensurate with the position of Chairman of the Board and Employee's responsibilities to and position with the Bank at the time of the occurrence of such Change in Control and not materially dissimilar to the office space, related facilities and support personnel provided to other key executive officers of the Bank; or
(d) a reduction by the Bank in the amount of Employee's Base Salary specified in Section 4.l(a) (or as subsequently increased) and as in effect at the time of the occurrence of such Change in Conbol, or a failure of the Bank to pay such Base Salary to the Employee at the time and in the manner specified in Section 4. 1 (a) of this Agreement; or
(e) the relocation, without Employee's prior written consent, of the Bank's principal executive offices to a location outside the county in which such offices are located at the time of the occurrence of such Change in Control; or
(f) the failure of the Bank to obtain the assumption by any successor to the Bank of the obligations imposed upon the Bank under this Agreement, as required by Section 15 of this Agreement; or
(g) the employment of Employee under this Agreement is terminated by the Bank without Cause; or
(h) the Bank notifies Employee of the Bank's intention not to observe or perform one or more of the obligations ofthe Bank under this Agreement; or
(i) the Bank breaches any provision of this Agreement.
8.6 CHANGE IN CONTROL. As used herein, the term "Change in Control" shall mean the occurrence with respect to First Prosperity Bancshares, Inc. ("Bancshares") or the Bank of any of the following events: (a) the acquisition of all or substantially all of the assets of Bancshares or the Bank, or (b) Bancshares or the Bank is acquired Pursuant to a merger, consolidation or other corporate reorganization.
9. NOTICES. Any notice under this Agreement must be in writing and may be given by certified or registered mail, postage prepaid, addressed to the party or parties to be notified with return receipt requested, or by delivering the notice in person. For purposes of notice, the address of Employee or any administrator, executor or legal representative of Employee or his estate, as the case may be, shall be the last address of the Employee on the records of the Bank. The address of the Bank shall be its Principal business address.
10. CONTROLLING LAW. This Agreement shall be governed by the laws of the State of Texas.
11 . ENTIRE AGREEMENT. This Agreement contains the entire agreement of the parties and may only be amended in writing signed by both parties; provided, that no amendment to this Agreement shall be effective unless authorized by resolution of the Board of Directors and signed on behalf of the Bank by a duly authorized officer of the Bank other than Employee.
12. REMEDIES, MODIFICATION AND SEPARABILITY. Employee and the Bank agree that Employee's breach of Sections 5 and 6 of this Agreement will result in irreparable harm to the Bank, that no adequate remedy at law is available, and that the Bank shall be entitled to injunctive relief; however, nothing herein shall prevent the Bank from pursuing any other remedies at law or at equity available to the Bank. Should a court of competent jurisdiction declare any of the covenants set forth in Sections 5 or 6 unenforceable, the court shall be empowered to modify or reform such covenants so as to provide relief reasonably necessary to protect the interests of the Bank and Employee and to award injunctive relief, or damages, or both, to which the Bank may be entitled. If any provision of this Agreement is declared by a court of last resort to be invalid, the Bank and Employee agree that such declaration shall not affect the validity of the other provisions ofthis Agreement. If any provision of this Agreement is capable to two constructions, one of which would render the provision void and the other of which would render the provision valid, then the provision shall have the construction which renders it valid.
13. PRESERVATION OF BUSINESS: FIDUCIARY RESPONSIBILITY. Employee shall use his best efforts to preserve the business and organization of the Bank, to keep available to the Bank the services of its present employees and to preserve the business relations of the Bank with suppliers, distributors, customers and others. Employee shall not commit any act which would injure the Bank. Employee shall observe and fulfill proper standards of fiduciary responsibility attendant upon his Office.
14. ASSIGNMENTS. This Agreement is personal to Employee and without the prior written consent of the Bank shall not be assignable by Employee other than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by Employee's legal representatives and heirs. This Agreement shall inure to the benefit of and be binding upon the Bank and its successors and assigns. The Bank shall require any corporation, entity, individual or other person who is the successor (whether direct or indirect, by purchase, merger, consolidation, reorganization, or otherwise) to all or substantially all of the business or assets of the Bank to expressly assume and agree to perform, by a written agreement in form and substance satisfactory to Employee, all of the obligations of the Bank under this Agreement. As used in this Agreement, the term "Bank" shall mean the Bank as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, written agreement, or otherwise.
15. WAIVER OF BREACH. The waiver by the Bank of a breach of any provision of this Agreement by Employee shall not operate or be construed as a waiver by the Bank of any subsequent breach of Employee.
16. REVOCATION OF PREVIOUS EMPLOYMENT AGREEMENT. Any and all previous employment agreements existing between the Bank and Employee are revoked and cancelled.
17. HEADINGS. The section headings in this Agreement are for convenience of reference and shall not be used in the interpretation or construction of this Agreement.
18. ATTORNEY'S FEES. In the event Bank or Employee breaches any term or provision of this Agreement and the other party employs an attorney or attorneys to enforce the terms of this Agreement, then the breaching or defaulting party agrees to pay the other party the reasonable attorney's fees and costs incurred to enforce this Agreement.
19. EXECUTION. This Agreement may be executed in multiple counterparts each of which shall be deemed an original and all of which shall constitute one instrument.
Employee acknowledges that he has read this Agreement and understands that signing this Agreement is a condition of employment.
IN WITNESS WHEREOF, this Agreement is executed as of the _____ day of ___________, 1998.
"EMPLOYEE" "BANK"
FIRST PROSPERITY BANCSHARES, INC.
___________________________________ BY:_________________________________
TRACY T. RUDOLPH TRACY RUDOLPH, DIRECTOR
BY:_________________________________
DAVID ZALMAN, DIRECTOR
BY:_________________________________
HARRY BAYNE, DIRECTOR
BY:_________________________________
JIM BOULIGNY, DIRECTOR
BY:_________________________________
J. T. HERIN, DIRECTOR
BY:_________________________________
CHARLES SLAVIK, DIRECTOR
BY:_________________________________
HARRISON STAFFORD, DIRECTOR
BY:_________________________________
ROBERT STEELHAMMER, DIRECTOR
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EXHIBIT 10.4
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
PROSPERITY BANCSHARES, INC.,
FIRST PROSPERITY BANK
AND
UNION STATE BANK
DATED AS OF JUNE 5, 1998
TABLE OF CONTENTS
Page
INTRODUCTION...........................................................1
I. THE MERGERS........................................................2
Section 1.1.Initial Merger.......................................2
Section 1.2.Articles of Association, Bylaws and Facilities
of First Surviving Bank..............................2
Section 1.3.Effect of Initial Merger.............................2
Section 1.4.Liabilities of the First Surviving Bank..............3
Section 1.5.Final Merger.........................................3
Section 1.6.Articles of Association, Bylaws and Facilities of
Continuing Bank......................................3
Section 1.7.Effect of Final Merger...............................3
Section 1.8.Liabilities of Continuing Bank.......................4
Section 1.9.Merger Consideration.................................4
Section 1.10.Adjustment to Merger Consideration..................4
Section 1.11.Dissenting Shares...................................5
Section 1.12.Exchange of Shares..................................5
Section 1.13.Ratification by Shareholders........................6
II. REPRESENTATIONS AND WARRANTIES OF UNION...........................6
Section 2.1.Organization.........................................7
Section 2.2.Capitalization.......................................7
Section 2.3.Approvals; Authority.................................7
Section 2.4.Investments..........................................8
Section 2.5.Financial Statements.................................8
Section 2.6.Title................................................8
Section 2.7.Environmental Laws...................................9
Section 2.8.Litigation and Other Proceedings....................10
Section 2.9.Taxes...............................................10
Section 2.10.Contracts..........................................10
Section 2.11.Insurance..........................................11
Section 2.12.No Conflict With Other Instruments.................11
Section 2.13.Laws...............................................12
Section 2.14.Conduct............................................12
Section 2.15.Allowance for Credit Losses........................13
Section 2.16.Employment Relations...............................13
Section 2.17.ERISA..............................................13
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Section 2.18.Deferred Compensation Arrangements.................14
Section 2.19.List of Loans......................................14
Section 2.20.Absence of Changes.................................14
Section 2.21.Brokers and Finders................................14
Section 2.22.Absence of Property Taxes and Liens................15
Section 2.23.Community Reinvestment Act.........................15
Section 2.24.Fair Housing Act, Home Mortgage Disclosure Act and
Equal Credit Opportunity Act.......................15
Section 2.25.Usury Laws and Other Consumer Compliance Laws......15
Section 2.26.Bank Secrecy Act...................................15
Section 2.27.Zoning and Related Laws............................16
Section 2.28.Year 2000 Compliance...............................16
Section 2.29.Securities Laws....................................16
Section 2.30.Regulatory Approvals...............................16
Section 2.31.Shareholders' List.................................16
III. REPRESENTATIONS AND WARRANTIES OF BANCSHARES AND FPB ...........16
Section 3.1.Organization........................................16
Section 3.2.Approvals; Authority................................17
Section 3.3.No Conflict With Other Instruments..................17
Section 3.4.Litigation and Other Proceedings....................17
Section 3.5.Ability to Pay Merger Consideration.................18
Section 3.6.Regulatory Approvals...............................18
Section 3.7.Year 2000 Compliance................................18
Section 3.8.Community Reinvestment Act..........................18
IV. COVENANTS OF UNION...............................................18
Section 4.1.Shareholder Approval and Best Efforts...............18
Section 4.2.Operations..........................................19
Section 4.3.Access to Properties and Records....................20
Section 4.4.Information for Regulatory Applications.............20
Section 4.5.Attendance at Certain Union Meetings................20
Section 4.6.Standstill Provision................................21
Section 4.7.Proxies.............................................21
Section 4.8.Termination of Data Processing Contracts............21
V. COVENANTS OF BANCSHARES...........................................22
Section 5.1.Best Efforts........................................22
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Section 5.2.Information for Applications and Proxy Solicitation.22
Section 5.3.Employee Benefit Plans..............................23
Section 5.4.Confidentiality.....................................23
Section 5.5.Applications........................................23
Section 5.6.Additional Capital..................................23
VI. CLOSING..........................................................24
Section 6.1.Closing.............................................24
Section 6.2.Effective Time......................................24
VII. TERMINATION.....................................................25
Section 7.1.Termination.........................................25
Section 7.2.Effect of Termination...............................26
VIII. CONDITIONS TO OBLIGATIONS OF BANCSHARES AND FPB................26
Section 8.1.Compliance with Representations and Covenants.......26
Section 8.2.Material Adverse Change.............................27
Section 8.3.Legal Opinion.......................................27
Section 8.4.Releases............................................27
Section 8.5.Dissenters' Rights..................................27
Section 8.6.Employment Agreements...............................27
IX. CONDITIONS TO OBLIGATIONS OF UNION...............................27
Section 9.1.Compliance with Representations and Covenants.......27
Section 9.2.Material Adverse Change.............................28
Section 9.3.Legal Opinion.......................................28
Section 9.4.Releases............................................28
X. CONDITIONS TO RESPECTIVE OBLIGATIONS OF
BANCSHARES, FPB AND UNION.......................................28
Section 10.1.Government Approvals...............................28
Section 10.2.Shareholder Approval...............................29
XI. MISCELLANEOUS....................................................29
Section 11.1.Non-Survival of Representations and Warranties.....29
Section 11.2.Amendments.........................................29
Section 11.3.Expenses...........................................29
Section 11.4.Notices............................................30
Section 11.5.Controlling Law....................................31
Section 11.6.Headings...........................................31
Section 11.7.Modifications or Waiver............................31
Section 11.8.Severability.......................................31
Section 11.9.Assignment.........................................31
Section 11.10.Consolidation of Agreements.......................31
Section 11.11.Counterparts......................................31
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Section 11.12.Binding on Successors.............................32
Section 11.13.Gender............................................32
Section 11.14.Disclosures.......................................32
Section 11.15.Publicity.........................................32
Section 11.16.Entire Agreement..................................32
SCHEDULE 2.1 TO THE AGREEMENT:
Organization - Union............................................34
SCHEDULE 2.2 TO THE AGREEMENT:
Capitalization - Union..........................................35
SCHEDULE 2.4 TO THE AGREEMENT:
Investments - Union.............................................36
SCHEDULE 2.5 TO THE AGREEMENT:
Financial Statements - Union....................................37
SCHEDULE 2.6 TO THE AGREEMENT:
Title - Union...................................................38
SCHEDULE 2.7 TO THE AGREEMENT:
Environmental Laws - Union......................................39
SCHEDULE 2.8 TO THE AGREEMENT:
Litigation and Other Proceedings - Union........................40
SCHEDULE 2.9 TO THE AGREEMENT:
Taxes - Union...................................................41
SCHEDULE 2.10 TO THE AGREEMENT:
Contracts - Union...............................................42
SCHEDULE 2.11 TO THE AGREEMENT:
Insurance Policies - Union......................................43
SCHEDULE 2.13 TO THE AGREEMENT:
Compliance with Laws - Union....................................44
SCHEDULE 2.14 TO THE AGREEMENT:
Conduct - Union.................................................45
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SCHEDULE 2.16 TO THE AGREEMENT:
Employment Relations - Union....................................46
SCHEDULE 2.18 TO THE AGREEMENT:
Deferred Compensation Arrangements - Union......................47
SCHEDULE 2.19 TO THE AGREEMENT:
List of Loans - Union...........................................48
SCHEDULE 2.20 TO THE AGREEMENT:
Absence of Changes - Union......................................49
SCHEDULE 2.21 TO THE AGREEMENT:
Brokers' and Finders' Fees - Union..............................50
SCHEDULE 2.22 TO THE AGREEMENT:
Absence of Property Taxes and Liens - Union.....................51
SCHEDULE 3.4 TO THE AGREEMENT:
Litigation - Bancshares.........................................52
SCHEDULE 4.7 TO THE AGREEMENT:
Proxies.........................................................53
SCHEDULE 8.3 TO THE AGREEMENT:
Legal Opinion to be Delivered by Union..........................54
SCHEDULE 9.3 TO THE AGREEMENT:
Legal Opinion to be Delivered by Bancshares.....................56
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AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization ("Agreement") dated as of June 5, 1998, is by and among Prosperity Bancshares, Inc., a Texas corporation ("Bancshares"), First Prosperity Bank, a Texas banking association ("FPB") and Union State Bank, East Bernard, a Texas banking association ("Union").
WHEREAS, Union desires to affiliate with Bancshares and FPB, and Bancshares and FPB desire to affiliate with Union in the manner provided in this Agreement; and
WHEREAS, Bancshares, FPB and Union believe that the acquisition of Union by Bancshares in the manner provided by, and subject to the terms and conditions set forth in, this Agreement and all exhibits, schedules and supplements hereto is desirable and in the best interests of their respective shareholders; and
WHEREAS, the respective Boards of Directors of Bancshares, FPB and Union have approved this Agreement and the transactions proposed herein substantially on the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of such premises and the mutual representations, warranties, covenants and agreements contained herein, the parties agree as set forth below.
INTRODUCTION
Following the execution of this Agreement by Bancshares, FPB and Union, Bancshares will charter and organize as a wholly-owned subsidiary an interim Texas banking association ("New Bank") solely for the purpose of consummating the merger transactions described herein. This Agreement provides for (i) the merger of New Bank with and into Union with Union as the survivor (the "Initial Merger"), all pursuant to this Agreement and a Plan of Merger by and between New Bank and Union, a copy of which is attached hereto as Exhibit "A" and all of the terms of which are incorporated by reference for all purposes and, immediately thereafter, (ii) the merger of New Bank with and into FPB with FPB as the survivor (the "Final Merger"), all pursuant to this Agreement and a Plan of Merger by and between Union and FPB, a copy of which is attached hereto as Exhibit "B" and all of the terms of which are incorporated by reference for all purposes. The Initial Merger and the Final Merger shall sometimes be referred to collectively as the "Mergers." In connection with the Initial Merger, Bancshares will acquire all of the issued and outstanding shares of common stock, $10.00 par value, of Union ("Union Common Stock") for an aggregate consideration as set forth in this Agreement.
I. THE MERGERS
Section 1.1.INITIAL MERGER. New Bank shall be merged into Union (the resulting bank being herein referred to as the "First Surviving Bank") as of the effective time of the Initial Merger under the charter and Articles of Association of Union, as determined by the Texas Department of Banking ("Banking Department"), and each of the outstanding shares of common stock of New Bank shall and without any action on the part of Bancshares be canceled and be converted into shares of common stock of the First Surviving Bank. The shares of common stock of the First Surviving Bank into which such New Bank common stock is converted shall represent ownership of 100% of the issued and outstanding capital stock of the First Surviving Bank, all of which shall be owned by Bancshares.
Section 1.2.ARTICLES OF ASSOCIATION, BYLAWS AND FACILITIES OF FIRST SURVIVING BANK. At the effective time of the Initial Merger and until thereafter amended in accordance with applicable law, the Articles of Association of the First Surviving Bank shall be the Articles of Association of Union as in effect at the effective time of the Initial Merger. Until altered, amended or repealed as provided therein and in the Articles of Association of the First Surviving Bank, the Bylaws of the First Surviving Bank shall be the Bylaws of Union as in effect at the effective time of the Initial Merger. The main office of the First Surviving Bank shall be the main office of Union as of the effective time of the Initial Merger, and all corporate acts, plans, policies, contracts, approvals and authorizations of Union and New Bank and their respective shareholders, boards of directors, committees elected or appointed thereby, officers and agents, which were valid and effective immediately prior to the effective time of the Initial Merger, shall be taken for all purposes as the acts, plans, policies, contracts, approvals and authorization of the First Surviving Bank and shall be as effective and binding thereon as the same were with respect to Union and New Bank respectively, as of the effective time of the Initial Merger.
Section 1.3.EFFECT OF INITIAL MERGER. At the effective time of the Initial Merger, the corporate existence of Union and New Bank shall be consolidated and continued in the First Surviving Bank, and the First Surviving Bank shall be deemed to be a continuation in entity and identity of Union and New Bank. All rights, franchises and interests of Union and New Bank, respectively, in and to any type of property and choses in action shall be transferred to and vested in the First Surviving Bank by virtue of the Initial Merger without any deed or other transfer. First Surviving Bank, without any order or other action on the part of any court or otherwise, shall hold and enjoy all rights of property, franchises and interest, including appointments, designations and nominations, and all other rights and interests as trustee, executor, administrator, transfer agent or registrar of stocks and bonds, guardian of estates, assignee, receiver and committee of estates and lunatics, and in every other fiduciary capacity, in the same manner and to the same extent as such rights, franchises and interests were held or enjoyed by Union and New Bank, respectively, as of the effective
time of the Initial Merger. As of the effective time of the Initial Merger, the directors and officers of New Bank shall become the directors and officers of First Surviving Bank.
Section 1.4.LIABILITIES OF THE FIRST SURVIVING BANK. At the effective time of the Initial Merger, the First Surviving Bank shall be liable for all liabilities of Union and New Bank. All deposits, debts, liabilities and obligations of Union and of New Bank, respectively, accrued, absolute, contingent or otherwise, and whether or not reflected or reserved against on balance sheets, books of account or records of Union or New Bank, as the case may be, shall be those of the First Surviving Bank and shall not be released or impaired by the Initial Merger. All rights of creditors and other obligees and all liens on property of either Union or New Bank shall be preserved unimpaired.
Section 1.5.FINAL MERGER. Immediately after the effective time of the Initial Merger, the First Surviving Bank shall be merged with and into FPB (which, as the receiving association, is hereinafter referred to as "Continuing Bank" whenever reference is made to it at or after the Effective Time (as defined in Section 6.2 of this Agreement)) under the charter and Articles of Association of FPB pursuant to the provisions of, and with the effect provided in the Section 32.301 of the Texas Finance Code.
Section 1.6.ARTICLES OF ASSOCIATION, BYLAWS AND FACILITIES OF CONTINUING BANK. At the Effective Time and until thereafter amended in accordance with applicable law, the Articles of Association of Continuing Bank shall be the Articles of Association of FPB as in effect at the Effective Time. Until altered, amended or repealed as therein provided and in the Articles of Association of Continuing Bank, the Bylaws of Continuing Bank shall be the Bylaws of FPB as in effect at the Effective Time. Unless and until changed by the Board of Directors of Continuing Bank, the main office of Continuing Bank shall be the main office of FPB as of the Effective Time. The established offices and facilities of the First Surviving Bank immediately prior to the Final Merger shall become established offices and facilities of the Continuing Bank. Until thereafter changed in accordance with law or the Articles of Association or Bylaws of Continuing Bank, all corporate acts, plans, policies, contracts, approvals and authorizations of the First Surviving Bank and FPB and their respective shareholders, boards of directors, committees elected or appointed thereby, officers and agents, which were valid and effective immediately prior to the Effective Time, shall be taken for all purposes as the acts, plans, policies, contracts, approvals and authorizations of Continuing Bank and shall be as effective and binding thereon as the same were with respect to the First Surviving Bank and FPB, respectively, as of the Effective Time.
Section 1.7.EFFECT OF FINAL MERGER. At the Effective Time, the corporate existence of the First Surviving Bank and FPB shall, as provided in the provisions of law heretofore mentioned, be consolidated and continued in Continuing Bank, and Continuing Bank shall be deemed to be a continuation in entity and identity of the First Surviving Bank and FPB. All rights, franchises and interests of the First Surviving Bank and FPB, respectively, in and
to any type of property and choses in action shall be transferred to and vested in Continuing Bank by virtue of such Final Merger without any deed or other transfer. Continuing Bank, without any order or other action on the part of any court or otherwise, shall hold and enjoy all rights of property, franchises and interest, including appointments, designations and nominations, and all other rights and interests as trustee, executor, administrator, transfer agent or registrar of stocks and bonds, guardian of estates, assignee, receiver and committee of estates and lunatics, and in every other fiduciary capacity, in the same manner and to the same extent as such rights, franchises, and interests were held or enjoyed by First Surviving Bank and FPB, respectively, as of the Effective Time. At the Effective Time, the directors and officers of FPB shall become the directors and officers of the Continuing Bank; provided, however, that within 90 days after the Effective Time, a holder of Union Common Stock immediately prior to the Effective Time will be elected as a director of Continuing Bank.
Section 1.8.LIABILITIES OF CONTINUING BANK. At the Effective Time of the Final Merger, Continuing Bank shall be liable for all liabilities of the First Surviving Bank and FPB. All deposits, debts, liabilities, obligations and contracts of the First Surviving Bank and of FPB, respectively, matured or unmatured, whether accrued, absolute, contingent or otherwise, and whether or not reflected or reserved against on balance sheets, books of account, or records of the First Surviving Bank or FPB, as the case may be, shall be those of Continuing Bank and shall not be released or impaired by the Mergers. All rights of creditors and other obligees and all liens on property of either the First Surviving Bank or FPB shall be preserved unimpaired subsequent to the Mergers.
Section 1.9. MERGER CONSIDERATION. Shares of Union Common Stock issued and outstanding immediately prior to the Effective Time, other than Dissenting Shares (as defined in Section 1.11 of the Agreement), shall, by virtue of the Initial Merger and without any action on the part of the holder thereof, be converted into and represent the right to receive aggregate consideration in the form of cash equal to $17,600,000.00, as subject to adjustment pursuant to this Agreement (the "Merger Consideration"), or approximately $251.43 for each of the 70,000 shares of Union Common Stock issued and outstanding at the Effective Time, payable to the holders of record such shares of Union Common Stock, without interest thereon, upon surrender of the certificate representing such shares.
Section 1.10. ADJUSTMENT TO MERGER CONSIDERATION. In the event the Closing
(as defined in Section 6.1) does not occur on or before one hundred fifty (150)
calendar days from the date this Agreement is executed and Union's failure to
fulfill any material obligation under this Agreement has not been the cause of,
or resulted in, the failure of the Mergers to become effective on or before such
date, then the Merger Consideration will increase by $2,612.00 per day for each
day between the end of such one hundred fifty (150) day period and the Closing
Date (as defined in Section 6.2).
Section 1.11. DISSENTING SHARES. Each share of Union Common Stock issued and outstanding immediately prior to the Effective Time, the holder of which has not voted in favor of the Mergers and who has delivered a written demand for payment of the fair value of such shares within the time and in the manner provided in Article 5.12 of the Texas Business Corporation Act ("TBCA"), is referred to herein as a "Dissenting Share." Dissenting Shares shall not be converted into or represent the right to receive the Merger Consideration pursuant to Section 1.9 of this Agreement unless and until such holder shall have failed to perfect or shall have effectively withdrawn or lost his right to appraisal and payment under the TBCA. If any such holder shall have so failed to perfect or shall have effectively withdrawn or lost such right, such holder's Dissenting Shares shall thereupon be deemed to have been converted into and to have become exchangeable for, at the Effective Time, the right to receive the Merger Consideration without any interest thereon. As set forth in Section 8.5 of this Agreement, if the holders of more than 10% of the Union Common Stock shall have exercised their dissenters' rights, Bancshares shall have no obligation to consummate the Mergers.
Section 1.12. EXCHANGE OF SHARES.
(a) Bancshares shall deposit or cause to be deposited in trust with FPB (the "Exchange Agent") prior to the Effective Time cash in an aggregate amount sufficient to make the cash payments pursuant to Section 1.9 hereof and to make the appropriate cash payments, if any, to holders of Dissenting Shares pursuant to Section 1.11 hereof (such amounts being hereinafter referred to as the "Exchange Fund"). The Exchange Agent shall promptly make the payments of the Merger Consideration out of the Exchange Fund upon surrender of such shares. Payments to holders of Dissenting Shares shall be made as required by the TBCA. The Exchange Fund shall not be used for any other purpose, except as provided in this Agreement.
(b) At least 20 days prior to the Effective Time, the Exchange Agent shall mail to each record holder of an outstanding certificate or certificates which represent shares of Union Common Stock (the "Certificates"), a form letter of transmittal which will specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Exchange Agent and contain instructions for use in effecting the surrender of the Certificates for payment therefor. At and after the Closing (as defined herein) and upon surrender to the Exchange Agent of a Certificate, together with such letter of transmittal duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor the amount of cash provided in Section 1.9 hereof in the manner described herein, and such Certificate shall forthwith be canceled. Payment will be made at Closing for shares of Union Common Stock if Certificates and a properly completed letter of transmittal with respect to such shares are received by the Exchange Agent at least five days prior to Closing. Payment will be made for all other shares of Union Common Stock within five days after the Exchange Agent's receipt of the Certificates and
a properly completed letter of transmittal. No interest will be paid or accrued on the cash payable upon surrender of the Certificates. If payment of cash is to be made to a person other than the person in whose name the Certificate surrendered is registered, it shall be a condition of payment that the Certificate so surrendered shall be properly endorsed or otherwise in proper form for transfer and that the person requesting such payment shall pay any transfer or other taxes required by reason of the payment to a person other than the registered holder of the Certificate surrendered or established to the satisfaction of Bancshares that such tax has been paid or is not applicable. Until surrendered in accordance with the provisions of this Section 1.12, each Certificate (other than Certificates representing Dissenting Shares) shall represent for all purposes the right to receive the Merger Consideration without any interest thereon.
(c) After the Effective Time, the stock transfer ledger of Union shall be closed and there shall be no transfers on the stock transfer books of Union of the shares of Union Common Stock which were outstanding immediately prior to such time of filing. If, after the Effective Time, Certificates are presented to Bancshares, they shall be promptly presented to the Exchange Agent and exchanged as provided in this Section 1.12.
(d) Any portion of the Exchange Fund (including the proceeds of any investments thereof) that remains unclaimed by the shareholders of Union for six months after the Effective Time shall be paid to Bancshares, and the holders of shares of Union Common Stock not theretofore presented to the Exchange Agent shall look to Bancshares only, and not the Exchange Agent, for the payment of any Merger Consideration in respect of such shares.
Section 1.13. RATIFICATION BY SHAREHOLDERS. This Agreement shall be submitted to the shareholders of Union in accordance with applicable provisions of law and the respective Articles of Association and Bylaws of Union. Union and Bancshares shall proceed expeditiously and cooperate fully in the procurement of any other consents and approvals and the taking of any other actions in satisfaction of all other requirements prescribed by law or otherwise necessary for consummation of the Mergers on the terms herein provided, including, without limitation, the preparation and submission of all necessary filings, requests for waivers and certificates with the Board of Governors of the Federal Reserve System ("Federal Reserve Board"), the Federal Deposit Insurance Corporation ("FDIC") and the Banking Department.
II. REPRESENTATIONS AND WARRANTIES OF UNION
Union represents and warrants to Bancshares and FPB that each of the statements made in this Article II are true and correct in all material respects. Union agrees that, at the Closing, it shall provide Bancshares with supplemental Schedules reflecting any changes in
the information contained in the Schedules which have occurred in the period from the date of delivery of such Schedules to the date of Closing.
Section 2.1. ORGANIZATION. Union is a Texas banking association duly organized, validly existing and in good standing under the laws of the State of Texas. Union has full power and authority (including all licenses, franchises, permits and other governmental authorizations which are legally required) to own, lease and operate its properties, to engage in the business and activities now conducted by it and to enter into this Agreement. Union (i) is duly authorized to conduct a general banking business, embracing all usual deposit functions of commercial banks as well as commercial, industrial and real estate loans, installment credits, collections and safe deposit facilities subject to the supervision of the FDIC and Banking Department; and (ii) is an insured bank as defined in the Federal Deposit Insurance Act. Union does not conduct any trust activities. True and complete copies of the Articles of Association and Bylaws of Union, as amended to date, have been delivered or made available to Bancshares. Except as otherwise disclosed in Schedule 2.1 to this Agreement, Union (a) does not have any subsidiaries or affiliates, (b) is not a general partner or material owner in any joint venture, general partnership, limited partnership, trust or other non-corporate entity, and (c) does not know of any arrangement pursuant to which the stock of any corporation is or has been held in trust (whether express, constructive, resulting or otherwise) for the benefit of all shareholders of Union.
Section 2.2. CAPITALIZATION. The authorized capital stock of Union consists of 70,000 shares of Union Common Stock, 70,000 of which are issued and outstanding. All of the issued and outstanding shares of Union Common Stock are validly issued, fully paid and nonassessable, and have not been issued in violation of the preemptive rights of any person or in violation of any applicable federal or state laws. Except as disclosed in Schedule 2.2, there are no existing options, warrants, calls, convertible securities or commitments of any kind obligating Union to issue any authorized and unissued Union Common Stock nor does Union have any outstanding commitment or obligation to repurchase, reacquire or redeem any of its outstanding capital stock. Except as disclosed in Schedule 2.2 to this Agreement, there are no voting trusts, voting agreements, buy-sell agreements or other similar arrangements affecting the Union Common Stock.
Section 2.3. APPROVALS; AUTHORITY. The Board of Directors has approved this Agreement and the transactions contemplated herein subject to the approval thereof by the shareholders of Union as required by law, and, other than shareholder approval, no further corporate proceedings of Union are needed to execute and deliver this Agreement and consummate the Mergers. This Agreement has been duly executed and delivered by Union and, is a duly authorized, valid, legally binding agreement of Union enforceable against Union in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors' rights generally and general equitable principles.
Section 2.4. INVESTMENTS. Union has furnished to Bancshares, as Schedule 2.4 of this Agreement, a complete list, as of March 31, 1998, of all securities, including municipal bonds, owned by Union (the "Securities Portfolio"). All securities listed in Schedule 2.4 are owned by Union (i) of record, except those held in bearer form, and (ii) beneficially, free and clear of all mortgages, liens, pledges and encumbrances, except as noted in Schedule 2.4. Schedule 2.4 also discloses any entities in which the ownership interest of Union equals 5% or more of the issued and outstanding voting securities of the issuer thereof. There are no voting trusts or other agreements or understandings with respect to the voting of the securities listed in Schedule 2.4.
Section 2.5. FINANCIAL STATEMENTS. Union has furnished or made available to Bancshares true and complete copies of Union's audited balance sheet as of December 31, 1997, 1996 and 1995, and the related statements of income and statements of cash flow for the years then ended, together with the notes thereto. Union has also delivered to Bancshares a true and correct copy of the Consolidated Reports of Condition and Income ("Call Reports") filed by Union as of and for the year ended December 31, 1997 and as of the three months ended March 31, 1998. The audited financial information and Call Reports referred to in this Section 2.5 are collectively referred to in this Article II as the "Union Financial Statements." The Union Financial Statements fairly present the financial position of Union and the results of its operations at the dates and for the periods indicated in conformity with generally accepted accounting principles applied on a consistent basis, except for the Call Reports which are in compliance with regulatory accounting principles. Except as set forth on Schedule 2.5 to this Agreement, as of the dates of the Union Financial Statements referred to above, Union did not have any liabilities, fixed or contingent, which are material and are not fully shown or provided for in such Union Financial Statements or otherwise disclosed in this Agreement, or in any of the documents delivered to Bancshares. Except as set forth in Schedule 2.20 to this Agreement, since December 31, 1997, there have been no material changes in the financial condition, assets, liabilities or business of Union, other than changes in the ordinary course of business, which individually or in the aggregate have materially and adversely affected the financial condition, results of operations or business of Union.
Section 2.6. TITLE. True and complete copies of all deeds and leases and title insurance policies, if any, for all real property owned or leased by Union and all mortgages, deeds of trust and security agreements to which such property is subject are attached on Schedule 2.6 of this Agreement. Union has good and indefeasible title to all of its assets and properties including, without limitation, land and improvements thereon, and all personal and intangible properties reflected in the Union Financial Statements or acquired subsequent thereto, subject to no liens, mortgages, security interests, encumbrances or charges of any kind except (a) defects, irregularities in title and encumbrances set forth in the public record of the applicable county, (b) as noted in the Union Financial Statements or as set forth in Schedule 2.6, (c) statutory liens not yet delinquent, (d) minor defects and irregularities in title and encumbrances which do not materially impair the use thereof for the purposes for which
they are held, and (e) those assets and properties disposed of for fair value in the ordinary course of business since the dates of the Union Financial Statements. Except as set forth in Schedule 2.6 to this Agreement, Union does not own securities of or other interest in any other commercial bank.
Section 2.7. ENVIRONMENTAL LAWS. Union is in compliance with all terms and
conditions of all applicable federal and state Environmental Laws (as defined
below) and permits thereunder. Except as set forth on Schedule 2.7 of this
Agreement, (a) Union has not received notice of any violation of any
Environmental Laws or generated, stored, or disposed of any materials designated
as Hazardous Materials (as defined below) under the Environmental Laws, and is
not subject to any claim or lien under any Environmental Laws; (b) during the
term of ownership by Union no real estate currently owned, operated, or leased
(including any property acquired by foreclosure or deeded in lieu thereof) by
Union, or owned, operated or leased by Union within the ten years preceding the
date of this Agreement, has been designated as requiring any environmental
cleanup or response action to comply with Environmental Laws, or has been the
site of release of any Hazardous Materials; (c) to the knowledge of Union, no
asbestos was used in the construction of any portion of Union's facilities; and
(d) to the knowledge of Union, no real property currently owned by Union is, or
has been, an industrial site or landfill. Bancshares and its consultants, agents
and representatives shall have the right to inspect Union's assets for the
purpose of conducting asbestos and other environmental surveys.
"Environmental Laws," for purposes of this Section 2.7, includes, but is not limited to, any federal, state or local statute, law, rule, regulation, ordinance, code, policy or rule of common law now in effect and in each case as amended to date and any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree, or judgment, relating to the environment, human health or safety, or Hazardous Materials, including without limitation the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. ss.ss. 9601, ET SEQ.; The Hazardous Materials Transaction Act, as amended, 49 U.S.C. ss.ss. 1801, ET SEQ.; the Resource Conservation and Recovery Act of 1976, as amended, 42 U.S.C. ss.ss. 6901, ET SEQ.; the Federal Water Pollution Control Act, as amended, 33 U.S.C. ss.ss. 1201, ET SEQ.; the Toxic Substances Control Act, 15 U.S.C. ss.ss. 2601, ET SEQ.; the Clean Air Act, 42 U.S.C. ss.ss. 7401, ET SEQ.; and the Safe Drinking Water Act, 42 U.S.C. ss.ss. 3808, ET SEQ.
"Hazardous Materials," for purposes of this Section 2.7, includes, but is not limited to, (a) any petroleum or petroleum products, natural gas, or natural gas products, radioactive materials, asbestos, urea formaldehyde foam insulation, transformers or other equipment that contains dielectric fluid containing levels of polychlorinated biphenyls (PCBs), and radon gas; (b) any chemicals, materials, waste or substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous wastes," "restricted hazardous wastes," toxic substances," "toxic pollutants," "contaminants,"
or "pollutants," or words of similar import, under any Environmental Laws; and
(c) any other chemical, material, waste or substance which is in any way
regulated by any federal, state or local government authority, agency or
instrumentality, including mixtures thereof with other materials, and including
any regulated building materials such as asbestos and lead.
Section 2.8. LITIGATION AND OTHER PROCEEDINGS. Except as otherwise noted on Schedule 2.8 hereto, there are no legal, quasi-judicial, regulatory or administrative proceedings of any kind or nature now pending or, to the knowledge of Union, threatened before any court or administrative body in any manner against Union, or any of its properties or capital stock, which might have a material adverse effect on Union, its financial condition, assets, operations or earnings or the transactions proposed by this Agreement. Union does not know of any basis on which any litigation or proceeding could be brought which could have a materially adverse effect on the financial condition of Union or which could question the validity of any action taken or to be taken in connection with this Agreement and the transactions contemplated hereby. Union is not in default with respect to any judgment, order, writ, injunction, decree, award, rule or regulation of any court, arbitrator or govern mental agency or instrumentality.
Section 2.9. TAXES. Except as otherwise noted in Schedule 2.9 hereto, Union has filed with the appropriate federal, state and local governmental agencies all tax returns and reports required to be filed, and has paid all taxes and assessments shown or claimed to be due. Union has not executed or filed with the Internal Revenue Service any agreement extending the period for assessment and collection of any federal tax, nor is Union a party to any action or proceeding by any governmental authority for assessment or collection of taxes, nor has any claim for assessment or collection of taxes been asserted against Union. Union has not waived any statute of limitations with respect to any tax or other assessment or levy, and all such taxes and other assessments and levies which Union is required by law to withhold or to collect have been duly withheld and collected and have been paid over to the proper governmental agency, domestic and foreign, or segregated and set aside for such payment and, if so segregated and set aside will be so paid by Union, as required by law.
True and complete copies of the federal income tax returns of Union as filed with the Internal Revenue Service for the years ended December 31, 1997, December 31, 1996, and December 31, 1995, have been delivered or made available to Bancshares.
Section 2.10. CONTRACTS. Except as otherwise noted on Schedule 2.10 hereto, Union is not a party to or bound by any (a) employment contract or severance arrangement (including without limitation any collective bargaining contract or union agreement or agreement with an independent consultant) which is not terminable by Union on less than sixty (60) days' notice without payment of any amount on account of such termination; (b) bonus, stock option, deferred compensation or profit-sharing, pension or retirement plan or other employee benefit arrangement; (c) material lease or license with respect to any
property, real or personal, whether as landlord, tenant, licensor or licensee;
(d) contract or commitment for capital expenditures; (e) material contract or
commitment made in the ordinary course of business for the purchase of materials
or supplies or for the performance of services over a period of more than one
hundred twenty (120) days from the date of this Agreement; (f) contract or
option to purchase or sell any real or personal property other than in the
ordinary course of business; (g) contract, agreement or letter with respect to
the management or operations of Union imposed by any bank regulatory authority
having supervisory jurisdiction over Union; (h) agreement, contract or indenture
related to the borrowing by Union of money other than those entered into in the
ordinary course of business; (i) guaranty of any obligation for the borrowing of
money, excluding endorsements made for collection, repurchase or resell
agreements, letters of credit and guaranties made in the ordinary course of
business; (j) agreement with or extension of credit to any executive officer or
director of Union or holder of more than ten percent (10%) of the issued and
outstanding Union Common Stock, or any affiliate of such person, which is not on
substantially the same terms (including, without limitation, in the case of
lending transactions, interest rates and collateral) as, and following credit
underwriting practices that are not less stringent than, those prevailing at the
time for comparable transactions with unrelated parties or which involve more
than the normal risk of collectibility or other unfavorable features; or (k)
material contracts, other than the foregoing, not made in the ordinary course of
business and not otherwise disclosed in this Agreement, in any schedule attached
hereto or in any document delivered or referred to or described in writing by
Union to Bancshares. Union has in all material respects performed all material
obligations required to be performed by it to date and is not in default under,
and no event has occurred which, with the lapse of time or action by a third
party could result in default under, any material indenture, mortgage, contract,
lease or other agreement to which Union is a party or by which Union bound or
under any provision of its Articles of Association or Bylaws.
Section 2.11. INSURANCE. A true and complete list of all insurance policies owned or held by or on behalf of Union (other than credit-life policies), including policy numbers, retention levels, insurance carriers, and effective and termination dates, is set forth in Schedule 2.11 to this Agreement. In the judgment of the Board of Directors of Union, such insurance policies are adequate for the business conducted by Union in respect of amounts, types and risks insured.
Section 2.12. NO CONFLICT WITH OTHER INSTRUMENTS. Neither the execution and delivery of this Agreement nor the consummation of the Mergers contemplated hereby, subject to obtaining all required shareholder consents, will conflict with or result in a breach of any provision of Union's Articles of Association or Bylaws. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, subject to obtaining all required shareholder and regulatory approvals, will not violate any provision of, or constitute a default under, any law, or any order, writ, injunction or decree of any court or other governmental agency, or any contract, agreement or instrument to which Union is
a party or by which either is bound or constitute an event which, with the lapse of time or action by a third party, could result in any default under any of the foregoing or result in the creation of any lien, charge or encumbrance upon the assets or properties of Union.
Section 2.13. LAWS. Except as otherwise noted in Schedule 2.13 hereto, Union is in material compliance with all applicable federal, state and local laws, rules, regulations and orders applicable to them. Except for approvals by regulatory authorities having jurisdiction over Union, no prior consent, approval or authorization of, or declaration, filing or registrations with, any person or regulatory authority is required of Union in connection with the execution, delivery and performance by Union of this Agreement and the transactions contemplated hereby or the resulting change of control of Union except for certain instruments necessary to consummate the Mergers contemplated hereby. Union has filed all reports, registrations and statements, together with any amendments required to be made thereto, that are required to be filed with the FDIC, Banking Department or any other regulatory authority having jurisdiction over Union, and such reports, registrations and statements are, to the best knowledge of Union, true and correct in all material respects.
Section 2.14. CONDUCT. Except as otherwise noted in Schedule 2.14 hereto,
since December 31, 1997, Union has not (a) issued or sold any of its capital
stock or corporate debt obligations; (b) declared or set aside or paid any
dividend or made any other distribution in respect of or, directly or
indirectly, purchased, redeemed or otherwise acquired any shares of Union Common
Stock; (c) incurred any obligations or liabilities (fixed or contingent), except
obligations or liabilities incurred in the ordinary course of business, or
mortgaged, pledged or subjected any of its assets to a lien or encumbrance
(other than in the ordinary course of business and other than statutory liens
not yet delinquent); (d) discharged or satisfied any lien or encumbrance or paid
any obligation or liability (fixed or contingent), other than accruals, accounts
and notes payable included in the Union Financial Statements, accruals, accounts
and notes payable incurred since December 31, 1997 in the ordinary course of
business and accruals, accounts and notes payable incurred in connection with
the transactions contemplated by this Agreement; (e) sold, exchanged or
otherwise disposed of any of its capital assets other than in the ordinary
course of business; (f) made any general or individual wage or salary increase
(including increases in directors' or consultants' fees) other than in
accordance with past practices, paid any bonus, granted or paid any perquisites
such as automobile allowance, club membership or dues or other similar benefits,
or instituted any employee welfare, retirement or similar plan or arrangement;
(g) suffered any physical damage, destruction or casualty loss, whether or not
covered by insurance, materially and adversely affecting its business, property
or assets; (h) made any or acquiesced with any change in accounting methods,
principles and practices except as may be required by GAAP; (i) excluding loan
commitments made and certificates of deposit issued, entered into any contract,
agreement or commitment which obligates Union for an amount in excess of $10,000
over the term of any such contract, agreement or commitment; or (j) except in
the ordinary course of business, entered or agreed to enter into any agreement
or arrangement granting any preferential rights to purchase any of its assets, properties or rights or requiring the consent of any party to the transfer and assignment of any such assets, properties or rights.
Section 2.15. ALLOWANCE FOR CREDIT LOSSES. The allowance for credit losses of Union has been calculated in accordance with generally accepted accounting principles as applied to banking institutions and in accordance with all applicable rules and regulations. To the knowledge of Union, the allowance for credit losses shown on Union's Call Report of March 31, 1998 is substantially adequate in all material respects to provide for all losses, net of recoveries relating to loans previously charged off, on loans outstanding as of March 31, 1998. At the Effective Time, no material facts relevant to the adequacy of the allowance for credit losses as of that date shall have been withheld from Bancshares. Except as disclosed in writing to Bancshares by Union on or before the date of the Agreement, there are no loans of Union that have been classified by bank examiners on Union's most recent examination report as "Other Assets Especially Mentioned," "Substandard," "Doubtful" or "Loss."
Section 2.16. EMPLOYMENT RELATIONS. The relations of Union with its employees are satisfactory, and Union has not received any notice of any controversies with, or organizational efforts or other pending actions by, representatives of its employees. Union has materially complied with all laws relating to the employment of labor with respect to its employees, including any provisions thereof relating to wages, hours, collective bargaining and the payment of workman's compensation insurance and social security and similar taxes, and, except as disclosed in Schedule 2.16 hereto, no person has asserted that Union is liable for any arrearages of wages, workman's compensation insurance premiums or any taxes or penalties for failure to comply with any of the foregoing.
Section 2.17. ERISA. The employee pension benefits plans and welfare benefit plans (referred to collectively herein as the "Plans") in effect at Union (all of which are included in Schedule 2.10 hereto) have all been operated in all material respects in compliance with ERISA since ERISA became applicable with respect thereto. None of the Plans nor any of their respective related trusts have been terminated (except the termination of any Plan which is in compliance with the requirements of ERISA and which will not result in any additional liability to Union), and there has been no "reportable event," as that term is defined in Section 4043 of ERISA, required to be reported since the effective date of ERISA which has not been reported, and none of such Plans nor their respective related trusts have incurred any "accumulated funding deficiency," as such term is defined in Section 302 of ERISA (whether or not waived), since the effective date of ERISA. The Plans are the only employee pension benefit plans covering employees of Union. Union will not have any material liabilities with respect to employee pension benefits, whether vested or unvested as of the Closing, for any of its employees other than under the Plans, and as of the date hereof the actuarial present value of Plan assets of each Plan is not less (and as of
the Closing of the Merger such present value will not be less) than the present value of all benefits payable or to be payable thereunder.
Section 2.18. DEFERRED COMPENSATION ARRANGEMENTS. The schedule attached as Schedule 2.18 contains a full description of all deferred compensation arrangements of Union, if any, including the terms under which the cash value of any life insurance purchased in connection with any such arrangement can be realized.
Section 2.19. LIST OF LOANS. Schedule 2.19 to this Agreement sets forth a true and complete list, as of March 31, 1998, of all loans (individually, a "Loan" and collectively, the "Loans") of Union, showing for each such Loan the outstanding principal balance due, before reduction for any discount. All currently outstanding Loans, including any current extensions of any Loan, were solicited, originated and currently exist in material compliance with all applicable requirements of federal and state law and regulations promulgated thereunder. To the knowledge of Union, the Loans are adequately documented and each note evidencing a Loan or credit agreement or security instrument related to a Loan constitutes a valid and binding obligation of the obligor thereunder, enforceable in accordance with the terms thereof, except where the failure thereof, individually or in the aggregate, would not have a material adverse effect on the condition (financial or otherwise), operations or prospects of Union. There are no oral modifications or amendments or additional agreements related to the Loans that are not reflected in Union's records, and no claim of defense as to the enforcement of any Loan has been asserted, and Union is not aware of any acts or omissions that would give rise to any claim or right of rescission, set off, counterclaim or defense, except where such claim would not have, either individually or in the aggregate, a material adverse effect on the condition (financial or otherwise), operations or prospects of Union.
Section 2.20. ABSENCE OF CHANGES. Since December 31, 1997, except as disclosed in Schedule 2.20 to this Agreement, there has not been any material adverse change in the financial condition, business or operations of Union; provided, however, that a material adverse change will not include a change with respect to, or effect on, Union resulting from a change in law, rule, regulations or GAAP or from any other matter affecting federally-insured depository institutions generally (including without limitation, their holding companies), including, without limitation, changes in general economic conditions and changes in prevailing interest or deposit rates; provided, any such change does not impact Union more adversely than other similarly situated financial institution. Since December 31, 1997, the business of Union has been conducted only in the ordinary course consistent with prior practices.
Section 2.21. BROKERS AND FINDERS. Except for the engagement of The Bank Advisory Group, Inc., Austin, Texas ("BAGI") and other than as set forth on Schedule 2.21 of this Agreement, neither Union nor any of its officers, directors or employees have
employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders' fees in connection with the Mergers contemplated herein.
Section 2.22. ABSENCE OF PROPERTY TAXES AND LIENS. All property taxes due under the applicable provisions of the Texas Tax Code have been paid by either Union or the shareholders of Union, and no liens imposed or authorized by the Texas Tax Code exist on the shares of Union Common Stock, except as otherwise disclosed in Schedule 2.22 to this Agreement.
Section 2.23. COMMUNITY REINVESTMENT ACT. Union is in material compliance with the Community Reinvestment Act (12 U.S.C. ss. 2901 ET SEQ.) and all regulations promulgated thereunder, and Union has supplied Bancshares with copies of Union's current CRA Statement, all support papers therefor, all letters and written comments received by Union since January 1, 1995 pertaining thereto and any responses by Union to such comments. Union has a rating of "satisfactory" as of its most recent CRA compliance examination and knows of no reason why it would not receive a rating of "satisfactory" or better pursuant to its next CRA compliance examination or why the FDIC or any other governmental entity may seek to restrain, delay or prohibit the transactions contemplated hereby as a result of any act or omission of Union under the CRA.
Section 2.24. FAIR HOUSING ACT, HOME MORTGAGE DISCLOSURE ACT AND EQUAL CREDIT OPPORTUNITY ACT. Union is in material compliance with the Fair Housing Act (42 U.S.C. ss. 3601 ET SEQ.), the Home Mortgage Disclosure Act (12 U.S.C. ss. 2801 ET SEQ. and the Equal Credit Opportunity Act (15 U.S.C. ss. 1691 ET SEQ.) and all regulations promulgated thereunder. Union has not received any notices of any violation of said acts or any of the regulations promulgated thereunder, nor does Union have any notice of, or knowledge of, any threatened administrative inquiry, proceeding or investigation with respect to Union 's compliance with said acts.
Section 2.25. USURY LAWS AND OTHER CONSUMER COMPLIANCE LAWS. All loans of Union have been made substantially in accordance with all applicable statutes and regulatory requirements at the time of such loan or any renewal thereof, including without limitation, the Texas usury statutes as they are currently interpreted, Regulation Z (12 C.F.R. ss. 226 ET SEQ.) issued by the Board of Governors of the Federal Reserve System, the Federal Consumer Credit Protection Act (15 U.S.C. ss. 1601 ET SEQ.), the Texas Consumer Credit Code (Tex. Rev. Civ. Stat. Ann. art. 5069-2.01, ET SEQ.) and all statutes governing the operation of national banks located in Texas. Each loan on the books of Union was made in the ordinary course of Union's business.
Section 2.26. BANK SECRECY ACT. Union is in material compliance with the Bank Secrecy Act (12 U.S.C. ss.ss. 1730(d) and 1829(b)) and all regulations promulgated thereunder, and Union has properly certified all foreign deposit accounts and has made all necessary tax
withholdings on all of its deposit accounts; furthermore, Union has timely and properly filed and maintained all requisite Currency Transaction Reports and other related forms, including, but not limited to, any requisite Custom Reports required by any agency of the United States Treasury Department, including but not limited to the Internal Revenue Service.
Section 2.27. ZONING AND RELATED LAWS. All real property owned by Union and the use thereof materially complies with all applicable laws, ordinances, regulations, orders or requirements, including without limitation, building, zoning and other laws.
Section 2.28. YEAR 2000 COMPLIANCE. Union has received a rating of "satisfactory" as of its most recent Year 2000 compliance examination. Union has no reason to believe the FDIC or any other governmental entity may seek to restrain, delay or prohibit the transactions contemplated hereby as a result of any act or omission of Union regarding Year 2000 compliance.
Section 2.29. SECURITIES LAWS. Union and its officers, employees and agents are now, and at all times in the past have been, in full compliance with all applicable federal and state securities laws and any regulations promulgated thereunder. Union and its officers, employees and agents have complied with, and currently hold, all necessary licenses and permits required under any federal or state securities law or regulation to conduct any securities activities in which Union or its officers, employees, or agents are now engaged or have been engaged in the past.
Section 2.30. REGULATORY APPROVALS. Union has no reason to believe that it will not be able to obtain all requisite regulatory approvals on the part of Union necessary to consummate the Mergers as set forth in this Agreement.
Section 2.31. SHAREHOLDERS' LIST. Union has provided or made available to Bancshares as of a date within ten (10) days of the date of this Agreement a list of the holders of shares of Union Common Stock containing for Union's shareholders the names, addresses and number of shares held of record, which shareholders' list is in all respects accurate as of such date and will be updated prior to Closing.
III. REPRESENTATIONS AND WARRANTIES OF BANCSHARES AND FPB
Bancshares and FPB represent and warrant to Union that the statements contained in this Article III are true and correct in all material respects as follows:
Section 3.1. ORGANIZATION. Bancshares is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas and a bank holding company duly registered under the Bank Holding Company Act of 1956, as amended ("BHC
Act"), subject to all laws, rules and regulations applicable to bank holding companies. Prosperity Bancshares of Delaware, Inc. ("Delaware-Company") is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and a bank holding company duly registered under the BHC Act subject to all laws, rules and regulations applicable to bank holding companies. Bancshares owns 100% of the issued and outstanding common stock of Delaware-Company and, indirectly through Delaware- Company, 100% of the issued and outstanding capital stock of FPB. FPB is a Texas banking association duly organized, validly existing and in good standing under the laws of the State of Texas. FPB is an insured bank as defined in the Federal Deposit Insurance Act. Bancshares and FPB have full power and authority (including all licenses, franchises, permits and other governmental authorizations which are legally required) to own their properties, to engage in the business and activities now conducted by them and to enter into this Agreement.
Section 3.2. APPROVALS; AUTHORITY. The Boards of Directors of Bancshares and FPB have approved this Agreement and the transactions contemplated herein subject to the approval thereof by the shareholders of FPB and New Bank as required by law, and, other than such shareholder approvals, no further corporate proceedings of Bancshares or FPB are needed to execute and deliver this Agreement and consummate the Mergers. This Agreement has been duly executed and delivered by Bancshares and FPB and is a duly authorized, valid, legally binding agreement of Bancshares and FPB enforceable against Bancshares and FPB in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors' rights generally and general equitable principles.
Section 3.3. NO CONFLICT WITH OTHER INSTRUMENTS. Neither the execution and delivery of this Agreement nor the consummation of the Mergers contemplated thereby, subject to obtaining all required shareholder consents, will conflict with or result in a breach of any provision of any Articles of Incorporation of Bancshares, or its Bylaws. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, subject to obtaining all required shareholder and regulatory approvals, will not violate any provision of, or constitute a default under, any law, or any order, writ, injunction or decree of any court or other governmental agency, or any contract, agreement or instrument to which Bancshares is a party or by which it is bound or constitute an event which, with the lapse of time or action by a third party, could result in any default under any of the foregoing or result in the creation of any lien, charge or encumbrance upon the assets or properties of Bancshares, or upon the stock of Bancshares.
Section 3.4. LITIGATION AND OTHER PROCEEDINGS. Except as otherwise noted on Schedule 3.4 hereto, there are no legal, quasi-judicial or administrative proceedings of any kind or nature now pending or, to the knowledge of Bancshares, threatened before any court or administrative body in any manner against Bancshares, or any of its properties or capital
stock, which might have a material adverse effect on Bancshares, its financial condition, assets, operations or earnings or the transactions proposed by this Agreement. Bancshares knows of no basis on which any litigation or proceeding could be brought which could have a materially adverse effect on the financial condition of Bancshares or which could question the validity of any action taken or to be taken in connection with this Agreement and the transactions contemplated hereby. Bancshares is not in default with respect to any judgment, order, writ, injunction, decree, award, rule or regulation of any court, arbitrator or govern mental agency or instrumentality.
Section 3.5. ABILITY TO PAY MERGER CONSIDERATION. Bancshares has available
through loan commitments or internal funds cash in the amount of the Merger
Consideration to be paid in cash to shareholders of Union as set forth in
Section 1.9 hereof.
Section 3.6. REGULATORY APPROVALS. Bancshares has no reason to believe that it will not be able to obtain all requisite regulatory approvals on the part of Bancshares and FPB necessary to consummate the transactions set forth in this Agreement.
Section 3.7. YEAR 2000 COMPLIANCE. FPB has not yet received a rating for its recent Year 2000 compliance examination but knows of no reason why it would not receive a rating of "satisfactory" or better pursuant to its recent Year 2000 compliance examination. FPB has no reason to believe the FDIC or any other governmental entity may seek to restrain, delay or prohibit the transactions contemplated hereby as a result of any act or omission of FPB regarding Year 2000 compliance.
Section 3.8. COMMUNITY REINVESTMENT ACT. FPB is in material compliance with the Community Reinvestment Act (12 U.S.C. ss. 2901 ET SEQ.) and all regulations promulgated thereunder. FPB has a rating of "satisfactory" as of its most recent CRA compliance examination and knows of no reason why it would not receive a rating of "satisfactory" or better pursuant to its next CRA compliance examination or why the FDIC or any other governmental entity may seek to restrain, delay or prohibit the transactions contemplated hereby as a result of any act or omission of FPB under the CRA.
IV. COVENANTS OF UNION
Union covenants and agrees with Bancshares and FPB as follows:
Section 4.1. SHAREHOLDER APPROVAL AND BEST EFFORTS. Union will, as soon as practicable following acceptance of Bancshares' regulatory applications for processing, present for the approval of its shareholders this Agreement and the transactions contemplated hereby. Union will take all reasonable action to arrange for a meeting of its shareholders for the purpose of considering the Agreement and, if the transaction is approved by such shareholders, to aid and assist in the consummation of the Mergers, and will use its best
efforts to take or cause to be taken all other actions necessary, proper or advisable to consummate the transactions contemplated by this Agreement, including such actions as Bancshares reasonably considers necessary, proper or advisable in connection with filing applications and registration statements with, or obtaining approvals from, all regulatory authorities having jurisdiction over the transactions contemplated by this Agreement.
Section 4.2. OPERATIONS. From and after the date of this Agreement to the Effective Time, Union agrees to (a) conduct its business in substantially the same manner as it has been conducted since December 31, 1997 and in accordance with prudent business and banking practices, (b) maintain and keep its properties in as good repair and condition as at present, except for deterioration due to ordinary wear and tear and damage due to casualty, (c) maintain in full force and effect insurance comparable in amount and scope of coverage to that currently maintained for Union, (d) make no alteration in the manner of maintaining its books, accounts or records, or in the accounting practices relating to its business, properties or assets except as required by GAAP, (e) perform all of its material obligations under contracts, leases and documents relating to or affecting its assets, properties and business, except such obligations as Union may in good faith reasonably dispute, (f) maintain and preserve its corporate existence, business organization, assets, licenses, permits, authorizations and business opportunities intact, use its best efforts to retain its present employees and maintain all relationships with depositors and customers of Union, (g) comply with and perform all obligations and duties imposed upon Union by all federal, state and local laws, and all rules, regulations and orders imposed by federal, state or local governmental authorities, (h) notify Bancshares promptly upon commencement of any compliance, safety and soundness or other type of examination conducted by the FDIC, Banking Department or any other agency having supervisory authority over Union or in the event of any actual or threatened litigation, (i) promptly give written notice to Bancshares upon obtaining knowledge of any event or fact that would cause any of the representations or warranties of Union contained in this Agreement to be untrue or misleading in any material respect, and (j) use its best efforts to continue to solicit deposits, maintain deposits and operate its deposit gathering procedures consistent with existing practices.
Union will not, without the prior written consent of Bancshares, (i)
permit any amendment or change to be made in Articles of Association or Bylaws
of Union except as directed by Bancshares as set forth in (i) above, (ii) take
any action described or do any of the things listed in Section 2.14 hereof
except with respect to Section 2.14(g), (iii) enter into or amend any contract,
agreement or other instrument of any of the types listed in Section 2.10 hereof,
(iv) excluding deposits and certificates of deposit, undertake any additional
borrowings in excess of ninety (90) days, (v) sell any investment securities,
(vi) purchase any investment securities other than United States Treasury
obligations or obligations of any United States governmental agency with
maturities of more than two (2) years, (vii) modify any outstanding loan, make
any new loan, or acquire any loan participation, unless such modification, new
loan or participation is made in the ordinary course of business, consistent
with existing practice, (viii) commit to or make any extension of credit to any borrower or his or its related interests in an amount which, when combined with all other loans to such borrower and his or its related interests, would exceed an aggregate of $250,000, or (ix) agree to settle all or part of any litigation matters, provided that with respect to sections (iv), (v), (vi), (vii), (viii) and (ix) written consent of Bancshares shall not be unreasonably withheld and shall be provided within five days of submission.
Section 4.3. ACCESS TO PROPERTIES AND RECORDS. To the extent permitted by applicable law, Union will afford the executive officers and authorized representatives (including legal counsel, accountants and consultants) of Bancshares full access to the properties, books and records of Union in order that Bancshares may have full opportunity to make such reasonable investigation as it shall desire to make of the affairs of Union, and the officers of Union will furnish Bancshares with such additional financial and operating data and other information as to the business and properties of Union as Bancshares shall, from time to time, reasonably request. As soon as practicable after they become available, Union will deliver or make available to Bancshares all unaudited quarterly financial statements prepared for the internal use of management of Union and all Call Reports filed by Union with the appropriate federal regulatory authority after the date of this Agreement. All such financial statements shall be prepared in accordance with generally accepted accounting principles applied on a consistent basis with previous accounting periods. In the event of the termination of this Agreement, Bancshares will return to Union all documents and other information obtained pursuant hereto and will keep confidential any information obtained pursuant to this Agreement.
Section 4.4. INFORMATION FOR REGULATORY APPLICATIONS. To the extent permitted by law, Union will furnish Bancshares with all information concerning Union required for inclusion in any application, filing, statement or document to be made or filed by Bancshares or Union with any federal or state regulatory or supervisory authority in connection with the transactions contemplated by this Agreement during the pendency of this Agreement. Union represents and warrants that all information so furnished for such applications and filings shall, to the best of its knowledge, be true and correct in all material respects without omission of any material fact required to be stated to make the information not misleading. Union agrees at any time, upon the request of Bancshares, to furnish to Bancshares a written letter or statement confirming the accuracy of the information with respect to Union contained in any report or other application or statement referred to in Sections 4.1 or 4.4 of this Agreement, and confirming that the information with respect to Union contained in such document or draft was furnished by Union expressly for use therein or, if such is not the case, indicating the inaccuracies contained in such document or indicating the information not furnished by Union expressly for use therein.
Section 4.5. ATTENDANCE AT CERTAIN UNION MEETINGS. In order to facilitate the continuing interaction of Bancshares with Union, and in order to keep Bancshares fully
advised of all ongoing activities of Union, Union agrees to allow Bancshares to designate two representatives, any one of whom will be allowed to attend as an invited guest and fully monitor all regular and called meetings of the board of directors and loan and discount and asset liability management committees of Union (including, but not limited to, meetings of the officers' loan committee of Union). Union shall promptly give Bancshares prior notice by telephone of all called meetings. Such representative shall have no right to vote and may be excluded from sessions of the board of directors or loan or investment committee during which there is being discussed (a) matters involving this Agreement, (b) information or material which Union is required or obligated to maintain as confidential under applicable laws or regulations or policies or procedures of Union, or (c) pending or threatened litigation or investigations if, in the opinion of counsel to Union, the presence of such representative would or might adversely affect the confidential nature of or any privilege relating to any matters to be discussed. No attendance by representatives of Bancshares at board meetings under this Section 4.5 or knowledge gained or deemed to have been gained by virtue of such attendance will affect any of the representations and warranties of Union made in this Agreement. Bancshares agrees that, until the Closing, it and its representatives will hold in strict confidence all information so obtained from Union and, if the transactions provided for herein are not consummated, Bancshares will, upon request of Union, return or cause to be returned to Union all written information and documents obtained from Union concerning Union then in its possession.
Section 4.6. STANDSTILL PROVISION. So long as this Agreement is in effect, neither Union nor any of its directors or officers shall entertain, solicit or encourage any inquiries, or provide any information to or negotiate with any other party any proposal which could reasonably be expected to lead to the merger, consolidation, acquisition, or sale of all or substantially all of the assets or any shares of capital stock of Union. Union agrees to notify Bancshares immediately of any such unsolicited acquisition proposals and provide reasonable detail as to the identity of the proposed acquiror and the nature of the proposed transaction.
Section 4.7. PROXIES. Union acknowledges that the persons listed in Schedule 4.7 have agreed to vote their shares of Union Common Stock in favor of this Agreement and the transactions contemplated hereby, subject to required regulatory approvals, pursuant to a Voting Agreement substantially in the form of Exhibit "C" to this Agreement which has been executed as of the date of this Agreement.
Section 4.8. TERMINATION OF DATA PROCESSING CONTRACTS. Union will timely take any and all actions necessary, including but not limited to notifying appropriate parties, to ensure that its current data processing contracts will not renew.
V. COVENANTS OF BANCSHARES AND FPB
Bancshares and FPB covenant and agree with Union as follows:
Section 5.1. BEST EFFORTS. Bancshares and FPB will take all reasonable action to aid and assist in the consummation of the Mergers and the transactions contemplated hereby, and will use their best efforts to take or cause to be taken all other actions necessary, proper or advisable to consummate the transactions contemplated by this Agreement, including such actions which are necessary, proper or advisable in connection with filing applications with, or obtaining approvals from, all regulatory authorities having jurisdiction over the transac tions contemplated by this Agreement.
Section 5.2. INFORMATION FOR APPLICATIONS AND PROXY SOLICITATION. To the extent permitted by law, Bancshares and FPB will furnish Union with all information concerning Bancshares and FPB required for inclusion in (a) any application, statement or document to be made or filed by Union with any federal or state regulatory or supervisory authority in connection with the transactions contemplated by this Agreement during the pendency of this Agreement and (b) any proxy materials to be furnished to the shareholders of Union in connection with their consideration of the Mergers. Bancshares and FPB represent and warrant that all information so furnished for such statements and applications shall, to the best of their knowledge, be true and correct in all material respects without omission of any material fact required to be stated to make the information not misleading. Bancshares and FPB will indemnify and hold harmless Union from and against any and all losses, claims, damages, expenses or liabilities to which Union may become subject under applicable laws, rules and regulations and will reimburse Union for any legal or other expenses reasonably incurred by Union in connection with investigating or defending any actions whether or not resulting in liability, insofar as such losses, claims, damages, expenses, liabilities or actions arise out of or are based on any untrue statement or alleged untrue statement of a material fact contained in any such application or proxy materials or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein, or necessary in order to make the statements therein not misleading, but only insofar as such statement or omission was made in reliance upon and in conformity with information expressly furnished by Bancshares expressly for use therein. Bancshares and FPB agree, upon the request of Union, to furnish to Union a written letter or statement confirming to the best of its knowledge the accuracy of the information with respect to Bancshares and FPB contained in any report or other application or statement referred to in Sections 5.1 or 5.2 of this Agreement, and confirming that the information with respect to Bancshares and FPB contained in such document or draft was furnished expressly for use therein or, if such is not the case, indicating the inaccuracies contained in such document or indicating the information not furnished by Bancshares or FPB expressly for use therein.
Section 5.3. EMPLOYEE BENEFIT PLANS. Bancshares agrees that the employees of Union who are bona fide participants in any of Union's health and welfare plans will be entitled to participate in all employee health and welfare plans maintained for employees of Bancshares in accordance with the terms of such plans. Former employees of Union who are terminated after Closing will receive severance under Bancshares' severance policy. All employees of Union retained by Bancshares will receive credit for their prior service with Union with respect to such plans and severance. Bancshares agrees that Union may agree to pay a bonus to employees/officers of Union at Closing if such employee/officer stays until the Closing ("Retention Bonus"); provided, however, that the aggregate amount of such Retention Bonuses may not exceed $50,000, and provided that Bancshares shall approve all Retention Bonus agreements when the aggregate value of all Retention Bonus agreements exceeds $25,000. Bancshares shall not unreasonably withhold approval of the Retention Bonus agreements. Union shall promptly notify Bancshares by telephone of all offers of a Retention Bonus. If Union becomes aware that an officer at the Vice President level or above is considering terminating employment with Union, Union shall promptly notify Bancshares.
Section 5.4. CONFIDENTIALITY. Neither Bancshares nor FPB shall, before or after the consummation or termination of this Agreement, directly or indirectly disclose any confidential information acquired from Union to any person, firm, corporation, association or other entity for any reason or purpose whatsoever, other than in connection with the regulatory notice and application process or, after termination of this Agreement pursuant to Section 7.1 hereof, use such information for their own purposes or for the benefit of any person, firm, corporation, association, or other entity under any circumstances.
Section 5.5. APPLICATIONS. Bancshares and FPB will file all necessary regulatory notices and applications not later than the 30th day after the execution of this Agreement and will provide Union with a copy of the non-confidential portions of notices, applications, statements or correspondence submitted to or received from regulatory authorities in connection with the Mergers.
Section 5.6. ADDITIONAL CAPITAL. If the Federal Reserve Board refuses to approve the Mergers on the basis that Bancshares will not have a 5% leverage ratio, 6% Tier 1 capital to risk-weighted assets ratio and a 10% total capital to risk-weighted assets ratio ("Capital Conditions"), then Bancshares shall raise additional capital such that it would satisfy the Capital Conditions on a pro forma basis. If Bancshares does not raise sufficient capital to satisfy the Capital Conditions and cannot otherwise obtain approval from the Federal Reserve Board, then Bancshares will pay Union cash in an amount equal to $250,000.00 ("Fee"). The payment of the Fee shall be in lieu of Union seeking any other relief or damages to which it is otherwise entitled pursuant to this Agreement.
VI. CLOSING
Section 6.1. CLOSING. Subject to the other provisions of this Section VI, on a mutually acceptable date ("Closing Date") as soon as practicable within a fifteen-day period commencing with the latest of the following dates:
(a) the receipt of shareholder approval and the last approval from any requisite regulatory or supervisory authority and the expiration of any statutory or regulatory waiting period which is necessary to effect the Mergers; or
(b) if the transactions contemplated by this Agreement are being contested in any legal proceeding and Bancshares or Union, pursuant to Section 10.1 herein, have elected to contest the same, then the date that such proceeding has been brought to a conclusion favorable, in the judgment of each of Bancshares and Union, to the consummation of the transactions contemplated herein, or such prior date as each of Bancshares and Union shall elect whether or not such proceeding has been brought to a conclusion.
A meeting ("Closing") will take place at which the parties to this Agreement will exchange certificates, opinions, letters and other documents in order to determine whether any condition exists which would permit the parties hereto to terminate this Agreement. If no such condition then exists or if no party elects to exercise any right it may have to terminate this Agreement, then and thereupon the appropriate parties shall execute such documents and instruments as may be necessary or appropriate to effect the transactions contemplated by this Agreement.
The Closing shall take place at the offices of Bracewell & Patterson, L.L.P. in Houston, Texas, or at such other place to which the parties hereto may mutually agree.
Section 6.2. EFFECTIVE TIME. Subject to the terms and upon satisfaction of all requirements of law and the conditions specified in this Agreement including, among other conditions, the receipt of any requisite approvals of the shareholders of Union and the regulatory approvals of the Federal Reserve Board, FDIC, Banking Department and any other federal or state regulatory agency whose approval must be received in order to consummate the Mergers, the Initial Merger shall become effective, and the effective time of the Initial Merger shall occur, at the date and time specified in the certificate approving the Initial Merger to be issued by the Banking Department, and the Final Merger shall become effective, and the effective time of the Final Merger shall occur, at the date and time specified in the certificate approving the Merger to be issued by the Banking Department ("Effective Time"). It is anticipated by Bancshares and Union that the effective time of the Initial Merger will occur immediately prior to the Effective Time and that the Closing and the Effective Time will occur on the same day.
VII. TERMINATION
Section 7.1. TERMINATION.
(a) This Agreement may be terminated by action of the Board of Directors of Bancshares or Union at any time prior to the Effective Time if:
(i) any court of competent jurisdiction in the United States or other United States (federal or state) governmental body shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the Mergers and such order, decree, ruling or other action shall have been final and non-appealable;
(ii) any of the transactions contemplated by this Agreement are disapproved by any regulatory authority or other person whose approval is required to consummate any of such transactions; or
(iii) the Mergers shall not have become effective on or before
January 1, 1999, the two hundred and tenth (210) day following the
date of this Agreement, or such later date as shall have been
approved in writing by the Boards of Directors of Bancshares and
Union; provided, however, that the right to terminate under this
Section 7.1(a)(iii) shall not be available to any party whose
failure to fulfill any material obligation under this Agreement has
been the cause of, or has resulted in, the failure of the Mergers to
become effective on or before such date.
(b) This Agreement may be terminated at any time prior to the Effective Time by the Board of Directors of Union if (i) Bancshares shall fail to comply in any material respect with any of its covenants or agreements contained in this Agreement, or if any of the representations or warranties of Bancshares contained herein shall be inaccurate in any material respect or (ii) there shall have been any change after December 31, 1997 in the assets, properties, business or financial condition of Bancshares which individually or in the aggregate have materially and adversely affected the ability of Bancshares to pay the Merger Consideration set forth in Section 1.9 hereof. In the event the Board of Directors of Union desires to terminate this Agreement as provided above, such Board of Directors must notify Bancshares in writing of its intent to terminate stating the reason therefor. Bancshares shall have fifteen days from the receipt of such notice to cure the alleged breach or inaccuracy, subject to the approval of Union (which approval shall not be unreasonably delayed or withheld).
(c) This Agreement may be terminated any time prior to the Effective Time by action of the Board of Directors of Bancshares if (i) Union shall fail to comply in
any material respect with any of its covenants or agreements contained in this Agreement, or if any of the representations or warranties of Union contained herein shall be inaccurate in any material respect, (ii) there shall have been any change after December 31, 1997, in the assets, properties, business or financial condition of Union which individually or in the aggregate have materially and adversely affected the financial condition, results of operation or business of Union, or (iii) the Board of Directors of Bancshares reasonably concludes, after consulting with counsel, that Bancshares will be unable to obtain any regulatory approval required in order to consummate the Mergers or any such approval is accompanied by terms or conditions unacceptable to Bancshares; provided, however, that a Federal Reserve Board requirement of a 5% leverage ratio, 6% Tier 1 capital to risk weighted assets ratio and 10% total capital to risk weighted assets ratio will not be deemed an unacceptable condition to Bancshares. In the event the Board of Directors of Bancshares desires to terminate this Agreement because of an alleged breach, inaccuracy or change as provided in (i) or (ii) above, the Board of Directors must notify Union in writing of its intent to terminate stating the cause therefor. Union shall have fifteen days from the receipt of such notice to cure the alleged breach, inaccuracy or change, subject to the approval of Bancshares (which approval shall not be unreasonably delayed or withheld).
(d) This Agreement may be terminated at any time prior to the Effective Time with the mutual written consent of Bancshares and Union and the approval of such action by their respective Boards of Directors.
Section 7.2. EFFECT OF TERMINATION. In the event of termination of this Agreement and the abandonment of the Mergers without breach by any party hereto, this Agreement shall become void and have no effect, without any liability on the part of any party or its directors, officers or shareholders. Nothing contained in this Section 7.2 shall relieve any party hereto of any liability for a breach of this Agreement.
VIII. CONDITIONS TO OBLIGATIONS OF BANCSHARES AND FPB
The obligations of Bancshares and FPB under this Agreement are subject to the satisfaction, at or prior to the Closing Date of the following conditions, which may be waived by Bancshares in its sole discretion:
Section 8.1. COMPLIANCE WITH REPRESENTATIONS AND COVENANTS. The representations and warranties made by Union in this Agreement must have been true in all material respects when made and shall be true in all material respects as of the Closing Date with the same force and effect as if such representations and warranties were made at and as of the Closing Date, and Union shall have performed or complied with all covenants and conditions required by this Agreement to be performed and complied with prior to or at the Closing. Bancshares shall have been furnished with a certificate, executed by an appropriate repre sentative of Union and dated as of the Closing Date, to the foregoing effect.
Section 8.2. MATERIAL ADVERSE CHANGE. Prior to the Closing Date, there shall not have occurred any material adverse change in the financial condition, business or operations of Union, nor shall any event have occurred which, with the lapse of time, will cause or create any material adverse change in the financial condition, business or operations of Union in the reasonable judgment of the Board of Directors of Bancshares; provided, however, that a material adverse change will not include a change with respect to, or effect on, Union resulting from a change in law, rule, regulation or GAAP or from any other matter affecting federally-insured depository institutions generally (including without limitation, their holding companies), including, without limitation, changes in general economic conditions and changes in prevailing interest or deposit rates; provided, any such change does not impact Union more adversely than other similarly situated financial institution. Bancshares shall have received a certificate to the foregoing effect executed by an appropriate representative of Union and dated as of the Closing Date.
Section 8.3. LEGAL OPINION. Bancshares shall have received an opinion of counsel to Union, dated as of the Closing Date, in form and substance satisfactory to counsel for Bancshares, to the effect set forth in Schedule 8.3 hereof.
Section 8.4. RELEASES. Union shall have used its best efforts to have the directors and officers of Union deliver to Bancshares an instrument in the form of Exhibit "D" attached hereto dated the Effective Time releasing Bancshares and FPB from any and all claims of such directors (except as to their deposits and accounts and any rights of indemnification pursuant to Union's Articles of Association). The directors of Union shall have delivered to Bancshares their respective resignations.
Section 8.5. DISSENTERS' RIGHTS. The holders of no more than 10% of the issued and outstanding Union Common Stock shall have demanded or shall be entitled to demand payment of the fair value of their shares as dissenting shareholders.
Section 8.6. EMPLOYMENT AGREEMENTS. FPB shall have offered employment agreements substantially in the form of Exhibits "E" and "F" to A. Schlick Boettcher and Clem W. "Buck" Boettcher, respectively.
IX. CONDITIONS TO OBLIGATIONS OF UNION
The obligations of Union under this Agreement are subject to the satisfaction, at or prior to the Closing Date, of the following conditions, which may be waived by Union in its sole discretion:
Section 9.1. COMPLIANCE WITH REPRESENTATIONS AND COVENANTS. The representations and warranties made by Bancshares and FPB in this Agreement must have been true in all materials respects when made and shall be true in all material respects as of the Closing Date
with the same force and effect as if such representations and warranties were made at and as of the Closing Date, and Bancshares and FPB shall have performed and complied in all material respects with all covenants and conditions required by this Agreement to be performed or complied with by Bancshares and FPB prior to or at the Closing. Union shall be furnished with a certificate, executed by appropriate representatives of Bancshares and FPB and dated as of the Closing Date, to the foregoing effect.
Section 9.2. MATERIAL ADVERSE CHANGE. Prior to the Closing Date, there shall not have occurred any material adverse change in the financial condition, business or operations of Bancshares, nor shall any event have occurred which, with the lapse of time, will cause or create any material adverse change in the financial condition, business or operations of Bancshares, which would materially and adversely affect the ability of Bancshares to pay the Merger Consideration set forth in Section 1.9; provided, however, that a material adverse change will not include a change with respect to, or effect on, Union resulting from a change in law, rule, regulation or GAAP or from any other matter affecting federally-insured depository institutions generally (including without limitation, their holding companies), including, without limitation, changes in general economic conditions and changes in prevailing interest or deposit rates; provided, any such change does not impact Union more adversely than other similarly situated financial institution..
Section 9.3. LEGAL OPINION. Union shall have received an opinion of counsel to Bancshares, dated as of the Closing Date and in form and substance satisfactory to counsel for Union, to the effect set forth in Schedule 9.3 hereof.
Section 9.4. RELEASES. Union shall have delivered to the directors and officers of Union who delivered releases to Union pursuant to Section 8.4. an instrument in the form of Exhibit "G" attached hereto dated the Effective Time releasing the directors from any and all claims of Union (except as to indebtedness and other contractual liabilities); provided, however, that such releases shall not release an action against such directors by Bancshares or FPB in connection with the transactions contemplated by this Agreement.
X. CONDITIONS TO RESPECTIVE OBLIGATIONS OF BANCSHARES, FPB AND UNION
The respective obligations of Bancshares, FPB and Union under this Agreement are subject to the satisfaction of the following conditions which may be waived by Bancshares, FPB and Union, respectively, in their sole discretion:
Section 10.1. GOVERNMENT APPROVALS. Bancshares, FPB and Union shall have received the approval, or waiver of approval, of the transactions contemplated by this Agreement from all necessary governmental agencies and authorities, including the Federal Reserve Board and any other regulatory agency whose approval must be received in order
to consummate the Mergers, which approvals shall not impose any restrictions on the operations of the Continuing Bank which are unacceptable to Bancshares, and such approvals and the transactions contemplated hereby shall not have been contested by any federal or state governmental authority or any third party (except shareholders asserting dissenters' rights) by formal proceeding. It is understood that, if any such contest is brought by formal proceeding, Bancshares or Union may, but shall not be obligated to, answer and defend such contest or otherwise pursue the Mergers over such objection.
Section 10.2. SHAREHOLDER APPROVAL. The shareholders of Union shall have approved this Agreement and the transactions contemplated by this Agreement and the holders of no more than 10% of the Union Common Stock shall have exercised their dissenters' rights in accordance with the applicable laws, rules and regulations as provided in Section 1.11 of this Agreement.
XI. MISCELLANEOUS
Section 11.1. NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and warranties of Bancshares, FPB and Union contained in this Agreement shall terminate at the Closing Time. The sole remedy prior to Closing for a misrepresentation that was not a knowing misrepresentation shall be the option to terminate this Agreement.
Section 11.2. AMENDMENTS. This Agreement may be amended only by a writing signed by Bancshares, FPB and Union at any time prior to the Closing Time with respect to any of the terms contained herein; provided, however, that the Merger Consideration to be received by the shareholders of Union pursuant to this Agreement shall not be decreased subsequent to the approval of the transactions contemplated by the Agreement without the further approval by such shareholders.
Section 11.3. EXPENSES. Whether or not the transactions provided for herein are consummated, each party to this Agreement will pay its respective expenses incurred in connection with the preparation and performance of its obligations under this Agreement. Similarly, each party agrees to indemnify the other parties against any cost, expense or liability (including reasonable attorneys' fees) in respect of any claim made by any party for a broker's or finder's fee in connection with this transaction other than one based on communications between the party and the claimant seeking indemnification. Except for the engagement of BAGI by Union, Bancshares and Union represent and warrant to each other that neither of them, nor any of their agents, employees or representatives, has incurred any liability for any commissions or brokerage fees in connection with this transaction. Union shall be responsible for all fees to BAGI in connection with the Mergers and Union will indemnify and hold harmless Bancshares and FPB for any fees and expenses to BAGI that are incurred in connection with the Mergers.
Section 11.4. NOTICES. Except as explicitly provided herein, any notice given hereunder shall be in writing and shall be delivered in person or mailed by first class mail, postage prepaid or sent by facsimile, courier or personal delivery to the parties at the following addresses unless by such notice a different address shall have been designated:
If to Bancshares and FPB:
Prosperity Bancshares, Inc
1301 N. Mechanic
El Campo, Texas 77437
Attention: Mr. David Zalman
With a copy to:
Bracewell & Patterson, L.L.P.
711 Louisiana Street, Suite 2900
Houston, Texas 77002-2781
Attention: Mr. William T. Luedke IV
If to Union:
Union State Bank
700 Church Street
East Bernard, Texas 77435
Attention: Mr. A. Schlick Boettcher
With a copy to:
Jenkins & Gilchrist
1445 Ross Avenue, Suite 3200
Dallas, Texas 75202
Attention: Mr. Charles Greef
All notices sent by mail as provided above shall be deemed delivered five (5) days after deposit in the mail. All notices sent by facsimile or courier as provided above shall be deemed delivered one day after being sent. All other notices shall be deemed delivered when actually received. Any party to this Agreement may change its address for the giving of notice specified above by giving notice as herein provided.
Section 11.5. CONTROLLING LAW. All questions concerning the validity, operation and interpretation of this Agreement and the performance of the obligations imposed upon the parties hereunder shall be governed by the laws of the State of Texas and, to the extent applicable, by the laws of the United States of America.
Section 11.6. HEADINGS. The headings and titles to the sections of this Agreement are inserted for convenience only and shall not be deemed a part hereof or affect the construction or interpretation of any provision hereof.
Section 11.7. MODIFICATIONS OR WAIVER. No termination, cancellation, modification, amendment, deletion, addition or other change in this Agreement, or any provision hereof, or waiver of any right or remedy herein provided, shall be effective for any purpose unless specifically set forth in a writing signed by the party or parties to be bound thereby. The waiver of any right or remedy in respect to any occurrence or event on one occasion shall not be deemed a waiver of such right or remedy in respect to such occurrence or event on any other occasion.
Section 11.8. SEVERABILITY. Any provision hereof prohibited by or unlawful or unenforceable under any applicable law or any jurisdiction shall as to such jurisdiction be ineffective, without affecting any other provision of this Agreement, or shall be deemed to be severed or modified to conform with such law, and the remaining provisions of this Agreement shall remain in force, provided that the purpose of the Agreement can be effected. To the fullest extent, however, that the provisions of such applicable law may be waived, they are hereby waived, to the end that this Agreement be deemed to be a valid and binding agreement enforceable in accordance with its terms.
Section 11.9. ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, but shall not be assigned by any party without the prior written consent of the other parties.
Section 11.10. CONSOLIDATION OF AGREEMENTS. All understandings and agreements heretofore made between the parties hereto are merged in this Agreement which (together with any agreements executed by the parties hereto contemporaneously with or subsequent to the execution of this Agreement) shall be the sole expression of the agreement of the parties respecting the Mergers.
Section 11.11. COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and all of which shall be deemed to constitute one and the same instrument.
Section 11.12. BINDING ON SUCCESSORS. Except as otherwise provided herein, this Agreement shall be binding upon, and shall inure to the benefit of, the parties and their respective heirs, executors, trustees, administrators, guardians, successors and assigns.
Section 11.13. GENDER. Any pronoun used herein shall refer to any gender, either masculine, feminine or neuter, as the context requires.
Section 11.14. DISCLOSURES. Any disclosure made in any document delivered pursuant to this Agreement or referred to or described in writing in any section of this Agreement or any schedule attached hereto shall be deemed to be disclosure for purposes of any section herein or schedule hereto.
Section 11.15. PUBLICITY. Subject to written advice of counsel with respect to legal requirements relating to public disclosure of matters related to the transactions contemplated by this Agreement, the timing and content of any announcements, press releases or other public statements (whether written or oral) concerning this Agreement or the Mergers will occur upon, and be determined by, the mutual consent of Bancshares and Union; provided, however, that this shall not include notices required to be published pursuant to the regulatory application process.
Section 11.16. ENTIRE AGREEMENT. This Agreement contains the entire agreement among Bancshares, FPB and Union with respect to the Mergers.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first above written.
PROSPERITY BANCSHARES, INC.
By:_________________________________
ATTEST:
By:_____________________
FIRST PROSPERITY BANK
By:_________________________________
ATTEST:
By:_____________________
UNION STATE BANK
By:_________________________________
ATTEST:
By:_____________________
SCHEDULE 2.1 TO THE AGREEMENT:
ORGANIZATION - UNION
None.
SCHEDULE 2.2 TO THE AGREEMENT:
CAPITALIZATION - UNION
None.
SCHEDULE 2.4 TO THE AGREEMENT:
INVESTMENTS - UNION
SCHEDULE 2.5 TO THE AGREEMENT:
FINANCIAL STATEMENTS - UNION
None.
SCHEDULE 2.6 TO THE AGREEMENT:
TITLE - UNION
SCHEDULE 2.7 TO THE AGREEMENT:
ENVIRONMENTAL LAWS - UNION
SCHEDULE 2.8 TO THE AGREEMENT:
LITIGATION AND OTHER PROCEEDINGS - UNION
None.
SCHEDULE 2.9 TO THE AGREEMENT:
TAXES - UNION
None.
SCHEDULE 2.10 TO THE AGREEMENT:
CONTRACTS - UNION
SCHEDULE 2.11 TO THE AGREEMENT:
INSURANCE POLICIES - UNION
SCHEDULE 2.13 TO THE AGREEMENT:
COMPLIANCE WITH LAWS - UNION
SCHEDULE 2.14 TO THE AGREEMENT:
CONDUCT - UNION
SCHEDULE 2.16 TO THE AGREEMENT:
EMPLOYMENT RELATIONS - UNION
None.
SCHEDULE 2.18 TO THE AGREEMENT:
DEFERRED COMPENSATION ARRANGEMENTS - UNION
None.
SCHEDULE 2.19 TO THE AGREEMENT:
LIST OF LOANS - UNION
SCHEDULE 2.20 TO THE AGREEMENT:
ABSENCE OF CHANGES - UNION
None.
SCHEDULE 2.21 TO THE AGREEMENT:
BROKERS' AND FINDERS' FEES - UNION
None.
SCHEDULE 2.22 TO THE AGREEMENT:
ABSENCE OF PROPERTY TAXES AND LIENS - UNION
None.
SCHEDULE 3.4 TO THE AGREEMENT:
LITIGATION - BANCSHARES
None.
SCHEDULE 4.7 TO THE AGREEMENT:
PROXIES
SCHEDULE 8.3 TO THE AGREEMENT:
LEGAL OPINION TO BE DELIVERED BY UNION
The legal opinion of counsel for Union which is called for by Section 8.3 of the Agreement shall be to the following effect:
(a) Union is a Texas banking association duly organized, validly existing and in good standing under the laws of the State of Texas, and has full power and authority to carry on and engage in the business and activities now conducted by it and to enter into this Agreement.
(b) The authorized capital stock of Union consists of 70,000 shares of Common Stock, $10.00 par value. As of the date hereof, 70,000 shares of Union Common Stock were issued and outstanding. All of the shares which are issued and outstanding are validly issued, fully paid and have not been issued in violation of the preemptive rights of any person. There are no existing options, warrants, calls, convertible securities or commitments of any kind enabling Union to issue any authorized and unissued Union Common Stock nor does Union have any commitment or obligation to repurchase, reacquire or redeem any of its outstanding capital stock.
(c) The Board of Directors of Union has approved the Agreement and the transactions contemplated thereby. All necessary corporate proceedings, including all appropriate and legal actions by shareholders of Union to approve and authorize the transactions set forth in the Agreement, have been taken. This Agreement has been duly executed and delivered by Union and is a binding agreement of Union enforceable against Union in accordance with its terms.
(d) Except as otherwise noted in the Agreement, there are no legal, quasi-judicial or administrative proceedings of any kind or nature now pending or, to the knowledge of counsel to Union, threatened before any court or administrative body in any manner against Union or any of their properties or capital stock which would have a material adverse effect on
Union, its financial condition, assets, operations or earnings or the transactions proposed by the Agreement. Union is not in default with respect to any judgment, order, writ, injunction, decree, award, rule or regulation of any court, arbitrator or governmental agency or instrumentality.
(e) The execution and delivery of the Agreement and the consummation of the transactions contemplated thereby will not, to the best knowledge of counsel to Union, violate any provision of, or constitute a default under, any law, or any order, writ, injunction or decree of any court or other governmental agency, or any material contract, agreement or instrument to which Union is a party or by which it is bound or constitute an event which with the lapse of time or action by a third party could result in any default under any of the foregoing or result in the creation of any lien, charge or encumbrance upon the assets or properties of Union or upon the Union Common Stock.
Such opinion shall also cover such other matters incident to the transactions contemplated by the Agreement as Bancshares may reasonably request. As to questions of fact material to their opinion, such counsel may rely upon certificates of officers of Union. Such opinion may contain such qualifications, exceptions and explanations as are satisfactory in form and substance to Bancshares.
SCHEDULE 9.3 TO THE AGREEMENT:
LEGAL OPINION TO BE DELIVERED BY BANCSHARES
The legal opinion of counsel for Bancshares which is called for by Section 9.3 of the Agreement shall be to the following effect:
(a) Bancshares is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas, and has full power and authority (including all licenses, franchises, permits and other governmental authorizations which are legally required) to own its properties, to engage in the business and activities now conducted by it and to enter into this Agreement.
(b) FPB is a banking association duly organized, validly existing and in good standing under the laws of the State of Texas, and has full power and authority (including all licenses, franchises, permits and other governmental authorizations which are legally required) to own its properties, to engage in the business and activities now conducted by it and to enter into this Agreement.
(c) The Board of Directors of Bancshares and FPB and the shareholder of FPB have approved the Agreement and the transactions contemplated thereby. The Agreement has been duly executed and delivered by Bancshares and FPB and is a binding agreement of Bancshares and FPB enforceable against Bancshares and FPB in accordance with its terms.
(d) The execution and delivery of the Agreement and the consummation of the transactions contemplated thereby, will not, to the best knowledge of counsel to Bancshares, violate any provision of, or constitute a default under, any law, or any order, writ, injunction or decree of any court or other governmental agency, or any material contract, agreement or instrument to which either Bancshares or FPB is a party or by which they are bound or constitute an event which with the lapse of time or action by a third party could result in any default under any of the foregoing or result in the creation of any lien, charge or encumbrance upon of the assets or properties of Bancshares or FPB or upon the stock of Bancshares or FPB.
(e) Except as disclosed in the Agreement and except for such consents, approvals, authorizations, actions or filings as have already been obtained or made, no consent, approval, authorization, action or filing with any court, governmental agency or public body is required in connection with the execution, delivery and performance by Bancshares or FPB of the Agreement.
Such opinion shall also cover such other matters incident to the transactions contemplated by the Agreement as Union may reasonably request. As to questions of fact material to their opinion, such counsel may rely upon certificates of officers of Bancshares and FPB. Such opinion may contain such qualifications, exceptions and explanations as are satisfactory in form and substance to Union.
EXHIBIT 21
SUBSIDIARIES OF PROSPERITY BANCSHARES, INC.
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION
Prosperity Holdings, Inc. Delaware First Prosperity Bank Texas
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Prosperity Bancshares, Inc. on Form S-1 of our report dated January 23, 1998 (except for Note 23 as to which the date is September 10, 1998), appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected Financial Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Houston, Texas
September 11, 1998
EXHIBIT 23.2
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to the inclusion in this Registration Statement of Prosperity Bancshares, Inc. on Form S-1 of our report dated January 23, 1998, on our audits of the financial statements of Union State Bank.
/s/ HARPER & PEARSON COMPANY Houston, Texas September 11, 1998 |
| ARTICLE 9 |
| THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. |
| MULTIPLIER: 1000 |
| PERIOD TYPE | 12 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | DEC 31 1997 |
| CASH | 17,372,158 |
| INT BEARING DEPOSITS | 198,000 |
| FED FUNDS SOLD | 0 |
| TRADING ASSETS | 0 |
| INVESTMENTS HELD FOR SALE | 38,612,395 |
| INVESTMENTS CARRYING | 129,256,453 |
| INVESTMENTS MARKET | 129,774,737 |
| LOANS | 120,577,987 |
| ALLOWANCE | (1,015,576) |
| TOTAL ASSETS | 320,143,082 |
| DEPOSITS | 291,516,912 |
| SHORT TERM | 2,800,000 |
| LIABILITIES OTHER | 1,008,573 |
| LONG TERM | 0 |
| PREFERRED MANDATORY | 0 |
| PREFERRED | 0 |
| COMMON | 3,993,884 |
| OTHER SE | 20,823,713 |
| TOTAL LIABILITIES AND EQUITY | 320,143,082 |
| INTEREST LOAN | 10,205,405 |
| INTEREST INVEST | 9,555,125 |
| INTEREST OTHER | 209,142 |
| INTEREST TOTAL | 19,969,672 |
| INTEREST DEPOSIT | 8,858,172 |
| INTEREST EXPENSE | 9,059,844 |
| INTEREST INCOME NET | 10,909,828 |
| LOAN LOSSES | 189,970 |
| SECURITIES GAINS | 0 |
| EXPENSE OTHER | 7,835,534 |
| INCOME PRETAX | 5,148,362 |
| INCOME PRE EXTRAORDINARY | 5,148,362 |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | 3,562,172 |
| EPS PRIMARY | 0.94 |
| EPS DILUTED | 0.92 |
| YIELD ACTUAL | 7.16 |
| LOANS NON | 0 |
| LOANS PAST | 88,000 |
| LOANS TROUBLED | 0 |
| LOANS PROBLEM | 0 |
| ALLOWANCE OPEN | 922,833 |
| CHARGE OFFS | (130,086) |
| RECOVERIES | 32,859 |
| ALLOWANCE CLOSE | 1,015,576 |
| ALLOWANCE DOMESTIC | 1,015,576 |
| ALLOWANCE FOREIGN | 0 |
| ALLOWANCE UNALLOCATED | 865,000 |